What you need to know about public work

Some things contractors need to consider before taking on public work

By now it is clear that nearly every segment of the construction economy has been adversely affected by the recession. As private work, starting with residential and now spreading to commercial and industrial, has dried up, more and more contractors are pursuing the public work that is still going forward. They are further spurred by the prospect that stimulus funds will be available. Some of those contractors are experienced with public work, but for those who are not, a lot of thought should be given to the many differences, outlined below, that go along with working for governmental owners.

Limitation of authority: Many contractors have been badly burned by making an oral agreement, or even a written agreement, with the wrong person for payment of work. Virtually all governments operate on the principle of limited and delegated authority. For example, if the directive did not come from the contracting officer, or if you started work before the contract was endorsed by the city clerk, you will not be entitled to payment.

Surety bonds: Most, but not all, public construction contracts require the contractor to post performance and payment bonds. Establishing a relationship with a surety company not only takes time, but it also requires assets, personal indemnification and financial reporting.

Bid mistakes: In the private arena, if a contractor gives a bid to a customer and realizes that it contains a mistake, the matter is frequently handled informally — the customer doesn't want a problem down the road and either allows a correction or goes elsewhere. In public work, laws generally do not allow for bids to be corrected or withdrawn except for specific reasons (this varies a lot from state to state). Contractors need to be extremely careful in putting bids together, getting them in on time, etc.

Compliance with regulations: Public contracts generally “incorporate by reference” a wide array of laws and regulations that we, the public, are presumed to know about because they are in the books and now on the Internet somewhere. The range of these is astonishing, and contractors have to certify that they are in compliance with the laws, and the penalties for violation are harsh: false claims and criminal exposure on top of breach of contract

Local preference laws: Many cities and states have laws or ordinances, giving preference to firms that are their residents, which can put out-of-town bidders at a price disadvantage they can't overcome.

Woman/Minority owned business participation: Not all public owners require this, but if you are dealing with a public owner who requires you to use good or best-faith efforts to meet its goals, you should investigate what that takes and have the right system in place to comply. For example, in your community do you know where to advertise and solicit bids? Do you have access to database information about potential bidders?

Added stimulus requirements: The American Recovery and Reinvestment Act of 2009 makes federal dollars available to state and local agencies, but it comes with strings attached. It's more than 400 pages, and Congress loaded it up with special provisions. For example, prevailing wages must be paid. Federal and many other public contractors are familiar with the Davis-Bacon Act, which requires them to pay, at minimum, the wage rates contained in the bid documents. Often, these rates turn out to be higher than a contractor would otherwise have bid and result in a contractor paying the same worker different hourly rates depending on who the owner is. Some public owners say that they are not pursuing ARRA funds for projects because, even with the funds, the projects cost more due to the increased labor costs.

Buy American requirement: Materials must meet the buy American requirement. While not as onerous as the standard FAR Buy American regulation, ARRA contains a requirement that iron, steel and manufactured goods must be domestic unless the head of the federal agency giving the funds waives it, and the grounds for waiver are specific. The federal Office of Management and Budget has issued an opinion that not all component parts of manufactured goods have to be U.S. made, but, even with this qualification, some contractors and local governments are finding that either they can't get domestic goods soon enough, or cheap enough, for the ARRA funds to do them any good.

Federal requirements: There are also federal requirements, on top of all the requirements discussed above, which you can expect state and local governments to include in their procurement policies. Contracts with U.S. government entities contain federal mandates that will make your head spin — Anti-Assignment of Funds, Anti-Assignment of Contract, Prompt Pay, Anti-Kickback, Anti-Gratuity, Anti-Collusion laws — the list goes on and on.

Contractors who haven't done much public work really need to educate themselves and, maybe, hire someone who has this experience before turning to Uncle Sam as a source of work.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].