How To Price a Federal Government Construction Claim
General and Administrative Costs, Bond Costs, Profit and Miscellaneous Costs (Part 4)
By Kay Kendall
The [SPELL OUT FIRST] (FAR) defines direct costs as any costs that can be identified specifically with a final cost objective. An example of a direct cost would be labor and concrete material costs incurred to construct a concrete slab. The concrete slab is the final cost objective.
Indirect Costs
The FAR defines an indirect cost as any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost object. An indirect cost is not subject to treatment as a direct cost. An example of an indirect cost is a contractor’s general and administrative (G&A) expenses. These are also known as home office overhead. The G&A cost cannot be identified with the concrete slab above because the home office personnel did not work directly on constructing the slab.
G&A costs are calculated by multiplying the contractor’s G&A rate by all other allowable direct costs in the REA or Claim.
When preparing a REA or Claim, the actual G&A rate should be used and the costs included in the G&A calculation should be in accordance with FAR Part 31 – Contract Cost Principles and Procedures. Costs that are not allowable should not be included in the G&A rate calculation. Examples of costs that are generally unallowable are interest expense, advertising for the promotion of sales, bad debt and contributions. There are others, but these are some common examples.
Some contractors arbitrarily use a rate of 5% or 10%, or some other markup for G&A. However, without making the actual calculation, the contractor will not know its actual G&A rate. Maybe the contractor’s actual G&A rate is 18%, but it has just arbitrarily been using 10% or less in its price proposals. The contractor is entitled to recover its actual costs.
When submitting REAs or Claims to the government, the actual G&A rate should be used. The government can request an audit of the contractor’s REA or Claim, and in some cases – if the total REA or Claim is over the acquisition threshold, then it is required by the FAR to be audited.
Bond Costs
Bond costs are calculated on the total contract amount. When contractors bid a project that requires a bond, they include the cost of a performance and payment bond. The actual bond premium is based on the entire contract amount. The bond premium is probably calculated on a scale.
Suppose a contractor is awarded a $5,000,000 project that requires a performance and payment bond. The premium may be calculated on a scale similar to this one: the first $500,000 may cost $15.00 per $1,000, the next $2,000,000 $13.50 per $1,000, and the remaining $2,500,000 may cost $11.00 per $1,000. The scale may continue for anything over $5,000,000, and the premium cost will be $9.00 per $1,000. In this example, if the original project was $5,000,000 and work was added, then the correct bond rate to use in a REA or Claim that will increase the contract amount above the $5,000,000 is the $9.00 per $1,000.
Profit Calculation
Profit is a negotiable item. Some government entities use the Weighted Guidelines to determine the rate of profit for the contractor on a particular change. When all of the Weighted Guidelines criteria are maximized, the highest rate of profit that can be achieved using the Weighted Guidelines is 12%. Although the Weighted Guidelines are not mandatory in determining profit, they are widely used by government agencies. There are other methods for determining a reasonable profit. The key is that the method must be fair and reasonable.
Miscellaneous Costs
Other miscellaneous costs should not be overlooked – for example, builder’s risk, general liability and workman’s compensation insurance. If these costs are not included in the G&A and are charged directly to the project, they should be included in the REA or Claim. If they are part of the G&A rate calculation, to avoid duplication of costs, they should not be included as a direct cost in the REA or Claim.
Contractors in some states or U.S. territories incur costs that are not incurred in other states. For example, in Puerto Rico, there is a tax calculated on the total contract amount. The tax is an allowable cost to include in the REA or Claim. It should be calculated at the current rate on the total amount of the change, including bond and profit. Technically, the tax should also be calculated on the tax, but on smaller REA and Claim amounts it is insignificant.
Conclusion
With the information in these articles, contractors have a guideline for preparing REAs and Claims. Sometimes, the REAs or Claims can become complex. In those situations contractors should seek a qualified professional to assist with the REA or Claim preparation.
Remember, until the issue becomes a dispute or a Certified Claim is submitted, the cost to prepare and support the REA is generally allowable to include in the REA. A consultant experienced in government contracting can facilitate a successful REA or Claim.
In the event the issue elevates to an appeal or lawsuit, a construction lawyer with federal government experience should be consulted. Federal government law and procedures are different than in the non-government arena.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: Again, you should never undervalue the worth of a qualified claims consultant and/or a lawyer well versed in federal construction law and procedures.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2015 TMV, LLC (Triune). Any and all rights reserved.
David vs. Goliath Businesses:
How to Level the Commercial Construction Playing Field
By Vince Fudzie
At the beginning of every year numerous pontificators are charged with predicting the future, only to have those predictions rescinded and recast throughout the year. Yet it’s probably still best to run your business based on educated predictions and forecasts than none at all.
