Under legislation approved this spring by the Washington State Legislature, three state agencies leapfrogged over the rights of subcontractors and suppliers to tap into retainage funds on public works projects when contractors fail to pay taxes and various premiums. Retainage refers to the 5% of each progress payment that is held back as a trust fund for certain parties by state and local agencies on public works projects.
Expands the list of state agencies that must be notified of final acceptance of a public works project.
Requires public agencies to obtain an approval from additional state agencies prior to releasing retainage to the contractor.
Changes the priority order of claims filed against retainage, in the event there are insufficient funds to cover all claims filed.
Notification of State Agencies: Under the previous law, public agencies were only required to notify the Department of Revenue of the completion of a public works project. Under SHB 1555, public agencies are now required to notify Revenue, Employment Security, and Labor and Industries (L&I) for all public works projects over $35,000. The process for notifying Revenue has been in place for years, and Revenue has informally forwarded public agency notices to Employment Security. However, no process is in place for notifying L&I.
On July 24, 2009, L&I issued an e-mail informing public agencies they would not be ready to implement the notification provisions of SHB 1555 until at least October 1, 2009. Thus, without instructions from Labor and Industries, public agencies are left with no choice but to wait for L&I to provide instructions for how to implement the new notification requirement.
Approval from State Agencies: Likewise, prior to the adoption of SHB 1555, public agencies were only required by chapter 60.28 RCW to obtain an approval from the Department of Revenue for payment of state excise taxes by the contractor. Most agencies made it a practice to also obtain a release from the Employment Security Department for payment of unemployment compensation premiums, and many agencies also verified from the Department of Labor and Industries’ website that the contractor and subcontractors were current on paying workers compensation premiums.
Under the provisions of SHB 1555, public agencies are now required to obtain the releases of these three agencies for all public works projects over $35,000. In practice, with Labor and Industries’ notification that they are not prepared to issue releases until October 1, 2009 or later, public agencies should ensure they receive releases from Revenue and Employment Security now, and from L&I once they have developed implementation procedures.
Priority of Claims Against Retainage: Under the provisions of SHB 1555, subcontractors and suppliers lost crucial rights to tap into the retainage, falling behind state agencies. The priority order of claims is important for when there are insufficient funds remaining in the retainage account, and helps determine who gets paid first or at all. The following chart illustrates the changes in the priority order of claims: Implementation: With the addition of Employment Security and Labor and Industries as beneficiaries of the retainage trust fund, subcontractors and suppliers may find little or no money left in the retainage for a project after state agencies have made their claims. Unlike subcontractors and suppliers, state agencies do not need to obtain a court order before requiring public agencies to disburse retainage funds to them.
The new legislation may discourage subcontractors and suppliers from pursuing foreclosure of their claims against the retainage if there is a lower likelihood of recovering funds from retainage.
Another impact of the new legislation, once fully implemented with notification and approval required from Labor and Industries, is that the process for releasing retainage to contractors may take longer.
I will continue to monitor the impacts and new processes of SHB 1555 and will post information on this Blog as it becomes known.
I am hoping to offer a four hour training workshop on "Public Works Contract Close-out: Bonding, Retainage, and Claims" sometime this fall that will address the impacts of the new legislation as well as other important issues. If you are interested in being notified of this upcoming training opportunity, please contact me, and I will let you know more about where and when this low cost training will be held.
Frequently, on public works projects, a public agency will request bids for alternates or additives.
While actual usage of these terms varies between agencies, I would characterize an alternate as an alternate material or method of construction different from what is included in the base bid. An additive, on the other hand, is an additional body of work that the owner may award if there is sufficient funding for it. It's a body of work that isn't critical for the project, but which allows the owner to bring the bid amounts within budget without having to re-advertise the project.
How should a public agency evaluate who is the low bidder? That decision should be based on what bidder is the low bidder on the base bid and the combination of alternates or additives that the owner chooses to exercise. Doing so ensures that the owner receives the lowest price for the work performed and is consistent with most laws that require award to the low bidder.
Depending on which alternates or additives are selected, the order of the bidders could change.This is a cause of concern for some contractors who fear that public agencies may use alternates and additives to manipulate who the low bidder is and to purposely exclude a bidder from receiving the award. A reputable owner should base their decision on award based on what funding is available for the project and what is in the best interest of the project.
