[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
ALL WORK AND NO PAY: CHANGE ORDERS DELAYED FOR SMALL CONSTRUCTION
CONTRACTORS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEES ON CONTRACTING AND WORKFORCE AND INVESTIGATIONS,
OVERSIGHT, AND REGULATIONS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD
MAY 25, 2017
__________
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Small Business Committee Document Number 115-022
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
TRENT KELLY, Mississippi
ROD BLUM, Iowa
JAMES COMER, Kentucky
JENNIFFER GONZALEZ-COLON, Puerto Rico
DON BACON, Nebraska
BRIAN FITZPATRICK, Pennsylvania
ROGER MARSHALL, Kansas
RON ESTES, Kansas
NYDIA VELAZQUEZ, New York, Ranking Member
DWIGHT EVANS, Pennsylvania
STEPHANIE MURPHY, Florida
AL LAWSON, JR., Florida
YVETTE CLARK, New York
JUDY CHU, California
ALMA ADAMS, North Carolina
ADRIANO ESPAILLAT, New York
BRAD SCHNEIDER, Illinois
VACANT
Kevin Fitzpatrick, Majority Staff Director
Jan Oliver, Majority Deputy Staff Director and Chief Counsel
Adam Minehardt, Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Knight................................................ 1
Hon. Stephanie Murphy............................................ 2
Hon. Trent Kelly................................................. 3
Hon. Alma Adams.................................................. 4
WITNESSES
Mr. Edward DeLisle, Co-Chair, Federal Contracting Group, Cohen
Seglias Pallas Greenhall & Furman PC, Philadelphia, PA......... 7
Mr. Andy Brown, Vice President, Glen/Mar Construction, Clackamas,
OR, testifying on behalf of the Associated General Contractors
of America..................................................... 8
Mr. Greg Long, CEO, Long Electric Company, Napa, CA, testifying
on behalf of the National Electrical Contractors Association... 10
Ms. Colette Nelson, Chief Advocacy Officer, American
Subcontractors Association, Inc., Alexandria, VA, testifying on
behalf of the Construction Procurement Coalition............... 12
APPENDIX
Prepared Statements:
Mr. Edward DeLisle, Co-Chair, Federal Contracting Group,
Cohen Seglias Pallas Greenhall & Furman PC, Philadelphia,
PA......................................................... 25
Mr. Andy Brown, Vice President, Glen/Mar Construction,
Clackamas, OR, testifying on behalf of the Associated
General Contractors of America............................. 32
Mr. Greg Long, CEO, Long Electric Company, Napa, CA,
testifying on behalf of the National Electrical Contractors
Association................................................ 37
Ms. Colette Nelson, Chief Advocacy Officer, American
Subcontractors Association, Inc., Alexandria, VA,
testifying on behalf of the Construction Procurement
Coalition.................................................. 44
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
Statement for the Record from Hon. Steve King................ 52
ALL WORK AND NO PAY: CHANGE ORDERS DELAYED FOR SMALL CONSTRUCTION
CONTRACTORS
----------
THURSDAY, MAY 25, 2017
House of Representatives,
Committee on Small Business,
Subcommittee on Contracting and Workforce
joint with the
Subcommittee on Investigations, Oversight, and
Regulations
Washington, DC.
The Subcommittees met, pursuant to call, at 10:00 a.m., in
Room 2360, Rayburn House Office Building, Hon. Steve Knight
[chairman of the Subcommittee on Contracting and Workforce]
presiding.
Present: Representatives Chabot, King, Knight, Kelly, Blum,
Bacon, Fitzpatrick, Marshall, Estes, Evans, Murphy, Lawson,
Clarke, and Adams.
Chairman KNIGHT. Good morning. This hearing will come to
order. Thank you all for coming.
Before we begin today's joint hearing of the Subcommittee
on Contracting and Work Force and the Subcommittee on
Investigations, Oversight, and Regulations, I would like to
thank our witnesses for taking the time to share their insights
with us today and I look forward to their testimony.
In 2016, our Federal Government spent $90 billion on
construction, an industry that is vital to rebuilding our
Nation's crumbling and aging infrastructure. Our agencies must
have agile, transparent, and fair processes in place in order
to ensure high quality structures are built at a reasonable
cost. Constriction is one particular industry where changes are
particularly prevalent and flexibility is crucial. Agencies
should be capable of swiftly adapting to changing conditions
without engaging in a completely new and lengthy acquisition
process. Issuing contract modifications through the use of
formally authorized and document change is one way to
accomplish this task.
In contracting, a certain degree of reasonable delay is
expected when changes are made. However, this becomes
inexcusable when Federal agencies are unwilling to formally
execute change orders and fail to pay for work that has been
completed for months or even years. During this waiting period,
small contractors are often left to finance new work out of
pocket. Some of these expenses include paying employees'
salaries, taxes, building materials, running expensive
machinery and other costs a small construction firm must
assume. Unfortunately, this creates untenable situations and
can result in financial distress, and in some cases,
bankruptcy.
Another common problem occurs. Contractors are directed to
perform change orders, work without following proper notice and
authorization procedures. If change order work is directed
without following protocol, contractors may not get paid even
for work they complete. With the added pressures of staying on
schedule and not wanting to poison the relationship between the
parties, small contractors must choose between working without
a guarantee of payment or risk contract termination for
nonperformance. Faced with this impossible decision, small
contractors often decided to go ahead and do the work.
This issue is not unique to small firms, however. Large
firms have the flexibility and capital to bear extended periods
of time waiting for change order payments. In contrast, smaller
operations require a stable and predictable cash flow to
replenish their limited working capital.
Many small contractors rely on bank loans and lines of
credit to bridge the gap, raising the risk of bad credit or
worse. When resources are tied up on unprofitable projects,
small contractors are unable to seek new work. When multiple
change orders are delayed, the impact is further compounded. By
engaging in these poor change order practices, agencies end up
struggling with small construction contractors. We need to make
it equitable for small businesses to work with the government
and reduce these barriers that hurt or dissuade small
businesses from working with government contracts.
I hope through this testimony of our witnesses we can learn
more about this issue and discover ways to prevent this
unfortunate circumstance. I do look forward to the discussion
today.
I would now like to yield time to the ranking member, Ms.
Murphy, for her statement.
Ms. MURPHY. Thank you, Mr. Chairman.
For several decades, the Federal Government has relied on
the private construction industry to build and repair
infrastructure for its day-to-day operations. Accordingly, a
thriving small business industrial base has become essential to
the U.S. economy and to our national security. However, it is
well documented that government contracts are less than perfect
when awarded. As we will hear today, more needs to be done to
reduce the burdens imposed on small construction firms due to
administrative delays.
During performance of a contract, many changes may be
required to fix inaccurate specifications, react to new
circumstances, or modify the work to better meet agency needs.
A change order is a unilateral, written order issued by a
contracting officer directing the contractor to make a contract
modification. Currently, such directives can be made with or
without the contractor's consent.
The ability of Federal agencies to make such unilateral
decisions has led to persistent problems in which agencies fail
to follow the proper procedures to issue change orders.
Agencies routinely delay the approval process for change orders
or bundle them to ease the administrative burden on contracting
officers.
This Committee is concerned that such actions have been
taken without sufficient consideration of the consequences for
small construction businesses. Agency delays can create
significant financial burdens on contractors. Due to the nature
of construction projects, processing a change order can slow
down other parts of the project, jeopardizing the ability of
contractors to meet their obligations. Firms are often left
with little choice but to comply with changes without receiving
formal approval of the change order or a guarantee that they
will receive payment.
This has created tremendous uncertainty for small
contractors that do not have the overhead margins of larger
primes and cannot afford to go unpaid for work performed.
Without prompt payment, small firms can struggle to meet their
payroll, let alone pay their bills. In some of the more
egregious cases, businesses have gone over a year without
payment for work completed.
Although equitable adjustment in the contract price enables
a contractor to receive compensation for additional performance
costs incurred by a contract modification, this option falls
short of solving the problem. Requests for equitable
adjustments (REAs) can allow small business construction
contractors to afford continuing performance, but any delay
means the contractor must assume the cost and hope for payment
after completion of the contract.
Numerous policies and protections have been enacted to
incentivize small businesses to continue participating in
government contracting, but more are necessary to manage the
change order process. Small businesses have approached this
Committee with complaints about the effect of bundling or
consolidation of change orders on their bottom line. I hope
today's hearing will shed light on these challenges, and I look
forward to hearing this panel's feedback on legislation that
Congressman Fitzpatrick, Chairman Knight, and I recently
introduced to address the issue.
Whether it comes to change order delays, reductions in
Federal procurement staff, or an increase in multiple award
contracts, there will always be new issues for small businesses
to overcome. We must ensure that the procurement laws evolve
with this changing landscape. Doing so is essential not only
for small firms and our Nation's industrial base, but for the
overall health of our economy.
I yield back the balance of my time.
Chairman KNIGHT. Thank you very much. And this is a joint
hearing, so we have the Chairman from the Subcommittee on
Investigations, Oversight, and Regulations with us, Chairman
Kelly, to have his opening statement.
Chairman KELLY. Thank you, Chairman Knight.
You know, in the Small Business Committee, I thank our
Ranking Member Murphy and Ranking Member Adams. We unite in the
Small Business Committee regardless of party, and we are all
great advocates for the small business communities that are so
important to our economy.
I would also like to thank our witnesses for your
willingness to testify on the serious problems endangering our
small businesses' construction contractors caused by the
actions and often the inactions of Federal agencies.
As the chairman mentioned in his opening statement, small
contractors often find themselves at the mercy of Federal
agencies while they wait for payment on work that they
completed months ago. Unfortunately, many do not know when that
payment might be made or if the payment will be made at all.
The danger of delayed change orders to small construction
contractors was revealed by the Government Accountability
Office's study of the Debarment of Veterans Affairs
construction process in 2013. The GAO found change orders took
an average of 2 to 3 months to complete from start to finish,
and sometimes as long as 6 months. In one instance, the VA
halted change order processing all together for one year
leaving small contractors without payment or resolution. In
2013, $41 million in payments to subcontractors from the VA had
not been made, leaving 33 businesses in financial distress.
Some contractors were waiting for payment for work they
completed over 12 months ago and a few filed for bankruptcy.
Because of these issues, small businesses would rather work in
the private sector than bid on financially risky and
potentially unprofitable government projects.
The agencies also suffer from their own poor practices.
Projects become less appealing to contractors, which reduces
competition. To offset this risk of delayed payment or
nonpayment, small contractors will inflate the prices on bids.
This forces the agency to accept much higher prices than
budgeted. Simply said, change order delays can stretch into
years and cost overruns can reach upwards of tens of millions
of dollars.
Furthermore, the Committee is concerned that agencies may
be engaging in unfair negotiation strategies with construction
contractors. One such tactic involved delaying multiple change
order payments until the end of a project to try to leverage
for a better price.
Agencies may also be forcing small businesses to rely on
claims process to litigate their dispute. Small businesses do
not have the time or resources to litigate claims and often
settle for lesser amounts than owed, rather than face thousands
of dollars in legal fees for the potential benefit of being
paid pennies on the dollar.
I look forward to hearing more from our distinguished panel
about whether agencies are, in fact, engaging in this unfair
treatment and what protective measures might be available.
Mr. Chairman, I yield back the balance of my time.
Chairman KNIGHT. Thank you very much.
And we would like to hear from the ranking member, Ms.
Adams, for her comments.
Ms. ADAMS. Thank you, Mr. Chairman. Thank you for holding
this valuable hearing, and I thank all of the individuals who
are here to testify today.
Today's discussion continues our ongoing work to help more
small businesses compete successfully in the Federal
Marketplace. As this Committee seeks ways to foster small
business growth and expansion, we must always carefully
consider what's being done to maximize entrepreneurs'
participation, including their experience while performing
government contracts.
One longstanding barrier to small business participation in
the Federal Marketplace has been the practice of bundling
contract modifications which delays the payments of contractors
while increasing the risk they take on. When Federal agencies
group small modification actions together, they reduce the
negotiating power of the contract. And while we have discussed
formal contract changes, informal contract change are not
issued in writing and often result from government conduct
unforseeing impediments to performance or other factors. Much
of the time they are disputed, leaving the business with costly
litigations. These costs hinder the small contractors' ability
to perform other contracts and cut into the profits of the
firm.
