Joint Checks to Ensure Subcontractor Payment

Subcontractors and suppliers on public works projects that have not been paid by the contractor may be able to file a claim against Retainage held by the owner (depending on the state), or file a claim against the Payment Bond provided to the owner by the contractor.

Eugene J. Heady

Joint checks:  Another strategy often used when a subcontractor has not been paid is for an owner to issue a joint check to both the contractor and subcontractor.

Article:  Atlanta Attorney Eugene J. Heady (Smith Currie & Hancock) has written an article entitled "Key Elements to an Effective Joint Check Agreement."  While the article is primarily focused on a contractor issuing a joint check to a subcontractor and supplier, many of the concepts in Mr. Heady's article apply for a public agency issuing a joint check to the contractor and subcontractor.

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Bill Requiring Certified Payrolls on Public Works Passes Washington State House of Representatives

On February 13, 2014, the Washington State House of Representatives approved (on a 54 - 44 vote) HB 2331 that would require all public agencies in the state to obtain certified payroll reports from the contractor and every subcontractors before making any payment on a public works project. 

Bill may increase cost of public works projects:  There is currently no state law that requires submission of payroll reports to public agencies, and HB 2331 imposes a major new requirement.  The bill will delay payments to contractors (and subcontractors), discourage contractors from bidding public works projects, and potentially result in increased bid prices to public agencies due to:

• Less competition:  A more limited pool of contractors bidding public works projects

• Cost of managing new requirement:  Contractors bidding more to manage the collection and submission of the payroll reports

• Cost of delayed payments:  Contractors bidding more to compensate for delayed payments from public agencies. 

Payrolls already required for federally funded projects:  Only if a project is federally funded are certified payrolls required.  Public agencies already have the contractual right to withhold payment in the event that payrolls have not been submitted on a federally funded project.  A new law that applies to all public works projects regardless of funding represents a major new requirement for public works contracting. 

Payroll submission already required by regulations:  WAC 296-127-320 already provides the option for Labor and Industries or an interested party to request certified payrolls on a public works project.  Mandating that certified payrolls be submitted on all public works projects by all contractors and subcontractors is not necessary and complicates public works bidding and contract administration.

What must a public agency do with the payrolls?  Interestingly, HB 2331 does not say that a public agency must do anything with the payroll reports other than collect them prior to making payment to the contractor.  In fact, the bill implies that a public agency's only role is to collect the payroll reports: "The awarding agency shall be held harmless and is not liable for the currency, completeness, or accuracy of certified payroll records submitted under this section."

Managing confidential information:  Because the payroll reports will become a matter of public record once received by the public agency, anyone may request the documents through a public records request (further increasing the workload of public agencies).  There is nothing in the bill that protects disclosure of confidential information (Social Security number, address, etc) on the certified payrolls to outside parties.

Impact on small businesses:  HB 2331 will have an especially negative impact on small contractors and subcontractors that do not have the administrative support systems in place to comply with this proposed new requirement.  

Status of the bill:  There was a public hearing on the bill on Friday, February 21, 2014 in the Senate Committee on Commerce & Labor.

Mike Purdy's Public Contracting Blog
© 2014 by Michael E. Purdy Associates, LLC
http://PublicContracting.blogspot.com

Best Practices for Monitoring Federal Prevailing Wages on Public Construction Projects

Federal prevailing wage requirements on public works construction projects requires that the contractor and all subcontractors, regardless of tier, submit weekly certified payrolls to the public agency.

Audit finding:  Some public agencies with federal funding on a project do not pay attention to the requirement for weekly payrolls.  Sometimes, they don't collect the payroll reports at all, or they collect them in batches from the contractor (not weekly), or collect them at the end of the project.  The largest county in Washington, King County, received a finding in 2012 from the Washington State Auditor's Office (see page 56) for failing to enforce the submission of weekly payroll reports.  Instead, the county collected payrolls at the end of their projects. 

Best practices:  If you have public works construction projects with federal funding, pay attention to the following:

• Frequency:  Are you collecting payroll reports weekly from the contractor and all subcontractors?

• Subcontractors:  Do you have a system for determining what subcontractors are working on site?

