Senate Committee Approves Bill Banning Reverse Auctions in Construction
On Feb. 14, the Senate Committee on Homeland Security and Government Affairs approved a bill that would prohibit federal agencies from using reverse auctions to procure construction and design services. S. 2113, the “Construction Consensus Procurement Improvement Act,” introduced by Sen. Rob Portman (R-Ohio) and Sen. Mazie Hirono (D-Hawaii), was initiated by the Construction Industry Procurement Coalition.
A reverse auction essentially is an online, real-time dynamic auction between a buying entity and vendors who compete against each other to win a contract. These vendors compete by bidding against each other, usually over the Internet, by submitting successively lower-priced bids during a specified bid period, usually about one hour.
“While this method may be suited to buying well-defined commodities, it is not suitable for skilled services with a high degree of variability like design and construction services,” ASA Chief Advocacy Officer E. Colette Nelson told the Senate Committee. “Electronic reverse auctions have brought ever greater efficiency to the practice of “bid shopping” in the construction industry.”
S. 2113 also would require federal agencies to use a two-step procurement method to contract for design-build services on projects of $3 million or more. Under the two-step process, a federal agency first evaluates the qualifications of potential proposers and then invites the most highly-qualified to prepare and submit a proposal. The Senate Committee approved the bill by a unanimous voice vote.
Anti-Forum Selection Clauses in the 50 States Is a No-Cost Benefit for ASA Members
Out-of-state prime contractors commonly require their subcontractors to sign forum-selection clauses, arguing that it’s more convenient and less expensive for them to resolve disputes in a jurisdiction of their choice. For example, a prime contractor headquartered in Idaho may place a forum-selection clause in a contract on a project in Delaware stating that “Regardless of the site of the project, the laws of the State of Idaho shall govern in the interpretation of any contract-related issues, and any hearings or dispute resolution meetings shall be held in the State of Idaho.”
Such clauses may create an undue hardship for the subcontractor on such a project. The subcontractor may have to comply with laws and regulations with which it is not familiar and be held accountable for failure to comply; the subcontractor may have to bear the expense of travel and litigation in a distant location. Further, the subcontractor may not be able to access witnesses or provide other evidence to support its position in a dispute. Ultimately, the additional burdens of a distant forum can often be prohibitive and effectively deprive a subcontractor of its day in court and/or leverage it to heavily discount, if not abandon, even the most worthy of claims. Many states view forum-selection clauses as against public policy and make them “void and unenforceable.”
The Foundation of ASA’s Anti-Forum Selection Clauses in the 50 States helps subcontractors understand how forum-selection clauses are treated in the 50 states and the District of Columbia. ASA-member law firm and ASA general counsel, Kegler, Brown, Hill and Ritter, Columbus, Ohio, prepared the manual, which is available under the “Contracts & Project Management” section in the members-only area of the ASA Web site at no cost to ASA members.
ASA Helps Subcontractors Master Final Payment
In ASA’s most recent member needs assessment, respondents reported that obtaining final payment remains their most serious problem. Certainly, the time between substantial completion of the project, when the owner occupies the project, and final completion, is rife with uncertainty for prime contractors and their subcontractors. The risks of delay or non-receipt of final payment extend well beyond the ordinary credit risks associated with progress payments. A subcontractor should give serious consideration before a project is even bid, to the risk that disputes, whether meritorious or contrived, will severely impact or even prevent the receipt of final payment after substantial completion.
ASA’s white paper, Mastering Final Payment, provides subcontractors with steps they can take to assure their receipt of final payment. The white paper also provides an analysis of the problem, and reviews industry policies and practices. The white paper is a no-cost member benefit available under “Contracts and Project Management” in the Member Resources section of the ASA Web site.
ASA Introduces White Paper on Contingent Payment
Observers of the construction industry have seen companies go bankrupt, or go through torturous downsizings, layoffs and disputes, because of slow payment and nonpayment by customers. One cause of such difficulties is the contingent payment clause. In addition to the economic damage pay-if-paid clauses cause, they also raise serious legal and ethical questions in business. Simply put, “contingent payment” describes a contractual provision that makes one party’s right to be paid for services provided to a second party contingent on the payment of the second party by a third party. In the construction industry, this clause often translates into a subcontractor’s right to be paid being contingent on the owner’s payment of the prime contractor for the subcontractor’s work.
