Government contracting: an opportunity in a down economy

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Although the recession may finally be coming to an end, commercial lenders remain reluctant to provide money for new construction. Many surviving contractors are taking jobs for small profit margins, if any. Where else can contractors turn to find work? Try the government sector.

Fundamentally, the only difference between commercial and government contracting is the source of the money. As the name suggests, government contracts are generally funded with public tax dollars instead of dollars from banks, investors or other private sources.

However, there are quite a few strings attached for contractors engaged in public contracting. And there is more on the line for contractors who fail to follow the unique rules and procedures of the public procurement code, including civil and criminal penalties. So it is crucial to become familiar with those rules before contracting with government agencies.

Here are some of the important differences between private and public procurement contracting. The focus is on federal projects, because state and local agencies generally follow the federal government’s lead in regard to contracting rules.

Getting paid

In the commercial contracting world, many project owners have filed for bankruptcy as property values have plummeted and construction funds have dried up. As a result, many contractors have gone unpaid for their work. On the other hand, public contracting entities must formally appropriate, and as such, set aside money for projects prior to entering into contracts. Accordingly, the risk of not getting paid is much smaller on government jobs than on private ones.

Competition in contracting

In the private world, owners have complete discretion on how to let a contract, with whom and under what terms and conditions. Competition is optional. In contrast, government agencies must follow strict rules – with a strong preference for competition. The agency will typically issue an invitation to bid for hard bid/low price competitions or a request for proposals for negotiated contracts. With one limited exception (where there are few or no other contractors willing or able to perform certain work), the successful contractor will have to compete with others for one or more portions of the work. Accordingly, the rules provide a fair opportunity for all contractors to be selected.

Bid protests

If an agency were to fail to follow procurement rules when entering into a government contract, “disappointed bidders” (those not awarded the contract) could file a bid protest to prevent the agency and the successful contractor from proceeding. The time deadline for filing a protest is short (typically between seven and 10 days from notification) and protesters must strictly follow the rules. On the other hand, the private sector presents no opportunities to challenge an award because owners are free to contract with anyone they choose. A successful protest presents a unique opportunity and a powerful tool for contractors to require an agency to either rebid the contract or revise the contract award.

Change orders

Both private and public contracts typically contain change order provisions that let the owner make changes within the general scope of the contract. However, the changes clause in a government contract is far more powerful because the government can unilaterally require a contractor to proceed with change order work without agreement on an adjustment in contract price and time. In a private setting, it is common for contractors not to proceed with work without agreement on the change order. As a result, government contractors must be prepared to “carry the contract” while working out a resolution on a disputed change order. The good news is that generally the contractor will get paid; it just may take some time.

Broad audit rights

Because tax dollars are at stake, agencies take special precautions to track money used on public jobs. While private contracts may also contain owner audit rights (especially on cost reimbursement as opposed to fixed-price contracts), the government’s rights are far broader, requiring contractors to follow strict accounting rules and open their books (and their subcontractors’) upon demand. While large government contractors are accustomed to such periodic audits, smaller and less sophisticated contractors may consider this somewhat burdensome and an “invasion” of their business.

Authority of the government contracting representative

Project owners typically have representatives who sign contracts and authorize change order work. If it turns out on a private job that the representative did not have actual authority to direct a contractor to proceed with certain work, the contractor may still have recourse against the owner under the theory of apparent authority. In government contracting, the concept of apparent authority in this context does not exist. The government’s representatives, called “contracting officers,” have only such authority as specified in a written “warrant” signed by the head of the agency. This authority usually allows for the base contract amount plus a reasonable volume of change orders. However, in the case that significant project changes are required, contractors should take care to ascertain the CO’s authority prior to proceeding with work. If the contracting officer agrees to modify the contract above the amount authorized, the contract becomes invalid.

False claims and criminal sanctions

The stakes are greater in government contracts because the government can impose civil and criminal penalties for failing to follow the rules. These severe sanctions, including hefty fines or even imprisonment, surface when contractors make “false claims” (whether inadvertent or intentional) – such as, for example, providing inaccurate data during a contract negotiation or submitting a payment application reflecting inaccurate information. Contractors that take on such jobs should ensure that compliance is monitored internally. In contrast, contractors can use just about any negotiation tactic on a private job, and owners may provide leeway when reviewing payment applications.

Marcus Eyth is of counsel in the Portland office of Davis Wright Tremaine LLP. He advises and represents U.S. and foreign companies on all aspects of construction and government procurement contracting, commercial transactions and litigation matters. Contact him at 503-778-5324 or [email protected].