• Reviewing payrolls:  Are you reviewing the certified payroll reports on a weekly basis to ensure that prevailing wages are being paid to the workers?  As part of your review, are you evaluating the following: a) whether the classifications reported are appropriate, b) the hourly wage rate is at least the prevailing wage rate, c) the proper overtime rates are being paid, d) apprentices are registered apprentices who may be paid less than the journey-level wage, e) the payroll report is signed by an authorized individual?  

• Documenting your review:  Are you documenting your review of the payrolls by marking the payroll reports?

• Weekly pay:  Are you monitoring to ensure that the contractor and their subcontractors paying their workers on a weekly basis?  This is required by the federal Davis-Bacon Act.

• Worker interviews:  Are you interviewing a representative sample of workers on-site, asking them questions about what work they are performing and how much they are being paid?  Are you correlating this information with what is reported on weekly payroll reports?

• Invoices:  Do you have a process that ties in your approval of a contractor's monthly pay application and invoice with your review and approval of the weekly payroll reports?

Note:  This blog posting is a repeat of one from December 4, 2012.

Mike Purdy's Public Contracting Blog 
© 2013 by Michael E. Purdy Associates, LLC 
http://PublicContracting.blogspot.com

How Frequently Should Certified Payroll Reports be Submitted by Contractors on Public Works Projects?

Federal prevailing wage requirements on public works construction projects requires that the contractor and all subcontractors, regardless of tier, submit weekly certified payrolls to the public agency.

Audit finding:  Some public agencies with federal funding on a project do not pay attention to the requirement for weekly payrolls.  Sometimes, they don't collect the payroll reports at all, or they collect them in batches from the contractor (not weekly), or collect them at the end of the project.  The largest county in Washington, King County, recently received a finding from the Washington State Auditor's Office (see page 56) for failing to enforce the submission of weekly payroll reports.  Instead, the county collected payrolls at the end of their projects.

Best practices:  If you have public works construction projects with federal funding, pay attention to the following:

• Frequency:  Are you collecting payroll reports weekly from the contractor and all subcontractors?

• Subcontractors:  Do you have a system for determining what subcontractors are working on site?

• Reviewing payrolls:  Are you reviewing the certified payroll reports on a weekly basis to ensure that prevailing wages are being paid to the workers?  As part of your review, are you evaluating the following: a) whether the classifications reported are appropriate, b) the hourly wage rate is at least the prevailing wage rate, c) the proper overtime rates are being paid, d) apprentices are registered apprentices who may be paid less than the journey-level wage, e) the payroll report is signed by an authorized individual?  

• Documenting your review:  Are you documenting your review of the payrolls by marking the payroll reports?

• Weekly pay:  Are you monitoring to ensure that the contractor and their subcontractors paying their workers on a weekly basis?  This is required by the federal Davis-Bacon Act.

• Worker interviews:  Are you interviewing a representative sample of workers on-site, asking them questions about what work they are performing and how much they are being paid?  Are you correlating this information with what is reported on weekly payroll reports?

• Invoices:  Do you have a process that ties in your approval of a contractor's monthly pay application and invoice with your review and approval of the weekly payroll reports?

Mike Purdy's Public Contracting Blog 
© 2012 by Michael E. Purdy Associates, LLC 
http://PublicContracting.blogspot.com

Why Did California Agency Pay $1 Million if There Was No Contract and Performance Standards Were Not Met?

A California school district and energy conservation contractor are locked in a legal dispute with competing lawsuits over a multi-year energy conservation savings program contract.

2 Lawsuits:  After being hit with a $1.5 million lawsuit from Energy Education, Inc. for unpaid bills and a termination fee, the Sacramento City Unified School District filed a counter suit against the firm. 

What was the District thinking?  The District's defense is somewhat unusual.  The District now claims that the contract is not valid because it was never approved by the school board, and that it was "not properly subjected to the public bidding requirements mandated under the law and that requirements in the contract for termination and unpaid fees are illegal and unenforceable."  All this after the District has already paid the firm almost $1 million since September 2008.  And the District now contends that they never should have paid the firm a performance fee of $23,500 a month because the metrics the firm uses to measure the amount of energy savings is flawed.  They're asking for that money back.

