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a cooperative and expeditious performance of the job. The use of competitive negotiation rather than formal advertising would permit the greater use of cost-type contracts, which might be more appropriate in some circumstances, especially on complex, long-range construction projects.

Our studies show that more than 95 percent of disputes under construction contracts arise under fixed-price contracts.12 The contract vehicle should permit risk to be reasonably allocated and provide the flexibility for necessary changes.

Some construction projects present the same problems as other large procurements where definitive design or performance specifications are not available, accurate cost estimates cannot be made, and the risk involved in complying with the specifications cannot be determined Under these conditions formal advertising and fixed-price contracts should be avoided. There is no compelling reason for distinguishing construction contracts as a class from other types of procurement, such as production contracts, commercial product purchases, or major system acquisitions. The contract process should clearly be tailored to the nature of the work. Under present rules there is a potential for overdependence on formal advertising procedures and on fixed-price contracting to the exclusion of other methods. If the Commission's general recommendations on statutory revisions are approved and implemented, these problems in construction procurement would be greatly reduced.

regulatory system, of a self-contained treatment of rules for procurement of construction. Today, construction buyers and sellers must plow through voluminous regulations applicable to other areas, such as research or major system procurement, to isolate specific treatment of construction. Our suggestion for experimentation with separate, self-contained regulatory treatment of differing types of procurement could be beneficial to the procurement of construction.

Under present law, informal, expedited small purchase procedures can be used only for purchases of up to $2,500.13 Our recommendation for increasing this ceiling to $10,000, with provision for periodic adjustment, would simplify the task of contracting for thousands of small construction and maintenance jobs each year and decrease Government and contractor administrative costs.

Subcontract "Bid Shopping"

There is no general agreement as to what constitutes “bid shopping,” but to the construction industry it is an emotional subject which poses many complex management and legal problems. Although bid shopping occurs in areas of Government procurement other than construction, in no other area is it viewed with such concern by the industry. The terms "bid shopping," "bid peddling," and "bid chiseling” have been used interchangeably at times. For purposes of this discussion we use the term “bid shopping” to refer to all efforts by a prime contractor to use the lowest bid received on a subcontract as leverage to gain an even lower bid, whether these efforts occur before or after the award of the prime contract.

Subcontract bid shopping is apparently common in the construction industry. It can create vigorous competition which may provide the general contractor (or a higher-tier subcontractor who “bid shops” the lower tiers) with larger profits at the expense of subcontractors. The problem is whether the Government can take practical steps administratively or by

Statutes and Regulations

Construction contractors who contract with two or more Federal agencies find that although their contracts are all with the Government, differing policies, procedures, and interpretations are applied by the agencies.

Consolidation of the basic procurement statutes and greater uniformity of implementing regulations, as we recommend in Part A, would facilitate construction procurement. A further aid to those who work in the construction area would be the promulgation, within a single

10 Armed Services Procurement Act of 1947; 10 U.S.C. 2301 et seq. and the Federal Property and Administrative Services Act of 1949 ; 40 U.S.C. 471 et seq.

2 Note 10, supra.

legislation to prevent this practice in Federal construction.

Often the time involved prior to the prime contract bid opening simply does not permit full evaluation by prospective prime contractors of the subcontractor's bids to see if (1) the bids relate precisely to their respective scopes of work, (2) the bids are reasonably priced, and (3) there are management and contractual concessions that can be made by the general contractor which would persuade the subcontractor to reduce his price. In such cases, further negotiation between the successful bidder for the prime contract and potential subcontractors may be necessary before subcontracts can be awarded.

The Code of Ethical Conduct of the Associated General Contractors of America de clares bid shopping unethical per se by stating a prohibition against “bargaining down” subcontract prices by use of other bid prices.

Difficulties involved in solving the bid shopping problem become apparent upon examining the three preventive methods now in use. Various requirements for the listing of subcontractors are the best known and most widely used method of preventing bid shopping. Here the general contractor must list subcontractors by name in his bid and cannot make a substitution without demonstrated justif 'ion. When this method is used, subcontractors who have more than a minimum percentage of the total job are generally required to be listed.

A form of subcontractor listing is currently used by GSA and the Department of the Interior for buildings and by several States for State construction projects.

