The Ins and Outs of Governmental Construction Bidding
Government construction contracts can be extremely lucrative for commercial construction firms. In 2018, construction spending from federal, state, and local agencies totaled $307.1 billion dollars, with $21.3 billion coming from federal agencies and $285.8 billion from state and local agencies, according to data from the U.S. Census Bureau. That’s a 3.6% increase over the total public construction spending from 2017. Through August 2019, public construction spending has totaled $214.3 billion, which is on pace to exceed 2018’s total.
Many construction firms rely on government construction contracts as their sole source of revenue, while others will bid on a mix of public and private opportunities. There are a number of regulations and statutes governing public construction contracting. These can vary greatly between agencies, so it’s important to understand which rules apply and carefully read all the bidding requirements when pursuing public construction contracts.
While an exhaustive list of all the regulations and statutes for all the federal, state, and local agencies would be nearly impossible to compile, there are some common requirements and practices that nearly all agencies follow. Here’s a look at a few things to keep in mind when bidding on government construction contracts.
For most public construction projects, cost is the determining factor in awarding a contract. The most common project delivery method is the Design-Bid-Build method where general contractors bid on the project after an architect has already been selected and completed the plans and specs.
Projects must then be advertised, with an Invitation for Bids or Request for Proposals, in a local newspaper or by electronic means, usually on the agency’s website, for a set number of days ahead of the bid date.
For public projects, the single prime, lump sum contract is most prevalent. General contractors take sub-bids from trade contractors and submit a bid to build the project for a set price. General contractors must submit a sealed bid or proposal by the bid date, at which time they are typically opened and read aloud.
Projects are awarded to the lowest responsive bidder, sometimes referred to as the lowest responsible and eligible bidder or the lowest responsive and responsible bidder. A responsive bid means that it has met all the legal requirements and substantially complies with all of the bid specifications. A responsible bidder is one who has the skills, ability, and financial resources to complete the perform the work and complete the project.
Other Procurement, Contracting, and Project Delivery Methods
While the competitive bidding and the Design-Bid-Build method reign supreme, alternative procurement, contracting, and project delivery methods are being used in public construction and gaining in popularity.
Two project delivery methods seeing an uptick in use are Design-Build and Construction Manager at Risk. With Design-Build, there is a single contract that covers both the design and the construction. While there are design-build firms out there, architects and general contractors will often form a joint venture to submit proposals for these types of projects.
The Construction Manager at Risk (CMAR) method involves hiring a contractor to work as a consultant during the design and construction and is responsible for delivering the project at a predetermined guaranteed maximum price (GMP). This is where the “at risk” comes into play with the CMAR method. If the project exceeds the GMP, the construction manager is financially responsible for any overages.
Rules for using the CMAR methods vary. In North Carolina, it is allowed only after the public entity has determined that CMAR is in the best interest of the project. The CMAR may not self-perform any of the work on the project except in a few rare instances like not receiving any bids for a subcontract.
Other procurement methods used on government contracts include best value, negotiated, sole source, and qualification-based. Some of the contract methods used other than lump sum and GMP include unit price, cost plus fee, and incentive contracts. While these methods aren’t as common, they are used occasionally so it’s a good idea to familiarize yourself with what they entail if you ever come across one as part of your bid/no-bid decision making.
Prequalifying general contractors for in order to bid on specific projects is a growing trend among public agencies, especially on the larger, more expensive projects. Prequalification can be done on a project by project basis or for any projects an agency lets. Again, rules for when an agency can or is required to prequalify contractors varies between public entities.
For example, the Florida Department of Transportation (FDOT) requires that contractors be prequalified in order to bid on any road, bridge, or transportation project that costs more than $250,000. The FDOT prequalification is done on a yearly basis.
Other prerequisites for bidding to a particular agency or on a specific project include registering to bid or receiving security clearances for your workers. To bid on a federal construction project, a company must first register with the System for Award Management. You will need to know your North American Industry Classification System (NAICS) code, tax identification number, and have a registered Data Universal Numbering System (DUNS) code from Dun & Bradstreet.
Be sure to do your homework and perform a little research on any project so you are considering bidding on to take care of any prequalification or prerequisites in plenty of time to be able to submit your bid. It’s no fun when you find a perfect project to bid only to discover that it’ll probably take a month to get prequalified for a project that bids next week.
Often on public construction projects, the owner will hold a pre-bid meeting or site visit to allow contractors and subcontractors to get a better understanding of the project requirements. These are great opportunities to ask questions about the bid or site conditions as well as network with trade contractors or general contractors interested in bidding on the project.