Considering the prevalence of this problem, it is vital
that we ensure the SBA is doing everything possible to
intervene in unnecessary bundling by giving them more power to
do so.
This raises a number of important oversight questions,
including whether the SBA has sufficient staff to monitor
contract actions or performance and is truly privy to agency
actions that negatively impact small businesses generally.
Because of the nature of the work, construction contracts most
often have informal changes. This leads to delays associated
with recognizing them as official and receiving compensation
for them. As other members have mentioned, this delay greatly
affects the capital available to small construction contractors
to cover the cost of suppliers or the proper bonding.
Often small businesses do not have the capital to support
large bonds that they need to participate in the Federal
Marketplace. This difficulty is exacerbated when bundled change
orders increases the original contract price, thereby requiring
a larger bond. Given the delays associated with bundling
modifications that potential increase in bonding could cause a
small contractor to not be able to complete performance on the
contract. And in other cases, small contractors avoid bidding
entirely which diminishes the pool of qualified participants.
This Committee must examine how well the SBA rulemaking process
functions to boost small businesses' ability to compete for
Federal contracts and protect them when completing performance.
Mr. Chairman, this Committee has a long track record of
working in a bipartisan manner, particularly when it comes to
procurement issues. It is my hope that we can continue that
tradition to further small businesses' role as successful
Federal contractors. It is all the more critical that this
Committee and the SBA work to remove barriers that prevent
small firms from successfully performing Federal work and
getting paid for all of the work done.
So I look forward to hearing the witnesses' perspectives
today on how we can best accomplish the task, and I yield back
the balance of my time.
Chairman KNIGHT. Thank you very much. And I firmly agree
that this is one of those Committees that is a bipartisan
effort to try and make it so that we get our small businesses
to work, our small businesses can create opportunities, and we
can have a robust economy.
So I am going to go through the rules here real quick. If
Committee members have an opening statement prepared, I ask
that they submit it for the record.
The lights in front are you are kind of our stoplights. So
as it goes green, you have 4 minutes to give your presentation.
When it goes yellow, you have a minute to kind of wrap it up.
And when it is red, you are wrapped up. So we are pretty easy
around here, but if you can kind of follow that, that would
help everyone. And we stick to the 5 minutes up here, too, with
our questions.
So I would like to introduce our witnesses. Our first
witness is Mr. Edward DeLisle. He serves as the co-chair of the
Federal Contracting Group at the Law Firm of Cohen Seglias----
Mr. DELISLE. Seglias.
Chairman KNIGHT. Pallas.
Mr. DELISLE. Pallas.
Chairman KNIGHT. Greenhall and Furman, and is shareholder
and member of the firm's board of directors. His practice
focuses on Federal contracting, construction law, construction
litigation, and he also counsels clients in all aspects of
small business procurement. Mr. DeLisle has appeared before
this Committee in the past, testifying on challenges facing
small business construction contractors. And we thank him and
welcome him back today.
Our second witness is Mr. Michael Andy Brown. Mr. Brown is
the vice president of Glen/Mar Construction, Inc., a woman-
owned and service-disabled veteran-owned small business
construction firm. Thank you very much. He has over 18 years of
experience in the commercial and industrial at-risk
construction market and in government contracting. Glen/Mar
holds construction contracts with agencies, including the
Department of Veterans Affairs, Army Corps of Engineers, and
the General Services Administration. Mr. Brown will be
testifying today in his capacity as the co-chair of the Small
Business Committee on the Federal and Heavy Division of the
Associated General Contractors. We look forward to his
testimony.
And now, since we have shuffled chairs back and forth, back
and forth, I would like to go to the ranking member to
introduce Mr. Long.
Ms. MURPHY. It is my pleasure to introduce Mr. Greg Long,
CEO of Long Electric Company in Napa, California. Mr. Long is
testifying on behalf of the National Electrical Contractors
Association. Mr. Long has been an electrician since 1979. He
established Long Electric Company in 1990, which now employs
dozens of workers. The firm serves customers in various
markets, including biotechnology and pharmaceutical facilities,
data centers, wineries, education facilities, and commercial
and industrial facilities. In 2015 and 2016, Mr. Long was
unanimously elected to serve as the council chair for ELECTRI,
NECA's educational foundation. He has also served as a
representative for the Council for the Electrical Contractors
Trust of Solano and Napa Counties and as chair for the ELECTRI
Program Review Committee. Welcome, Mr. Long.
Chairman KNIGHT. Thank you very much.
And our final witness is Ms. Colette Nelson. She is
testifying today on behalf of the Construction Procurement
Coalition, which includes 14 national trade and professional
organizations, including the American Subcontractors
Association. Ms. Nelson is the chief advocacy officer of the
Association, and in her 30-plus years with the association, she
has been involved in most of the major issues impacting the
construction industry. We are pleased to welcome Ms. Nelson to
the Committee.
We look forward to your testimony. I can tell you that
Chairman Kelly and I are here to have a robust and aggressive
program. We are not just here to look pretty as Mr. Kelly and I
do; we are to actually build a program that can be put into law
that can help small businesses. And I know I speak for the
entire, both Committees that that is the goal.
So with that, we will start with Mr. DeLisle.
STATEMENTS OF EDWARD DELISLE, CO-CHAIR, FEDERAL CONTRACTING
GROUP, COHEN SEGLIAS PALLAS GREENHALL & FURMAN PC; ANDY BROWN,
VICE PRESIDENT, GLEN/MAR CONSTRUCTION; GREG LONG, CEO, LONG
ELECTRIC COMPANY; COLETTE NELSON, CHIEF ADVOCACY OFFICER,
AMERICAN SUBCONTRACTORS ASSOCIATION, INC.
STATEMENT OF EDWARD DELISLE
Mr. DELISLE. Thank you, Mr. Chairman.
As you indicated, the crux of my practice centers around
the representation of construction contractors that perform
work for the Federal Government, many of whom are small. So I
am very familiar with the issue that we are here to discuss
today, which is the problems associated with government delay
in issuing contract modifications or change orders. I thank
members of the joint Subcommittee for inviting me to testify
today.
If you travel to Washington, D.C., as I do from
Philadelphia on the train and you take a cab from Union Station
toward the White House, if you look across the sky, you will
see that it is littered with cranes, and those cranes sit on
construction projects. And as you make your way toward the
White House an you stop in front of one of those construction
projects, you will see teams of people working, going up and
down ladders, pouring concrete, setting steel, operating
equipment. You see dust and debris everywhere, and it is quite
chaotic. And it is quite chaotic to the construction
contractors that are performing, but it is something that they
are accustomed to. There are a million risks associated with
getting a construction project successfully performed, but a
good contractor can manage many of the risks that you see as
you drive past. Safety plans are in place to keep workers free
from harm. Detailed performance and delivery schedules are in
place so that work can be accomplished orderly and timely. But
what happens when an unexpected change occurs on a project?
What happens, for example, when the contractor realizes that it
cannot build what is depicted on the plans and specifications?
Or a situation where the government decides to change the
configuration of a room in the middle of performance? That is
where the real risk lies for a construction contractor,
especially a small one. And they happen all the time. Changes
in and additions to scopes of work represent unknown, and to a
large extent, uncontrollable risk that can have an enormous
impact on the time of performance and cost.
The keys to mitigating that risk are to quickly identify
the problem, modify the contract as soon as possible so that
the performance issues can be addressed, fixed, and paid for.
Unfortunately, the government often does not move as quickly as
it should, which puts the contractor, especially a small
government contractor, in a difficult position.
I will discuss by way of example what can happen in a
situation where the government fails to act, but first, let us
talk about what should happen.
The Federal acquisition regulations provide the contractor
with guidance on how to proceed when faced with an unexpected
or a change in condition. If a contractor runs into such a
situation, it must generally notify government and ask for
guidance. If the contracting officer responds with a directive
to do something that the contractor thinks is over and above
what it is required to do by contract, under FAR part 52.243-4,
which is the changes clause that is typically included in a
government construction contract, the contractor is supposed to
tell the contracting officer that its directive will have a
cost and time consequence if that is the case. Most of the time
that is precisely what happens. Contractors know when they are
going to incur unexpected cost, and it has all the incentive in
the world to let the government know that that is the case.
The problem is that the timely recognition of the change by
the government does not happen when it should, does not happen
like it should. FAR 52.243-4 states that once a change is made
or occurs, the contracting officer shall make an equitable
adjustment and modify the contract in writing. That notion
mirrors FAR 43.204, which is the FAR section that pertains to
contract modifications, which states that the contracting
officer shall negotiate equitable adjustments resulting from
change orders in the shortest, practicable time.
So when there are changes, the contracting officer is
supposed to recognize them and negotiate an appropriate
adjustment. That process does not happen the way that it
should. Oftentimes what happens is that the change is not dealt
with or recognized at all, and here is how that can play out in
reality.
I represented a service-disabled, veteran-owned small
business on a job for the Department of Veterans Affairs. It
was a $6 million renovation project with a performance period
of 400 days. There were a myriad of changes that occurred on
that project, all of which were obvious. After 700 days of
performance and very few change orders issued, and a million
dollars of his own money spent, this service-disabled veteran
gave up and left. His reward for leaving was a termination for
default. After 2 years of litigation, we finally settled. The
contractor received $960,000 in compensation and the
termination for default was rescinded, but it was too late. The
contractor had already closed its doors. That is precisely why
we are here. Thank you.
Chairman KNIGHT. Thank you very much.
And Mr. Brown, you are now recognized for 5 minutes.
STATEMENT OF ANDY BROWN
Mr. BROWN. Thank you. Members of the Committee, thank you
for inviting me to testify on this important topic impacting
small business contractors.
I am vice president of Glen/Mar Construction, a family-
owned and operated general contractor. As a woman-owned and
service-disabled veteran-owned small business, Glen/Mar
performs vertical building construction, seismic renovations,
and horizontal construction for Federal, state, and local
agencies. I currently serve as co-chair of the Small Business
Committee for the Associated General Contractors of America.
For years, AGC has worked with the House Small Business
Committee to establish more protections and better governing
policies for America's small business contractors. The agency
appreciates and thanks the Committee for its continued efforts
to help our Nation's small businesses.
Change orders are an inherent process within the
construction industry. Most contractors refer to it as a
necessary evil as a perfect construction project simply does
not exist. As with any construction project, unforeseen issues
may emerge, resulting in a change order. However, in the
Federal construction industry, change orders have become the
bane of all contractors with significant financial impact to
small business.
The financial impact has a ripple effect that extends
beyond just the prime contractor. It impacts the prime
contractor, our subcontractors, and the project as a whole.
Delays in processing change orders disrupt cash flow on the
project. Cash flow is critical, and in my business, we often
view it to be more important than profitability. Without
sufficient cash flow, a company will never reach the finish
line where profitability resides.
When a Federal Agency fails to timely process and pay
change orders, the contractor is left with few options. The
contractor can either finance the work to meet the project
schedule or stop work all together. Either option brings real
problems to small businesses. To keep the project moving, often
small businesses finance the work to complete the project and
to avoid unnecessary Miller Act or payment bond claims filed by
subcontractors and suppliers.
It should come as no surprise that this adversely impacts
our overall bonding capacity, which is necessary to pursue
additional Federal contracts. The ripple effect begins when
untimely processing and payment of change orders on one project
prevents a small business from competing for additional Federal
projects.
In the past, my company has been unable to bid on projects
because our equity was tied up while waiting on payment of
change orders. The result is a decrease in competition for
Federal projects, less efficient use of taxpayer dollars, and
fewer opportunities for small business.
The current state of change order processing continues to
limit the pool of qualified contractors who desire to pursue
work in the Federal Marketplace. Simply put, this has become a
barrier to entry. Contractors, especially small businesses, can
only finance these projects for so long. Slow payment impacts
not only the prime contractor but all lower tier
subcontractors.
As an example, I have an active VA project in California.