More Information:  Click here to read an April 1, 2012 story from the Sacramento Bee newspaper (published on the Modesto Bee's website) on the dispute.

Lessons Learned:  It will be interesting to see how these lawsuits play out in court.  In the meantime, what can we learn from this situation?

• Selection Process:  Prior to selecting a contractor, public agencies should follow their own requirements for selection.  Such a process should be fair, open, and transparent, and the basis of selection should be clear and consistent with applicable laws and policies.

• Valid Contract:  Both agencies and contractors should pay attention to whether all the appropriate steps and approvals have been received for executing a contract.  Are the parties who signed the contract, in fact, authorized to commit the party?

• Payment Authorization:  Public agencies should not pay a contractor for work not performed, or if the contractor is not in compliance with the performance standards of the contract.

• Checks and Balances:  Does the public agency have sufficient management checks and balances in place to ensure that those responsible for managing the project and authorizing payments are performing their tasks appropriately? 

Mike Purdy's Public Contracting Blog 

© 2012 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Public Works Bribery Case in Georgia

Two public works department employees of Dekalb County, Georgia accepted bribes from a contractor in exchange for allowing a $1.4 million sidewalk project to continue.  The engineering supervisor and construction inspector also directed the contractor to bill for work not performed and over-bill the county, in exchange for part of the over-billed amount.

FBI Sting:  Unbeknownst to the employees, the contractor contacted the FBI and the workers were arrested.  On March 6, 2012 the workers were charged with extortion and bribery.  If convicted in the pay-to-play scheme, the employees could face up to 20 years in prison and a fine of up to $250,000.

More Information:  Click here to read an article from the Atlanta Journal-Constitution.

Lessons Learned:  Checks and balances in the review and payment of invoices on public works projects is an important part of ensuring that the public's money is appropriately being disbursed.

Mike Purdy's Public Contracting Blog 

© 2012 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Washington Revises Prevailing Wage Policy

The Washington State Department of Labor and Industries has revised its policy on "Filing an Affidavit Form 'On Behalf' of Subcontractor."  

The new policy, dated November 22, 2011, replaces the policy dated August 17. 2009.

Steps and Conditions for Filing by Contractor: The policy describes the steps that a contractor must take before they may file an "Affidavit of Wages Paid" form on behalf of a subcontractor who has gone out of business, is bankrupt, or has refused to file its own Affidavit.  Affidavits must be on file with the public agency awarding a public works project for the contractor and all subcontractors before retainage may be released to the contractor.

What's Different in the Revised Policy?  The major change in the revised policy eliminates requiring the contractor to certify that the workers have been paid the prevailing wages by the subcontractor (something that the contractor may have no basis for certifying).  Instead, the Assumption of Liability Statement which must accompany a hand filled out Affidavit only keeps the language that the contractor agrees to "accept full liability for any unpaid wages owed" by the subcontractor.  There are a few corresponding changes in the policy to address this modification.

Read the Revised Policy:  Click here for a copy of the revised policy.

Obtaining an Affidavit for a Missing Contractor:  L&I's policy does not address what to do if it is the general or prime contractor who has gone out of business, declared bankruptcy, or refused to file the Affidavit.  If you have this situation occur, discuss it with L&I.  In the past, prior to any policy by L&I on the contractor filing an Affidavit on behalf of a subcontractor, I have had the bonding company fill out and sign the Affidavit on behalf of the contractor.  In my opinion, L&I should expand its policy to provide for the surety to file the Affidavit on behalf of the contractor.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

The Importance of Managing a Project According to the Contract

One of the keys to a successful project is to manage it according to the terms of the contract.  While that may sound like an obvious statement, it doesn't always happen.  

Purpose of Contracts:  Instead, once the contract is signed, it is often put on the shelf never to be referred to again - unless there are claims and disputes.  But the contract and referenced provisions represent the agreement between the parties for performance and payment.  It serves as the basis for bidding or negotiation of costs.  It allocates the risk between the parties.  And it serves as the guide for both parties in making decisions and managing disagreements.

