H.R. 4012 - The Construction Quality Assurance Act

Mr. Chairman, Members of the Subcommittee, I am pleased to discuss with you today the Administration's views on H.R. 4012, the "Construction Quality Assurance Act of 2000." At the outset, I want to emphasize that the Administration shares the Subcommittee's desire to ensure quality construction on Federal public works projects. In my capacity as the Deputy Associate Administrator for Acquisition Policy of the agency primarily responsible for Federal public works construction, I fully appreciate the need to make the most effective use possible of taxpayer dollars on our construction projects. Contracting Officers and Program Managers in the construction business today have available to them a mixed set of tools. These tools range from traditional sealed bid contracting to the more recently authorized two-phase design-build selection procedures. These options make it possible for contracting officers to use the source selection process that will achieve the best results given the nature of any particular construction project. Irrespective of the process used, our overall goal is always the same: to take full advantage of competition and structure contracts to effectively incentivize quality and timely contractor performance.

H.R. 4012 raises the issue of whether our ability to achieve this goal is being undermined by "bid shopping" and "bid peddling." The bill finds that prime construction contractors, after being awarded a contract by a Federal agency, may seek or otherwise be induced to subcontract with lower price subcontractors to increase their profits. The bill states that bid shopping and bid peddling result in the use of subcontractors with questionable abilities that expose Federal construction projects to the dangers of substandard performance. To address this concern, H.R. 4012 would direct executive agencies to require that bidders for Federal construction contracts over $1,000,000 include in their offers specific information about subcontractors who would perform work over $100,000 under the contract. Contractors would be required to show good cause and seek a contracting officer's approval in order to substitute a subcontractor in place of one listed in the original offer. The government could impose damages on contractors who violated the substitution requirements, and repeated violations (where damages were imposed) could serve as grounds for possible debarment or suspension of a contractor from Federal contracts.

The Federal Acquisition Regulation (FAR) does not currently include the subcontractor listing requirements called for by H.R. 4012. The FAR instead relies on our Contracting Officers to enter into effective contracts that hold prime contractors accountable for the performance of their subcontractors - a customary commercial practice. This notwithstanding, the FAR precludes a contractor from entering into a subcontract in excess of $25,000 with a contractor that is debarred, suspended, or proposed for debarment unless there is a compelling reason to do so. (This requirement is set forth at FAR 9.409(b) and FAR clause 52.209-6.) Before entering into a subcontract with a party that is debarred, suspended, or proposed for debarment, a corporate officer or a designee of the contractor must, among other things, provide the Contracting Officer with compelling reasons for doing business with the subcontractor notwithstanding its inclusion on the List of Parties Excluded from Federal Procurement and Nonprocurement Programs ("the list").

Beginning in 1984, GSA has included a clause in all building construction, alteration and repair contracts precluding the successful bidder from subcontracting with any contractor who, at the time of subcontract award, is identified on the list. Since that time, GSA is not aware of major resultant problems in its construction program or significant problems with inferior work due to bid shopping or peddling.

The Administration believes that mandating subcontractor listing requirements for our construction contracts as H.R. 4012 proposes would create more harm than benefit and strongly opposes H.R. 4012 for the following reasons. First, locking a prime contractor into business relationships that can be revised only with the permission of the contracting officer is contrary to the commercial practice of holding prime contractors accountable for properly managing their subcontracts. The bill would insert the contracting officer into contractor management decisions that should best reside with the contractor. There is little or no protection to be gained by the government through this process, because the government does not control the subcontractors used in the original bid or offer. Focusing instead on desired mission-related outcomes and tying payment to the contractor's success in achieving those outcomes -- a performance-based approach -- puts the burden of good contract performance on the contractor and enhances performance. The government's protection lies not in micro-managing the prime contractor, but rather in being a smart buyer, specifying the right quality, and holding the contractor and its subcontractors to meeting the specifications by performing sufficient quality inspections to ensure they are met.

