New Contractor Start-Up Issues In A Distressed Market; Things You
Should Avoid Like The Plague In Your Tenuous Startup Situation 

In the economic downward spiral of a recession, and even long into the recovery period as well, bidding opportunities diminish. Meanwhile the contractors competing for the diminished bid opportunities multiply, sometimes to 12 or 14 bidders for each construction project. Older, more experienced, and better financed players will cut their prices to the bone, hoping, if awarded the project, at worst to slide by with a no-profit job, thereby keeping their workforce together and occupied while awaiting better markets.

You have just recently secured your very first surety bond line with a single-project, and entire work program bond cap, at just under $1,000,000. Your new working capital line provided by the bank is minimal but probably sufficient if things go perfectly on the first contract.

In a moment of stark realism, you become acutely aware that your next personal pay check must come from but two, and only two, sources: the first contract’s cash flow --- or absent a new contract cash flow, by burning down your new company’s net worth in the amount of the check(s).

The second option is definitely not attractive. In order to persuade the bank to extend you a larger working capital line in the near future, it has keenly hinted that you will need a stronger financial statement than the one on which it initially lent to begin. While mulling over this bit of pragmatism, you also contemplate the following.

Premiums for your workman’s comp, “key-man” life and builders risk insurance are already due and will be continuing fact of life going forward – regardless. Bidding expenses; travel, bid document costs, telephone and fees to electrical and mechanical contract estimators are starting to become quite significant for your three or four unsuccessful bids todate.

Clearly, the business needs a project to build; a contract, now. But not just any contract. If ever there is a time in the life of a new contracting business its key person must be on high alert, this is it. Here are some facts of contracting business life and related issues a new contractor needs to be, and remain, acutely aware of.

1. Life is not always fair. Contracting life is oftentimes even less fair.
2. Playing fields are unlevel, not level.
3. Government construction contract playing fields are more unlevel, not less.
4. The size of the negative impact of the above will be inversely proportional to the contractor’s financial capability or current net worth.
5. Stuff happens. Worse stuff happens to new contractors holding contracts with concealed defects and/or administered by unfair owner’s representatives.
6. Surety bond underwriters, where the surety’s relationship with its new principal (you) is yet completely untested, are universally unsympathetic to contract problems, whether you are completely blameless or not. Disregard all hype you may have previously read  or heard about how in the event of some major disruption to your contract which is not your fault a surety may provide financing or otherwise support and help you complete the contract. Much to the contrary, in such an event even if you survive it, your surety is more likely to surprise you with a much more restricted bidding program afterward – the cause of the disrupted and delayed contract performance your fault or not.
7. Banks¹ are just as unforgiving, regardless of what it was that caused your net worth to fade, not rise, after you finish your first project(s).

The first five offerings above are merely a list of some of “Glen’s Corollaries”, appropriate for consideration in the context of starting up a government construction general contraction business – or any construction contracting business requiring surety and working capital credit lines.

The final two reflect observations based on the experience of other government construction contractors (and the undersigned as well). The particular brand of experience I refer to here is the “bought and paid for” variety.

The Trojan Horse Construction Contract – Or Worse
Arguably, the most tenuous time in a general contracting business’ life is during that time, and under the circumstances, which I have alluded to heretofore. Equally as possible, the most important decision you will ever make within that limited time is the selection of which contracts you will bid most aggressively, or even bid at all, to begin with.

Perhaps the worst thing you can do in contracting startup is to become the owner of a real “dog” of a contract; a “project from hell”. It happens. In a recession, bidding opportunities are less plentiful and competition is more intense. Moreover, acutely aware of the “buyer’s market” available to them, owners are opportunistic and prone to place back into the bidding queue contracts they have placed out for bid before but refrained from awarding due to high contractor bid prices.

Those contractors knew what they were doing. There were owner design, unrealistic schedule, performance impossibility, concealed underground, or other such issues in those contracts’ specifications and/or drawings! The previous bidders bid them “fat” with extra funds to overcome these problems in the event of receiving an award!

Identify and avoid them.² Your chances of not loosing money on, not to mention surviving, one of these in your new position is little and none. You can confirm such a suspected contract’s identify by finding a talkative estimator somewhere in the competition or by other phone discussions with potential vendors and subcontractors.

Onerous and/or Excessive Risk-Shifting Clauses
The classic example of this is the “No Damages For Delay” clause. Where you see this, believe it and beware. They mean it. Any delay, the fault of whoever. Suppose you are awarded a contract which has this in the specifications. Eventually during performance owner re-design causes a major, expensive, work suspension. Further suppose that it is crystal clear and undeniable that the owner is responsible. When you present your formal request for relief (request for equitable time and cost adjustment – REA in government contracting speak) to the owner’s representative (the contracting officer if a government contract) she will merely point to the clause and deny the request. Bid this contract at your own peril.

Pre-bid Equipment Vendor Complaints of Specs Impossible of Performance
Their equipment or special materials line is all these guys do. Listen to them. They most probably know what they are talking about. Taken to the extreme, if awarded a contract on which all such suppliers placed caveats on their quotations, at best the odds are there will be delays while you try to persuade the owner to accept alternate or modified equipment. Where all except one single vendor complains, you will likely find that he has no competition and his price is far off the reasonable scale. He and the owner have cooked the specification books. He probably supplied the draft for the equipment or special material specs, a setup for receiving special preference, a violation of federal procurement statutes if it is a government contract.

