What’s In Your Contract?: Subcontractor Procurement Strategy

HPM’s Audit + Contract Services team recently started a monthly blog series authored by one of our in-house subject matter experts – all of whom have decades of expertise providing advice on construction audits and contracts to companies and institutions throughout the US.

Rogers

This second in the series features Valerie Rogers, Senior Auditor.  Valerie serves owners in the areas of contract negotiations, pay app reviews, calculations of scheduled damages, claims analysis management and defense, and interim and final audits for reimbursables, fees, and savings allocations. You can reach out directly to Valerie at vrogers@hpmleadership.com or 817.941.1642.

General contractors (GCs) and construction managers (CMs) will usually prepare bid packages and a request for proposal (RFP) to be sent to prospective sub-bidders (subs) for selected scopes of work.  These RFP’s will typically ask for a fixed price for performing the work. These RFP’s also will often ask for additional information from the bidders, such as corporate financial and safety related information.  Sometimes, and much too often, the CM will ask the subs to quote the fees they want on change orders (COs) or ask the subs for their labor rates to be used on COs.

This later type of information is almost never used in the selection process but is nevertheless later inserted into the subcontracts as a unit cost to be used if COs occur.

Most owner contracts contain language as to how COs are to be priced. Labor, material, and equipment costs of a change is assumed to be at cost, unless there is an agreement in the owner/CM contract to price those items differently.

When the CM inserts language into its subcontracts, fixing certain costs at a predetermined amount, this causes a conflict between the CM agreement with the owner and the contract with the sub.

The CM often is attempting to fix labor rates because it makes it easier for them.  Usually, there is no regard to whether these quoted rates are accurate, what cost elements might be included, or if they include fee mark up.  In fact, it is very common the amounts allowed to a sub for a common wage classification — like a carpenter — is much greater than the owner allows the CM to charge for the same classification, given the CM is limited to only charging actual cost.

Case Study Example

To further illustrate this point, we recently reviewed a union electrical subcontractor selected by the CM.  The CM selected the sub with the highest labor rate (greater by $10 per hour) of three bidders.  The CM had agreed to these higher quoted rates and inserted them into their subcontract.  As the owner’s representatives, we asked for support for the actual cost and also reviewed the RFP that originally went to the subs.  It was discovered in this process the selected sub had assumed the labor rates should include overhead and profit (OH + P), while the other subs apparently did not.  Also, it was discovered the actual cost of labor was $5 an hour lower than the quoted rates even after OH + P was removed from the rate.

What You Should Know

Hopefully, your take-away from this blog post is to be mindful of what is being bid versus what is simply being asked. You should try to limit the requested responses in a bid to only those items that will be used to determine which bids are lowest and most complete. Informational items such as unit cost for material or labor, in the advent of a change, should be limited unless those results are going to be factored into the low bid analysis.

As always, if any of our team members for Audit + Contract Services at HPM can help you, please don’t hesitate to find more information on our page or contact any one of us directly.


Join us next Thursday for our HPM Talks Webinar. As we all continue to navigate the effects of COVID-19, we examine how owners need to take a second look at carrying bonds for subcontractors or invest in SDI in order to mitigate risk to construction projects.