Why Contracts Aren't Enforced:  Over the years, I've observed that some public agency project managers are hesitant to enforce contract terms.  I think this happens for a couple of reasons:

Knowing the Contract:  Project managers sometimes don't manage according to the terms of the contract because they don't have a good understanding of the contract.  An agency's legal and procurement/contracting personnel may have developed a strong contract, but if the project manager doesn't know the contract's provisions and the protections it affords the agency, the agency looses a major tool for ensuring a successful project.  Public agencies should:

• Update:  Regularly review and update their standard contracts.  This process should involve attorneys, procurement/contracting personnel, and project managers - those who will be responsible for actually managing projects based on the contract provisions.

• Train:  Establish a regular and systematic training program for those who interact with contractors, consultants, and vendors to ensure they fully understand the terms of the standard contract.  

Managing according to the contract is an important part of managing the project.  They go hand in hand.

Keeping the Relationship Professional:  Project managers are sometimes hesitant to enforce contractual terms because of their desire to maintain an effective working relationship with the contractor.  There is a misguided concern that an adversarial relationship will be created with the contractor if the agency enforces the terms of the contract.  So a project manager may not review pay requests before approval, may approve payments that are inconsistent with the rates or terms of the contract, may not require documentation of proposed change order costs, may accept change order costs without review and negotiation, or may approve work that doesn't meet the standards described in the contract.  

The following are some of the consequences of not managing according to the contract:

• Cost:  The agency may pay more than what was bid, or more than what is authorized by the contract.

• Performance:  The contractor's performance may not be consistent with the agency's needs as described in the contract.

• Risk:  The allocation of risk between the contractor and the agency may be shifted by decisions made outside of the contract - something that undermines the integrity of the competitive bidding process and ultimately affects costs to an agency.

• Audits:  The agency may receive audit findings for not managing the project according to the contract, and not controlling costs.

Risks of Shifting Allegiances:  Establishing a cooperative working relationship with the contractor is important.  But the nature of the relationship is that it should be based on business and contractual terms, not personal or professional friendship.  When public employees begin to shift their allegiance from their agency and the mandates of the contract to the contractor because of a desire to be friends with the contractor, or a hesitancy to confront business disagreements - a dangerous line is crossed.  

Working for a public agency is different than working for a private business.  As steward's of the public's money, public employees have a higher standard for ensuring that the terms of the contract are met. 

Cooperation and Compliance:  It is possible to both cooperate with the contractor and ensure that the terms of the contract are met.  But it takes an understanding of the contract, an understanding of the proper role of the project manager, and a willingness to agreeably disagree with the contractor in order to protect the public's interests.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Turning a Good Contract into a Good Project

I spoke this afternoon in downtown Seattle at a seminar entitled "Public Works Contracting: How to Get the Best Value from a Weak Economy."  

It was sponsored by the law firm of Foster Pepper PLLC and was attended by almost 50 people from government agencies across the state (plus another more than 30 by webinar).

My topic was "Project Management: Turning a Good Contract into a Good Project."  Here's an outline of my speech:

4 Foundations for a Good Contract

• Work with the Designer
• Pick the Right Delivery Method
• Tune-up Your Bidding and Contract Documents
• Allocate and Manage Risk

5 Foundations for a Good Project

• Pick the Right Contractor
• Evaluate if a Bid is Too Low 
• Manage the Contract and Project
• Negotiate Change Orders
• Document for Audits 

Other Topics and Speakers:  Here are the other topics and speakers:

• Low Price - Good Value?  Establishing Bidder Responsibility and Performance Capacity (Steve DiJulio)

• When Low Price is Not Enough - Utilizing Alternative Procurement Methods (Greg Guedel)

• The View from the Other Side - Contractor Perspectives on Facilitating Project Success (Tom Peterson)

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Movement to Delay or Repeal 3% Withholding Tax

Pressure continues to mount nationally for a delay or repeal to the 3% withholding tax that would require all federal, state, and local governments and agencies with annual expenditures in excess of $100 million to withhold 3% of each payment over $10,000 to vendors, contractors, and consultants, and send the money to the IRS for income tax purposes.

