Delivered January 19th, 2020. Contributors: Shannon S., George K. and
Contract Negotiation Legislation
Legislation affecting construction contract negotiation exists at both the Federal and State levels. If enacted, the Stop Unfair Bid Shopping Act would require all prime contractors under Federal contracts to notify the Government of all subcontractors on the project and any subsequent substitutions, and the Fair and Open Competition Act would allow non-unionized workers and businesses to compete for Federal Government contracts. Kentucky recently enacted a State level Fair and Open Competition Act, and the State of Illinois recently passed a retainage cap law designed to cap private construction contract retainage at 10% or less.
Federal Bills Introduced: H. R. 5248 and H. R. 1852
H. R. 5248, also known as the Stop Unfair Bid Shopping Act, was introduced on November 21, 2019, and is sponsored by Representative Scott Peters. If enacted, the bill would require "prime contractors under Federal construction contracts to notify the Government of changes in certain subcontractors performing work under the contract." The act would require "prime contractors on awards of $1.5 million or more to list major first-tier subcontractors of $100,000 or more." Any substitutions of listed subcontractors "that amount to deductions of 10% or more would result in a deductive change to the prime contract for amounts above the substitution threshold."
H. R. 1852, also known as the Fair and Open Competition Act, was introduced on March 25, 2019, and is sponsored by Representative Ted Budd. If enacted, the bill would "ensure that the federal government cannot mandate project labor agreements (PLAs) on federal projects." This bill is designed to increase the number of federal construction projects non-unionized private construction workers are able to work on, thereby increasing competition. Kentucky signed a similar bill into state law, signed by Governor Matt Bevin in March 2019 and originally introduced by Representative Phillip Pratt, which allows all skilled construction workers and qualified businesses to compete for local public works contracts.
Retainage Laws: the State of Illinois and Public Act 101-0432
Twenty states have enacted legislation to cap private contract retainage at 10% or less, with New Mexico law prohibiting any retainage from being withheld from a construction contract.
Sponsored by Senator John Mulroe and signed into law by Governor Pritzker on August 20, 2019, SB 1636 is an amendment to the Illinois Contractor Prompt Payment Act, 815 ILCS 603, which took immediate effect on all contract negotiations that involve retainage provisions. It affects all private construction contracts in Illinois.
The amendment, now known as Public Act 101-0432, "codifies a 10% cap to the amount of retainage that may be withheld on all private construction contracts in the state of Illinois." It also requires that retainage be dropped from 10% to 5% once the project is halfway complete.
In addition to its impact on construction contracts, the passing of SB 1636 had an immediate effect on loan negotiations between owners and lenders. Owners need to consider retainage requirements and maximums to ensure their project cash flow is not affected by the change in the law.
The National Law Review also notes that "Project participants will also need to negotiate who is liable to finance retention payments to subcontractors in the inevitable scenario where subcontractors performing early work reach 50 percent completion on their subcontracts, but the general contractor is still subject to 10 percent retainage."
The bill was enacted one year after Governor Rauner vetoed an identical bill, SB 3052, because it “could potentially discourage economic growth, harm existing businesses, increase financing costs, and leave owners with no recourse to address performance issues on construction projects.”
Contract Scandal Case Studies
Kellogg, Brown & Root (KBR) is a construction company headquartered in Houston, Texas. Between 2001 and 2011, KBR was awarded a contract under the Logistics Civil Augmentation Program (LogCap). It was later discovered that this was an open-ended, "cost-plus contract which allowed the company to engage in fraudulent activities.
KBR LogCap Scandal
When and Where
The U.S. Army did not find any infrastructure for supporting and housing its troops when it moved into Afghanistan in 2001. The military, therefore, formulated an umbrella contract called the Logistics Civil Augmentation Program (LogCap).
In 2001, the U.S. Army awarded KBR the LogCap contract to KBR for the provision of an unspecified value of “selected services in wartime.”
While KBR won the contract through competitive bidding in 2001, a series of one-year contract extensions ensured that it did not face a competitor's bid for nearly eight years. In 2003, KBR's services expanded into Iraq together with the U.S. forces.
The selected services rendered by KBR included "base support services" (water supplies, feeding, sewage services, and billeting, among others) and logistics functions (transportation, movement of supplies, ammunition, and gas, among others). According to a former Vice President of Halliburton (KBR's parent company), the company was providing support to over 200,000 troops by offering “anything they need to conduct the war.”
It was later discovered that the U.S. military's contract with KBR was under "open-ended terms." Essentially, it did not define the type of services that are needed but instead left it to the contractor to decide what needed to be done and the resulting costs to be billed to the government.
It was also discovered that LogCap was a "cost-plus contract," which "reimburses a company for its expenses and then add a fee that’s usually fixed contractually or determined by a performance evaluation board." Under those terms, the contractor (KBR) did not have any incentives to limit or minimize the government's costs because increased costs meant more fees paid to the contractor.
KBR took advantage of the LogCap contract by providing or claiming to provide unnecessary services such as hiring high-end security contractors for about $500 million.
According to the Contracting Commission, "KBR accounted for about half of contractor personnel in Iraq. When bases closed and its personnel left those bases, KBR merely transferred some of them to other bases and continued to bill for their support."
KBR also overcharged the government for everything from fuel supply to housing and food delivery. The company then encouraged government officials to scan their IDs at snack and meal times in order to justify the costs.
An audit conducted by the U.S. government caused KBR to lose the said contract to Flour Co. in 2011. The company was forced to hand over its operations to the Flour, another major U.S. construction company. It also had to spin off its name and move its operations to Dubai for some time.
"The newly enacted law adds Section 20 to the Act, and codifies a 10% cap to the amount of retainage that may be withheld on all private construction contracts in the state of Illinois."
"Section 20 also requires that once a construction contract is 50% complete, the maximum retainage that may be withheld on the remainder of the project is 5% of the remaining payments to be made under the contract."
" In August 2018, Governor Rauner vetoed the latest iteration of these acts, S.B. 3052, raising concerns that enacting this law “could potentially discourage economic growth, harm existing businesses, increase financing costs, and leave owners with no recourse to address performance issues on construction projects.”"
"Project participants will also need to negotiate who is liable to finance retention payments to subcontractors in the inevitable scenario where subcontractors performing early work reach 50 percent completion on their subcontracts, but the general contractor is still subject to 10 percent retainage."
"The SUBS Act would require prime contractors on awards of $1.5 million or more to list major first-tier subcontractors of $100,000 or more. Post-award substitutions of listed subcontractors that amount to deductions of 10% or more would result in a deductive change to the prime contract for amounts above the substitution threshold."