Public Contracting…The Potential Perils?

It’s no secret that when the economy takes a hit…so does the construction industry.  So what do contractors do when the work available is minimal and private companies cannot afford to carry out their grandiose plans of development?  Contractors turn to public contracting.  Even with the crippling California state economy, state projects are still going forward.  Many state agencies are accepting bids on projects that will take years to complete and state projects appears to be where the money is…or so contractors hope.  Moreover, public contracting can be very lucrative as you have a potentially solid source of funds to pay for the work and generally the work can be billed at a higher rate as it is done on a prevailing wage.

However, the process of obtaining a public contract is different than private contracting.  In the realm of public contracts, the public agency must put the project out to bid and the lowest bidder is awarded the contract.  As with private contracts, the contracts between the public agency and contractor can be very one sided in favor of the public agency.  Getting that burdensome contract can be a difficult and frustrating venture as many different contractors are fighting for the bid.  Consequently, some contractors may prepare their bids in such a way that change orders will be needed in the future.  Thus, allowing the contractor to obtain the project with the lowest bid, but allowed to make up the difference through change orders.  This is hardly what the legislators envisioned when they created the concept of awarding the contract to the lowest bidder.  Ultimately, bid awards can be challenged on the grounds that they are non-responsive to the bid request.  However, that can be a difficult task to undertake.

Nevertheless, the most common problem in the terms of contracting usually arises with change order work, whether it be a public contract or a private contract.  Unlike many private contracts, the contractor generally has no option to refuse extra change order work on public projects. In fact, similar to that of forced labor, the state can usually force contractors to do extra work, whether the contractor wants to or not.  Now while the contractor may think…I want out! How can they make me do this?  The reason the state can usually make you do this is because when you the contractor were awarded that contract in the very beginning of the project…that contract contained terms which stated more or less, that the contractor will do extra work if upon the direction of the public agency.

What is more, the public contract generally requires the contractor to perform the work, even without a written agreement on the price of the additional work.  The public agency generally tells the contractor to file a claim.  In other words, the contractor will be forced to wait until the end of the project to be paid for the additional work he/she performed.  Thus, the contractor is funding the project with his/her own finances.  In our experience, this is something that public officials never seem to understand.

Why do we think this is?  There are many potential reasons, but to name a few we think that it boils down to: (1) the current financial status of many local governments; (2) the lack of understanding of government officials as to what it takes to complete a construction project (they do not seem to understand that contractors are putting their money into the project first and then hoping to be paid back later); and (3) government officials operate “credit” or “attaboys”… and you do not receive “credit” or an “attaboy” if you cannot deliver the project in accordance with the original bid.

So what do contractors do who are stuck in this situation? They need to operate within the rules set forth to get paid…every public contract has extra change order work procedures and claims procedures which must be followed on both sides.  More often than not, at least in our experience, the public agency project managers do not read the prime contract, do not understand the prime contract, yet continue directing the work. The important thing to remember is that these project managers are not invincible…and they are often incorrect.  A good contractor will use its independent judgment, follow the laborious terms in that contract (which is required by the California Public Contract Code), follow up on payment, submit accurate claims for improperly denied change order requests, and keep the state agency on its feet so they know early on that the contractor will not be pushed around.

So, if you venture into the realm of public contracting, we would like to give a few sound pieces of advice:  (1) pay attention to the bid documents… as well as the bids of your rival contractors; (2) read and understand the contract; and (3) be sure to follow the change order procedure.

 

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