On GSA contracts for new construction estimated to cost more than $150,000, the bidders must list in their bids the names of subcontractors they will engage if awarded the contract. The listing of subcontractors for such elements as plumbing, heating, air conditioning and ventilation, electrical work, and elevators is typically required.14

There are two apparent difficulties with attempts to control bid shopping by the listing method. First, the general contractors often do not have time to evaluate fully and assemble the subcontractor bids. Second, a subcontractor who submits a successful bid can sharply re

strict the general contractor in final negotiation on the scope of work of the subcontract. Under bid listing there is no contract between general contractor and subcontractors prior to the opening of prime contractor bids.

The listing of subcontractors may fail to prevent bid shopping because of subterfuge, both by general contractors and subcontractors. General contractors do not have to list subcontractors for those portions of the job they plan to perform themselves. For those specialty items for which the general contractor has listed no one, he can shop after bid opening until he finds a subcontractor willing to perform at the general contractor's price. Once found, the subcontractor and his employees can be retained to perform the work as employees of the general contractor.

Another approach is for the general contractor to list either a dummy or subsidiary company as his subcontractor. The bid shopping can then occur at a tier below the first-tier subcontractor, since only first-tier subcontractors must be listed. This approach has been attempted on GSA 15 and state jobs alike.

The second system, filing of bids by prospective subcontractors, is used primarily in Massachusetts. The State advertises separately for major portions of a job as well as for the total job. Subcontractor bids for the special portions are received by the State a week or two prior to the time fixed for receipt of general contractor bids. The subcontractor bids are publicly opened and recorded. In filing their bids with the State, the subcontractors may specify which general contractors may or may not use their bids.

This practice is necessary because subcontractors may not give the same price to all general contractors. Because of experience with factors such as compatibility and the general contractor's expertise in a particular specialty, a subcontractor's price may be lower to one general contractor than to another. There may be certain general contractors for whom a subcontractor would not want to work under any circumstances.

The third system used to protect subcontractors is the multiple prime contractor system employed in New York and several other States for State financed construction. Here the job

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14 41 CFR 5B-2.202-70.

18 See Comptroller General Decision B-162586, May 14, 1968.

is broken down into main portions, such as foundation, structural steel, electrical, and mechanical. The State lets a prime contract for each portion through competitively bid fixedprice contracts.

This system reduces the opportunity for bid shopping by making prime contractors of a number of firms which would normally be first-tier subcontractors. It does not prevent bid shopping below the prime contract level.

Of all the systems designed to protect subcontractors, the multiple prime contractor system is the most expensive and the most chaotic. A construction project is normally performed in concert by individuals brought together for that job and then disbanded. For such an assemblage there must be a leader. Traditionally, the general contractor has been that leadercoordinating the elements, pacing the work, and directing overall production. Without the general contractor in that position, the buyer must take on the effort or hire someone to do it for him—usually a contract manager. In any event, no matter how it is accomplished, another layer of management is added, at additional cost.

In summary, these efforts have reduced bid shopping only among principal subcontractors of the first-tier. The efforts burden contract administration personnel, and while protecting some subcontractors from bid shopping, they have not precluded bid shopping by the higher-tier subcontractors in the selection of lower-tier subcontractors and suppliers.

Bid shopping occurs on non-Federal as well as Federal jobs; however, attempts to develop a system to control bid shopping to the satisfaction of all parties have been largely unsuccessful. General contractors and subcontractors alike appear to be responsible for the failures in that they both appear to “bid shop” where such practice serves their best interest. Government contracting officers, engineers, and inspectors have not indicated that inferior work, higher prices, or reduced competition have resulted on jobs they suspected were “shopped.”

Since 1955 bills requiring the listing of important subcontractors at the time the prime building contractor submits his bid on Federal construction projects have been periodically introduced. The most recent, H.R. 10, intro

duced in 1971, would require persons submitting bids on public works contracts to specify certain subcontractors who will assist in the construction. According to its sponsor, Congressman Robert L. Leggett, H.R. 10 is a measure “to save contractors and subcontractors from themselves and provide reasonable provisions to safeguard a subcontractor ... when he has submitted a reasonable bid on Federal work." The bill appears to be in line with GSA and Department of the Interior regulations, which over the past seven years have required subcontractor listing. The Department of Defense and other agencies with major construction responsibilities have not issued similar regulations.

Both GSA and the Department of the Interior have opposed H.R. 10, stating that current administrative measures are adequate and that H.R. 10 would not afford the necessary administrative flexibility.

A system to halt all first-tier bid shopping on Federal construction, in an effort to control those general contractors who practice it, would be likely to cost the Government far more than the benefits to be gained. We do not believe the situation would be materially improved by the adoption of mandatory requirements—by legislation or otherwise—and do not recommend a mandatory Government-wide requirement for subcontract listing in Federal construction.