According to data from several prominent sources such as FMI, AIA and Dodge, everyone seems to believe that any growth in 2015 will be bolstered by a broader range of sectors. And it’s probably safe to say that U.S. construction starts will be somewhere between the estimated $654 billion in 2014 and the 2015 estimated $612 billion – give or take a billion or two.
Based on our own increased volume of new bid opportunities, I can safely say that there appears to be an uptick in the amount of construction starts going into 2015. Unfortunately, even though we have been extremely competitive on our bids, there have been a couple of recent occasions where we were the low bidder from an invited list, and we still were not awarded the project.
Case in Point: On one recent bid we were invited to participate with two other general contractors. The first contractor was a hundred-year-old behemoth, which I will call Company T, and the other was a captive entity of a large healthcare system, which I will call Company M. As such, both competitors had very deep pockets and extensive resumes doing large-scale projects of which this was not one.
Other than that, we were all pretty equally yoked. We had comparable bonding, insurance, people and more importantly, lots of successful relevant experience. The bid tab indicated that we were lower – by 7 percent or $275,000 from Company T.
So what would make a customer spend an extra $275,000 on a project that we have numerous times proven ourselves more than capable of doing?
Whatever the reasons it simply burns my britches, but instead of complaining about the unfairness of it all, I want to spend time talking about how we all can mitigate such occurrences in the future. In essence, what can we, as small to midsized contractors, do to level the playing field when competing against our older cousins? Spending some time in the new year developing the right strategy will soon have you chopping your larger competitors down to size.
1. Recruit the Best and Brightest
One of the advantages of being smaller is that you typically can’t afford to spend thousands to hire and train the best and brightest young minds, but you can afford to hire them later in their careers. Many such employees may have become disenfranchised by the bureaucracy, politics and inefficiencies found in larger firms. Therefore, create a culture that is appealing to the best people your company can afford and maintain an environment to keep them.
2. Engage Industry Leading Service Providers
If you are going to effectively compete, you need to employ the same caliber of service providers as your larger competitors. This way no potential customer can call this aspect of your business inferior. Whether it’s insurance, banking, bonding or any other needed service, make sure they are leaders in the industries they represent.
3. Develop a Solid Subcontractor Network
Having a competitive and knowledgeable subcontractor network is essential to not only quality bids, but also to maintaining the highest level of knowledge in the various trades of our industry. This level of knowledge will become invaluable as you work to be an industry leader on par with bigger players.
4. Try Something Exceptional
This is where you need to think outside the box and do something that will put you on the radar in your market area. This could be sponsoring a major event or actively supporting a charitable organization in the community. Remember you don’t have to be a behemoth to do exceptional things that will endear you to potential customers and the community.
5. Determine Your Value Proposition
Have you spent time establishing a value proposition that truly adds value to customers? If not you need to get on it. As a smaller competitor there are numerous attributes that you possess that adds value to each project. You just need to spend time seriously determining exactly what they are. Once you have determined the value you bring, you must actively convey it to potential customers and decision makers prior to your next bid opportunity.
6. Exceed Expectations
Once you have leveled the playing field and successfully won a project, it is imperative that you not only meet but exceed the expectations of your new customer.
Exceeding expectations will not only create loyalty with the customer but will also create a new advocate for you and help establish your company’s reputation.
In a nut shell, you level the playing field by being on par with the larger competitors in all possible areas – personnel, knowledge, service, and subcontractors – and then beat them in the areas where you are unique and/or add value.
Vince Fudzie MBA, CPA, CIRA, is the Managing Member of Triune. Founded in 1997 with headquarters in Dallas, Triune is a leading, integrated design-build General Contractor in the Southwest region of the country.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2015 TMV, LLC (Triune). Any and all rights reserved.
How To Price a Federal Government Construction Claim
Pricing Labor and Equipment Cost for Government Construction REA or Claim (Part 2)
By Kay Kendall
After establishing the legal basis and causation of a REA or Claim, the damage costs must be quantified. The costs in the REA or Claim should be in sufficient detail to permit an analysis of all material, labor, equipment, subcontract and overhead costs, as well as profit, and should cover all work involved in the proposal, whether such work was deleted, added or changed.
In a previous article titled “That’s Not in the Contract, Do I Still Have To Do It?” we discussed one of the differences between a REA and a Claim: costs incurred in preparing and supporting the cost in a REA are generally allowable costs to include in the REA. Therefore, it is best to put as much supporting documentation and explanation into the REA as is available.
