Winning a government construction contract can be lucrative for contractors: Federal, state, and municipal agencies spent $345 billion on construction in 20211. But contractors who want to win government construction projects must navigate a complex bidding process, increased regulation, and unique payment rules that don’t exist on private projects. In this article, we’ll explain what contractors need to know about government construction contracts – before bidding, during construction, and after the job is complete.
Bidding on government contracts
While public agencies are typically required to select contractors in a competitive bidding process for contracts over a certain threshold, bidding isn’t necessarily open to everyone.
The federal construction process is governed by the Federal Acquisition Regulation (FAR). This set of rules establishes the process government agencies must follow in selecting contractors, including the qualifications required. On federal jobs, contractors must be registered in the System for Award Management (SAM) database.
To bid on state and local government projects, businesses typically must hold a contractor’s license in the state or municipality that qualifies them for the scope of work required, at a minimum.
Finding bid opportunities
Sam.gov is an excellent starting point for finding federal government contracts. This is a database where contracting officers post contract opportunities over $25,000. Contractors can find currently available contracts as well as upcoming opportunities.
State and municipal projects can be harder to find, but are typically published on departmental sites for each government agency. For example, the California Department of Transportation (Caltrans) posts road and rail construction projects on the Caltrans Project Portal. These projects are also often listed on many construction bidding websites.
For free information and counseling on how to compete for government contracts, you can also visit the Association Procurement Technical Assistance Center website. They have over 300 local offices and are procurement professionals working specifically to help local businesses compete for local, state, and federal government contracts.
There are numerous procurement methods used to secure government construction contracts. The two most common procurement methods for public contracts are Invitations to Bid and Requests for Proposals.
Invitations to Bid
An invitation to bid is designed to ensure fair and open competition. It eliminates the ability of the contracting agency to influence the bidding and evaluation process.
The typical process includes a public invitation for bids posted by the contracting entity. The invitation should leave ample time to submit bids before the deadline expires. Submissions are then sent in sealed envelopes and opened at a predetermined time and place. Once opened, the bids will be made public, evaluated by the contracting entity and awarded based on the lowest price.
There is another form of sealed bidding which involves a “two-envelope” system. Bids are submitted in the same fashion. However, instead of all the bidding information in one envelope, it is split into two: one envelope containing all the technical information, and the second containing all the financial information. The technical information is evaluated and ranked, before opening the financial bid estimates. Those that don’t pass muster under the technical requirements are weeded out before considering the price.
Requests for Proposals (RFPs)
A Request for Proposals (RFP) is commonly used for larger/complex projects that may need some modification or developmental work. This process begins with the publication of a request for proposals.
The RFP will outline the agency’s requirements and all the significant factors that will be taken into consideration when evaluating the proposals. The contracting agency may even invite prospective bidders to a pre-bid conference to gather more information.
Initial bids are submitted and evaluated by the agency. At this point, some bidders are rejected, and the others enter into negotiations on pricing and technical details. The bidders then submit a best and final offer before the contract is awarded.
Contractor bond requirements
On public projects, there are three common types of contractor bonds: bid bonds, payment bonds, and performance bonds.
Contractors on public projects are often required to post a bid bond along with their bid submission, which guarantees that they will perform the contract as bid (if they are selected). If the contractor backs out of the contract after it is awarded, the contracting agency can initiate a claim against the bid bond.
Before providing a bid bond, the surety company will put the contractor through a prequalification process to ensure they have the experience, capacity, and financial capability to complete the project.
A performance bond guarantees the owner that the contractor will perform all its contractual duties in accordance with the plans and specifications. If the contractor is unable to fulfill its duties, the surety will step in to pay for the obligations of the contractor. This will often require bringing in another contractor to see the project through to completion.
A payment bond guarantees that a contractor will pay the labor, material, and subcontractor costs on the project. The amount of money that a contractor must post varies depending on the project type and location.
On public projects, contractors can’t file a mechanics lien on the property – instead, a payment bond acts sort of like a pile of money against which a claim can be made. Unpaid subs or suppliers will be able to make a claim against the payment bond if they go unpaid.
Government construction contracts are also subject to a variety of laws governing payment.
On most federal and state projects, contractors are required to pay their subs and laborers the prevailing wage rate.
Essentially, prevailing wage laws require that workers on government projects are paid at about the same rate as those performing similar work on non-government jobs. By doing so, prevailing wage laws prohibit contractors and subs from undercutting local workers.
On projects where prevailing wage laws apply, the contractor is required to submit certified payroll reports to verify that they are paying the appropriate rates.
The Federal Prompt Payment Act was enacted to avoid slow payment problems on government construction contracts. Most states enacted similar Prompt Payment laws that apply to state and municipal contracts.
Under these laws, the public agency must pay the prime contractor within a specific period of time after receiving a proper invoice. In turn, the prime must pay their subs and suppliers within a set number of days after receiving payment from the agency. If any party fails to meet the deadlines, they may be subject to late fees, interest payments, and/or other financial penalties.
There is typically a “flow-down” provision that imposes these requirements on everyone up and down the payment chain. This means that Prompt Payment provisions must be incorporated into the contracts of lower-tier subs and suppliers.
Retainage is generally allowed on most public works projects, though every state has their own regulation regarding retention practices.
On government contracts, the public agency will typically withhold 5-10% of each payment from the prime contractor as retainage, to be paid after project closeout.
The prime contractor will typically withhold the same amount in retention from the subcontractors on the job. Withholding retainage is not required by the law, but rather left to the discretion of the prime or agency.
The timing of retainage payments is also subject to the applicable prompt payment laws.
The False Claims Act penalizes anyone who submits a false or fraudulent claim for payment, whether the government agency approved the payment or not.
All payment applications should be as accurate as possible – overbilling the government comes with a steep penalty. Currently, 31 states have their own versions of a false claims act.
Closing out a project can be a stressful time when working on government construction contracts. While the bulk of work is done, scrambling to button up the punch list and to make sure everyone’s paid is the source of many headaches.
Inspection & acceptance
Before the project can be considered complete, the contracting agency will likely do an inspection walkthrough to verify that the work has been completed according to the contract specifications.
Once approved, the project will reach final acceptance. Federal projects are subject to the FAR’s Inspection of Construction clause, which states:
“Acceptance shall be final and conclusive except for latent defects, fraud, gross mistakes amounting to fraud, or the government’s right under any warranty or guarantee.”
This process is similar on state and local projects. Once the contracting agency accepts the project, the contractor’s liability is limited to warranty rights and correction of any latent defects.