Chapter 10
Monitoring Construction Contracts
Performance and Payment Bonds
The Miller Act requires contractors to furnish performance and payment bonds for construction contracts over $100K. Bonds are similar to an insurance policy. A bond is a written instrument between the contractor and a third-party surety to ensure fulfillment of the contractor's obligation to the government and to suppliers of labor and material for a given project. Performance bonds protect the government from default by the prime contractor and are required in the amount of 100 percent of the original contract price in construction contracts (see Federal Acquisition Regulation [FAR] 52.228-15, Performance and Payment Bonds—Construction). Payment bonds protect suppliers of labor and materials in the event that the prime contractor does not reimburse the subcontractors. Payment bonds are required because construction subcontractors do not have the legal right to place liens against real property of the government in the form of mechanics' liens.
Such liens can be placed against real property by subcontractors in civilian contracting if the prime contractor does not reimburse the subcontractors.
Contractor Inspection Clauses
When construction contracts are in excess of the simplified acquisition threshold, the contractor is required by FAR 52.246-12, Inspection of Construction, to maintain an inspection system.
The contractor shall maintain an adequate inspection system and perform such inspection as will ensure that the work performed under the contract conforms to contract requirements. The contractor shall maintain complete inspection records and make them available to the government. All work shall be conducted under the general direction of the contracting officer and is subject to government inspection and test at all places and at all reasonable times before acceptance to ensure strict compliance with the terms of the contract.
The contractor must make its records of inspection available to the government. At a minimum, the contractor's records must indicate the nature of the observations, the number of observations made, and the number and types of deficiencies found. The records also must indicate the acceptability of the work and the actions taken to correct deficiencies. The COR must ensure that the contractor complies with this contract requirement.
Correction of Deficiencies
In accordance with the Inspection of Construction clause, the contractor must replace materials or must correct workmanship not conforming to the contract requirements at no additional cost to the government. In addition, the contractor is subject to any liquidated damages specified in the contract or actual damages incurred by the government. If the contractor fails to correct deficiencies, the general provisions of the contract provide for specific actions to be taken by the contracting officer, as follows:
- Replace or correct the item or work at the contractor's expense. This may be accomplished by award of a new contract or by use of the government's own resources.
- Accept the items with a reduction in price. This action is accomplished by formal modification to the contract. The reduced price is based upon the reasonable value of the item, considering the possible cost of correcting the item.
- Terminate the contract for default. This action is taken only as a last resort. If the item or work must be reprocured, the contractor is normally liable for excess costs incurred by the government.
The COR may not take any of these actions, but must ensure timely notice of deficiencies to the contracting officer.
Liquidated Damages
Liquidated damages are required in Department of Defense (DoD) construction contracts over $500K but may be used in contracts under this threshold if the contracting officer determines that the government may suffer a loss if the project is not completed on time. Liquidated damages are amounts agreed to and settled on in advance to avoid litigation. They are based on the damage one party may incur if the other does not complete the contract on time. Because they are determined prior to award of the contract, they can be only estimates and may not be the actual damages that the party ultimately may incur. The amount does not have to be the exact damages that may be incurred but must show some reasonable relationship to the anticipated damages. If there is no reasonable relationship to the anticipated damages, the liquidated damages will be determined to be a penalty and will not enforceable. The contract must contain a clause limiting the amount of liquidated damages that can be assessed a contractor. The government is entitled to the amount of liquidated damages agreed to unless the contractor has encountered an excusable delay.
The COR must keep accurate notes and records. For example, contractors normally dispute the number of days that have been assessed and not the liquidated damage rate. Consequently, the COR must keep adequate daily records of weather or any conditions that may affect the completion of the contract. Contracting officers have the final authority as to whether or not they will enforce liquidated damages if the delay is excusable.
Differing Site Conditions
One of the major risks of a construction project is the type of subsurface or other latent physical condition that will be encountered. If bidders were required to assume the full risk of these conditions, they would either have to examine the site extensively or include contingencies in their bids to protect themselves against potential unfavorable conditions. On the other hand, the government normally has obtained information concerning site conditions during its design of the project prior to soliciting bids and wants to avoid the disruption and bidding expense that would be involved if each bidder were to make borings or other extensive investigations. The government's response to this situation has been to make its information about the site available to bidders, to admonish bidders to make reasonable site investigations, and to relieve the contractor from the risk of certain types of unexpected unfavorable conditions while protecting the government if the conditions turn out to be more favorable than expected.
Differing site conditions are separated into two categories. Relief for a Category I condition depends on whether the contractor has encountered a subsurface or latent physical condition differing materially from conditions that are indicated in the contract documents or may be implied from other language in the contract documents. To recover for a Category II condition, the contractor must demonstrate that the condition was unknown and that it was unusual, differing materially from conditions ordinarily encountered and generally recognized as inherent in work.