In Part A of our report we discuss the importance of subcontractors in the Government procurement process and urge that contracting agencies take steps to ensure the continued existence of a viable subcontractor community. Bid shopping can have adverse effects in some situations, and we believe the contracting agencies should continue to seek practical methods to reduce or eliminate such practices.

STUDY GROUP CONSIDERATIONS

Our study group on Construction reviewed a number of problems in Federal construction procurement and made detailed recommendations. Significant areas of concern identified by the study group are listed below.

Solicitation and Award

Contract Financing

Professional opinions on subsurface conditions. Interpretative analysis of factual data obtained by the Government from soil borings or drill cores is not normally furnished prospective bidders in construction projects. • Environmental protection requirements. Environmental restrictions on construction operations are often not identified in bidding documents. • Cost estimates. Government estimates of construction costs are normally withheld from prospective bidders.

Bond premiums. The cost of payment and performance bonds is recovered by the contractor through contract payments rather than as a separate transaction between the Government and the contractor. • Mobilization costs. The cost of site mobilization, or "start-up," is often not singled out for separate treatment under the contract. • Retained percentages of progress payments. A percentage of progress payments is retained even if the contractor is on schedule.

Contract Administration

Standard commercial products. Standard commercial products known by the Government to fulfill specification requirements are often not disclosed to bidders or contractors.

Regulations and Contract Clauses

Availability of federal field construction personnel. There is often inadequate availability at the construction site of Government personnel with authority to make technical and business decisions required by conditions at the site and by the contract terms. Change orders. Change orders are often negotiated by the Government on an "all or nothing" basis rather than on the basis of payment of the agreed amount and negotiation as to matters in disagreement.

We do not make recommendations on these detailed matters, but urge the contracting agencies to take them into consideration.

Truth in negotiations. Government regulations related to disclosure of contractor cost or pricing data are not tailored to construction negotiations. • Warranty provisions. Warranty clauses in construction contracts vary from agency to agency.

CHAPTER 4

Labor Conditions and Labor Laws Affecting Federal Procurement of Construction

Our studies revealed widespread and grow ing concern about the impact of labor conditions and laws on construction. Some of the problems are the result of the evolution of the labor movement in the construction industry and general labor legislation, and affect public and private construction alike. Others result from conditions peculiar to Government contracting or laws applicable to Government contracts.

In private as well as Government construction, costs have continued to increase at an alarming rate. While many inflationary factors are root causes, both Government and industry assign some of this responsibility to traditional work practices, union control over entry to crafts, training programs for apprentices, and measures which affect mobility of craftsmen. Some persons, including union representatives, also charge part of the result to construction contractors because they have allegedly abdicated responsibilities to organized labor. Although the causes of increased construction costs are many and diverse, it is apparent that Government construction activities both affect and are affected by private construction. The fact that the Government is the largest single buyer of construction has unavoidable impacts on the construction industry.

In Part A, we discuss National Policies Implemented Through the Procurement Process, and make recommendations (1) for a program to reexamine the full range of social and economic programs, (2) to increase the visibility of costs

associated with their implementation, (3) to provide uniformity in treatment for comparable violations, and (4) to change the dollar thresholds at which these programs are applied to the procurement process. Three of the statutes affected by these recommendations are the Davis-Bacon Act, the Miller Act," and the Contract Work Hours and Safety Standards Act." The Davis-Bacon Act provides for the establishment of minimum wages for laborers and mechanics on Federal construction projects, and the Miller Act provides for the furnishing of payment and performance bonds. The Contract Work Hours and Safety Standards Act provides, among other things, for the payment of overtime for work in excess of 40 hours a week or more than 8 hours a day.

Our study has substantiated the existence of significant problem areas with respect to these statutes which affect the economy and efficiency of Government construction.

DAVIS-BACON ACT

The most important labor law directly affecting Federal procurement of construction is the Davis-Bacon Act. It provides that Federal construction contracts exceeding $2,000 must require the contractor to pay laborers and mechanics no less than the wages determined by the Secretary of Labor to be prevailing in the city, town, village, or other subdivision of the State in which the work is to be performed.

* The interaction of the general labor laws between private and Government construction was examined in detail by Study Group 13C (Construction). An analysis of the situation is covered on pp. 160–179 of its report to the Commission.

? See Part A, Chapter 11. 840 U.S.C. 276A-276A-5. * 40 U.S.C. 270a-270d. 549 U.S.C. 327-333.

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