From September through December of 2016, we submitted 15 change
orders totaling nearly half a million dollars. These change
orders are undisputed by the agency, but as of today's
testimony, some 5 to 7 months later, the work is done but we
have not been paid. Therefore, I have been unable to pay a key
subcontractor 100 percent for the additional work they have
completed. As a result, this subcontractor is now under a
Department of Labor investigation due to their inability to
make timely payments in their employees' 401(k) plan. This
example shows the ripple effect small businesses face because
of untimely payment of change orders.
Conversely, stopping work due to agency indecision or
inaction can lead to negative past performance evaluations.
Negative evaluations can adversely impact a contractor's
ability to gain future work. And in extreme cases, stopping
work could give rise to the agency terminating the contract for
default. Either option is detrimental to small business
contractors.
What I have described in my testimony today is quickly
becoming the norm rather than the exception with regards to
timely processing any payment of change orders. Just as Federal
agencies try to avoid poor performing contractors, contractors
in turn try to avoid poor performing agencies, facilities, and/
or government personnel, or at least bids accordingly.
To highlight the irony, when we do not pay our bills, our
utilities shut off, our cars are repossessed, our houses
foreclosed. However, when the government fails to pay their
bills, small businesses go out of business.
In closing, I would like to thank you again for inviting me
on behalf of AGC to testify before the Committee today. I look
forward to answering any questions you have.
Chairman KNIGHT. Thank you very much.
Mr. Long, you are now recognized for 5 minutes.
STATEMENT OF GREG LONG
Mr. LONG. Okay. First of all, I would like to thank you,
Chairman Knight, Chairman Kelly, Ranking Member Murphy, Ranking
Member Adams, and members of both Subcommittees for inviting me
to testify today on behalf of the National Electrical
Contractors Association (NECA). I greatly appreciate the
opportunity to speak before you. The Subcommittees are to be
commended for holding this important hearing to address the
critical issues of change orders.
My name is Greg Long, and I am president of Long Electric
Company located in Napa, California. Since founding the company
in 1990 at the age of 28, our family-owned business has
provided electrical construction services on everything,
including schools, hospitals, wineries, and various sustainable
energy projects, to name a few.
We at Long Electric are proud members of the National
Electrical Contractors Association, where I have had the honor
of serving on a number of industry committees and on the Board
of Directors for the Northern California chapter since 1994.
NECA is a national recognized voice of the $130 billion
electrical construction industry, and our 4,000 members bring
power, light, and communication technology to communities
across the United States.
Change orders are a part of every construction project.
That said, our focus as contractors is to complete the job on
time and under budget with safety as a priority. When we
receive a proposed change order, we want to execute and address
it in a timely manner. Unfortunately, there is a lot of back
and forth negotiating the cost of the change order--direct
cost, indirect cost, and consequential cost.
A refusal by a contractor to complete a change order,
refusal to begin on a change order until all paperwork is
complete can result in loss of payment, potential lawsuits, and
other punitive actions. Because of this, contractors typically
proceed with the work under a change directive, requiring them
to perform the work even prior to an agreement over the
contract price and time.
Navigating the challenges presented by change orders often
forces us to collide with the very title of this hearing, ``All
work and no pay.'' Change orders thrive in a realm where
contractors have limited leverage in agreeing to the work and
even less in extracting payment for the hard work they
successfully perform. Often, we are not recouping our costs. In
some cases, we are not paid in a timely manner. Sometimes we
may not be paid for as long as 18 months or longer. This can be
crippling to a small business.
According to a study commissioned by ELECTRI International
performed by Michigan State University, profits for change
orders are slim. On average, a mere 3 percent. This also does
not account for the litany of risk factors previously
identified. To make matters worse, if this payment process is
delayed, subcontractors run the risk of not making any profit
at all. It can even impact our ability to bid future work due
to lack of working capital.
Despite these challenges, there are a handful of
opportunities that have contractors like myself optimistic, but
first is the construction industry growth over the past year,
with a nearly 4 percent increase since March of 2016, the
industry is expanding. And secondly, legislatively it is
twofold. The first is Representative Bacon's recently
introduced bill H.R. 2350, the Small Business Know before you
Bid Construction Transparency Act of 2017. This legislation
aims to address the length of time it takes for the Federal
Government to review, approve, and pay for equitable changes.
The validity of payment assurances, such as payment bonds and
the timeliness of monthly payments.
The second, introduced by Representative Fitzpatrick,
Representative Murphy, and Chairman Knight, is H.R. 2594, the
Small Business Payment for Performance Act of 2017, offers our
contractors the ability to continue work without fear of
withheld payments for change orders. The bill requires a
partial payment of 50 percent within the timeframe specified by
the Prompt Payment Act for any additional work.
These reforms streamline the process of bidding on Federal
construction work and allows subcontractors to adequately
address the undue risk they assume when completing change order
work. We urge the Committee to take positive action on these
bills as soon as possible and welcome any and all questioning
regarding their intricacies.
With all of this in mind, I would like to thank you again
for the opportunity to testify before you. NECA applies the
Committee's unwavering efforts to examine these important
components of our expanding construction industry. We are
pleased and remain optimistic at this Committee's efforts to
address change order concerns.
Chairman KNIGHT. Thank you very much, Mr. Long.
And Ms. Nelson, you are next for 5 minutes.
STATEMENT OF COLETTE NELSON
Ms. NELSON. Thank you. Thank the members of the Committee.
For those of you who have worked with the construction
industry before, and I am sure that is all of you in your
capacity, you know that sometimes, frequently, we have trouble
coming together and agreeing on anything. On these issues, on
this change order issue, we are united, and that is why we have
this Construction Industry Procurement Coalition that I am
representing today.
You know, change orders are ubiquitous in the construction
industry. I live across the street from the Federal Courthouse
in Alexandria, and as I was getting ready for this hearing last
night, I got a notice that the government sewer connection does
not line up with the city's sewer connection, which will create
a delay in the project and a change order.
I would like to spend my time talking about solutions that
the coalition has identified for this problem that we would ask
that you consider. So we have several solutions that we have
debated and agreed upon.
The first would be to provide notice of agency policy and
procedures on change orders in the RF process. This proposal is
incorporated in H.R. 2350, and it is a very simple concept.
Contractors and subcontractors are bidding on Federal projects,
sometimes without knowing what they are getting into. As a
quick example, on the National Geospatial Intelligence Agency
campus outside of St. Louis, a several billion dollar, 5-year
project at a recent event to brief small and emerging firms and
encourage them to bid as subcontractors, a question was asked
about, does the Corps of Engineers delay change orders until
the end of the project? The answer was yes, and some small
businesses who would otherwise have considered bidding left the
room. They could not risk a delay of years for what will be
certainly change order work.
The second proposal that we make would be to establish
deadlines for agency responses to requests for equitable
adjustment. The Federal Acquisition Regulation sets a deadline
for contractors. Contractors have to respond in 30 days. They
have to submit their REA in 30 days. The FAR simply says that
the contracting agency has to respond in a reasonable amount of
time. That is not defined. We would suggest that at least for
projects on which small businesses are the prime contractor,
that a specific time be set. If we can compile a bid and a
proposal in 30 days, certainly, the agency should be able to
review and approve that within the same amount of time.
The third proposal was incorporated in H.R. 2594, and that
would be to require provisional payment of 50 percent of a
request for equitable adjustment. That is a practice in the
private sector, and it does not prejudice either the government
or the contractor on future claims, but it keeps the cash
flowing. So it is payment for performance that if the
contracting officer has directed unilaterally the contractor to
perform a change, that the contractor can request payment for
up to 50 percent of its actual work on that change. Again, it
keeps that cash flowing.
The fourth proposal is to require regular reports on the
status of REAs. What we have found is that the REAs go in and
get put on the corner of the contracting officer's desk for the
duration of the project. By providing contractors, and thus,
subcontractors and suppliers, with regular information, perhaps
incorporated with the monthly progress payments, that at least
the contractors would know when and if payment would be
forthcoming. It would have the additional benefit of providing
the Congress and other oversight entities informed on when
those contracting orders are being processed. You know, one
thing those of us in management know is that you do what is
measured. So this would be an opportunity to measure those
approvals.
Now, I want to add just two more things. Some payment
transparency assistance. Any time the contractor knows what is
being done, the better we can perform, so we have two more
proposals.
One, to require the government to post in a public
environment the prime contractor's payment bond, and secondly,
to notify, to provide in a public environment when the prime
contractor is paid. So thank you very much for your time, and I
am happy to respond to questions.
Chairman KNIGHT. Thank you very much.
And we will go now to our questions. I will take 5 minutes
to start off the questioning. And just a basic question because
I think you all hit on it, and we have all worked with
contractors in a very small arena, whether working on our house
or working in a business or something of that nature. And I
know a lot of us have been in just that situation that Ms.
Nelson said, that we come up with 50 percent, they get going on
the job, and as the job gets to its completion, then the second
payment is made. And I think that is kind of a regular thing
that happens with small contractors around the area.
And so my first question is, what are the reasons that the
government gives for withholding a million dollars or
withholding payments to small businesses that have completed
the work and now they are asking for payment? Is there a reason
from the government or is there just no response? And I will--
--
Mr. DELISLE. Yes, Mr. Chairman. The reasoning that
contractors will get can certainly vary. It can vary from ``I
did not receive all the paperwork that I needed,'' which
oftentimes is not the case. ``I have not gotten around to it
yet. I am busy.'' Oftentimes what you will hear is, ``Well, we
dispute the basis that there is a change,'' when very clearly
you can demonstrate to them that it is a change. So there is
this guise of a dispute that really should not be there.
Chairman KNIGHT. So there I am just going to add on to my
second question because we are talking about change orders. If
I do work in my house and I say, you know what, I want a
different door than I requested, that is basically a change
order right there. I am asking for an upgrade in door, and I
initial there and say now I want this door that is going to
cost X number of dollars more. And good contractors will do
that, and they will say, okay, well, you acknowledge that you
are doing this and you are saying that you are going to pay for
this. Is that something that the government or that the
subcontractor could require of the government? If we are going
through these change orders, then there should be something
that goes back and forth. I see a lot of nodding heads going
back and forth like this. But is that something that, you know,
this Committee is looking for answers and things that we do not
get to these payments at the end where there is a dispute. And
if there is no dispute when the work is done, there should not
be any dispute when the work should be paid. But if they do not
acknowledge it and they say, yes, there is a change order now
but 6 months later they say, was that really a change order or
did you just do the work?
Mr. DELISLE. I can give you a quick example. I alluded to
this contractor that ended up going out of business in my
opening statement. In that particular case, there were a series
of change order discussions that took place between the
government and the contractor. There were 2 weeks' worth of
meetings that happened, and at the end of that meeting period
there was a handshake deal about what the cost should be. It
was a negotiated agreement. What we found out later was despite
that handshake agreement, the government simply did not have
the money to pay for it. She was then going to try to get the
money and it did not happen. So what they did was they forced
the contractor into a claim situation, litigation, and the
contractor never was able to recover from that.
Chairman KNIGHT. And, you know, I am going to get to
another question here but I am kind of going down this road
because I know a lot of other questions will come about other
things, but we are trying to fix something. And, you know, I
would not shake hands with the government, and I am part of the
government. So I think that what we are trying to say is things
have got to be, you know, more concrete in everything that goes
for a project. And especially if we are talking about a mammoth
project where you might have 90 subcontractors coming in and
doing work on a VA situation or building a hospital in Colorado
that who knows when they will get done. You know, it is those
kinds of things I would think that we could do something
legislatively.
But, and lastly, and I will never be the person to say we
should collect more data in the government, but I guess I am
this time. Is there a data collecting process of this?
Everybody is shaking their head like this. No, there is not
that shows that there are this type of activity that is going
on year after year and we can kind of chart it and say we did
not pay these subcontractors on time last year at a rate of 17
percent and the year before it was 12 percent. There is no data
collecting in that arena, is there, Ms. Nelson?
Ms. NELSON. Mr. Knight, there is a requirement in the
Prompt Payment Act to report to Congress on late payments, but
these are not late payments because they are not approved
payments.
Chairman KNIGHT. Okay. Well, we are going to move on to Ms.
Murphy for her questions.
Ms. MURPHY. This question is for Mr. Long.
You know, each construction project has its own unique set
of factors that help determine the overall cost of the project.
For example, a project in Florida would have a different set of
conditions than maybe a similar project in New York. Do you
think that the change order process allows the agencies to
consider the different variables that construction projects
face?