Delay Proposed in President's Jobs Bill:  The latest development comes from a provision in President Obama's proposed American Jobs Act that would delay implementation of the 3% withholding tax until January 1, 2014.  Recently, the IRS administratively delayed implementation of the provision until January 1, 2013 from January 1, 2012.
 

Purpose of the Law:  The 3% withholding tax was passed by Congress as part of the Tax Prevention and Reconciliation Act of 2005, and its implementation has been delayed based on a variety of concerns.  The law is intended to improve compliance of income tax payments by businesses and add money to the federal government's coffers. 

 

Negative Consequences of the Bill:  Businesses argue that the 3% withholding tax will hurt cash flow and creation of new jobs and cause an increase in prices they charge to the government.  For government agencies, it will be expensive to make changes to financial systems to implement the law.  Some public agencies have already begun the process of making the necessary programming changes to implement the law. 

 

AGC Speaks Out Against the Law:  The Chief Executive Officer of the Associated General Contractors (AGC), Stephen E. Sandherr, testified before the IRS on September 12, 2011 about concerns related to the 3% withholding law that will, unless Congress repeals or delays it, go into effect on January 1, 2013.  Click here to read Sandherr's eight pages of testimony.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

How Should Labor Costs Be Calculated on a Change Order?

When a change order occur on public works construction project, how should the hourly costs associated with the labor element of the change order be calculated?

Calculating Hourly Labor Rates:  There are a couple of different methods:

Bid Item:  If the body of work included in the change order was a bid item in the original bid for the project, the bid item price (which may include labor and other costs), may be used to calculate the amount of the change order.

Unit Prices:  If the original bid included unit prices for labor rates for future change order work, these may be used as the basis of negotiating and calculating the labor amount for the change order.

Prevailing Wages:  The contracts or General Conditions of some agencies include language addressing the relationship of prevailing wages with the labor rate paid on change orders.  The hourly rate should not be artificially limited to just the prevailing wage rate, which may not account for the fact that a contractor may pay more than the prevailing wage rate in order to retain qualified workers, or that the contractor may be required to pay more than the prevailing wage rate based on the terms of a union collective bargaining agreement.  Besides the hourly rate actually paid to workers, the hourly labor cost typically includes other costs such as for workers compensation, federal and state taxes, and other amounts.

• State of Washington's Approach:  The State of Washington's General Conditions addresses this issue in a manner that initially pegs the labor rate to the rate the contractor includes on the "statement of intent to pay prevailing wage" document filed with the Department of Labor and Industries.  On this form, the contractor notes the hourly rate they intend to pay to workers in specific classifications, which may be higher than the prevailing wage rate.  The language further goes on to permit the Owner to pay more than the amount noted on the form.  Here's the language from the State's General Conditions:

"The hourly costs shall be based on the following...Hourly rates and benefits as stated on the Department of Labor and Industries approved "statement of intent to pay prevailing wages" or a higher amount if approved by the Owner."

Balancing Public and Private Interests:  There are a couple of keys in negotiating labor rates on a change order.  The hourly labor rate must:

1. Protect the public's interests by not being higher than what the contractor normally pays on an hourly basis for certain classifications of labor.
2. Fairly compensate the contractor for actual costs.  A contractor should not be required to work at less than their actual costs on change orders.

Check Your Contract Language:  How does your standard public works contract address calculation and negotiation of labor rates for change orders?  Work with your attorneys and policy makers to craft language that helps ensure that the public's interests are protected and is fair to contractors.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Feds Investigating Chicago Minority Business Fraud

The United States Attorney's office has issued a subpoena for the City of Chicago to turn over files related to a construction company formerly owned by and certified as a minority business. 

Minority Firm Paid $26 Million:  The company, City Construction Company has been paid at least $26 million over the last ten years, and received much of the work through Chicago's minority business set-aside program. Official records indicate ownership of City Construction Company has changed over the years, and the firm lost its certification as a minority business in 2009.

Chicago's Program a Target of Criticism:  The City's minority program has been subject to criticism that many of the minority and women owned businesses were actually owned by white men, a practice known as setting up a "front company."