Contractual Rights of the Government
A contractual right of the government cannot be waived, nor may a contract be modified for the convenience of a contractor. However, it may be in the best interest of the government not to reject the materials or services of a construction contract because of resultant utilities shut-off, downtime of equipment or facilities, excessive inconvenience to users or occupants, or other reasons unique to the contract—costs that may not be recoverable from the contractor as damages. If it is desired to accept work that essentially meets the needs of the government but does not conform to the requirements of the contract, the COR must furnish the contracting officer recommendations to accept the work, along with findings on all points in which the work fails to meet contractual requirements and an estimate of the time required (and cost decrease, if applicable) for the contractor to complete performance. The contracting officer may extend the contract completion date by formal modification to allow the contractor to correct deficient work.
Progress Payments
FAR 52.232-5, Payments under Fixed-Price Construction Contracts, provides that the contractor is entitled to progress payments monthly as the work proceeds, or at more frequent intervals as determined by the contracting officer. This clause further permits a maximum retention of 10 percent of the amount of the payment until satisfactory progress is achieved, unless a lesser retention percentage is approved by the contracting officer. For progress payments, the contracting officer should advise the contractor prior to commencement of on-site work to furnish a breakdown of the total contract price showing the amount for each principal category of the work. Such breakdown should be in as much detail as requested by the contracting officer, to provide a basis for processing progress payments. The categories of work shown on the contractor's request for progress payment may be the same as set forth in the progress schedule approved by the contracting officer in accordance with FAR 52.236-15, Schedules for Construction Contracts, which is included in all construction contracts having a performance period exceeding 60 days. A detailed breakdown is not needed for final payments under a contract line item.
FAR 52.232-5 also requires the following.
Along with each request for progress payments, the contractor shall furnish the following certification, or payment shall not be made: 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) Payments to subcontractors and suppliers have been made for previous payments received under the contract, and timely payments will be made from the proceeds of the payment covered by this certification, in accordance with the subcontract agreements and the requirements of 31USC 39; and (3) This request for progress payments does not include any amounts that the prime contractor intends to withhold or retain from a subcontractor or supplier in accordance with the terms and conditions of the subcontract. This certification is not to be construed as final acceptance of a subcontractor's performance.
The COR must screen each invoice for progress payments and the above certification, and compare the total amount invoiced with the progress reports to ensure that the percentage of the amount invoiced is not excessive relative to the percentage of work accomplished. The COR must ensure that quantities, percentage of work completed, list of materials delivered to the job site, and monetary amounts are accurately stated on all receipts and acceptance documents. The COR must forward a copy of each receipt and acceptance document, processed in connection with progress or final payments, to the contracting officer concurrent with forwarding the document to the paying office. The COR is responsible for ensuring that payments to the contractor are processed promptly.
Suspension of Work
The government includes the Suspension of Work clause in all fixed-price construction contracts and in architect-engineer contracts. The Suspension of Work clause allows the contracting officer to suspend a contractor's performance for a reasonable period of time. If the suspension is unreasonable, the contractor may be entitled to reimbursement of certain costs that can be attributed to the delay. Ordered suspensions covered by the Suspension of Work clause can be compensated for only if they result in unreasonable delay. A suspension of work differs from a stop work order, which is used in negotiated contracts for supplies and services.
The CORs must maintain adequate records for any actions taken under the Suspension of Work clause. Adequate records may reveal that the contractor contributed to the suspension, that the contractor may not have been damaged by the suspension, or that the government's suspension was reasonable. COR records are vital in determining the amount of monies that the contractor may be entitled to if the suspension is determined to be unreasonable.
As prescribed in FAR 42.1305 (a), Contract Clauses, the contracting officer must insert the following clause in solicitations and contracts when a fixed-price construction or architect-engineer contract is contemplated.
Suspension of Work: The contracting officer may order the Contractor, in writing, to suspend, delay or interrupt all or any part of the work of this contract for the period of time that the contracting officer determines appropriate for the convenience of the government.
If the performance of all or any part of the work is, for an unreasonable period of time, suspended, delayed, or interrupted (1) by an act of the contracting officer in the administration of this contract, or (2) by the contracting officer's failure to act within the time specified in this contract (or within a reasonable time if not specified), an adjustment must be made for any increase in the cost of performance of this contract (excluding profit) necessarily caused by the unreasonable suspension, delay, or interruption, and the contract modified in writing accordingly. However, no adjustment may be made under this clause for any suspension, delay, or interruption to the extent that performance would have been so suspended, delayed, or interrupted by any other cause, including the fault or negligence of the contractor, or for which an equitable adjustment is provided for or excluded under any other term or condition of this contract. A claim under this clause must not be allowed (1) for any cost incurred more than 20 days before the contractor has notified the contracting officer in writing of the act or failure to act involved (but this requirement may not apply as to a claim resulting from a suspension order), and (2) unless the claim, in an amount stated, is asserted in writing as soon as practicable after the termination of the suspension, delay, or interruption, but not later than the date of final payment under the contract.
Chapter Acronyms
COR – Contracting Officer's Representative
DoD – Department of Defense
FAR – Federal Acquisition Regulation
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