Second, subcontractor- listing requirements could adversely affect the timeliness and cost of contract performance and would increase the government's administrative expenses. The process for changing a designated subcontractor is cumbersome and could well have an impact on the work completion schedule as well as any efforts of other subcontractors whose work is dependent on the replacement subcontractor. As a practical matter, a prime contractor may not be able to identify all subcontractors at the time of proposal. Often, a prime contractor proposes based on estimates and past experience. Prime contractors deprived of this flexibility might well decide not to bid on government construction contracts or, alternatively, submit higher bids that could increase the cost to construct public works. We are concerned that this would likely reduce the quality of the winning contractor's subcontract team if we force prime contractors to enter into binding relationships with potential subcontractors prior to award of the prime contract. No one contractor is going to be able to lock in each of the best subcontractors. One prime contract competitor will get the best mechanical, another will get the best electrical, and so on.

Third, the Bill would negatively impact the overall quality of the subcontractors by forcing primes to "sub-up" prior to contract award, thus depriving the prime and the government of the best subcontract team. Prime contractors sometimes enter into exclusive agreements with subcontractors. Because of such arrangements, the best subcontractors may not be available for Government work if they are part of a losing bid. The Bill would promote these practices to the Government's detriment.

Lastly, the bill could draw the government into disputes between contractors and their subcontractors, with concomitant liability. A major tenet of government contracting is that the Federal government has no privity of contract with subcontractors. This bill blurs that distinction and is unacceptable on that basis alone.

On a historical note, GSA adopted a policy similar to that in H.R. 4012 in 1963. We required bidders on construction contracts to submit with their bids the name and address of their subcontractors for designated categories of work. The intent was to curtail the practice of bid shopping by the successful bidder for lower subcontract prices after bids were publicly opened. We were concerned that in many instances bid shopping had resulted in substandard work by lower price subcontractors whose competence and responsibility were questionable. We also believed that the elimination of bid shopping would create a competitive market among construction subcontractors, with resultant savings accruing to the government. GSA's subcontractor listing requirements subsequently were included in GSA's procurement regulations.

During the late 1970's, GSA met with various general contractor groups such as the Associated General Contractors of America, subcontractor groups such as the American Subcontractors Association, and specialty subcontractor firms. The ultimate result of several months of discussions with these groups resulted in the agreement that the administrative burden to manage subcontractor-listing efforts exceeded the benefits.

In 1983, based on 20 years of experience with GSA's subcontractor listing requirement, GSA decided to eliminate the requirement and to add a construction subcontractor eligibility requirement. The new requirement incorporated a clause in all building construction, alteration and repair contracts precluding the successful bidder from subcontracting with any contractor who, at the time of subcontract award, was identified on the list.

We published the proposed change in the Federal Register for public comment in October 1983. Our notice explained that during the past several years, bidding problems and protests related to the listing of subcontractor's requirement adversely affected the GSA construction program. These problems resulted in delays in awards of contracts. Low bids were sometimes rejected, preventing the timely completion of important projects and resulted in higher procurement costs. The purposes of the proposed change were to simplify procurement procedures, reduce paperwork burdens associated with procurement, establish uniformity with other Federal construction agencies which for the most part, did not require subcontractor listing, and to eliminate potential delays and financial losses experienced as a result of the listing requirement.

GSA received numerous responses to its Federal Register notice from individual contractors, subcontractors, and specialty contractors, as well as their local and national associations and representatives. After reviewing the comments received in opposition to the proposed change, we found no evidence that the elimination of the subcontractor listing requirement would cause the prime contractors to bid shop, those few subcontractors now covered by the listing requirement to provide inferior work or to submit inflated bids, or the prime contractor to reap a windfall at the expense of the subcontractor or the government.

Accordingly, GSA concluded that eliminating the subcontractor- listing requirement would be in the government's best interest and published a final rule in the Federal Register on February 15, 1984. Since that time, as I noted earlier, GSA is not aware of major problems in its construction program due to the elimination of the subcontractor-listing requirement.

Mr. Chairman, Members of the Committee, for the reasons I have just outlined, the Administration strongly urges the Subcommittee not to impose subcontractor listing requirements on Federal construction contracts. The potentially significant resources that would otherwise be required to carry out H.R. 4012 should instead remain fully focused on the smartest application possible of the acquisition tools available to our workforce today. This focus will better serve our taxpayers in achieving the positive results on our construction contracts that we jointly desire.

This concludes my prepared statement. I would be pleased to answer any questions you may have.