No Additional Details:  The subpoena was issued to the City a year ago, but thus far there are no specific details available of what those records might show, or whether City Construction Company was operating as a front company or not.

More Information:  For more information, click here to read a September 2, 2011 article from the New York Times.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Coming Soon: Audit on Construction Change Order Pricing

The Washington State Auditor's Office has completed most of their work on their performance audit of Construction Change Order Pricing for seven cities and one county in the state.  

Audit Being Finalized:  The auditor's office has requested the agencies audited to provide their technical review of the draft audit.  Once the auditor makes any changes in the audit based on feedback and corrections from the agencies, they will send the final draft report to the agencies for them to provide their formal written response to the audit.  The formal responses from the agencies will be published in the final audit.  The auditor hopes to publish the audit later this month.

Agencies Who Were Audited:  The following are the agencies that were audited:

• City of Bellingham
• City of Everett
• City of Puyallup
• City of Richland
• City of SeaTac
• City of Shoreline
• City of Spokane
• Thurston County

What Are Best Practices?  It promises to be an interesting audit report when it is finally published that will generate a lot of conversation (and some disagreement with the audit) over what practices should be followed.  It probably won't rise to the blockbuster level of some of the previous construction management performance audits that have come from the state auditor. 

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Who Can Authorize Change Orders?

Change orders on public construction projects are a fact of life.  There are always unforeseen conditions that require an adjustment in the contract amount and scope of work.

Authority Levels and Roles:  In managing the administration of change orders, it is important for public agencies to have clear internal procedures about who is authorized to execute change orders, and when approval from higher level management or a governing body such as a city council is required.

Tacoma City Council Not Informed of Change Orders:  Project management staff for the City of Tacoma, Washington have recently been criticized by members of the Tacoma City Council for not keeping the Council informed of change orders totaling $821,000 on a $26.5 million Design-Build contract for renovation of the city's Cheney Stadium.  Click here to read a news article from the Tacoma News Tribune about the change orders on the project.

Practical Tips:  In managing change orders, public agencies should have clear policies, procedures, and practices related to the following issues:

1. What individual(s) have authority to approve change orders for the owner?
2. What are the dollar thresholds of change orders that public agency employees may approve?
3. When do contingency amounts spent on change orders need approval from higher level management or a governing body?
4. At what dollar amounts does the governing body need to be notified of change orders or approve change orders?
5. Is the governing body being kept informed on a regular basis on the progress of the project, and potential or actual change orders for the project?
6. Is the public agency ensuring that the contractor is paid only after execution of a change order?
7. Is the scope of work of the change order generally consistent with the scope of work for the project, or could it be bid as a separate project?
8. Is the public agency conducting an independent cost estimate of the change order?
9. Are the dollar amounts of the change order being appropriately negotiated by the public agency?
10. Are there appropriate internal controls in place to ensure that the public agency's change order approval process is being implemented consistent with the approved policies and procedures?

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Cost Estimating and Contract Pricing - Training

When: Wednesday, May 18, 2011 (8:00 a.m. to 5:00 p.m.)

Where: Tumwater, Washington (Edna Lucille Goodrich Building, 7345 Linderson Avenue, S.W.)

Instructor: Pamela Solis, CPCM, CCCM, CFCM, Contract Manager at Northrop Grumman Corporation in San Jose, CA

Description: What should a product, service, or integrated business solution cost? How much is it worth to the buyer? What is the appropriate rate of return or profitability for a product or service? What constitutes a fair and reasonable price? How can buyers ensure they are not paying too much? How can sellers maximize sales, revenue, and profitability in a consistent manner? The answers to these questions range from simple to complex and are the focus of this seminar.

Sponsored by: National Contract Management Association

Cost:

• Members: $265
• Non-members: $315

Pre-registration deadline: Tuesday, May 10, 2011

Information and registration form (Word Document)

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Efforts Continue to Repeal 3% Withholding Requirement as Deadline Nears

A coalition of 124 national, state, and local organizations continues to urge Congress to repeal a 2005 law that would require all levels of government to withhold 3% from most payments for products or services, starting January 1, 2012.

