The United States Census Bureau estimates that the entire American construction industry generates around $1.2 trillion dollars each year. The federal government is responsible for around $400 billion of that money, and that is why such a large federal construction contracting business has grown throughout the country. But not all construction dollars are created equal, and no where is that diversity more evident than in the differences between federal and private contracting.
The Benefits Of Federal Construction
Each year, the federal government puts together its budget for construction projects and then stays with that list of projects until they are completed. When you work with the federal government, you are tapping into a stream of revenue that is much more stable than the private construction industry. Projects get announced and then shelved all the time in the private world, but the federal government has a process that ensures that a project will be awarded after it has been announced.
There are a lot of regulations involved with doing federal construction work, but those regulations and the processes used to enforce them are extremely predictable. Once a contractor understands how to do business with the federal government, they do not have to re-learn the process with each project. In the private world, every company has their own way of doing things and those processes can change when a contracting associate is replaced.
The Challenges Faced When Doing Business With The Government
One of the reasons that the list of contractors who do business with the federal government is not longer is because of the restrictions that come with the job. Since federal projects spend taxpayer money, the government is extremely strict about enforcing its rules. Some contractors simply cannot do business with such a strict process, but it can be very lucrative for those who can.
Five Problems To Be Aware Of
Change Orders and Payments
In the private sector, construction companies usually expect change orders to be approved by the project owners, and some companies will pad their final invoice a little to make a few extra dollars. With government contracts, it can be extremely difficult to get change orders approved even for the most obvious need. Contractors must submit payment invoices that match their contracted amount either exactly or within a reasonable amount if they want to get paid at all.
Relationships With Contracting Officers
The relationships between private contracting managers and construction companies is loosely governed by laws that are generally ignored. Lavish lunches and private gifts for contracting managers are common in the private sector. When a contractor works with a government contract, any attempt to influence the contracting officer with gifts is a federal offense punishable by jail. Contractors can also go to jail if they give false information about their experience in the industry.
The other challenges of getting involved in a government contract is that the federal government has a lot of things to worry about. For example, if your construction company is building a special hangar for a jet that eventually does not get approved for production, then the government can decide to terminate the contract in the best interests of the taxpayers.
The contractor is allowed to bill for their costs up to that point of the project, and they can even bill for profit that had been part of their budget. But when the government decides to shut a project down, all work must stop and the contractor has to clear out. This is not a common situation, but it can happen.
Subcontractors Cannot Sue
In the public sector, only general contractors can sue the federal government for payment. A subcontractor has no right to sue, and must pursue action against the general contractor to get the issue resolved. In some cases, a subcontactor can have their payment pulled from the general contractor’s project bond, but that can be an extremely long process.
Contractors Must Use Prevailing Wage
Contractors who win federal construction contracts are forced to use the federal prevailing wage scale to pay their employees. In some cases, using the prevailing wage can add a considerable amount of cost to a project.
Understanding And Getting Through The Construction Bidding Process
Federal construction bids are either done through a sealed bid process, or through a contractor negotiation. The conditions for a sealed bid include:
- The project can wait to go through the process of a sealed bid and is not an emergency or rush project
- The contracting officer is confident that there will be more than one sealed bid received
- The project can be awarded on the basis of a lowest price, lump-sum bid
- There is no need for the contracting officer to discuss the bids or bidding process directly with contractors
All of the sealed bidding is done in a public place and the contractors are able to be there when the bids are opened. Contractors must remember that late bids are not opened or accepted, and their price must include all of their work, materials, and labor.
The negotiation process is used when a sealed bid is inappropriate. For example, if a key government building catches fire, then it will need to be repaired immediately. The contracting officer conducts direct negotiations with contractors and determines who is awarded the contract based on those negotiations.
One of the benefits of the negotiation process is that most of the contracts awarded in this way are usually awarded on merit and experience rather than price. Each contractor is given a chance to present their qualifications for the project, and the contracting officer is also allowed to discuss non-cost factors with contractors.
The Changing Face of Government Contracting
Any kind of contracting done with the federal government is going to find itself part of the political process, and that process can make federal contracting a challenge. In May 2017, the state government of California said it was considering a measure that would ban any contractors that worked on Donald Trump’s immigration wall from being able to bid on California state projects. The measure is not law yet, but it could set a precedent that would make the decision to get involved in the multi-billion dollar wall project a difficult one.
Donald Trump was proposing a $1 trillion infrastructure improvement budget on the campaign trail funded by private investors, and that got the construction industry buzzing. The buzz was so strong that many of the larger federal contracting corporations saw spikes in their stock prices. But when Trump took office, his attention was diverted from infrastructure planning by scandals and other more pressing issues. When you are a federal contractor, the news headlines can sometimes take money right out of your pocket.
The federal construction contracting industry provides access to a relatively predictable and steady stream of opportunities. If you can learn how to handle all of the protocol and paperwork that comes with government contracting, then it can be a lucrative business. However, if you are unable to play by the rules and try to treat government contracting like it was in the private sector, then you may find yourself out of business. If you really try to bend the rules, you could find yourself in jail.