That way, when/if a Claim or even an appeal is pursued, the detail has already been done and it was done in the REA where the preparation costs are generally allowable. If the contractor prepares and submits the REA without adequate documentation to support the costs and then decides to go the Claim route, a more detailed document will need to be prepared for the Claim, or the same result may occur.
When possible, the contractor should set up a separate cost code to track the changed or delayed work. If there are multiple changes or delays, then multiple cost codes should be set up to track the costs.
If it is not possible to set up cost codes, the costs should be documented in other ways. Contractors Quality Control Reports are a good place to discuss costs and personnel working on changed or delayed items.
In this article, we will discuss labor and equipment costs.
Labor Costs
When direct labor costs can be identified by the names of the personnel who performed the work, the actual labor rate of those personnel should be used to calculate the actual cost. Be sure to add costs related to labor, such as payroll taxes and fringes. Those employees who are not a part of direct labor or whose hours are not tracked to a specific project should compile contemporaneous notes of the time spent on the projects, were claims will be submitted.
Equipment Costs
Equipment usage and idle time related to the change or delay should be tracked. If the equipment is company owned, hourly rates can be obtained from the Corps of Engineers Construction Equipment Ownership and Operating Expenses Schedule.
It is also known as EP-1110-1-8 and has a volume for 12 different regions in the US and US territories.
It can be downloaded from the following website: http://140.194.76.129/publications/eng-pamphlets/EP_1110-1-8/toc.html.
The contractor will have to determine which region the project is in to apply the rates, and the appropriate year of the publication should be used for the time the work was performed. The Corps Equipment Schedule is referenced in many government contracts as the source to use for pricing equipment costs for changes.
Construction equipment rented from third parties should include an hourly rental rate based on the monthly, weekly or daily rate – whichever was invoiced. If the equipment was active (or operating), the fuel costs should be added. The Corps Equipment Schedule is a good source for obtaining hourly fuel costs, as it has some cost elements broken out of the rate.
If the fuel costs used in the Corps Equipment Schedule are significantly lower than the actual current fuel costs, the fuel costs can be adjusted by dividing the fuel cost in the schedule by the cost per gallon used in the Corps Equipment Schedule, then multiplying by the current fuel cost. On smaller REA’s and Claims, the difference is not significant, but on larger REA’s/Claims that include many pieces of equipment performing work for a large change, the increased fuel cost could make a sizable difference.
If the construction equipment used in the change or sitting idle during a delay is not specifically listed in the Corps Equipment Schedule, then a similar piece of equipment can be used. In determining a similar piece of equipment, such as a bulldozer, comparing HP, weight, purchase price and similar functions and attachments can be used to determine a comparable piece of equipment to use in the REA/Claim price.
Standby rates are applicable to periods when the equipment is dedicated to the change or delay and the equipment is idle. Standby costs for equipment are not applicable if the equipment would have been idle anyway.
In the next article we will discuss material costs, subcontractor costs and job site overhead costs.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: We as a company went nearly 10 years without having to file a Certified Claim on a federal project. Fortunately, we were prepared with good documentation and we were eventually made whole. I think the biggest issue we have encountered with claims is making sure that we recover those costs of non-direct job cost personnel.
As a company you need to make sure non-direct personnel involved keep daily detailed notes including hours spent working on your claims. Don’t allow your profits to take a hit because you underestimate the non-direct expenses incurred as a result of REA’s and claims.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
How To Prepare a Federal Government Construction Claim
Request for Equitable Adjustment and Construction Claims (Part 1)
By Kay Kendall
In the last article, “That’s Not In the Contract, Do I Still Have To Do It?” we discussed Requests for Equitable Adjustment (REAs) and Certified Claims.
The Federal Acquisition Register (FAR) provides government contracting guidelines for the government and contractors, including standard clauses for changes, differing site conditions, suspensions and terminations. The FAR also provides detailed cost principles for costs that are allowable and allocable to government contracts.
Documentation, Documentation, Documentation!
Let’s take a quick sidebar into contract administration. In this age of email and text messaging, it may seem convenient at the moment to send informal texts and emails for short communications, but when trying to piece events back together for documentation of REAs or Claims, often the communications are lost or difficult to find.
Many times those short communications make sense at the time because a phone call or a face-to-face conversation took place immediately before, but six months or a year later, they are unintelligible. Therefore, contractors should establish an organized method for tracking communications and documentation for each project.
Letters should be assigned serial numbers and include the serial number and the purpose of the letter in its subject or reference line. Request for Information (RFI) logs should be used to track RFI submissions and responses. Other useful tracking systems should be established for common documents transmitted to and from the government.