The caution light just came on for you.

Solicitations With Excessively Long Contractor Offer Retention Periods
Typically, a construction contract bid solicitation will require that all bidder offers, not just the apparent low and second low bids, be held firm and expire only at the end of the stated retention period, usually 30, 45 or at the latest 60 days. Thus even if you are the high bidder, your surety bond capacity to bid other contracts is automatically depleted in the amount of your bid until the owner awards the contract, or until he declines to award at all and the retention period expires.

However, in the government contracting world, things work a little more to a contractor’s disadvantage. The government’s fiscal year ends September 30 and by then the various government facilities and entities must have spent that year’s construction allocation or else the remaining funds must be sent back to Washington to be divided into the next fiscal year’s various money pots. This being the case, a bidding frenzy is created in August and September, as the government begins dumping out into the bidding arena rebids, half-cooked designs begging for re-design on which the government skimped on the original design due to budget constraints, contracts on which physical elements have been lopped off to force it into some tight budget without regard for the impact on the overall ultimate constructability, contracts with multiple “alternates” which the bidder must price individually and from which the government can pick and choose various elements based on funds available during the low bidder determination, and the like.³

Various and sundry red flags will readily appear for you on such bids and in that time period. Watch out. However, the easiest to identify is the unreasonably long bid retention period. During this feeding frenzy period in government contracting, it is not at all unusual to see durations of 150 days! Not only is there probably something wrong with the bidding documents, this is a sure sign the government hasn’t a clue exactly how or when or even if it can ever fund this contract. It is relying on scraping together fund
residue from other contracts on which prices came in below budgets! Which obviously may never happen.

These contracts are not for you.

Specification Clauses Which Make No Practical Sense; Ambiguous Specifications
A single shining example of this brings immediately to mind a government contract for a metal building to be used as a helicopter hanger. In the course of several specification pages, the bid documents had the concrete for the approach slab and the floor slab specified three (3) different ways, all intertwined and “wrapped around the axle” in an amazingly but patently ambiguous⁴ way. First, the floor slab concrete was specified to be typical commercial building-strength concrete readily available at the local ready-mix plant. Next, the approach slab was specified to be a high strength special mix, normally employed only in airfield runway and taxiway work. Meanwhile, interspersed clauses indicated that this applied to the building floor slab also – in spite of the floor slab specification stated above. Finally, in three or four rambling pages of additional concrete specifications, the documents described concrete production and placement methods found only in dams, locks and hydro power plants and the like – along with reasonable inferences that all concrete shall be such!

My client related how he made the assumption that the spec writer was a mere bumbler and had intended that the relatively clear and reasonable initial direction for commercial building grade concrete prevailed on the floor slab. Meanwhile, he priced the approach slab using high strength taxiway concrete, a reasonable conclusion. Awarded the contract, he subcontracted the concrete to a local concrete contractor on that basis, and made the appropriate submittals for same to the government. In the meantime, the sub, whose work load for the season was heavy and without much slack, placed the floor slab in his work schedule queue.

Weeks late, the government rejected my client’s concrete submittal, demanding high strength concrete in the floor slab. Argument was futile, lost time needed to be regained and the contractor quickly turned to the sub requesting his immediate change to the high strength concrete. The sub agreed (after a substantial price increase), but declined to perform on the original schedule, as the change required special placing and finishing equipment and enlarged crew, not then available. This resulted in a major costly delay, not to mention the extra direct cost of equipment, crew and concrete.

This specification mish-mash was a bright red warning flag, never to be disregarded.

Owner Culture
Determination of whether or not you should even be bidding work which is under the direction of the administrators of certain owners or certain owners’ satellite offices or facilities needs to be addressed. Make no mistake. There are an alarming number of agencies who are prone to treat small contractors unfairly in the extreme – many times for no apparent reason.⁵ I have found this most prevalent in federal government contracting.⁶

How to investigate this? Make friends with hands-on actors in your competition, to the extent possible. Superintendents and project managers know the score. Suppliers and subcontractor’s people, given the right forum, can also become quite candid with information. You can’t be too pre-informed.

There are actually places where you do not want to try to perform your first contract; some are where you do not want to try to perform any contract, ever.

Conclusion
Contracting is a good business, but tough and hazardous. Done professionally, it can be great – noble, some even say. Building shelter and workspaces for people; and power, transportation and water purification structures and facilities for the nation. Providing livelihoods and skill-learning forums for the skilled and unskilled alike. Noble indeed.

Be careful and good luck.  If you meet these situations, call me at 205-349-3516.  I charge no fee for discussion and initial opinion.

Glen L. Eaton

ConstructionClaimsExpert.com

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1 “A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it starts to rain.” Mark Twain.
2 I call these the “pigs-with-lipstick” contracts. Even shined up just a bit for the re-bid, they are still pigs.

3 A veritable swine farm full of lipsticked pigs.

4 Openly and clearly given to more than one interpretation of the correct concrete specification(s). Latent ambiguities on the other hand are those considered to have been incapable of discovery by a reasonably experienced contractor.

5 As a natural consequence this unfair treatment usually leads to some response by the contractor,which will not be received well by the owner’s reps, and things go rapidly downhill from there. As a new small contractor sitting on the bubble financially, you must avoid if at all possible even being present in a culture climate where unfair owner practices regularly occur.
6 This is in spite of the fact that there are many, many good, fair government owners to work for.