Thus, if the owner decides not to award any alternates or additives, the award evaluation would be based on just the base bid and that is all that would be awarded. If, on the other hand, the owner had funding for additive bids 1, 3, and 5, the owner would add up the prices for the base bid and additives 1, 3, and 5 for all of the bidders to determine which bidder was low on this combination.
Some owners prioritize the alternates and additives in order to ensure that it is not possible to pick their favorite bidder. The downside to such prioritization is that it can limit options for what may be best for the project and the funding available.
After making an evaluation and award, it is inappropriate for an owner to later change order an alternative or additive bid into the project, if in so doing it would change the order of who the low bidder was. Such an action would likely result in an audit finding.
There are five key issues that should drive public agency officials in making ethical contracting decisions:
Facts: What are the particular and unique facts of a situation?
Law: How do applicable laws and policies impact a decision?
Appearances: It is critical to evaluate how a particular action will appear and be perceived by others even if it is legal. This is often known as the "front page of the newspaper" test. Will your action likely be good material for a front page story?
Judgment: In making contracting decisions, use your judgment and that of your supervisors and managers.
Trust: Will your decision help or hinder in instilling public confidence in the integrity of the public contracting process?
All five of these factors are important to consider in making ethical decisions. For more information about ethical contracting situations, visit the section of my blog addressing ethics.
The next meeting will be held on October 8, 2009 from 9:00 a.m. to noon at the Northwest Carpenters Facility, 25120 Pacific Highway South, Kent, Washington.
The Pinellas County (Florida) Board of County Commissioners voted on July 21, 2009 to table a motion that would have provided up to 10% local preference points in the County's procurement of consultants, architects and engineers. The matter was referred back to County staff for additional study and to obtain input from a regional committee.
To view the staff report and the proposed ordinance, click here.
Training: Public Works Contracting - Beginning to End
Cost: FREE
When and Where (10:00 a.m. to 2:30 p.m.):
September 8, 2009 (Renton)
September 16, 2009 (Camas)
September 24, 2009 (Everett)
September 29, 2009 (Yakima)
Description: This training will cover the basics of public works contract management for the duration of a project. We will review the role of a contract administrator through roster management, spec development, bidding process, bonding, insurance, prevailing wage, limited public works process, and much more.
Vendors will have the opportunity to meet face to face with over 600 public purchasing managers, supply officers, public works contracting officers, facilities managers, fleet managers and fiscal officers. The trade show is focusing on Sustainability this year.
Register by September 14, 2009 or earlier as the trade show does fill up.
I've developed the following presentation to outline the requirements of chapter 39.10 RCW for the contract award process for using Design-Build as a project delivery method in Washington State.
The Washington State Department of Labor and Industries announced major changes in the new prevailing wage rates that will become effective on September 2, 2009, and that were published earlier this month.
L&I previously published revised wages on August 3, 2009, with an effective date of September 2, 2009. Since the original publication, L&I has published two corrections (for residential sprinkler fitters in Douglas County, effective on September 4, 2009, and for metal fabrication-in shop in Jefferson County, effective on September 5, 2009).
Approximately one third of the wage updates in the August 3, 2009 publication (or 22 crafts) were based on data from prevailing wage rate surveys conducted by L&I. Other changes were based on changes in collective bargaining (union) agreements.
A number of industry stakeholders contacted L&I with concerns about the accuracy of some of the survey data. As a result, L&I will be publishing new prevailing wage rates on August 24, 2009, which will still be effective on September 2, 2009. The new wage rates will delete all of the changes previously published on August 3, 2009 based on survey data.
The survey data will be reviewed over the next six months, and appropriate changes will be published in February 2010.
In keeping the effective date of the wages to be published on August 24, 2009 as September 2, 2009 (less than the required 30 days after publication), L&I is exercising their emergency authority under WAC 297-126-011, in order to prevent questionable prevailing wage rates based on the surveys from going into effect.
The question of whether the engineer's estimate for a public works project should be published in either the advertisement and/or the bidding documents is a question that many contracting professionals ask.