Formal Notification
Now back to the REA/Claim preparation. One very important step is to make sure that formal notification is given to the government if a change (directed or constructive) or even a delay/suspension/stop work order has occurred and that the contractor reserves its right to submit a REA or Claim. Once the notification is made, the government can remedy the situation, provide some sort of direction or just be notified that the contractor reserved its right.
Executive Summary
When preparing the REA or Claim, it is always good to start with an Executive Summary. It should briefly discuss the contract, the reason for the REA or Claim, how the issue arose and how it impacted the contractor. It should also include a summary of the costs included in the REA or Claim.
If a Certified Claim is being submitted, then the claim certification should be included. The certification language should match exactly that of the Disputes Clause of the contract and be signed by someone duly authorized to sign on behalf of the contractor.
Every REA and Claim should include these three basic elements: legal basis for the Claim, causation and damages.
Legal Basis of Claim
In order to present the REA or Claim, the legal basis must be established. The contractor must make sure that it has not waived its legal basis for the REA or Claim. Extreme caution should be taken not to waive the rights to the REA or Claim by signing other contract modifications that include blanket waivers of all prior issues. Another thing to watch out for is signing contract modifications for time extensions that waive time extensions for previous events.
The legal basis of the REA or Claim should be identified. If there was a change directed by the government or a constructive change, then the Changes Clause of the contract would apply and should be listed as a contract clause relevant to the REA or Claim. There are other contract clauses that entitle a contractor to an equitable adjustment, such as the Suspension Clause, Stop Work Order Clause and the Differing Site Conditions Clause, to name a few.
Claim Causation
After identifying the legal basis, the causation needs to be established – the contractor needs to be able to connect the dots and show how the government’s actions (or inaction) were responsible for the cost and/or time impact.
Damage Calculation
Next, the contractor needs to accurately quantify the cost impact. In the event that a change is directed to the contract to add an element of work, if the contractor can track those costs in the job cost report by creating a job cost code specifically for costs related to the change, this will help make the quantification process easier.
Sometimes it isn’t that simple, though. In the event of a change that increases the quantity of an existing work item, and not necessarily at an identifiable point in time, it is hard to identify how much labor was spent on increasing the quantity.
An example would be an electrical change to a project. Let’s say each room in an office building had three electrical outlets shown on the plans, and before the work is performed a change is issued stating that now some rooms will have five, some seven and some two. It is not possible to track the actual cost for performing the changed work because it is co-mingled with the original work. In situations like this, estimates must be used.
More discussion on pricing the government REA and Certified Claim will be provided in the next article.
Kay Kendall is currently president of Kendall-Dinielli Consulting providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: As I have said many times before one of the keys to successfully completing construction contracts is through documentation, documentation and more documentation.
You should approach each contract with a litigious mindset, i.e. hope for the best but plan for the worse. This mindset should be common practice for all personnel who work on any component of a project.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
6 Reasons for Construction Profit Fade
By Wesley Middleton
Profit fade. This is a situation your bonding agent doesn’t want to see. Profit fade is a tool very seldom used by the company owner or controller, despite the fact that it can be very effective in identifying issues inside a company.
Preparing a fade analysis on a regular basis can help identify trends that may warrant further investigation.
What is a fade analysis? In a very general sense, it is simply a comparison of your original estimated gross margin on a job to your actual progression throughout the construction period. Generally, a fade of 10% or more will result in a call from your bonding agent. The more variability in your contract over time, the more of a risk you appear to be to your bonding agent, and the less confidence he/she will have in your ability to estimate and manage jobs.
A Note on Fade/Gain Calculations: Avoiding a Common Error
If you have an estimated profit of 2% and your profit drops to 0%, then technically you have a 100% profit fade. The calculation should be a percentage change, rather than the difference between two percentages. Let’s look at another example: if your 2% gross margin represented $1 million and the job broke even, then you’d want an explanation of the 100% profit fade. The current schedule would only show a 2% fade.
Sources of Contract Fade
When preparing a fade analysis, it is important to break it down by project manager, estimator, category of construction work, or other categories that may exist in your company. This can further isolate the cause of the contract fade. Here are six important reasons that you may be experiencing contract fade:
1. An estimator who is not competent at estimating jobs and is too optimistic in his/her estimates; or aggressive bidding by an estimator who is struggling to win contracts.
2. Change orders that are unprofitable or simply have not been approved and recorded in the accounting system.
3. An under-performing project manager who is not effective in managing the costs and people on the job.
4. Jobs that are outside the company’s expertise, resulting in a learning curve that causes additional costs or job delays.