Original Intent: The law, which would apply to federal, state, and local governments with expenditures of $100 million or more, was designed to combat tax evasion. Proponents point out that retaining 3% of payments against vendors' tax liability is projected by the government to raise nearly $7 billion between 2011 and 2015 through improved taxpayer compliance.

Hidden Costs: Critics, however, contend that the new rule could incur a number of hidden costs:

• Cash flow: Companies, especially smaller ones, that rely on full, prompt payments for day-to-day expenses would be faced with making up the 3% reduction through price increases or costly financing.

• Up-front investment to modify systems:  Public agencies would need to invest in updates to their financial systems to track withholding and comply with reporting requirements.

• Administrative costs:  Agencies would also need to cover the cost of administering the withholding requirement.

• Increased project costs: Bid prices may rise from companies raising their prices to cover additional costs, or from decreased competition as fewer firms bid on government jobs.

Repeal Efforts: A number of bills have been introduced to the House and Senate in the past few years in an attempt to repeal "Section 511" (the original measure was contained in Section 511 of the Tax Increase Prevention and Reconciliation Act of 2005). While none have yet been successful (a few introduced this year are still in committee), the industry did gain a small victory in early 2009 when the date of implementation was postponed a year from the first of January 2011 to 2012.

More Information:

• The Government Withholding Relief Coalition is spearheading industry efforts to repeal the withholding law, and maintains links to a number of resources
  • A one-page summary of the law (PDF) by the Government Withholding Relief Coalition
• The (one-page) text of the original law (PDF)
• A recent GovPro article covering the new law and efforts to repeal it
• My previous blog post on the law and its implications

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

No Bid for Modular Home Bought From Commissioner's Spouse

The Washington State Auditor's Office issued a finding against the King County (WA) Fire Protection District No. 28 for the following:

• No Bid:  The District failed to solicit bids or declare that an $85,000 modular home it purchased from the spouse of one of the Fire District's Commissioners was available from only one source.

• Conflict of Interest:  Even though the Commissioner abstained from voting on the purchase, the transaction represented a conflict of interest under state law.

• Gift of Public Funds:  The District reimbursed the Commissioner $1,850.92 for the cost of a lot fee for keeping the modular home in its current location until the District obtains permits and relocates the home.  Without any written agreement, the Auditor noted that such reimbursements represented a gift of public funds, a violation of the State constitution.

Practical Tips:  

1. Pay attention to the bid laws that affect your type of agency, and follow them.  
2. Be sensitive to conflicts of interest, whether real or apparent.  If you have any doubts, it may be a problem.  Consult with the leadership of your agency and fully disclose any potential conflicts.
3. Make sure you have a contractual agreement in place before you make payments. 

Audit Report:  Click here to read the three page audit report.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

5 Inch Error Costs Contractor $20,000 to $25,000

A 5 inch surveying error has resulted in a misalignment of a concrete ramp being built in Seattle by PCL Construction.  

After assessing its options, PCL decided to tear down 160 feet of concrete and start over, a mistake that will cost the company between $20,000 and $25,000.  The ramp is part of work being performed on the South Spokane Street Viaduct.

Click here for an article from the Seattle Times with more details.

Mike Purdy's Public Contracting Blog 

© 2011 by Michael E. Purdy Associates, LLC 

http://PublicContracting.blogspot.com

Are You Paying Consultants Consistent with Contract Terms?

In negotiating and executing a consultant contract, both the consultant and the public agency agree upon the basis of payment, including but not limited to hourly rates, permitted reimbursable expenses, and sub-consultant mark-up percentages.

Review Invoices:  When invoices are submitted to the public agency for payment, it is critical for appropriate public agency staff to carefully review the invoice to ensure that the payment requested is consistent with the terms of the contract.

Audit Finding:  The Washington State Auditor's Office issued a Citizen Hotline Report on November 8, 2010 reporting on its investigation of charges made by a citizen against the City of Snoqualmie.  The citizen complaint complained that the City was overpaying consultants because City personnel were not carefully reviewing invoices submitted for payment.  The auditor found that the City was overcharged $13,000 based on invoices reviewed by the auditor.  The City then passed the costs onto private developers in accordance with agreements in place.