Occasionally, these pre-bid meetings are mandatory. Failing to attend a mandatory pre-bid meeting means you aren’t eligible to bid on the project and agencies often use the attendance lists to send out addenda to the bid or bidding documents. It’s always a good idea to attend pre-bid meetings when they are offered, regardless of whether they are mandatory or not, in order to submit a better bid.
MBE, DBE, & SBE Programs
In order to ensure that small, minority-, and women-owned firms had the equal opportunity to participate and compete for construction contracts, many federal, state, and local agencies have established programs to award a certain number of contracts to those businesses.
These programs usually have an overall participation goal for all their projects. For instance, Maryland has the country’s oldest Minority Business Enterprise (MBE) program, dating back to 1978, with a 29% overall participation goal for all construction projects for most state agencies. The U.S. DOT has the Disadvantaged Business Enterprise (DBE) program that covers federal transportation projects and state and local projects that received financial assistance from the U.S. DOT.
The U.S. DOT defines a DBE as:
“A for-profit small business concerns where socially and economically disadvantaged individuals own at least a 51% interest and also control management and daily business operations.
African Americans, Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian Americans, and women are presumed to be socially and economically disadvantaged. Other individuals can also qualify as socially and economically disadvantaged on a case-by-case basis.”
Each agency receiving federal funds for projects are required to set annual DBE participation goals as well as contract-specific DBE subcontracting goals. To fulfill those goals, the DBE subcontractor must provide a commercially useful function. In instances where the participation goal is not met, the prime contractor must prove that they made Good Faith Efforts to meet the goal.
There are also programs that encourage or incentive participation by Small Business Enterprises (SBE), Women Business Enterprises (WBE), Small Disadvantage Businesses (SDB), Women-Owned Small Businesses (WOSB), Veteran-Owned Small Businesses (VOSB), Service-Disabled Veteran-Owned Small Businesses (SDVOSB), and Historically Underutilized Businesses (HUB).
Businesses that fall into any of these categories should get their business certified and registered with the individual agencies in order to take advantage of these programs and projects.
The Davis-Bacon Act of 1931 is a federal law that requires contractors and subcontractors be paid locally prevailing wages (including fringe benefits) on any federally funded or assisted construction projects. Prevailing wages are determined based on wages paid to the various classes of laborers working on specific types of construction projects in a given area.
In addition to federally funded or federally assisted projects, 26 states and Washington, D.C. also have their own prevailing wage laws under what are called “Little Davis-Bacon Acts.” Threshold amounts vary from state to state and the prevailing wage will differ based on where the project is taking place so it’s important to note when the apply and what those amounts are so they can be incorporated into your bids.
Government agencies often require construction bonds from prime contractors to guarantee that bids, construction work, and payments to subcontractors and suppliers to ensure that the terms of the bid and contract are followed.
Construction bond typically involves three parties: the obligee, the principal, and the surety. The obligee for public projects is the agency that is bidding out the work. The principal is the general contractor or construction manager. The surety is the agency that underwrites the construction bonds and guarantees payments will be made to the obligee if the general contractor doesn’t meet their obligations.
General contractors purchase bid bonds from the surety which covers the penal sum, or the maximum amount of damages the surety will cover with the bond. The three most common bonds required on construction projects are bid bond, performance bond, and payment bond.
A bid bond guarantees that a bid is accurate and true, and that the contractor intends to perform the work if they win the bid and are awarded a contract. If a contractor submits a bid without a required bid bond, the bid won’t be opened. Obligees can make a claim on the bid bond if the contractor withdraws their bid, doesn’t have the financial credentials to perform the work, or declines an award. In some instance, a claim can be made if a contract isn’t executed within a set number of days after award. Bid bonds are typically for 5% of the total bid.
Performance bonds are used to ensure the contractor performs the construction work as outlined in the contract. If they fail to do so, the performance bond is used to guarantee the owner doesn’t lose money by having to bring in another contractor to complete the project. Performance bonds are typically 100% of the bid.
Payment bonds are in place to ensure that the general contractors pay all their subcontractors and suppliers for the work and materials provided. If a contractor defaults or files for bankruptcy, the owner can make a claim and use the money to pay any outstanding balances. Payment bonds are typically for 100% of the bid.
Performance and payment bonds are required by the Miller Act for federal projects and are governed by “Little Miller Acts” by individual states.
Other types of bonds that are sometimes required on construction project include: contractor license bonds, supply bonds, and maintenance bonds. Contractors should check with their surety agent to review your company’s financials, skills, resources, and capability to perform the work.
Most surety companies give you two bonding capacity amounts: one for single projects and an aggregate for all open projects. Once you complete a project you should inform your surety agent so they can free up your bond line before your next project if necessary.
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