Changes in the World of Construction Contracting
The downturn in the economy has continued to have a serious effect on the construction market. While there have been some “upticks” in construction spending, the volume of dollars spent on construction still has not shown a significant upward trend. As a result, the competition for new contracts continues to increase dramatically. However, the largest procurer of construction services in the world, the U.S. Government, remains the most promising source of new projects, both in terms of building and civil projects, although this will certainly decline in the post-Stimulus Act era and with the new budget-minded Congress.
Because the recent prominence of the Federal Government in the construction market place, many contractors who did some Government contract have focused more effort on Government work. In addition, many contractors, who previously performed little or no Government work, have moved into that arena in a significant way.
At the same time, Government contracting has undergone significant changes. The most important change in recent years has been the Government’s emphasis on combating fraud, waste, ranging from corrupt procurement practices to false claims to abuse of the disadvantaged business enterprises programs, through aggressive use of the Government’s powers.
While most long-time Government contractors know of the changes, even they are experiencing the reality of the significant increase in investigations and prosecutions and have had to alter their normal practices and procedures. However, contractors just entering the Government contracting market place from the private sector face a major paradigm shift in the way they do business, which requires changes in their corporate systems, attitude, training, and oversight. Doing business with the Government can be profitable, but only if the contractor knows how to work within the system and avoid the many pitfalls they will face.
For example, recent Federal Government regulations require that all government contractors with contracts over $5 million implement an ethics and compliance program. However, there still are many Government contractors that have not recognized that such a compliance program has to be more than published policies; rather, such a program must reflect the genuine commitment of that contractor to achieve the level of compliance that the government expects. Furthermore, they must recognize that such a genuine commitment is the best way to avoid the expenses and the risks inherent in a Government investigation.
Contractors doing business with the Government must understand their ethical obligations to the Government and what happens if they violate them. All contractors know that bribes or kickbacks are illegal, but they do not always recognize many of the more subtle landmines. For instance, the intentional overstatement of quantities of work on payment requisitions, claims for equipment costs based on book rates where the company can determine actual equipment costs from its books, and misstatements in proposals in response to RFPs can all constitute false claims that have Draconian results.
One of the key recent changes in the regulations that likely will cause contractors difficulty is the duty to self-report violations of the civil and criminal False Claims Act. The regulations require self-reporting of such things as significant overpayments when the contractor has credible evidence of a violation. Contractors will be faced with very difficult decisions. Informing the Government that you cheated is not something that will easily be done.
One of the biggest problems with false claims and non-compliance are the severity of the penalties for violations. The penalties include treble damages, forfeiture of entire claims and contract payments for even small violations, suspension and debarment from Government contracting, and fines.
Because of the increased emphasis on false claims by the Government and the seriousness of the penalties, Government contractors need to become more proactive, rather than reactive and that starts with a comprehensive compliance program and training.
The emphasis on improving the environment, which has pushed green building to the forefront of the nation, is also having a major impact on the way construction is performed in both the public and private sectors.
In green building construction, new and untested contract clauses and forms, products, and means and methods of performance are being used on a trial and error basis. The industry faces new issues every day. For example, when a contract calls for a platinum rating: who is responsible for achieving this rating, the contractor, design professional, owner, or all of them? What happens if a platinum rating is not achieved? What are the damages arising from the failure to obtain the platinum rating and are they unrecoverable consequential damages? To compound the problem, the industry does not have sufficient people trained and experienced in green construction. As a result, claims and litigation will increase while the construction industry works its way through the growing pains of building green.
Building Information Modeling (“BIM”)
Technology is also having a major impact on how construction is performed. At the forefront of new technology is Building Information Modeling. BIM is a computer model of a construction project having four or five dimensions. The Government is a leader in requiring the use of BIM on its projects.
This new technology has a tremendous potential to increase productivity and reduce claims and litigation in the future. However, like green building construction, it requires new clauses and contracts, introduces new relationships, and requires training and experience to achieve its potential. Some new issues that the industry faces include: Who is responsible for errors in data entered into the model? What platform should be used? Who pays for the technology and do all subcontractors have to have the BIM technology? Who owns the model upon completion and where is it stored? While answers to these and many other questions are being resolved, there will be a short term increase in claims and litigation.
Methods of Contracting
In part, in an effort to decrease claims and litigation, new methods of contracting have evolved including guaranteed maximum price, design-build, construction manager agency, construction manager at risk, program management, and recently collaborative construction documents.
The design-build method of contracting attempts to remove some of the conflict inherent in the normal method described above by providing for one point of responsibility for design and construction. The new collaborative contract documents are even more innovative in trying to reduce conflict. They are based on a single contract between the owner, designer, and contractor where each party shares in the financial success or failure of the project, thereby attempting to alleviate conflict between the parties and encourage cooperation among all parties. Like the other innovations discussed above, there will be growing pains with this new form of contracting.