The federal work 'trade-off': What contractors need to know about the public sector
One of the most popular elements of President Donald Trump's campaign was his $1 trillion plan to boost the U.S. construction industry and revamp the nation's highways, bridges, ports and other public assets. That proposal has sparked industry excitement as evidenced by spikes in construction-related stock prices the day after Trump won the election and whenever he hints at the possibility of advancing his infrastructure agenda.
However, the highway to riches has been paved with uncertainty thus far, with the administration largely focused on other issues like the repeal and replacement of the Affordable Care Act, tax reform, an increasingly volatile foreign policy landscape and a Supreme Court nomination.
Trump's proposed 2018 budget seemed to confirm that infrastructure was no longer a priority, as it eliminated funding for many popular transportation-related programs. Then came word at the end of March that Trump might introduce an infrastructure spending bill along with tax reform, but that fell flat as the proposed measure did not earmark any of the new tax revenue that would be gathered under the bill for public works construction.
However, companies like AECOM still are positioning themselves in ways that allow them to take advantage of the federal work currently available. The construction and engineering giant recently formed a business unit dedicated to federal procurement, explaining that the new division would aid the company in its quest to grow its existing military construction program and to expand its business with the General Services Administration and the State Department.
Before contractors rush into the world of federal contracting — for purposes of getting in on the potential infrastructure construction bonanza or, like AECOM, for current opportunities — they need to know the differences between the public and private construction sectors. Some of those distinctions can be positive for companies, but additional rules and regulations can potentially burden those looking to jump into the federal contracting fray.
Benefits of federal work
One of the best aspects of federal contracting is the fact that the opportunities to bid on jobs keep chugging along, even when the private sector slows down.
"That's how I got into public sector work," said Malcolm MacInnes, founder and president of MGM General Contracting in Fort Lauderdale, FL.
"For good or for bad, whatever it says in the contract, that's what you have to do."
Founder and president of MGM General Contracting
After 21 years with another large construction company, he started MGM in 2006 just before the Great Recession and ended up connecting with someone who invited him to bid on a relatively small $2 million project at an airport in Fort Lauderdale. Fast forward 10 years, and MGM continues to perform aviation work all around Florida, as well as private construction work
MacInnes credits MGM's success to skills in an area of public work where he said many other contractors fail — the ability to be professional and follow the rules.
"A private sector company has its own set of rules and can choose to enforce them or not," he said. "In the public sector … it's all about the rules because it's on the public dollar. For good or for bad, whatever it says in the contract, that's what you have to do."
Challenges in the public sector
New South Construction in Atlanta also performs both private and public work, and Dave Butler, an executive vice president with New South, agrees that the federal contracting world can be challenging for those who are unprepared.
Change orders typically can’t be negotiated by a superintendent not officially authorized to make decisions, pay requests must be exact or close to it, and designs can't be reworked on the fly like they sometimes can be on private projects. In addition, he said, there are extra costs such as having to pay prevailing wages.
"The process is the key [difference] with the federal government," he said. "You have to be very careful that you are hitting every one of their criteria." For example, he said, there are multiple references to the Federal Acquisition Regulations (FAR). FAR affects almost every area of the contract, and Butler said there is limited flexibility if there is a misunderstanding on the part of the contractor or if something on the project goes awry.
Most of New South's federal work falls into the category of design-build, so it has a bit of leeway when it comes to design — as along it doesn't violate the FAR. For those submitting lump-sum bids where contracts are awarded to low bidders, he said, "[they] really don't have much opportunity to deviate at all."
One of the major drivers of all these tough rules around federal contacting is the fact that they're funded with taxpayer money, according to Aron Beezley, partner at Bradley Arant Boult Cummings. This makes the federal agencies that are administering construction contracts the guardians of public trust, and courts can come down hard on those trying to skirt regulations.
"The process is the key [difference] with the federal government ... You have to be very careful that you are hitting every one of their criteria."
Executive vice president at New South Construction
The differences between public and private work are glaringly apparent as early as the low-bid process, which is typically a requirement on federal contracts, according to Beezley. There are deviations in procurement methods, like design-build, but the rules around those bidding procedures are no less stringent.
Once awarded, Beezley said, federal contracts are subject to "a whole universe" of unique statutes and regulations, unlike private work, which is governed by state law and the Uniform Commercial Code.
The federal government is also protected from lawsuits brought by subcontractors who haven’t been paid. In many of those cases, Beezley said, unpaid subs are forced to go after the prime contractor's bond. The exception to this is when construction companies that have contracted directly with the federal government have an option to sue and collect what's owed to them.
In the private construction world, state laws protect subcontractors and general contractors from nonpayment via the ability to bring suit or file a mechanic's lien against the owner's property.
The biggest landmines, Beezley said, are actions that are considered somewhat acceptable or overlooked in the private sector that could land a contractor in jail under a federal contract. Taking federal contracting officers out for an expensive lunch, embellishing industry experience to qualify for a project or adding a few points to the percentage of completion on a pay application are all major violations and can result in the contractor being debarred, or worse, depending on the severity of the situation.
A 'big incentive' for federal work
However, public sector work does have some advantages over the private sector. There is the aforementioned stream of work when the economy hits a bump. Contracting rules, Butler said, as strict as they may be, are also appealing to some in the industry because the process, once mastered, is predictable.
"There are … contractors who like federal work," he said. "They know the regulations inside and out, and they excel because they know how to provide exactly what the federal government is asking them for. The good thing about the federal government is you don't have to guess how they're going to respond."
"Here's the trade-off," Beezley said. "There are a vast universe of complex laws and regulations that contractors have to comply with, but, at the same time, the federal government spends roughly $400 billion on contracting [annually]. That's a big incentive for contractors to step into the federal arena."
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