5. The accounting department is not coding job costs to the correct job. Having the project manager and estimator review and approve the final job costs will help in this area.
6. Cost shifting, otherwise known as fraud. It could be in the accounting department or from the project manager. The project manager could be shifting costs from one job to another to cover up the fraud, or the accounting clerk could be doing the same thing. Either way, the same review process in #5 above would help prevent this from happening.
Seeing the Better Picture
Comparing the total actual costs to the estimated costs simply isn’t enough. Seeing the change in gross margin from year to year adds an additional level of analysis.
A well-planned deception of systematically “shifting” job costs from one contract to another between periods may not be detectable by only comparing estimated costs to actual. Preparation of the fade analysis is better supported by a well-prepared WIP or contract schedule.
For a basic contract fade analysis template, click here.
“Wesley Middleton is the Managing Partner at MiddletonRaines+Zapata, LLP, a leading Houston-based CPA firm offering a full suite of accounting, tax, audit, and consulting services to the small and middle markets.” wmiddleton@middletonraines.com
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
The Necessity of Daily Cash Reports and Reconciliation
By Mike Crabtree
I occasionally do outside consulting work in order to help small companies ensure that their accounting processes are in good working order. Small construction companies often have limited resources, and accounting is not always high on an owner’s list of priorities, especially if operating at a “Mom and Pop” level. However, this can lead to problems.
Bank Account Reconciliations
Perhaps not surprisingly, one of the areas I am frequently asked to address is that of bank account reconciliations. People get involved in the day-to-day activities of operating a business and put off the monthly reconciliation of their bank account for a few days…or weeks…or months.
I was recently asked to come in and catch a company up on their bank reconciliations. The operating account hadn’t been reconciled in 15 months. They had a strong positive cash flow and were not audited, so reconciliations hadn’t been a high priority. After all, what could really be wrong?
The owner wasn’t directly involved in the accounting process, relying on a very young “bookkeeper” he had hired on the recommendation of a friend. She was very good at the day-to-day tasks, such as filing paperwork, processing lien waivers, writing checks, making deposits, etc. However, she didn’t really understand the mechanics of properly recording cash transactions, even at the basic level of understanding that a deposit should be a debit to the ledger cash account and a check should be a credit. Sometimes, she would forget to record a deposit.
Additionally, as is common with many small companies, the owner would frequently write manual checks when he was out of the office. Sometimes he would tell her, sometimes he wouldn’t. Sometimes she would record the ones she knew about, and sometimes she wouldn’t.
It didn’t take long before she realized she was in trouble, but she was afraid to tell her employer. She did make an attempt to reconcile the cash account at first, but because of the number of transactions that had occurred during the month and her lack of understanding, she gave up…and continued on as before.
Again, cash flow was strong, so no disaster occurred.
Eventually, the company wanted to get a bank loan for expansion (they had never before had one due to the strength of their cash flow), and part of the lender’s requirements was current bank reconciliations. At this point, I was called in.
Ultimately, I discovered that there were more than 500 improperly recorded or missing transactions directly related to the cash account, which also caused the books to be significantly off as a whole. After a significant amount of time and fees for my services, we were able to get his cash reconciled and the books in order. The company got the loan, but it was discovered that there was $150,000 less cash than thought. It was an expensive lesson.
Now, the bookkeeper in this situation was a good person, no fraud was committed; she just didn’t understand her job as well as she should have, got behind and was afraid to ask for help. I was able to teach her some basic “debits and credits” so that she could successfully go forward in the future.
The owner in this case was very understanding and kept her at the company (along with my phone number). However, this entire situation could have been avoided if he had required and reviewed the bank account reconciliation. Still, even a monthly reconciliation might have been inadequate given the number of transactions that occurred over a 30-day period.
This is why I recommended a daily cash report with short-term anticipated cash inflows and outflows as well as a reconciliation of cash. With internet access to banking activity available today, it is unnecessary, in fact unwise, to wait until your monthly bank statement to reconcile.
A daily comparison of your banking and book activity allows missed cash transactions or backwards postings to be discovered and corrected in just a few minutes. Situations like this one will never happen again, and management/ownership will always know its true cash position.
Mike Crabtree has over 20 years’ experience in the commercial construction industry. He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune. Triune is a leading, integrated design-build General Contractor in the Southwest region of the country.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
Construction Project Management for the Not So Smart!