Mr. LONG. I think that a lot of times the proper procedures
and protocol does not allow for a lot of issues and impacts
with regards to change orders period. They are not recognized
by all as far as the circumstance we could have in California
or if it is in Florida. It could be taken into effect, but in
most cases there is just a lot of--the problem is people are
not recognizing the true cost impacts of the change order and,
again, those could be the direct costs that are pretty
obvious--labor materials, subcontractors and equipment, or it
could be the indirect or consequential costs that you are
speaking of. So they are just not recognizing the entire costs
and allowable overhead and profit on top of that. That is a
major problem and that is a major excuse you might say of these
change orders getting delayed is the first part of that delay
is them recognizing our true costs, followed by then the lack
of prompt processing and payment thereof, which basically
handcuffs us in doing business when this is just continual, one
after the other on each project that we are contracted for.
Ms. MURPHY. And so if you have laid out some of these
problems that a lot of the similar, like small businesses are
experiencing with change orders, is it possible that other
industries are also facing the same challenges? And if they are
also facing the same challenges, should the use of
consolidation be prohibited for change orders at a certain
stage in the performance of the contract?
Mr. LONG. Do you mean the other trades?
Ms. MURPHY. Yes. Other industries.
Mr. LONG. Yeah. It is happening to all of us. So, you know,
you could have a change order and it could involve 12
subcontractors in that one change order. It might not be just
adding 20 outlets and 40 light fixtures, you know. We could be
adding a generator or some mechanical equipment, and there are
a lot of people involved in that change order, and it is
happening to, like you stated, it is happening all the way down
the line. So it is impacting all the industries. They all fill
in exactly the same thing.
Ms. MURPHY. And Mr. Brown, you had testified to the follow-
on consequences or the flow-down consequences of change order
delays and the role that this plays in negatively impacting
prime contractors and subcontractors. How can this Committee
work to lessen the financial burden of untimely payments on
small construction firms at every level in the contracting
process?
Mr. BROWN. The way our subcontract typically is set up, and
this is universal, and I am sure Mr. Long will confirm, we have
a pay-when-pay clause. So if we do not get paid as the prime,
the sub does not get paid, unless we decide to finance the job
for the benefit of the project and the sub. And oftentimes we
have to make that call. So yeah, transparency about the
process, I would say it is described as consistently
inconsistent across the government, across agencies, within
agencies, different divisions. You get different answers about
why it is being held up. And I think Ms. Nelson noted it is not
late until they have accepted it. So the change order that I
described in my testimony this morning, I actually recently had
to reach out to VA headquarters to inquire about the status,
and coincidentally, that same day I received a follow-on email
saying that the additional funds request had been received.
That would have been 7 months to the day. In reading the email
string, the agency did not submit the request until the end of
March. I had already been talking to the contracting head in
October about what is the status and was being told it is going
through the process.
Ms. MURPHY. You all have shared really egregious stories.
Are there any particular agencies that are worse than others?
Mr. DELISLE. Just in my experience, I will tell you the
answer is absolutely yes. I have had my clients, not me
personally, but I have suffered through it with them, my
clients have had a horrible time with the Department of
Veterans Affairs. I, unfortunately, was involved in that mess
in Aurora, Colorado. I represented a service-disabled, veteran-
owned small business there, and but for the grace of God, we
were able to maneuver him through and he survived. But his $18
million project cost him $32 million. And this is a small
business. And when you do not get paid that kind of money, most
of the time it does not work out very well for you. So that was
a VA job.
The instance that I described earlier during my testimony,
that was a VA job and the list goes on and on. There are many
of them.
Ms. NELSON. I might suggest that frequently the differences
are by region rather than by agency. And sometimes it is just
by the skill and experience of the contracting officer. One of
the problems that we face is over the last several decades
funding for the number and the education of contracting
officers or contracting staff for the Federal Government has
deteriorated. Their ability to do things that we would like to
have done promptly also has deteriorated. So sometimes it is
just administrative convenience for an agency to put these
requests for equitable adjustments to the side and audit and
process them at the end of the project.
Ms. MURPHY. Thank you. Thank you, Mr. Chairman, for
allowing me a couple extra minutes.
Chairman KNIGHT. Absolutely.
And we are graced by the chairman of the Full Committee.
Chairman Chabot is here.
And I would like to now yield 5 minutes to Chairman Kelly
for his questions.
Chairman KELLY. And I am going to yield my position to
Representative Fitzpatrick, who is a leader in pushing
legislation in this matter, and he has another engagement, and
so I want to yield that to him because I want to make sure he
gets his questions. So I yield my time, or yield my position to
Mr. Fitzpatrick.
Chairman KNIGHT. Very well.
Mr. FITZPATRICK. Thank you, Chairman Kelly, and Chairman
Knight, and also Chairman Chabot, for bringing this important
issue to the Committee.
Our small contractors, as we all know, have endured unfair,
one-sided treatment for far too long. And as was referenced
with the help and leadership of both Chairman Knight and
Ranking Member Murphy, together we introduced H.R. 2594, the
Small Business Payment for Performance Act, which we believe is
a common-sense bill which recognizes that cash flow is the
lifeblood of small business contractors. So with that being
said, I want to open it up to the panel of experts starting
with Mr. Long from NECA, as to what you think this legislation
will accomplish and what remains unaccomplished. What steps do
we need to take to further close that gap?
Mr. LONG. Well, any time that you are going to put
something on a bill out there that is going to provide some
kind of payment relief, that is a good thing. The fact that
change orders are being recognized as an issue and a problem in
all sectors quite frankly, and it will be helpful in that
manner. Again, cash flow is really everything, you know, to our
small business. And if you have a $100,000 change order and you
have 5 percent profit on it, that means you have $90,000 out
there that you have already spent on that job, on that change
order that is not getting approved. That is money out of your
working capital. You times that by, you know, 10 or 20 or 50 or
100 change orders and over the course of 10 or 15 or 20 jobs,
you know, we are not going to be able to sustain that. So
promptly what needs to be done still I would say, if there is
anything I could recommend, we need standardized change order
protocol. There is a document that ELECTRI put out that is
change order guidelines for electrical contractors right here.
If that was used in creating a standardized change order
document, we would take of a lot of the problems of at least
getting to the approval process. Okay? And we still have the
issue of timely handling and payment. So I would say another
thing that needs to happen is a timeframe that becomes standard
as well. You know, a deadline. And there has to be
accountability and responsibility with that. In other words,
what happens if they do not meet the deadline? You know, there
has to be a hammer. There has to be leverage. There has to be
something there to not just go over that deadline. But timely
processing of change orders and receiving fair payment for
those change orders, any legislation that can meet that end is
what I know I am after.
Mr. FITZPATRICK. What consequences would you suggest for
delayed payments?
Mr. LONG. Well, obviously, the best thing for me is I am
not going to keep continuing to do work when I am not getting
paid, so I am going to stop work. And I think entities do not
want to see that work stop but I want to see payment, too. I do
not want to see my whole company go away and all of our team,
our employees, and that whole company that was referenced
earlier that did not make it. And we are not doing anything
wrong. You know, they have asked us to do the change order
work. We have priced it fairly. If you follow this document, it
is a fair price. Like I said, we are making 5 percent on a
change order, possibly 3 to 5 percent. So I do not understand
what the hang up is with approving that when we have provided
the backup and we are continually dealing with no approval.
Because there is no hammer. They have to be held accountable
and it has to be if you do not pay, then we are going to stop
work.
Mr. FITZPATRICK. I yield back.
Chairman KNIGHT. Thank you very much.
And we will now go to the ranking member, Ms. Adams, for
her questions.
Ms. ADAMS. Thank you, Mr. Chair.
To Mr. Long, small businesses play an important role in the
American economy and national security. So as we continue to
try to grow our economy, it is vital that we provide small
businesses with the necessary opportunities to thrive to remain
in the supply chain and to maintain our industrial base. If
barriers continue to prevent new and existing small businesses
from participating in the Federal Marketplace, such as delays
in change orders and packing their bottom line, what will this
mean for the industrial base and businesses like yours?
Mr. LONG. Well, again, our company--I can only speak for
our company. We will not work under those conditions because we
would be out of business. When you are performing a service and
paying out that labor and materials, subcontractors, equipment,
and you are not getting paid, you are not going to be around
long. So I would say that personally, if we find a contract
like that, we will not bid it, so we will just go to other
sectors to still remain, you know, a growing company in our
community.
Ms. ADAMS. Okay. Would other members of the panel like to
respond? Mr. Brown?
Mr. BROWN. Could you repeat the question real quick?
Ms. ADAMS. If barriers continue to prevent new and existing
small businesses from participating in the Federal Marketplace,
such as delays in change orders that impact your bottom line,
what will this mean for the industrial base and businesses like
yours?
Mr. BROWN. Yeah, I think Mr. Long hit it. There is a huge
sector with the government contracting and small business
programs that are there to encourage participation and really
help start-up companies. It would be fool-hearted to say that
that is the right place to go if you are just starting out. And
change orders do become a barrier because you are forced to
either proceed with the work or not proceed with the work. And
as I kind of alluded in my testimony, we are faced with adverse
past performance evaluations or the threat of termination for
default. And that does not give us a lot of leeway to have any
say unless you are prepared to go down that path. It is kind of
a buyer beware as you try to enter the government marketplace.
But just as the testimony up here earlier, I think one thing
that is missing, it is clear in the FAR and in the contract
terms that we have timeframes by which we are supposed to
provide notice and get in pricing. The back half is missing and
it sits there unbeknownst in the process.
Ms. ADAMS. Okay. Thank you very much.
Ms. NELSON. Ms. Adams, may I?
Ms. ADAMS. Yes.
Ms. NELSON. When we talk about the industrial base, we too
often talk about other than small businesses, but every other
than small business was a small business at some point. And if
we do not encourage the development and growth of small
businesses, we will not have those large businesses for our
industrial base in the future.
Ms. ADAMS. Okay. Thank you very much.
So Mr. Brown, what has been the impact of contract
modification delays on small business past performance rating?
Mr. BROWN. Oftentimes, the issues in the past performance
when you get an adverse rating, it is dictated by the morale
that was created during the project and that issue is never
identified as being a source of conflict during the course of
construction. So it leaves the contractor to reply to the, I
would say misleading or mischaracterization of our performance
by having to kind of sling a little mud about what the other
side of the story was. And so, but it is in the record, right?
And then it is up for other agencies who are reviewing our past
performance as to whether they are going to decide are we
qualified enough, or do they want to hire us for the
procurement that is in progress?
Ms. ADAMS. Thank you. I am just curious about how change
orders impact women and minority-owned construction firms when
completing contracts, and do they face any different challenges
when they are navigating from this process than their
counterparts? If anybody, we have got about 18 seconds.
Ms. NELSON. I think it is a problem for any small and
emerging firm. The smaller and less experience you are, the
more serious the problem.
Ms. ADAMS. Okay, 7 seconds.
Mr. BROWN. Yes. The change order issues I do not think sees
small business versus large, women-owned versus emerging. It is
universal.
Ms. ADAMS. Thank you, sir.
I yield back, Mr. Chair.
Chairman KNIGHT. Thank you very much.
And I now yield 5 minutes to Chairman Kelly for his
questions.
Chairman KELLY. As a former small business owner, I know
cash flow is the lifeblood of a small business. Even if you are
not getting paid what you are worth or what it costs you, to
not have that cash flow absolutely forces you to appoint a
bankruptcy or the inability to honor your obligations to
others. So cash flow and timely cash flow is very huge.
That being said, Ms. Nelson, as you noted in your
testimony, the Federal Acquisition Regulation, FAR, does not
define how long the shortest practicable time is for the
government to review and request an equitable adjustment. In
fact, you state an agency like the Army Corps waited for all
requests for equitable adjustments until the end of the
construction project likely for funding reasons. Can you talk
about how the small business payment for performance acts would
impact how agencies like the Army Corps pay out their change
orders?