ASA members can master contingent payment by studying ASA’s Mastering Contingent Payment white paper. This white paper helps readers understand the important differences between pay-if-paid and pay-when-paid clauses, discusses industry practices, reviews existing law and trends, and provides tips on how a subcontractor can protect its business. The white paper is available to ASA members under “Contracts and Project Management” in the Member Resources section of the ASA Web site.
ASA Payment Script Teaches Negotiation Skills
ASA’s Negotiating the Payment Clause: A Script is a case study designed to help ASA members improve their ability to negotiate better subcontracts. The Script illustrates through everyday language how to negotiate more equitable payment terms.
“Subcontractors have little opportunity to observe how a negotiation with a prime contractor might proceed,” said Brian Cubbage, contracts administration counsel, Heico Construction Group, Alexandria, Va., and chair of the ASA Task Force on Contract Documents. “After all, no one has made an Oscar-winning movie or an Emmy-winning television show that portrays a construction prime contractor-subcontractor negotiation. Even a search of YouTube doesn’t reveal such an example of negotiations.”
The script was designed to provide ASA chapters with a tool to demonstrate to members what a prime contractor-subcontractor negotiation on payment terms may look like. However, the document also can be used for internal subcontract education by individual subcontracting firms. The script demonstrates critical negotiation skills and techniques, such as establishing a friendly tone and common goals, confirming the reasons behind the low bid, asking for clarifications rather than changes, focusing on benefits the contractor received from the owner, and setting a precedent for future contracts.
Negotiating the Payment Clause: A Script is located under “Contracts and Project Management” in the Member Resources section of the ASA Web site.
Guideline Helps Prevent Change Order Headaches
Change orders are one of the most common causes of misunderstandings and disputes on construction projects. Fortunately, there’s an easily accessible resource subcontractors can use to smooth out potential issues with change orders and, hopefully, even help prevent problems from happening.
The resource is the “Guideline on Procedures for Change Orders,” which is one of the Guidelines for a Successful Construction Project developed and published by ASA, the Associated General Contractors of America (AGC), and the Associated Specialty Contractors (ASC). The guideline describes best practices for a change order initiated by the owner, contractor or subcontractor, as well as the different kinds of change orders that may be used (lump sum, unit price, time and material, change directive, recorder minor change).
With the guideline, subcontractors can read what details these different types of change orders should contain, and even cite the guideline in explaining their need for information to employees and contractors. One critical point made in the guideline is that “[c]hange order work should not begin until after the owner or owner’s agent issues a written authorization to proceed.” Even if the subcontractor can’t obtain a signed, completed change order, the subcontract may allow for an alternative way of handling the dilemma if the client insists that the subcontractor proceed with work. If a price and time for a change cannot be agreed upon in advance, the subcontractor should obtain a written authorization in the form of a signed change directive. A change directive would provide documentation of the authorization to proceed while preserving the subcontractor’s rights to time and price adjustments—rights that the subcontractor risks losing if it simply proceeds without any written authorization. Some of the guideline’s most critical points for lessening or preventing disputes are not contained in its best practices for what’s “in” a change order, but rather in the best practices it describes for setting up and following processes to communicate change order information and authorization. To prevent disputes, it is critical that the persons with authority to agree to change orders be clear. The guideline notes:
“Special care should be taken with subcontractors and material suppliers to clarify the proper communication paths and to identify the persons in authority … Appropriate communication processes should be clearly outlined during the Pre-Construction Conference attended by all parties.”
The pre-construction conference is where the subcontractor’s and contractor’s points of contact for change order authorizations should be clarified. Subcontractors should also take heed of the guideline’s warning not to let change orders accumulate until the end of a project. If a subcontractor waits too long, it may not be able to follow the contractual procedure for submitting change orders.