4 Steps to Successful Construction Project Management
By William Goodman
Because of the ever-growing array of huge, complex and technically challenging projects in today’s world, project management has become a critical skill. People need special tools, techniques and knowledge to handle their project management assignments, such as confirming a project’s justification, developing project objectives and schedules, maintaining commitment for a project, holding people accountable, and avoiding common pitfalls.
Having or obtaining these critical skills may be somewhat overwhelming and intimidating. However, by following a few basic and simple steps a manager can avoid getting tangled up with the technical challenges and pitfalls that inherently come with being in this position.
It’s no secret that following a simple rule called KISS can be good philosophy to have: Keep It Simple Stupid. But, here are some additional steps to take to avoid traps and challenges:
1. Know Your Contract.
You must know the contract: what it says, the objectives, the contractors’, owners;/clients’ and architect’s responsibilities, , the deliverables, milestones, the common terms, etc. Be sure to highlight and tab the essential parts of the contract that require action for quick reference later.
By understanding the contract, you can manage assignments and project justification. Prepare a matrix to track the assignments and who is responsible for each task or action required.
2. Communicate, Communicate, Communicate.
The manager must be able to communicate whether in writing or verbally. According to Dale Carnegie, author of How to Win Friends and Influence People, 85% of success on the job is due to one’s ability to lead people and personality. Only 15% of success is due to one’s technical knowledge. Therefore, the ability to communicate with people is vital and essential in increasing your success tremendously. It takes time to develop good communication skills and a good part of that development requires you to be a good listener. You should be listening two times more than speaking.
Try to avoid these kinds of pitfalls when communicating: expressing your feelings, making it personal, guessing or making assumptions. These types of emotions do not go over well in the business world, let alone in construction. Stick to the topic and facts. Be proactive – not reactive. Always maintain your composure and confidence. And, always be ready for that unexpected curve ball that undoubtedly will come at some point in time, but do not waiver or overreact to these types of situations.
3. Be Prepared.
One of the more important and time consuming tasks that a manager is responsible for is preparing and administering project meetings. Plan to start preparing for a scheduled meeting – whether it’s a conference call or in-person – at least a week in advance.
First, start by drafting the meeting agenda. Then, gather and assemble supportive documentation and exhibits that will be reviewed at the meeting. Be sure that all participants have confirmed or accepted the meeting request or invite. If applicable, send out the meeting agenda and attachment to the participants a day in advanced.
Finally, when it comes time for the meeting, allow for some interaction and light conversation between all attendees. Most importantly, be prepared and anticipate the unexpected.
4. Keep Things In Proper Perspective.
You must be able to adapt to an array of personalities and the unexpected. Therefore, you need to be flexible with your management style so that you can make adjustments to achieve your goals and end results. Do not take yourself too seriously. Instead, strive to balance seriousness and light humor. This is something you are more apt to figure out through real-life experiences.
William Goodman, Senior Project Manager for Triune, is a highly accomplished multi-talented project manager with over 30 years of construction experience. He encompasses excellent skills in preparing schedules and managing job costs, budgeting, contract negotiation, Design Build, and pre-construction services.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
15 Issues Leading to Construction Subcontractors Being More Heavily Scrutinized by Bonding Companies
15 Issues Leading to Construction Subcontractors Being More Heavily Scrutinized by Bonding Companies
By Brady Cox
It might seem counter intuitive, but some Bonding Companies do not embrace the opportunity to serve subcontractors. So what’s different about subcontractors and subcontracts? Why do some sureties redline this entire segment of the market?
Some of the possible reasons are as follows:
The Number One Issue – Low on the Food Chain!
One complaint underwriters have about subcontractors is that they are farther down the food chain than General Contractors (GC’s) are.
GCs have a “prime” contract, meaning they work directly for the project owner and are the first recipient of cash payments. Only then are subcontractors subsequently paid by the GC. Subs may face delays and sometimes even harassment at the hands of GC’s.
Remember, subcontracts are all private contracts not regulated by governmental or institutional rules, even if the prime contract is so regulated. Put simply, subs have a harder time collecting their money.
14 Other Issues for Subs and Their Sureties
1. GCs may not normally disclose bid results (2nd & 3rd bidders’ figures). This makes it difficult to evaluate contract price adequacy – a disadvantage for both the sub and surety.
2. Unregulated procurement procedures and contract administration: GCs may be aggressive in their procurement methods, pressuring subs for price concessions: “Knock their heads together.” Such practices make the subcontracts less profitable and therefore more risky for the sub and surety. Subs can also be victimized with verbal awards and unwritten change orders.
3. Contract documents (including bond forms) may be nonstandard, drafted by GCs specifically to give strong advantages over subs and sureties. In some cases, the normal Performance Bond transforms into a forfeiture-type financial obligation.