Ms. NELSON. Well, it is really quite simple. On a
unilateral change order, if the Corps of Engineers were to
direct a prime contractor to do some extra work, the contractor
would be required to submit its request for equitable
adjustment within 30 days under the current FAR, and as that
prime contractor performed, it could then invoice for up to 50
percent of the request for equitable adjustment that it
submitted to the government. That would prejudice neither the
government nor the contractor, but it would keep that cash
flowing. Under the Prompt Payment Act, the prime contractor has
to pay its subs and suppliers within 7 days of receipt of
payment by the government, so it would then make sure that that
cash flow went to the lower tiers as well so that those who
need to pay labor, who need to purchase materials to get the
government's work done, will have the cash to do it.
Chairman KELLY. And I have spent my whole life fighting for
the little guy. I do not know if it is my southern DNA or what
it is, but I have got a chip on my shoulder. But you know, I
find they use that leverage, and so they know that small
businesses have to have that cash flow just like I talked about
initially, and they use that as leverage to make them take less
than what they are worth, and also, the longer they drag it
out, the less they will take. And we have just got to break
that thing where they cannot do that.
My next question is to Mr. Brown. In your testimony, you
identify one of the greatest challenges Federal contractors
face is obtaining timely decisions from Federal employees.
Could you elaborate on any ideas you might have to motivate the
government to act more efficiently and swiftly?
Mr. BROWN. Well, you know, we get the contract thrown at us
any chance the agency can. And unfortunately, we do not have
much leverage when it comes to getting timely decisions. Even
if we are talking about undisputed change orders, maybe just
RFIs and submittals. I mean, there is a guideline and a
timeline that everybody has to participate in. It is a project.
It is a team.
I think the thing that is missing is with regards to the
change order FAR is a requirement of the timeliness to get the
approval. It cannot just sit on somebody's desk. We cannot just
be told it is going through the process. We are requesting
prior year funds. As a small business, I do not know what that
is. I do not know if it is true. I go talk to another VA
employee and that is not the answer I get. So it is hard to
figure out what is really going on, and you are trying to just
develop some trust and rapport, and I am taking it on face
value. But not until I send an email up to headquarters does
the tree get rattled. I cannot do that every day. I hope that
answers your question.
Chairman KELLY. It does. And I guess one of the things is
people have to have skin in the game. There has got to be some
personal accountability of those government employees so it
costs them, not the agency, it costs them something for bad
acts or acts of bad conduct or bad faith. And I do not know
what the right answer is but I know this; if people are not
held personally accountable and there is some big bureaucracy,
they do not have that sense of urgency which is required. And
trust me, our small businesses, each and every one, unless they
are a whole lot more fortunate than I was and a lot better
businessmen, those cash flow and timeliness of that cash flow
is very important.
With that, I yield back, Mr. Chairman.
Chairman KNIGHT. I think that says a lot right there.
We are going to go to Mr. Lawson, the ranking member on the
Subcommittee on Health and Technology.
Mr. LAWSON. Thank you, Mr. Chairman. I want to thank you
all for being here.
And I do not know a lot about this particular area, and so
I will need your help because I would like to be able to help
you all.
You know, when you are building a house and there is a
change order, the contractor normally will inform you. Like
your wife said she wants Pella windows, unlike the windows that
were being bidded on. And so as a result, then you go back to
talk to the bank and say we are going to need a little bit more
money in order to do it. In a situation where you all are
involved in, who determines the change order? Is it the agency
that determines the change order? And when they say that we
want different a different kind of fixtures now in our
restrooms, better access for handicap and so forth like that,
at that point, do you start to talk dollars with them? Or what
really happens? Which I do not quite understand, because I know
cash flow ends. I have been in business for 36 years but we did
not have change orders in the insurance business. So I have to
understand a little bit better about the contract. Maybe some
of you all can enlighten me. What happens when this occurs?
Mr. BROWN. In construction, there are really three
scenarios that kind of give rise to a change order. One is the
one where the agency requests the change. We want a bigger
space or a new door or a different type of window. The other is
if there is a different site condition. We encounter something
typically subsurface that we did not anticipate. There is a
sewer line that was not noted on the drawings. We have got to
deal with it. Or there are conflicts within the drawings. The
drawings and specs are not accurate, and as we are getting out
into the field, what is drawn on paper is not really working in
the field, and those give rise to change orders when we have to
change the course of action or the fix.
Mr. LAWSON. And if I may follow up, Mr. Chairman, then how
does the agency start to handle that? When you see those things
that did not appear on the specs and it is going to be $10,000-
$15,000 more to be able to fix it correctly, how long does it
take the agency to really determine whether they are going to
give you the resources that you need in order to be able to do
it?
Mr. BROWN. Well, this is the consistently inconsistent
part. It varies from project teams, both the government and the
contractor side. Some will acknowledge, yep, this is a change
and will go down the change order place. They will say, yes,
and the agency will issue us an RFP. Here is how we want you to
change it, price it. We negotiate it and we move forward. Other
times, they will want to dispute the entitlement of the change
order and they will try and find different ways within the
contract or a clause in the specs and play that kind of game
which only delays the project. And then once the change order
finally comes to fruition, your $20,000 change order became
$40,000 or $60,000 because of the delay, and there is really no
added value on that additional $20,000 to $40,000. Nothing.
Right? The building did not get any bigger. And as a change
order, we do not make any money in change orders. Mr. Long
alluded to that. We are recovering costs at that time. Costs.
And if we settle for anything less, we are settling for 30
cents on the dollar. Or if they tell us, hey, if it is really
egregious, they will say, hey, why do you not file a claim and
you can go access money from the judgment fund. And that has
been a common response that we have received as a small
business.
Mr. LAWSON. And at that point, and then you can talk, Ms.
Nelson, what do you do with the subs?
Mr. BROWN. We hold hands. I mean, you know, it depends. We
will get subcontractor pricing, and then depending on, as a
prime, just a case-by-case basis, and depending how many other
projects we have similar, we will fund it ourselves or we will
split it and try and give enough cash to the subcontractor to
keep them going. Because the worst thing that could happen is
they would pull off the job. We do not want that. Or they go
out of business and then the cost to the contractor becomes
greater to find a replacement contractor. So it is a dance.
Mr. DELISLE. Representative Lawson, on that Aurora,
Colorado project, the prime contractor was very large. It was a
joint venture between two very large companies. And what it
decided to do in that case was pay millions of dollars to
various small, individual companies, service-disabled
companies, 8(a) companies, to prevent them from filing
bankruptcy, because those companies could not finance carrying
on the work. They had to be paid in some way. So luckily, the
prime in that case had the wherewithal to pay them or it would
have been all over. Two companies filed bankruptcy out of 33.
You would have had them all go down but the prime stepped up.
Mr. LAWSON. Well, thank you.
I yield back, Mr. Chairman.
Chairman KNIGHT. Very good. And we are going to take one
more. We are voting, but we have got a little bit of time so we
will go to Mr. Bacon for his questions.
Mr. BACON. Thank you to both chairmen, and to our ranking
members. I appreciate you all being here today.
I heard really loud and clear during our campaign and when
I get back to the district that small businesses are struggling
with getting their contracts with government delayed payments,
the rescinded orders or the change orders like you have already
mentioned and so forth, lack of transparency. And so we worked
with a variety of folks that put this bill together called Know
before You Bid, so I want to thank Mr. Long for your support
today during testimony.
I just wanted to ask if the other three may have had a
chance to read it. I would love to have your feedback on this
bill. And I know Mr. Fitzpatrick is also submitting a bill. But
what else do we need to do? What can we do to better support
the small business team with contracts for government?
Ms. NELSON. Mr. Bacon, the members of the coalition all
support the bill as introduced.
Mr. BACON. Thank you. It is great to hear that.
What other work do we need to do then? Is there another
bill here we need to work on or what is some other target areas
that we should be focusing on?
Ms. NELSON. I outlined in my written testimony four
proposals, including yours. But I would like to expand on one
of those items. Mr. Fitzpatrick had asked what is the
enforcement mechanism that if you establish a timeframe as we
have recommended for when the government must approve a request
for equitable adjustment, how does one enforce that?
My response would include two options. The option that the
contractors might prefer is that if the government does not
respond in a timely manner, the request for equitable
adjustment is automatically approved. As a taxpayer, I might
suggest that another alternative would be that if the
contracting officer does not respond in a timely manner, that
the request for equitable adjustment is automatically denied.
That allows the contractor to file a claim if it chooses to do
so.
Mr. BACON. Thank you very much.
Any other comments from our panel?
Mr. DELISLE. Very quickly. One of the issues I think that
still needs to be tackled is this issue of creating a dispute
where one does not exist. And Mr. Brown made reference to it. I
mean, these construction contracts are 3 and 4 inches thick.
And if the government wants to find a dispute in there
somewhere, they can. And the problem is when it does find a
dispute, it can just simply deny a change order which could
very well be legitimate and obviously so. So I think one thing
to think about in terms of moving forward is how can we create
a resolution process that is quicker than what the contractor
has available to him now? Because what is available to him now
is filing a claim, waiting 60 days, having that claim denied,
appealing that denial and going through a very long, protracted
litigation process. There needs to be some mechanism, a better
mechanism in place to assist the contractor through that type
of problem.
Mr. BACON. Thank you very much. I yield back.
Chairman KNIGHT. Thank you very much.
And we are going to go to Ms. Clarke. And you can wrap this
whole thing together and figure everything out in 5 minutes.
Ms. CLARKE. Thank you very much, Mr. Chairman. I am afraid
it looks like it is going to take a bit more time from all of
us to sort this thing through.
I want to thank all of our witnesses for testifying here
this morning. This has been a pretty vexing problem for quite
some time. As a New Yorker, I travel across a Brooklyn Bridge
that looks like it is suffering from change order-itis.
Mr. DeLisle, in your testimony, you gave an example of a
contracting officer that had a practice of issuing unilateral
change orders for 10 percent of the value claimed for the
additional work. With agencies having so much control in the
contract modification process, how can we reverse this trend?
Mr. DELISLE. Well, I think as we have discussed this
morning, Congressman Fitzpatrick's bill would certainly assist
in doing that because it would not be 10 percent that the
contracting officer would be justifying, if you will; it would
be 50. Okay? So there would be more cash flow for the
contractor, so I think that would certainly help. It is a big
part. Cash flow is a big part of the problem.
Ms. CLARKE. And then just to the panel, the covering
contract modification process is causing anxiety among small
business contractors and in some cases inhibiting them from
participating in the Federal Marketplace. In your opinion, what
is the number one challenge that small businesses in your
industry are facing when it comes to using the change order
process? The number one.
Ms. NELSON. Cash flow, cash flow, and cash flow.
Mr. LONG. Yeah, the position we are being put in right now
is not one that I do not think we should be responsible for. We
are not a bank and that is the position that we are all being
put in. We are being put in the position of the bank. We are
financing these jobs, and that is the easiest way to explain
it, you know. Yeah.
Ms. CLARKE. Anyone else?
Mr. BROWN. I guess part of the cash flow is time, right? So
in our world, time is money. Our proposals and our costs are
based on time. So the sooner we can close the change order
negotiation, the better off we are, and it will help with the
cash flow. But cash flow is king.
Ms. CLARKE. Do you agree, Mr. DeLisle?
Mr. DELISLE. For sure. One of the other issues, and Mr.
Brown just mentioned, is the time factor. If the government is
held to strict accountability in terms of how long it has to
resolve these change order issues, it would go a long way for
sure.
Ms. CLARKE. Very well. Mr. Chairman, I yield back the
balance of my time.
Chairman KNIGHT. Well, thank you very much.
I think this has been a robust Committee hearing. You have
already heard two pieces of legislation have come out of this.
I would expect we are going to see more. We are going to be
continuing to talk about this because it affects every district
in every state with every subcontractor and every small
business across the country. We have heard that cash is the
issue and that is for a small business. Your biggest assets are
your employees and how much money you can leverage. Whether you
have it or you can get it. And if it is all out, then there is
problems. And so we always like to see small businesses
bringing more money in than putting out. And so you will see
more ideas and more pieces of legislation coming out of small
business, but we appreciate you being here. Thank you very
much.
And we are, hang on, I always have smart people next to me.
All right. I ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record. Every member hear that?
Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 11:19 a.m., the Subcommittees were
adjourned.]