If your state laws require that the public agency publish the estimate, then it is obvious what needs to be done. It is less clear when your state law doesn't require it. For example, in Washington State, there is no requirement for publishing the engineer's estimate. However, RCW 39.04.020 does require that there be an estimate and that it be disclosed upon request.
What are the arguments as to why to publish or not publish the estimate?
Some people suggest that by publishing the estimate, it invites bidders to submit bids very close to the estimate amount, even if the cost of the work is less. That may be a more persuasive argument in a booming economy where contractors can more or less pick and choose what projects they will bid, and may inflate their prices. In our down economy, my experience recently has been that bids are coming in at significantly below the estimate, whether published or not. Even in a booming economy, however, there will always be bidders who want to remain competitive and will bid their actual costs. However, to mitigate against this concern, some public agencies will only publish a range of the estimate amount.
Those who suggest that the engineer's estimate should be always published in the advertisement and bidding documents point toward using the estimate as a marketing tool. It helps contractors understand whether it is a project within their price range and whether it is worth while for them to bid the project. In addition, publishing the estimate can help bidder understand the magnitude of the project and not overlook major key elements of the project.
Generally, I lean on the side of transparency and disclosing the engineer's estimate. I think the benefits far outweigh the potential risks. Besides, under the public disclosure laws of most states, even if the estimate is not published in the advertisement and/or bidding documents, it is public information and must be disclosed upon a formal request. So it's better in the first place just to make it available in the advertisement.
Check the language of your bidding documents for public works projects. Does it distinguish, as it should, between responsiveness and responsibility?
Often, I see language that states the public agency will award to the "lowest responsive and responsible bidder." Technically, this is not correct. Bids are low, not bidders. It's important to understand the difference between the two concepts of responsiveness and responsibility, and how each are evaluated differently.
Responsiveness is always in relationship to a bid received. Is the bid responsive? In other words, does the bid respond to the requirements of the bidding documents? Is the bid signed, was it received on time, and was a bid guaranty submitted are some of the issues surrounding bid responsiveness.
Responsibility, on the other hand, always relates to the bidder. Is the bidder a responsible bidder, or are they capable and qualified to perform the project? Depending on what state you're in, there may be requirements that govern what type of responsibility criteria can be included in the bidding documents. In Washington State, for instance, RCW 39.04.350, governs this issue.
Instead of language that states the public agency will award to the "lowest responsive and responsible bidder," consider something different such the following: award will be made to the "responsible bidder submitting the lowest responsive bid."
Errors in construction documents developed for public works projects are often a cause for change orders. While architects and engineers strive for accuracy, projects are complex, and it can be difficult for the designer to always catch all of the potential problems in the drawings and specifications.
One tool that a number of owners use to mitigate against errors is to hire an independent, third party to review the construction documents prior to bidding the project. The third party can identify inconsistencies in the documents that can be corrected prior to bidding. To the extent that the bidding documents are clear, there is less likelihood that there will be as many change orders.
Not unexpectedly, small business confidence has declined sharply over the past year. However, the confidence of most types of small businesses surveyed either held steady or showed a small increase between October/November 2008 and April 2009 - even as the average Recent Performance Index declined by nearly six points.
The report presents survey results from small business owners dealing with the current economic situation, including an examination of the Small Business Confidence Index, the Recent Performance Index and the factors affecting it, access to credit, and employment numbers.
The Greater Pierce County (Washington) Purchasing Forum
When: September 18, 2009 (8:00 a.m. to Noon)
Where: Environmental Services Building (9850 64th St. W., University Place, WA 98467)
Sponsored by: Pierce County Economic Development Division
Cost: Free
If you are a public agency, you may want to attend and learn how to sponsor your own event for your agency.
Content: The Forum will offer businesses a chance to:
Learn first-hand how to register and complete for contracts with government, schools, and public entities in Pierce County
Hear a panel of local business owners/managers that have been successful in winning government contracts share their experieinces and offer first-hand advice on how to win contracts
Speak one-on-one with purchasing agents
Meet and interact with Pierce County business owners and managers.
FMI Corporation - Management Consulting has conducted a very interesting survey of 230 general contractors, construction managers, large specialty trade and heavy civil contractors.