4. Flow-down or pass-through clauses in subcontracts force subs to assume obligations rightfully belonging to the GC. An example would be wording that makes the sub responsible for the liquidated damage amount on the prime contract if they are found to have caused a delay on the subcontract.
5. “Pay when paid” language can result in delayed payment to the sub. “Pay if paid” can result in the sub never being paid.
6. Unbonded public work is rare, but in such cases there is no Payment Bond at the GC level to protect the sub, and liens (filed against the project for failure to receive payment) may be prohibited.
7. Indemnification: Broad-form indemnity clauses can make the sub financially responsible even if they are not at fault.
8. Delay damages: Subs may be barred from seeking financial recovery.
9. Lien waivers: When read literally, these documents may operate to waive and release claims for which the subcontractor has not yet been paid.
10. Termination for Convenience: This contract clause can enable the GC to terminate the contract and leave the sub with a series of unreimbursed expenses and lost profits.
11. Some trades perform their work late in the project, meaning the bond is carried for a lengthy period with no progress on the contract.
12. Certain trades can operate with minimal capitalization, so the field may be populated with lightly financed companies. Such competitors can drive down contract prices, making it harder for others to bond their work.
13. Financial reporting may be less sophisticated than for GCs (CPA financial statements vs. bookkeeper or QuickBooks).
14. Due to their size and circumstances, subs may lack bank support, such as a working capital line.
Conclusion
Subcontractors literally perform the majority of all construction work. They are the backbone of the construction industry and cannot be ignored by sureties.
When it comes to bonding, subcontractors need to demonstrate that they are well-managed companies that reflect the same attributes as a successful GC.
Brady K. Cox is a Principle with the Baldwin-Cox Agency, LLC. in Dallas, TX. The agency was founded in 1990, and has always focused on providing construction bonds to contractors. Today the Baldwin-Cox Agency,LLC is one of the largest bond producers within all of North Texas.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
I Sent a Bid to the General Contractor, Now Where Is My Contract?
By Ed Krum
So your company has submitted a bid to the general contractor; now what? Well if you followed the suggestions from the last post:
1. Let the general contractor’s estimator know in advance that your company intends to submit a bid, especially if you haven’t worked with them before. A phone call is best.
2. Communicate with the general contractor’s estimator prior to bidding. Here are few good things to communicate:
a. Estimator, did you notice “so and so” about the project?
b. Estimator, the architect is doing it this way and we can save money by doing it this way and we will get the same result.
c. Estimator, here is a list of similar projects that our company has completed.
3. Send in your bid with enough time for the estimator to call you with any questions he/she might have.
4. Call the estimator to check if he/she received your bid and answer any questions.
5. Wish them luck.
This will give you something to refer back to as past communication. In all likelihood, you sent your bid to all the general contractors that submitted proposals for the project, and this communication will increase your chance of getting the project.
At this point, there are a couple pieces of information that you need: first, the general contractors with the three lowest bids, and second, how your firm’s bid compares to the others.
Once a project bids, it can be some time before a notification goes out stating to whom the owner intends to award the project. Since most projects go through some type of evaluation process, allow anywhere from a few days to a few weeks for the process to play out.
The other factor in how your firm’s bid compares to others is a tricky question of what is ethical and what is not. Trying to get a tabulated bid tab showing the dollar amount of each of your competitions’ bids before the project has been awarded to a subcontractor could be seen by some as unethical, as it gives the firm an unfair advantage to negotiate with the awarded general contractor.
The best approach is to develop a relationship with the general contractor so that your firm can get a seat at the negotiation table regardless of what your bid was. Spend time reviewing your firm’s bid now that the project has bid; go back and see if there are ways to cut costs, also known as sharpening your pencil.
Few negotiations end up with both parties getting everything they are asking for, so be prepared to give up something and know what you are willing to give up before you sit down. Most importantly, you want to convince the general contractor that your firm is easy and a joy to work with.
Ed Krum, Senior Estimator for Triune, is a highly accomplished, multi-talented project manager, with over 25 years of commercial construction experience. He is a skillful and highly regarded in value engineered, conceptual, competitive, negotiated and design/build estimates.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2014 TMV, LLC (Triune). Any and all rights reserved.
That’s Not In the Contract, Do I Still Have To Do It?
Changes Clause, Request for Equitable Adjustment and Claims Overview
By Kay Kendall
Claims Clause!
In most federal government contracts, there is the Changes Clause that allows the government to direct changes to the contract. In that situation, the contractor, in accordance with the Changes Clause, can submit a request for equitable adjustment, or REA, if the contractor determines that the change will increase the cost or duration of the performance of any part of the work under the contract.