A P P E N D I X
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Statement of Edward T. DeLisle
Cohen Seglias Pallas Greenhall & Furman PC, Philadelphia,
Pennsylvania
Subcommittees on Contracting and Workforce and Investigations,
Oversight, and Regulations
Committee on Small Business
United States House of Representatives
May 25, 2017
Chairman Knight, Chairman Kelly, Ranking Member Murphy,
Ranking Member Adams and members of the committee, thank you
for inviting me to testify on the important topic of change
order delays in the federal construction market. My name is Ed
DeLisle. I am a partner with the law firm of Cohen Seglias,
where I co-chaired our federal contracting group and work very
closely with our federal construction clients. I regularly
counsel federal contractors on a wide variety of small business
issues, including advice on affiliation rules; mentor-protege
programs; small business and set-aside strategy and compliance
(8(a) contracting, ANC, NAC, HUBZone, SDVOSB); small business
subcontracting plan compliance; and small business size
protests.
Construction projects are subject to a wide array of
variables that may require a federal agency to alter their
initial plans. Consequently, reasonable delays and changes may
be required to meet conditions on the ground. The concern is
not with reasonable delays and changes to the initial contract.
Rather, the concern rests with agencies failing to execute
change orders and make payment to contractors for months--and
even years--at a time. Unsurprisingly, this delay causes
serious harm to the project schedule and has a deleterious
impact upon payment to the prime and subcontractors, especially
small businesses which depend upon that cash flow to remain in
business. To avoid these impacts, small business prime
contractors, or subcontractors, may walk off a job, as a
protracted change order delays can impede the small business's
very ability to operate and survive. When that occurs, small
businesses can be with non-small business prime contractors or
subcontractors.
In this testimony, I will discuss:
Define change orders;
How they typically come about on a
construction project;
The steps involved in submitting a change
order;
The FAR provisions giving authority to
change orders; and
The significant challenges small businesses
face in the change order and claims processes when
working for federal agencies.
Overview of Change Order Process
Change orders and contract modifications describe the same
action. You may hear these terms used interchangeably, but
these terms are essentially synonymous. In this context, we are
referring to contractual changes between construction
contractors and the federal government. Broadly speaking, a
change order is any change to the scope of work of an already
existing contract and the price to be paid, and/or the time to
complete, the new work. Federal construction contracts contain
a ``Changes'' clause, which permits the government to make
changes in the general scope of the contract, including
modifications to the drawings, specifications, materials,
manners of performance or method of performance. See, e.g.,
Federal Acquisition Regulations (FAR) Part 52.243-4. This
clause requires the government to make an equitable adjustment
in the contract price for these changes. This clause also
permits the contractor to assert that a change has occurred if
the government gives any written or oral order (such as an
instruction, interpretation, direction) that causes a change to
the contract. This concept is known as a constructive change.
Under the language of the clause, these changes are treated as
if the government ordered the change, entitling the contractor
to an equitable adjustment.
Differing Site Conditions
Changes orders can arise through several avenues. Federal
construction projects are typically large and complex. The
agency may realize that a size of a room does not match the
intended purpose, and may need to expand, or reconfigure it.
This is a common issue for federally owned hospitals, where
modern medical equipment, such as Magnetic Resonance Imaging
(MRI), may change size in the years since the design
specifications were agreed upon. This problem occurred on the
much maligned VA hospital project in Aurora, Colorado and
resulted in increased costs of approximately $1.1 billion.
There may be a differing site condition at the worksite
that was unknown to either party or not listed in the contract
specifications. Differing site conditions \1\ generally arise
in two way, and are sometimes referred to as ``Type 1'' or
``Type 2.'' Type 1 conditions are physical conditions that are
materially different from those described in the contract. An
example of a Type 1 condition occurs when the contract
documents identify the expected ground conditions, do not show
rock and the contractor encounters rock during excavation,
which requires extensive, unanticipated effort to remove. Type
2 conditions are ``unknown physical conditions of an unusual
nature which differ materially from those ordinarily
encountered and generally recognized as inhering in work of the
character provided for in the contract.'' For example, the
contractor begins to excavate the site and there is an unknown
subterranean issue, such as a high, undisclosed water table in
a place where water would not be expected. Finding such a
condition would require different, extensive excavation efforts
and increase the cost to the project.
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\1\ FAR 52.236-2
When either Type 1 or Type 2 differing site conditions
occur, the contractor must notify the federal agency's
contracting officer, who is obliged to investigate the site
conditions and determine if an equitable adjustment should be
made and the contract modified to reflect the actual cost to
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perform given the unexpected conditions.
Bilateral and Unilateral Change Orders
FAR Part 43.103 discusses the different types of change
orders available to a contractor. On a federal construction
project, there are bilateral change orders and unilateral
change orders. A bilateral change order, or modification, to a
contract is a supplemental agreement where the parties have
negotiated and agreed the specified additional work that will
be accomplished in return for specified consideration, normally
additional money and/or time. Where a contractor accepts and
signs without reservation or protest a bilateral contract
modification, it is generally barred by accord and satisfaction
from later claiming an additional adjustment.
A unilateral change order, or modification, is one which is
issued by the contracting officer without requiring the consent
or signature of the contractor. Unilateral change orders
typically arise when the parties agree that there is a changed
condition, but cannot agree on the extent of the change, price
and/or impact on schedule. It is a one-sided directive from the
federal agency to perform and, although a contractor must abide
by a unilateral directive, it is free to file a claim for the
additional costs or time incurred beyond what set forth in the
modification. Since a unilateral change order does not require
the contractor's signature, the change order cannot act as a
release of further claims.
Submitting a Change Order
Bilateral change orders are common in both the federal and
private construction markets. In either context, parties can
agree upon changes in scope of work. The difference in the
federal market is that a federal agency does not act like a
private entity. The federal agency does not have the same
incentives to quickly finish a project or act in the best
interest of the construction project. The federal agency has
the luxury of time and vast resources that small businesses, in
particular, simply do not have. To that end, contracting
officers will often try to force a contractor to sign a
bilateral modification for less time and money than a
contractor has requested knowing that the bilateral contains
binding release language. A contractor may sign that
modification for the sake of certainty, particularly if the CO
has indicated that there may be some dispute regarding scope of
work. That said, the contractor at least has a choice.
Unilateral change orders are a different story and are
unique to the federal market. Here, the government holds all
the cards and can decree by fiat that a contractor will change
the scope of work. There is no ``submission'' process per say.
The government agency simply issues a modification, requiring
the contractor to proceed for the price indicated. The
contractor, especially a small business contractor, has little
recourse but to comply with the federal agency's directive, or
suffer the consequences, financial or otherwise.
The process for submitting a bilateral change order begins
when a party to the contract realizes a desire or need to
modify the scope of work. A request for a change order may be
generated from the contractor and sent to the federal agency,
typically to the CO. FAR Part 43.204 states that a CO ``shall
negotiate equitable adjustments resulting from change orders in
the shortest practicable time.'' Unfortunately, the time is
seldom short, but the contractor is told that it must continue
to perform and not delay job completion. Failure to comply
could result in default, a poor performance rating, or both.
Alternatively, a change may be requested or directed by the
government and sent to the contractor. The contractor will
price the cost for additional work and submit it to the CO.
Only contracting officers can sign change orders and bind the
government.\2\
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\2\ FAR 43.102
Often the COs are not very involved on a construction
project. Typically, the project engineer, or other lower level
government personnel, are the only ones who are personally
involved in and physically at the project and understand the
problem. This is especially problematic when a change order is
needed quickly. Lower level government personnel will often
tell a contractor to do the extra work prior to receiving a
change order. This puts the contractor in a difficult bind.
Delays in changing the scope of work can have a ripple effect,
costing the government and contractor excess money and delaying
the overall completion of the project. If the contractor
proceeds without a change order, however, the contractor is put
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at risk and faces potential liability should an issue arise.
Issues Facing Small Businesses with Claims against Federal
Agencies
When small business contractors and federal agencies
disagree as to when work is, or is not, covered under a
construction contract, a contractor may file a claim for
equitable adjustment, or a certified claim, wherein it demands
payment from the government. The claims process is often long,
expensive and risky. Small businesses neither have the luxury
of deep pockets to bear long periods of time without payment,
nor can they generally handle such risk. The claims process
generally takes years--sometimes five or more years--to
conclude. During that time, small businesses may have to pay
thousands, or tens of thousands, of dollars in legal fees for
the potential benefit of being paid pennies on the dollar later
through a settlement that it is forced to accept simply to cut
its losses and survive. That is the simple reality of the
process.
These problems were most recently publicized on the
Department of Veterans Affairs' Aurora Hospital project in
Colorado, which was referenced above. On the VA Aurora Hospital
project, the refusal of the VA to process appropriate contract
modifications left the general contractor and its
subcontractors without proper payment for extended periods of
time with severe consequences. The contracting officer there
had a practice of issuing unilateral change orders for 10% of
the value claimed for the additional work. He promised that
these modifications represented ``part one'' of what would be a
``two part'' change order. The problem was that ``part two''
often never came and the costs for additional work totaled tens
of millions of dollars. Along the way, the VA simply stopped
processing change orders.\3\ Small companies rely on prompt
payments to meet payroll and expenses, often unable to cover
those costs for very long.\4\ Many rely on bank loans and lines
of credit to bridge the gap, but on the Aurora project some
banks balked at letting small business clients rely on its
money to continue work.\5\ According to the Colorado SBA, at
least 33 small businesses were not paid for work in a timely
fashion, and some were waiting more than a year after work was
completed for payment.\6\ Of those 33 companies, at least two
filed for bankruptcy.\7\ The prime contractor even paid
subcontractors several million dollars out of its own pockets
while waiting for payment from the VA, which was highly
unusual.\8\ While the project in Aurora is a recent and,
unfortunately, well-known example, problems with processing
change orders happen in every federal construction agency on a
regular basis. The problem is that those change order delays
are happening on projects worth $5 million, $10 million and
$100 million, over which Congress does not ordinarily conduct
oversight. The issue is that when the dollar amount is not
high, and media attention is not existent, meaning that there's
a lack of public outrage, the problems persist but go unnoticed
by everyone except the small business that may have to close
its doors.
---------------------------------------------------------------------------
\3\ David Migoya & Mark Matthews, Aurora VA Hospital Project
Spooked Subcontractors, Causing Cost Hikes, Denv. Post, May 15, 2015
available at http://www.denverpost.com/news/ci--28125325/
aurora-va-hospital-project-spooked-subcontractors-causing-cost
\4\ Id.
\5\ Id.
\6\ Cathy Proctor, SBA: Progress being made on Helping Unpaid VA
Hospital Subcontractors, Denv. Bus. J., April 4, 2013 available at
http://www.bizjournals.com/denver/news/2013/04/04/sba-urges-va-to-
speed-payments-for.html
\7\ Id.
\8\ Id.
There will always be legitimate discrepancies between a
small business contractor and the government based on the terms
and scope of a contract. That's normal. However, our concern is
when the claims process is used unfairly--where the government
fails to act in good faith--to the detriment of small
businesses. Generally speaking, project funds comes from a
different budget account than the funds used to litigate and
pay claims. Consequently, with project budgets tight, some
federal contracting officers may tell contractors that there
will be no change orders issued on a project, or no further
change orders issued, regardless of how apparent the need may
be for a modification. That happens. If there is an issue, the
contractor will have to do the work and file a claim. The
expense of litigating the claim, in the long run, will often
cost more to the government and taxpayers than issuing the
change order in the ordinary course. It will certainly result
in additional costs to the contractor. However, forcing a
contractor into this situation is not something that will
typically impact the contracting officer on the project or that
project's budget. As such, it is easier for the government to
simply kick the can down the road and use the unlimited time
and financial resources of the federal government to wait the
small business out until it can no longer afford to continue,
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forcing it to settle.
Thank you again for inviting me to testify before the
committee on this important topic. I look forward to answering
your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Statement of Mr. Greg Long
President and Owner of Long Electric Company
On behalf of the National Electrical Contractors Association
(NECA)
Subcommittee on Contracting and the Workforce
Subcommittee on Investigations, Oversight, and Regulations
Committee on Small Business
May 25, 2017
Thank you Chairman Knight, Chairman Kelly, Ranking Member
Murphy, Ranking Member Adams, and members of the both
Subcommittees for inviting me to testify today at this very
important hearing. On behalf of the National Electrical
Contractors Association (NECA), we greatly appreciate the
opportunity to submit a statement for the record to the
Subcommittee on Contracting and the Workforce and the
Subcommittee on Investigations, Oversight, and Regulations on
``All Work and No Pay: Change Orders Delayed for Small
Construction Contractors.'' The subcommittees are to be
commended for holding this important hearing to address the
critical issue of change orders and their effect on small
businesses, particularly within the construction industry.