Specifically, the auditor noted the following overpayments by the City:

• Hourly Rate Overpayment:  The City paid a forestry consultant at an hourly rate of $110 per hour, when the contract limited the hourly rate to $85 per hour.  For a six month period in 2007, this amounted to an overpayment to the consultant of more than $4,000.

• Mileage Reimbursement Overpayment:  The City reimbursed the same forestry consultant for mileage at 48.5 cents a mile, while the contract only permitted reimbursement at 31.5 cents a mile, resulting in an overpayment of more than $1,600.

• Payment for Reimbursables Not Permitted:  The City reimbursed an engineering firm almost $1,700 for the use of a four-wheel drive vehicle and cellular telephones that were not allowable under the contract.

• Hourly Rate Overpayment:  The City approved invoices for and paid for the work of a senior project manager with an engineering firm at an hourly rate of $130, when the contract only permitted $120 per hour.

• Mileage Reimbursement Overpayment:  The City approved mileage reimbursement for an engineering firm in excess of what was permitted by the contract.  In addition, the City approved mileage reimbursement for personnel who were working on the project, but did not incur actual mileage expenses because no travel occurred.

Practical Tips:  In managing your consultant contracts, do you have processes in place to ensure that invoices paid are appropriate and consistent with the terms of the contract?  Here are a couple of procedural tips that can help you in managing contract payments.

• Contract Terms:  Know the payment terms of your contract.

• Copy of Contract:  Ensure that staff who are managing contracts or approving payments for contracts actually have a copy of the contract.

• Detailed Invoices:  Require that invoices be submitted in sufficient detail to determine the breakdown of costs so the public agency can determine if the costs are consistent with the terms of the contract.

• Review Invoices:  Have appropriate staff with direct knowledge of the work performed review the invoices not just for whether the work was performed, but whether the charges are consistent with the terms of the contract. 

• Internal Controls:  Institute appropriate internal controls within your agency so that others (supervisors, purchasing, contracting, or accounting) also review invoices for consistency with the terms of the contract.

• Rejection of Invoices:  Reject invoices submitted that are inconsistent with the terms of the contract, and require the consultant to re-submit the invoice after it has been corrected.

More Information:  Click here to read the complete 15 page Citizen Hotline Report.  In addition to the overpayments noted above, the report also concluded that the City could have saved a significant amount of money by hiring a city employee to perform the work instead of paying consultants. 

Mike Purdy's Public Contracting Blog (© 2010 by Michael E. Purdy Associates) 

http://PublicContracting.blogspot.com

Contractor Involved in Excessive Subcontractor Lawsuits

Ebenal General, Inc., a Bellingham, Washington based contractor has racked up at least 35 lawsuits by subcontractors since 1999, with 14 of those lawsuits in just 2009 and 2010.  That doesn't count the eleven times since 1998 that Ebenal has sued subcontractors to force them "to live up to their agreement," according to the owner of the construction company.  

Statistics such as these are outside the norm for most general contractors.  Contractors with business practices responsible for multiple lawsuits can be problematic for both subcontractors and owners.  

Risks for Subcontractors:  Subcontractors need to be knowledgeable about the integrity and practices of the general contractors they work for.  One project where a contractor fails to pay a subcontractor can be the cause of a subcontractor going out of business.  

Risks for Owners:  Owners who hire general contractors with a poor record of subcontractor relationships and payments and a history of lawsuits can cause project completion to be delayed, often with substantial additional costs to the owner.  Ebenal has recently failed to complete on time a dormitory project at Western Washington University  in Bellingham.

Bidder Responsibility Criteria:  In 2007, the Washington State Legislature adopted RCW 39.04.350 which provides public agencies with the right to establish supplemental bidder responsibility criteria to address issues such as having an excessive history of lawsuits and failure to pay subcontractors in a timely manner.

More Information:  To read an article from The Western Front Online about Ebenal, click here.

Mike Purdy's Public Contracting Blog (© 2010 by Michael E. Purdy Associates) 

http://PublicContracting.blogspot.com