Yesterday’s blog explored the risks and intricacies of contractors unbalancing bids. At times, contractors seek to “front end load” their bids by adding money to unit priced items that occur at the beginning of the project and removing money from unit prices that are performed towards the end of a project.
Conversely, it is in the Owner’s interest to “back end load” the contractor’s schedule of values. While owners have little control over the contractors’ bids, owners may, by the specifications, require that the contractor distribute certain amounts of money to activities that are performed at the end of the project such as punch list, project close out, O&M manuals and commissioning. This way, owners seek to ensure that the contractor has “skin in the game” until the end of the project. By tying up enough of the contractor’s money through “back end loading,” the owner keeps the contractor interested in expeditiously completing the job. This well-intentioned practice squarely collides with state Prompt Payment Act and retention limitation statutes.
1. Prompt Payment Act.
The Prompt Payment Act requires that public works owners pay the prime contractor within 30 days of receipt of an invoice or the receipt of goods and services, whichever is later. See RCW 39.76.011 (Washington statutes are cited in this example however both Alaska and Oregon have enacted Prompt Payment Acts which would dictate a similar result).
The Washington Legislature, when it passed the Prompt Payment Act, “promised” contractors that they would be paid expeditiously. In return, the State purchases its construction projects at a lower price.
Many public owners acknowledge the Prompt Payment Act in their specifications with language along the following lines:
“The contractor shall comply with the requirements of RCW 39.10 [the Prompt Payment Act] the provisions of which shall take precedence over any inconsistent provision in the contract documents.”
2. Retention Statute
RCW 60.28.011 limits a public improvement contract’s retention to five percent (5%) of the prime contractor’s money earned as a trust fund for the protection of subcontractors and suppliers as well as Department of Labor & Industry assessments. The statute also provides that, except for the five percent (5%) retention, “withholding” by a public body for any other purpose is prohibited. RCW 60.28.011(9).
Similar to the prompt payment act, by assuring contractors that the public works owner will only withhold 5% retention, contractors can bid with confidence that the owner will not withhold excessive amounts. Thus the financing of the public works project on the owner, and the taxpayers benefit from lower contractor bids.
Public owners also doff their hats to the statutory retainage requirements in typical specifications, which read as follows:
Statutory retainage will be paid as specified in the revised A 201-97 General Conditions and RCW 60.28.”
3. Typical specification provisions mandating back-end loading of the Schedule of Values
“At least fourteen (14) days before the first Application for Payment for each Component the Contractor shall submit…a schedule of values allocated to the various portions of the work for that Component. This schedule, unless objected to by the …Owner, shall be used for a basis for reviewing the contractor’s application for payment. [Here’s where the specification gets interesting]. “Mobilization” shall be a maximum of one-half of one percent (0.5%) of the GMP, and shall be paid only if supported by an itemized breakdown of costs acceptable to the owner; the schedule of values shall allocate at least one percent (1%) of the GMP to Commissioning of Operational Systems, as defined in the contract documents; and the schedule of values shall also allocate at least two percent (2%) of the listed value of each line item in the schedule of values so that the proportion of the work between the substantial completion and final completion of that line item to be earned and to become payable in the next Application for Payment upon final completion of that line item.”
In simple terms, the owner has by contract sought to limit front end loading by the contractor for mobilization to 0.5%. More disturbing, however, is the fact that if the mobilization exceeds 0.5%, there is no way for the contractor to get an upward adjustment in the schedule of values but mobilization could even be reduced if the contractor cannot demonstrate by “an itemized breakdown of costs” that the mobilization cost at least equals 0.5%!
To exacerbate matters, the contractor must allocate one percent (1%) of the GMP for the commissioning of operational systems and at least two percent (2%) for each of the listed close-out, line items in the schedule of values that occur between the substantial and final completion date. If the contractor’s fee on the project is 2.5% (which is not uncommon in today’s economic environment), it is easy to envision that the contractor’s entire fee plus two or three percent more could be tied up until the project is finally completed. Contrary to State public policy that retention will be limited to 5% and the promise by Washington’s legislature that contractors will be promptly paid, public works owners that “back load” the schedule of values ultimately force contractors to finance a portion of the public works project. General contractors then “flow down” these onerous provisions to subcontractors and suppliers whose “retention” is also artificially increased.
A pertinent question is: If the amount that the public works contractor may withhold in retention is limited to five percent (5%) how do public works owners get away with “back end loading” and thereby increasing retention to 8-10%?
The simple answer appears to be because they are getting away with it. No contractor has formally challenged that practice yet. Back end loading of a schedule of values should be discouraged for many of the same reasons that front end loading has been criticized. Public works owners should reconsider whether their practice of forcing contractors to artificially place money into completion items which violates Washington’s statutes and public policy is truly in the best interest of taxpayers.