My name is Greg Long and I am the President and CEO of Long
Electric Company located in Napa Valley, California. Shortly
after graduating from Napa High School, I entered the
electrical trades in 1979 and quickly moved through the ranks.
Later, I founded Long Electric company in 1990. Over the years,
our family-owned business has provided its services for
everything from local schools to hospitals, wineries, and
various sustainable energy projects. Our business has never
seen more exciting times as we continue to promise that ``not
only are we large enough to do the job, we are small enough to
care.''
We at Long Electric are proud members of the National
Electrical Contractors Association (NECA), where I have had the
honor of serving as a member of the NECA Northern California
Chapter's Board of Directors since 1994. NECA is the nationally
recognized voice of the $130 billion electrical construction
industry, that brings power, light, and communication
technology to buildings and communities across the United
States. NECA, as a member of the Construction Procurement
Coalition, continues to build on a legacy of protecting the
public and making innovation possible in construction
contracting. We, as member contractors, strive to be solution-
providers for our customers and our industry expertise benefits
everyone working on an electrical construction projects.
Workforce Development and the Apprenticeship Program
One of the ways which Long Electric and NECA are able to
provide the highest level of electrical work comes from our
involvement in a rigorous and rewarding training program. We
are extremely proud of the level of skill and professionalism
that is crafted in each-and-every one of our electricians
nationwide by these programs. While there is true merit to a
traditional college education, our programs offer an
experience, education and career path that rivals the colleges
and universities of this country, all without the burden of
graduating with hundreds of thousands of dollars in student
loan debt and no guarantee of employment.
Over 70 years ago, NECA and the International Brotherhood
of Electrical Workers (IBEW) embarked on a joint venture to
develop the National Joint Apprenticeship Training Program
(NJATC). The newly rechristened ``Electrical Training
Alliance'' invests $100 million in private funds annually in
what we believe is the largest and most successful
apprenticeship and training program in the nation. Today, there
are more than 300 jointly administered local programs that are
trust financed and together we have trained over 350,000
apprentices to journeyman status.
Our apprenticeship program is a well-organized and
supervised method to train people with little or no prior
knowledge of a craft or trade to become capable, qualified
craftpersons or journeypersons. It is an ``earn while you learn
program.'' The ``on-the-job'' portion of the training is a
full-time, well-paid job. The goal is to provide the electrical
construction industry with the highest level of training and
highly skilled workforce possible. To accomplish this goal,
apprentices receive the highest level of training in the
industry, with a requirement of 8,000 hours of on-the-job
training and 900 hours of classroom time over a five-year
period. Upon completion of the curriculum and on-the-job
training, apprentices receive certificates documenting their
successful completion of the program. Incidentally, all
electrical apprentices receive incremental raises as they reach
certain set milestones. They are not a burden to the taxpayers
because the training is fully funded by the industry without
any taxpayer assistance. Perhaps the greatest benefit is that
in the end they are earning while they are learning. Each year,
participants in the program contribute in excess of $600
million dollars in federal, state, and local taxes. Lastly,
they also receive retirement plans and medial coverage for
themselves and their families that are also provided at no cost
to the American taxpayer.
Addressing our nation's current and future employment needs
is critically important to our industry and we believe the
existing apprenticeship infrastructure provided by construction
trades is a sure-fire bet for success, particularly for small
businesses. More important, the program is 100 percent industry
designed and funded and is a wheel that does not need to be
reinvented.
The apprentices that graduate from our training centers
work across the commercial and industrial sectors and
specialize in a broad range of areas including traditional
power and lighting, power quality, lighting controls, fire,
life safety and security systems, backup power generation,
communication and connectivity systems, automation controls and
energy efficiency projects.
While successfully completing this work, we on the
management side of the business, often run into the topic of
today's hearing, change orders.
Change Orders: Their Current State and Effect on Small
Construction Businesses
Change orders are an essential part of every construction
project. In a perfect world, we would have zero change orders
and all jobs would be bid exactly as is, with no hiccups or
complications in their completion., But that is not the world
we live in. That said, our goal as contractors is to be as
adaptable and accommodating as possible to the contracting
officer's needs and to respond efficiency and effectively to
their request for an equitable change.
Today, a change order is defined as a written order, agreed
upon by the owner, contractor and designer, authorizing changes
to the scope of the work, the contract sum, and the contract
time. While this appears to be a clear-cut definition, the
processes that formalizes and compensates a contractor for a
change order is not so. Due to the lack of a clear standard for
administering change orders, beyond the requirement that they
be within the ``scope of the project,'' much of the onus of
risk falls directly on contractors like myself to accommodate
contracting officers working on behalf of the federal
government.
A refusal to complete an order or to challenge the validity
of a change order can result in a loss of payment or potential
lawsuit by the contracting officer or even the prime
contractor. Therefore, contractors proceed with the work and do
their best to account for the consequential costs and risks
incurred when the timing and scope of a job is altered.
These costs and risk factors generally present themselves
in one of three forms, either: 1) project and field conditions,
known for delaying project completion like capacity issues, or
season and weather changes; 2) added cost factors, including
increased contract administration, supervision time for another
job, and/or lost profits due to delayed scheduling; and, 3)
labor productivity-related factors, involving the stacking of
trades, morale and attitude, and/or crew size inefficiency. The
combination of these factors amounts to one anxious estimator
and project manager. This pair of individuals, in conjunction
with the job's foreman, are then expected to issue a hastily
revised and accurate bid proposal, where both parties
expeditiously and in good faith can negotiate and adjust the
contract price and/or the contract timing.
Once we are able to navigate the various challenges change
orders present, too often we collide with the very title of
this hearing, All Work and No Pay. As stated previously, change
orders do not exist in a perfect world. Instead, they thrive in
a realm where contractors have extremely limited leverage in
agreeing to completing the work and even less in extracting
payment for their hard work. In some cases, contractors are not
paid for as long as 18 months. In some cases, this can last
even longer. This elongated period can be crippling to a small
business like my own who must balance the books monthly and
anticipate capital for upcoming project. If we are unable to
anticipate prompt pay, or to receive prompt payment as
guaranteed under the Prompt Payment Act of 1982 (PPA), our
business is unable to function, let alone prosper.
When timely payments are made under the PPA by the
contracting officer to the prime contractor, subcontractors
have no ability for knowing when that transaction takes place.
This again adds another layer of complexity for subcontractors
when it is time to be paid themselves. Jobs that have multiple
layers of subcontractors can be extremely tough to navigate
when the date of payment from the government to the prime
contractor is unknown. Any solution that requires a notice of
payment by the contracting officer would be gratefully welcomed
by all contractors involved in this process.
It is clear that the single most common area of dispute in
the change order process leading to delayed work or payment is
cost. In fact, a 2014 study by Michigan State University found
that ``among cost-related disputes, items related to
recoverable direct cost, overhead-profit percentages, and
impact factors resulting in inconsequential costs constitute
the clear majority of the disagreements.'' Every change order
could hypothetically run into these problems, but those that
are most prone are the ones that have not addressed an ``agreed
upon price or percentage amount (for such costs) in the initial
contract.'' This is disturbingly common as ``most standard
contract documents do not provide specific guidance'' on these
percentages. To make matters more complicated, subcontractors
must deal with multiple parties, including other
subcontractors, designers, prime contractors, and of course the
owner of the project.
The ultimate challenge for these issues is the true lack of
any real profit for our business in the completion of a change
order. In reality, most electrical contractors consider change
orders as not profitable. Cases where change orders are truly
profitable are few and far between. The same Michigan State
University study mentioned previously found that change order
work results in a profit of merely two-to-five percent, as
opposed to the generally anticipated ten to 15 percent for the
job as a whole. Once all other costs like overhead or direct
material costs have been accounted for, electrical contractors
have been found to make a profit of only 3.54 percent. This is
drastically low and does not adequately account for the risk
factors previously identified.
Payment Bonds
Branching out from the topic of change orders, one key
component of the construction world that comes into play
concerns bonds. Payment bonds are an essential investment where
a financier provides a prime contractor with the backing of
funding necessary to assure payment of its subcontractors and
suppliers. These bonds are generally defined for a set amount
of time and are held at a fixed interest rate. Typically bonds
and the assurance we as contractors receive from them do not
come into play until a contractor is unable to complete their
work or pay for the work of subcontractors, in such a case the
bonding company would then be obligated to do so.
When considering change orders and the effect they may have
on the bonding process it is paramount to recognize that in any
dispute that may delay the construction timeline or negate the
contract altogether, the bonding agency is obligated to provide
services or payment in lieu of the faltering company. As a
subcontractor, our main concern for such disputes generally
arises over concerns of receiving payment for services. When a
prime contractor becomes unable or unwilling to pay for
services rendered, subcontractor are able to file a claim to
the bonding agent. Under the Federal Miller Act of 1935,
Federal Acquisition Regulation requires that payment bonds of
this type be utilized on all jobs exceeding $150,000.
Too often the information for contracting bonding officers
or the text of the bond itself is either kept private or it
remains privy to a handful of people involved on the job,
making is extremely difficult for a subcontractor to extract
the information from a contracting officer when need be. There
is an industry wide need for and easier method to access bond
information which could be fixed through the already existing
network of internet platforms that house so many of todays
construction documents.
Opportunities Lay Ahead
Although I have painted a gloomy picture of the current
state of change orders, there are a handful of opportunities in
the near future that have contractors like myself optimistic
for the industry as a whole. The first, is the growth that the
construction industry has experienced over the past year.
At nearly a four percent increase since March 2016, our
markets continue to expand. This growth, combined with the
current political support for a nationwide infrastructure plan
have the entire industry tinted with a positive glow.
On a legislative note, we at NECA were delighted to learn
about two recently introduced bills. The first, introduced by
Rep. Bacon, H.R. 2350, the ``Small Business Know-Before-You-Bid
Construction Transparency Act of 2017.'' This legislation aims
at addressing the length of time it takes the federal
government to review, approve and pay for equitable changes;
the validity of payment assurances, such as payment bonds; and
the timeliness of monthly payments. These reforms will
streamline the process of bidding on federal construction work
and allow subcontractors to adequately address the consistent
and undue risk they assume when completing change order work.
The second, introduced by Rep. Fitzpatrick, Rep. Murphy,
and Chairman Knight, the ``Small Business Payment for
Performance Act of 2017'' offers our contractors the ability to
continue work without fear of withheld payments for change
orders. The bill requires a partial payment of 50 percent
within the time frame specified by the Prompt Payment Act for
any additional work performed. This bill does note that the 50
percent payment does not amount to a mutual agreement on price
itself.
Conclusion
The issues this Committee is willing to tackle concerning
change orders, bonds, and contract information are ones that do
not just affect Long Electric's work in California or solely
the electrical contracting industry; these are issues that
affect each-and-every small business contractor and others
bidding on government contracts nationwide.
Thank you for the opportunity to testify at this very
important hearing. NECA applauds the committee's unwavering
efforts to examine these important components of our expanding
construction economy. We are pleased and remain optimistic at
this committee's efforts to address change order concerns. We
will continue to offer our support in helping advance the
committee's agenda and look forward to working with you all as
you move forward in enacting smart and sound policy for the
entirety of the construction industry.
Statement of
E. Colette Nelson
Chief Advocacy Officer
American Subcontractors Association, Inc.
on behalf of the
Construction Industry Procurement Coalition
to the
U.S. House of Representatives
Committee on Small Business
Subcommittee on Contracting and Workforce
Subcommittee on Investigations, Oversight, and Regulations
for a hearing on
``All Work and No Pay: Change Orders Delayed for Small Construction
Contractors''
May 25, 2017
Statement of E. Colette Nelson
Construction Industry Procurement Coalition
On behalf of the Construction Industry Procurement
Coalition, I'd like to thank the Committee on Small Business,
its members and staff for taking seriously construction
industry concerns about processing and paying for change orders
on federal construction projects. The Coalition is a 14-member
group of trade associations representing construction design
professionals, prime contractors, specialty trade contractors,
subcontractors, suppliers, sureties and surety bond producers.
