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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

• 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.

• 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

• 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.

Contract Financing

• 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

• 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.

CHAPTER 4

Labor Conditions and Labor Laws Affecting Federal Procurement of Construction

Our studies revealed widespread and growing 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.1

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

1 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.

5

3

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.2 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.

2 See Part A, Chapter 11.
340 U.S.C. 276A-276A-5.
440 U.S.C. 270a-270d.
549 U.S.C. 327-333.

While the Davis-Bacon Act applies only to construction purchased directly by the Government, some 60 other statutes make wage rates determined by the Secretary of Labor in accordance with the Davis-Bacon Act applicable to various construction programs affected by Federal grants, loans, insurance, and leases. The Department of Labor estimated that for fiscal 1971, about 59,000 direct Federal and Federally assisted contract awards totaling about $30.1 billion were covered by wage determinations."

Background

The Davis-Bacon Act was aimed at the practices of construction contractors who were paying substandard wages to migrant construction workers. It was enacted during a time of economic depression when competition for limited markets forced employers to cut labor costs and both wages and prices were declining sharply. The original act applied only to contracts in excess of $5,000 and determinations as to prevailing wages were made by the contractors.

The need for strengthening the act was developed in a number of House and Senate Hearings in 1932, and again in 1934. The hearings resulted in extensive amendments to the act in 1935, lowering the threshold to $2,000 and requiring that prevailing wages be determined by the Secretary of Labor rather than by the contractor. The Comptroller General was directed to pay, from accrued payments withheld under the contract, any wages found to be due laborers or mechanics.

The most recent amendment to the act in 1964, extended the coverage of wage determinations to fringe benefits.

The need for consistent policy among the various agencies involved in administering the act resulted in the issuance of Reorganization Plan No. 14 of 1950. Under the plan, the enforcement and compliance responsibility remained in the contracting agencies. However,

U.S. Comptroller General, Report B-146842, Need for Improved Administration of the Davis-Bacon Act Noted Over a Decade of General Accounting Office Reviews, July 14, 1971, p. 8. 749 Stat. 1011, c. 825, Aug. 30, 1935.

8 Public Law 88-349, July 2, 1964. 95 U.S.C. Appendix.

the Secretary of Labor was directed to publish regulations and undertake investigations or other actions to bring about consistent administration and enforcement of the labor standards prescribed by the act.

The history of the Davis-Bacon Act has been one of considerable controversy. After the depression of the 1930's subsided and gave way to the inflationary pressures of the post-World War II period, opponents claimed that the act had outlived its usefulness and ought to be repealed. They claimed that the act contributed to inflation by the breadth and strength of its impact, by its essential denial to the Government of available competition, and by the manner in which it was administered. It was contended that the Fair Labor Standards Act of 1938 afforded sufficient minimum wage protection. There is a strong belief today among construction contractors and Government contracting agency personnel that the deterrent effects of the act outweigh its recognized social value.

Organized labor, on the other hand, maintains that, in the absence of prevailing wage protection afforded by the act, the practice of the Government to award contracts to the lowest responsible bidder would encourage nonunion firms to compete by paying wages lower than prevailing wage scales.

President Nixon, observing that the problem of excessive and inflationary wage settlements in the construction industry constituted an emergency situation, temporarily suspended the act on February 25, 1971.10

Problem Areas

POTENTIAL CONFLICTS BETWEEN THE DAVIS-BACON ACT AND THE NATIONAL LABOR RELATIONS ACT

The Davis-Bacon Act was enacted four years before the National Labor Relations Act."1

10 U.S. President, Proclamation 4031, "Proclaiming the Suspension of the Davis-Bacon Act of March 3, 1931," 36 Fed. Reg. 3457, Feb. 25, 1971. Executive Order 11588, Mar. 29, 1971, reinstating the act, provided for a Construction Industry Stabilization Committee and directed the Secretary of Labor not to take into consideration, for wage determination purposes, any wage or salary increase in excess of that found acceptable by the Committee.