Entitled "Strategy in the Eye of the Storm" the survey was designed "to gauge exactly how executives of the industry's leading firms were preparing for a rapidly changing landscape...and how they were positioning their businesses for both the short and long-term."
Under Washington state laws, owners who meet certain criteria are exempt from being required to be paid prevailing wages, but must nevertheless comply with other reporting requirements.
According to the Washington Administrative Code (WAC 296-126-026), the prevailing wage requirements of state law (chapter 39.12 RCW) do not apply to:
Sole owners and their spouses
Any partner who owns at least 30% of a partnership
The president, vice-president and treasurer of a corporation if each one owns at least 30% of the corporation.
The purpose of this exemption is to not require the owner of a construction business to pay themselves prevailing wages on public projects. There are other provisions of chapter 39.12 RCW that deal with issues other than what wages must be paid to individuals.
For example, even owners who are exempt from paying themselves the prevailing wage rates must still file a "Statement of Intent to Pay Prevailing Wages" (before the public agency makes the first payment) and an "Affidavit of Wages Paid" (prior to release of retainage by the public agency). This is often not clearly understood by public agencies and contractors.
In addition to company owners being exempt from paying themselves the prevailing wage, the prevailing wage requirements of chapter 39.12 RCW do not apply to workers employed by public agencies in the State of Washington.
Public agencies using the General Contractor/Construction Manager (GC/CM) method of public works construction contracting should ensure that they preserve their options in the event that negotiations with the GC/CM for the Maximum Allowable Construction Cost (MACC) are not successful.
Owners often have language in the Request for Proposals to the effect that the owner may cancel negotiations and begin negotiations with the next highest ranked contractor if the parties are unable to successfully negotiate a MACC. However, negotiation with the next highest ranked contractor may not be in the owner's best interest given the status of the project, and the owner should preserve its right to take other actions.
I suggest that wording similar to the following be included in the Request for Proposals: "Should the Contractor and Owner not agree on a MACC, the Owner may cancel the negotiations and begin negotiations with the next highest ranked proposer, or pursue other options for completing the work as may be in the Owner's best interests."
This additional language gives the owner the right to put the work out for competitive bids if that would be most advantageous to the owner and the project.
The rates are applicable for all public works projects with a bid submittal deadline of September 2, 2009 or later. Public agencies may need to issue an addendum for projects out to bid in order to include the new prevailing wage rates.
According to Washington State law, the actual prevailing wage rates must be included in all bidding documents and contracts issued by public agencies in the State. Simply referencing L&I's website with the wage rates is not sufficient.
For more than 40 years, I served as a contracting manager for major public agencies in Washington State (City of Seattle, Seattle Housing Authority, and University of Washington), and as an independent consultant providing consulting and training to more than 100 public agencies, industry associations, and businesses across the country on the managing the complex world of public procurement and contracting. In March 2015, I discontinued regular postings to Mike Purdy’s Public Contracting Blog to focus on speaking and writing about U.S. presidential history. My book, "101 Presidential Insults: What They Really Thought About Each Other - and What It Means to Us" was published in June 2019. In August 2022, my second book on the presidents was published. It's entitled "Presidential Friendships: How They Changed History." Please visit www.PresidentialHistory.com where you can sign up for a free email subscription to my Presidential History Blog. I am now entering into a new season of life managing my health as I deal with a lethal and incurable cancer (metastatic prostate cancer). I have written a candid and vulnerable memoir about my wild medical adventure titled “Reflections of an Uncertain Journey.” All my books are available through Amazon, Barnes & Noble, other online outlets, and in local bookstores.
Under legislation approved this spring by the Washington State Legislature, three state agencies leapfrogged over the rights of subcontractors and suppliers to tap into retainage funds on public works projects when contractors fail to pay taxes and various premiums.
Implementation: With the addition of Employment Security and Labor and Industries as beneficiaries of the retainage trust fund, subcontractors and suppliers may find little or no money left in the retainage for a project after state agencies have made their claims. Unlike subcontractors and suppliers, state agencies do not need to obtain a court order before requiring public agencies to disburse retainage funds to them.
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