For those of you who have worked with the construction industry
on other issues, you know that all too frequently it is
difficult for us to agree on almost anything. Thus, I am
pleased to report to you that the construction industry is
united on both the problem and possible solutions to the
problem of slow approval and payment of change orders on
federal construction projects.
Since the United States government began purchasing
construction services and materials--that is, since its
inception--there have been disagreements between the government
and its suppliers about payment. Indeed, even before the
Declaration of Independence was signed, the states issued ``war
bonds'' promising to pay the Continental Army's suppliers.
In the construction industry, even in the private sector,
we have more than our share of payment challenges. While George
Washington was in charge of buying for the war effort, one of
Virginia's other founding fathers, Thomas Jefferson, introduced
the concept of a mechanics lien into the New World's statutory
system. That is, since a construction contractor's work is
incorporated into the real property and cannot easily be
removed, the contractor who has not been paid may reduce its
financial risk by acquiring an interest in that real property
in the form of a mechanics lien. Eventually, the courts rules
that a contractor cannot lien public property--the king's land.
Congress responded by passing the Heard Act in 1894; this law
required a prime contractor to provide a single performance and
payment bond to protect the government and subcontractors,
respectively. In 1935, Congress replaced the Heard Act with the
Miller Act, which requires a federal prime construction
contractor to post bonds guaranteeing both the performance of
their contractual duties and the payment of their
subcontractors and material suppliers.
By the 1980's, the construction industry was again
reporting challenges with getting paid on federal projects.
Congress responded by enacting the Prompt Payment Act of 1982,
and, when problems persisted, the Prompt Payment Act Amendments
of 1988. The law established very specific time frames for the
government to pay its construction prime contractors for work
performed and for those prime contractors to pay their
subcontractors and so on through the construction tiers. These
laws have done an excellent job in assuring prompt payment on
federal construction for progress payments and final payment--
but, unfortunately, not for requests for equitable adjustment,
more commonly called change orders.
I review this history both to show the insidious nature of
payment problems on federal construction and to demonstrate
Congress's willingness to address them. The legislative history
also demonstrates that while the current statutory structure
helps assure contractor payment, it also protects the federal
government. For example, when a federal prime contractor
submits an invoice for payment, it must include the following
certification:
``I hereby certify, to the best of my knowledge and
belief, that--
(1) The amounts requested are only for performance in
accordance with the specifications, terms, and
conditions of the contract;
(2) All payments due to subcontractors and suppliers
from previous payments received under the contract have
been made, and timely payments will be made from the
proceeds of the payment covered by this certification,
in accordance with subcontract agreements and the
requirements of Chapter 39 of Title 31, Untied States
Code;
(3) This request for progress payments does not
include any amounts which the prime contractor intends
to withhold or retain from a subcontractor or supplier
in accordance with the terms and conditions of the
subcontract; and
(4) This certification is not to be construed as
final acceptance of a subcontractor's performance.''
Penalties for a contractor who falsely certifies to the
government are between $10,781.40 and $21,562.80 per claim,
plus three times the amount of damages that the federal
government sustains because of the false claim--certainly a
deterrent to a false certification.
As other witnesses will testify, existing payment
protections for contractors on federal construction are not
working when it comes to changes, more commonly referred to as
change orders or requests for equitable adjustment. A change
order, in its simplest form, is an agreement to affect a change
to the already executed contract. Often, it is necessitated by
added, deleted or simply changed work from the plans and
specifications already bid and agreed upon. While a change
order typically adds value to the contract in exchange for the
changed scope, it also can delete funds, change work without
affecting price, and add or subtract time to completion of the
work. The change order process is complex, and involves the
construction owner, the prime contractor and the subcontractor
tasked with the change.
In federal construction, the most easily identifiable
change orders come from the federal government in what is
commonly called a directed change--a ``written order designated
or indicated to be a change order, make changes in the work
within the general scope of the contract.'' This includes
changes in the specifications, in the method or manner of
performance, in the government-furnished property or services,
or acceleration of the work.
The Federal Acquisition Regulation requires a contractor to
submit a request for payment for the increased cost of
performing the revised contract within a fairly tight time
frame--within 30 days after receipt of the written change order
or notice. The FAR provides an additional incentive for a
contractor to act expeditiously by stating that ``except for an
adjustment based on defective specifications,'' no adjustment
in cost can made for any costs incurred by the contractor
``more than 20 days before the Contractor gives written notice
as required.'' That means during a 20 to 30 day window, the
prime contractor must consult with its subcontractors, and put
together a cost estimate that will stand up to the federal
government's strict pricing and audit requirements.
Yet the federal government's rules establish no minimum
requirements on when the government itself must review and
approve the contractor's request for equitable adjustment.
Instead, the FAR requires a contracting officer to ``negotiate
equitable adjustments from change orders in the shortest
practicable time'' with no further specificity. Thus, while the
prime contractor and its subcontractors must act swiftly to
price their increased work, all the while performing the work
at the direction of the government, federal agencies apparently
have interpreted ``shortest practicable time'' to mean a time
that is administratively convenient for them.
As an example, let's look at the stated policies and
procedures of just one federal construction agency, the U.S.
Army Corps of Engineers (USACE). Again, nothing in the FAR, the
Department of Defense FAR Supplement (DFAR), the U.S. Army
Supplement to the DFAR (AFARS) or the USACE Acquisition
Instruction (UCI) [Version 3; 1Nov14) specifies time periods
during which a contracting officer is required to act on a
contractor's REA, on the contractor's request for additional
funding or a schedule adjustment to accommodate the
government's unilateral change order. In addition, the UCI
specifies that any contract modification in excess of the
Simplified Acquisition Threshold ($150,000) requires a formal
Independent Government Cost Estimate (IGE), pursuant to USACE
Procurement Instruction Letter (PIL) 2012-03-R1 (Requirements
for Development, Review and Approval of the Independent
Government Estimates (IGE)).
Further, under USACE procedures, a contracting officer is
authorized to bundle the contractor's requests for written
change orders ``for ease of administrative processing,'' which
is exclusively beneficial to the government. The USACE
contracting officers routinely defer consideration of all of a
contractor's REAs to the end of the construction project when
they an be ``resolved as an omnibus settlement.'' Again, this
is solely to the benefit of the government, since the
contractor and all of the subcontractors and suppliers are
funding the performance of the multiple unilateral change
orders issued by the government during the total duration of
contract performance. Most likely, such unconscionable deferral
of action by the government flows from the desire to conduct
only one IGE and the necessity to make certain that adequate
funding is available to fund the ``omnibus settlement.''
The Construction Industry Procurement Coalition hereby
petitions this Committee and others in Congress to take action
to provide relief to prime construction contractors and
subcontractors from the slow processing and payment of change
orders on federal construction. The Coalition has identified
and supports several legislative solutions to the problems
experienced by construction contractors and subcontractors with
respect to change orders.
Provide Notice of Agency Policy and Procedures on Change
Orders
The CIPC recommends that Congress require federal agencies
to advise competing offerors about the agencies' policies with
respect to the time for processing and paying for change
orders, so that they make appropriate business judgments prior
to submission of bids or offers.
For example, if this proposal were in place, the USACE
would have to tell its prospective bidders that it has the
right to ``bundle'' the processing of change orders until the
end of the project. By obtaining this information in advance,
prospective offerors could factor into their offers to the
federal government the risk and resulting cost of delayed
payment for change orders. On projects with a short time frame,
businesses simply may increase their bids to take into account
the cost of money. On projects with a longer time frame, many
businesses, particularly small and emerging firms, may choose
not to participate.
The proposed ``Small Business Know-Before-You-Bid
Construction Transparency Act'' (H.R. 2350) takes one approach
to this notice requirement by requiring a federal agency to
actually report information about the agency's past performance
in processing requests for equitable adjustment in its IFBs and
RFPs. The Coalition supports H.R. 2350.
Establish Deadlines for Agency Response to an REA
The CIPC recommends that Congress specify deadlines for the
issuance of a written change order and a response to the
contractor's proposal for modification to the construction
contract schedule and additional funding to cover the
contractor's estimate of the additional costs associated with
performing the work flowing from a unilateral change order. As
noted previously, the FAR establishes deadlines for a
contractor to submit an REA, but establishes no such deadlines
for agency action.
Such a directive, for example, could require that a
contracting officer issue a final decision regarding an REA
submitted by a small business within 14 days with respect to a
request in the amount of $1 million or less and 28 days with
respect to a request in an amount more than $1 million.
Require Provisional Payment of 50 Percent of an REA
The CIPC recommends that Congress establish a requirement
that when an agency issues a unilateral change order, that the
contracting officer provisionally authorize the payment of 50
percent of the additional funds requested by the contractor to
cover the government's unilateral change order, without an IGE.
Such provisional payment is considered a best practice in
the private construction market. For example, model documents
published by ConsensusDocs--a coalition of more than 40
construction owner, design professionals, contractor,
subcontractor and surety organizations--state in their changes
clause:
``8.2.2 The Parties shall negotiate expeditiously and
in good faith for appropriate adjustments, as
applicable, to the Contract Price or Contract Time
arising out of an Interim Directive. As the directed
Work is performed, Constructor shall submit its costs
for such Work with its application for payment
beginning with the next application for payment within
thirty (30) Days of the issuance of the Interim
Directive. If there is a dispute as to the cost to
Owner, Owner shall pay Constructor fifty percent (50%)
of its actual (incurred or committed) cost to perform
such Work. In such event, the Parties reserve their
rights as to the disputed amount, subject to the
requirements of ARTICLE 12 [Dispute Resolution and
Mitigation]. Owner's payment does not prejudice its
right to be reimbursed should it be determined that the
disputed work was within the scope of the Work.
Constructor's receipt of payment for the disputed work
does not prejudice its right to receive full payment
for the disputed work should it be determined that the
disputed work is not within the scope of the Work.
Undisputed amounts may be included in applications for
payment and shall be paid by Owner in accordance with
this Agreement.''
Excerpt from ConsensusDocs Form 200, Standard Agreement and
General Conditions Between Owner and Constructor (Lump Sum)
(2017).
The CIPC notes that, under the Prompt Payment Act
Amendments of 1988, such payment to a prime contractor would be
required to flow through to subcontractors for their
performance on such change order work.
Require Regular Reports on the Status of REAs
The CIPC recommends that Congress require federal agencies
to regularly report to their prime contractors, actions taken
on requests for equitable adjustment. Specifically, CIPC
suggests that a federal agency include with each progress
payment to a prime contractor, information on the status of
each REA submitted by the contractor. Contractors, particularly
small and emerging firms, must plan and carefully manage their
cash flow. A status report on its REAs would alert a contractor
whether or when it can expect payment for change order work
performed. Alternatively, a federal agency could post such
information on an appropriate government Web site.
A requirement for regular status reports on REA would
complement other payment transparency provisions supported by
the CIPC. This includes language included in H.R. 2350, which
would require a federal agency to post on a Web site each
payment made to the prime contractor, including the date of
payment and the amount paid, specifying any amounts withheld
from the amount requested by the prime contractor and a general
explanation of why an amount was withheld. This information
would allow a subcontractor or supplier to determine when its
payment is due, without resorting to contacting directly the
already harried federal contracting officer or the prime
contractor. Further, the prime contractor would benefit from
having a clear statement of why its federal customer did not
issue full payment so that it can more expeditiously address
and correct any problems.
The CIPC also supports the provision in H.R. 2350, which
would require a federal agency to post on a Web site a copy of
any payment bond provided for the contract and any modification
to such bond required by the agency. This information will
allow a subcontractor or supplier to obtain a copy of the
payment bond without resorting to contracting directly the
contracting officer or the prime contractor. Subcontractors and
suppliers need a copy of the bond to determine its existence
and validity and where required notices must be provided.
Thank you again for inviting the Construction Industry
Procurement Coalition to testify before the committee today. I
look forward to answering any questions you may have now or
subsequent to the hearing.
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