Requests for Equitable Adjustments (REAs)
Sometimes contractors experience constructive changes instead of a directed change. A constructive change is not the result of the government directing the contractor to do something, but could be a result of a circumstance the contractor encounters in performing the work. Even though constructive changes are not addressed in the Changes Clause, they are remedied as though it were a change directed to the contract.
Furthermore, well-settled case law has established that when a contractor performs work beyond that required by the contract without a formal change order, and such work was informally ordered by the government or is caused by government fault, a constructive change has occurred, thereby entitling the contractor to an equitable adjustment (American Line builders, Inc. v. United States, 26 Cl. Ct. 1155, 1179. 1992). As such, the contractor can submit a REA requesting to recover the additional costs and time to perform this work.
Where Should REAs Be Submitted?
REAs should be submitted to the person in the government that has the authority to make decisions to obligate the government to financial liability. In most cases it is not the resident engineer or contracting officer technical representative (COTR). Delegation of authority was discussed in the first article Delegation of Authority and Notifications. Refer to that article for more discussion on the delegation of authority.
What Happens If My REA Is Denied?
In the event the REA is denied or cannot be settled at a lower level, the contractor can elevate the REA to a Certified Claim. The FAR contains a Disputes Clause which provides the contractor another avenue to pursue recovery. If the contract contains the Disputes Clause then it is subject to the Contract Disputes Act of 1978, as amended (41 U.S.C. 601-613). If the contractor elects to submit a Certified Claim under the Contract Disputes Act of 1978, then the contractor must include certification language in that claim certifying that the claim is made in good faith; that the supporting data are accurate and complete to the best of the certifier’s knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the contractor believes the government is liable; and that the person certifying the claim is duly authorized to certify the claim on behalf of the contractor.
It is not a requirement to submit an REA and have it denied or be unresolved before submitting a certified claim.
However, there is an advantage to submitting the REA first. The costs for preparing and submitting a REA and supporting documentation are generally allowable costs to include in the REA. The costs for preparing and submitting a Certified Claim are not allowable costs to include in the REA. When a claim is properly submitted and certified, interest begins to accrue on the claim from the date the contracting officer receives the claim, but the government interest rates are low.
The Certified Claim MUST be submitted to the contracting officer or to the person designated in the contract. The Certified Claim, should be submitted in a manner such that the date it is received can be verified. Certified mail with return receipt requested is a common way to send it formally. A second copy can be forwarded by email, but a hard copy should be sent and tracked.
For contractor claims of $100,000 or less, the contracting officer must, if requested in writing by the contractor, render a decision within 60 days of the request. For contractor Certified Claims over $100,000, the contracting officer must within 60 days decide the claim or notify the contractor of the date by which the decision will be made.
If the contracting officer fails to notify the contractor of the decision or provide the date in which the decision will be made, then the claim can be “deemed” denied. At that point the contractor has the option to file a timely Notice of Appeal to the Armed Services Board of Contract Appeals (ASBCA) within 90 days of the denial, or to file a lawsuit in the United States Court of Federal Claims within one year of the denial (except as provided in the Contract Disputes Act of 1978, 41 USC 603 regarding Maritime Contracts).
Do I Have To Continue To Work If My Claim Is Denied?
Regardless of whether the REA or claim is denied, the contractor is required to proceed diligently with performance of the contract.
REAs and Certified Claims should reflect the accurate costs that the contractor believes it is entitled to recover. The government has no tolerance for inflated or exaggerated claims. In the next few articles we will discuss how to prepare and price the government construction REA and Claim.
Kay Kendall is currently president of Kendall-Dinielli Consulting, providing consulting services to government and commercial clients. She has extensive experience in preparing requests for equitable adjustment proposals and claims for government construction contractors. She has also consulted Contractors with DCAA audits and resolving audit disputes. You can visit Kendall-Dinielli Consulting at www.kendall-dinielli.com.
Vince – the blogger Reality Bite: Do I still have to work if the federal customer directs me to complete work that is not in the original scope or where they have not provided a contract modification? The quick answer is absolutely. The customer does not want you to use a work stoppage as a means of holding them hostage.
However, I have seen instances where the work is clearly not within your scope, yet you are still required to proceed even if it puts your company at financial risk. In such a case you may want to seek assistance from other interested parties such as the Small Business Administration or your congressional representative.
Remember, regardless of how some may act, most people in the federal government still believe they are not in the business of putting small businesses out of business.
The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune). Any and all rights reserved.
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