11 29 U.S.C. 158.

Under the National Labor Relations Act an employer has a legal obligation to bargain with the authorized representative of employees regarding terms and conditions of their employment. Once agreement has been reached, the employer cannot unilaterally modify it. If the Secretary of Labor prescribes wage rates pursuant to the Davis-Bacon Act higher than those agreed to in collective bargaining, the employer must obtain approval to depart from the collective bargaining agreement; otherwise he would breach the collective bargaining agreement and violate the National Labor Relations Act. Although there is little likelihood that a union would sue an employer for paying employees wage rates higher than the union had negotiated, the existence of separate legal obligations under the Davis-Bacon Act and the National Labor Relations Act can pose a dilemma for potential contractors for Government construction work.

Possible conflicts between the Davis-Bacon Act and the Railway Labor Act 12 were recognized by the Department of Labor in the case of construction work performed by employees of railroad companies covered by collective bargaining agreements. By administrative decision in 1942, the Secretary of Labor held he was precluded from applying the Davis-Bacon Act to construction work performed by such employees because they were subject to the Railway Labor Act which "contains a comprehensive system for the establishment and maintenance of wage rates for the employees of railroad common carriers." However, a similar rationale has not been extended to construction work performed by employees of contractors covered by collective bargaining agreements subject to the National Labor Relations Act.

THRESHOLD FOR APPLICATION OF THE ACT

The requirement for applying the DavisBacon Act to contracts in excess of $2,000 was established in 1935, thirty-eight years ago. Numerous small contracts exempted by that threshold in 1935 are now covered by the act because of inflation. In today's market it takes

12 45 U.S.C. 151.

$10,200 to buy as much construction as $2,000 bought in 1935.13

The present $2,000 threshold of the act practically eliminates the possibility of any construction being exempted. As a result, there are increased administrative costs for both the contracting agencies and the Department of Labor. The increased number of wage determinations required of the Department of Labor also hampers the effective collection of data.14 The number of wage decisions issued has increased from 3,884 in 1945 to about 26,000 in each of fiscal years 1970 and 1971.15 The Department of the Interior has proposed legislation which would raise the minimum dollar amount of contracts subject to the Davis-Bacon Act from $2,000 to $25,000.16

Most other Federal agencies either support the Department of the Interior proposal or at least the proposition that the $2,000 threshold ought to be increased. The General Services Administration (GSA) agrees with the proposed $25,000 limitation. Of the agencies surveyed during our study, the majority supported a dollar limit of $25,000; however, suggestions ranged from $5,000 to $100,000. After $25,000, the next most common recommendation was $10,000. The reasons given are essentially the same as those advanced by the Department of the Interior.

The Assistant Administrator, Office of Government Contracts and Special Wage Standards, Wage and Hour Division of the Department of Labor, stated to our Study Group that the proposed legislation would ease the Department's workload, although the full amount of the administrative savings to the contracting agencies and to the Department of Labor is not quantifiable.

The General Accounting Office (GAO) has

13 Calculated by the Commission from data in 1935 U.S. Department of Commerce Composite Cost Index for Construction converted to 1967 100 base from data on page 385, Historical Statistics, Colonial Times to 1957, series N 85-103 (1947-49 100); also see table 1094, "Price and Cost Indexes for Construction and Selected Components of Construction: 1950 to 1970," p. 664, Statistical Abstract of the United States, 1971 (1957-59 100) and U.S. Department of Commerce Bureau of Census Construction Reports, Value of New Construction Put in Place, Report C30-72-7, Sept. 1972, table 18, p. 22 (July 1972 index), 1967 100.

14 Letter from Leo R. Werts, Assistant Secretary for Administration, U.S. Department of Labor to Hon. Elmer B. Staats, Comptroller General of the United States, Oct. 9, 1970.

15 Note 6, supra.

16 Memorandum from the Department of the Interior to OMB, Dec. 3, 1971, transmitting the Department's proposed legislative program for the 92d Cong., 2d sess.

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