Regret-Free Contracting

This insight from a real-world user of contract services could help make your future projects more successful.

By Randall Noon, P.E.

Companies typically don’t take the decision to use a contractor lightly.

The details and activities associated with successfully setting up and managing contract projects and contractors shouldn’t be taken lightly, either. The goal is twofold: 1) The contractor is to complete a project for the company that benefits both parties; 2) When the work is completed, both contractor and client should be able to walk away from a job well done, without further entanglements, ready to work again with each other if the need arises.

Choosing contractors
The traditional RFP and low-bid process may be the least effective way of meeting the two parts of the preceding goal. Consider the following scenario:

The company writes an RFP that details the work, the schedule and everything else in an attempt to control costs and get the job done at the lowest price. Savvy contractors will then game the system by combing through the RFP carefully to see what work has been left out of the document that must be done in order to complete the project—and keep such findings to themselves. (Think of this information as a contractor’s ace in the hole.)

Since many companies that want work to be done are less experienced in the overall scope of their desired projects than contractors, it’s not unusual for things to be left out of RFPs. It is difficult to be omniscient. Consequently, a contractor may underbid the true price of the project to get the job and then attempt to make up the difference by constantly finding “extra work” to be billed according to a time and materials schedule that’s in addition to the bid. (As many readers already know, billing rates in an “extra work schedule” are typically higher than the billing rates implicit within an accepted bid.)

About halfway through the project, the contractor may attempt to play his/her “ace in the hole” and use the unfinished work as bargaining leverage. Further, the contractor will be the first to recognize that some of the materials or items specified in the contract cannot be found in a timely fashion and may barrage the company with material-change and extra-work notices. Most of the change notices will be for material substitutions that increase the contractor’s margin or will be billed as the “extras.”

This hypothetical scenario is a classic example of how the traditional low-bid contracting system sets up adversarial relationships in the real world: Instead of working together to efficiently solve problems and complete the job, the contractor is constantly looking for loopholes and deviations from the contract. The client company, on the other hand, attempts to stay within the original contract to keep the price low—even when unanticipated problems that require deviations arise. Since few major projects rarely go exactly as planned, the odds are on the contractor’s side. The unyielding bid price keeps both parties hostage.

There is a better way: Pre-qualify a contractor, or group of contractors, any one of which will do a fine job at a reasonable cost. Don’t accept bids or proposals from contractors that chronically litigate for extra money over the bid price; shift workers and resources to other, more profitable projects; or disappear overnight when the cash flow goes into the red.

(Note: If a pre-qualified contractor is assured of being paid fairly, it will work with the client company to get the job done correctly. On the other hand, if a contractor worries about losing money, its main focus may be on bringing work to a quick end.)

Perform your due diligence
Working with a contractor is essentially taking on a temporary partner. Most people prefer trustworthy partners with whom they can bargain and problem-solve in good faith when emergent issues occur during a project—as they usually do. Finding a contractor who is a trustworthy partner solves most problems before they start.

Unfortunately, the procedures many companies and government agencies use in securing contractor services—such as some low-bid processes—don’t always ensure the selection of a trustworthy partner. In this regard, the best and perhaps only useful measure of a contractor’s trustworthiness is its past performance. Don’t be caught off guard. Make phone calls and/or write letters to obtain critical information before entering into a contract.

Following are a number of important points to consider while evaluating a new contractor. Check the contractor’s record with the Better Business Bureau and the state attorney general’s office. How a contracting company deals with disputes that arise with its own clients indicates how it will handle problems with your company. 

Check the contractor’s credit record. Does the company pay its bills on time? Can it meet payroll obligations while the job is in progress? Is it difficult for creditors or subcontractors to collect from the contractor? Are there liens for non-payment against the contractor’s business? Will the business fall apart before it finishes your work? A surprise you don’t want (or can’t afford) would be the discovery that your contractor has gone bankrupt halfway through your major project.

Check the contractor’s legal record. Has the business been involved in a string of lawsuits concerning work-scope disputes, higher-than-expected costs, missed milestones, etc.? There is nothing more fun than being tied up in a lawsuit where unfinished work is used as leverage. Low-bid contracts become expensive quickly when teams of $500-per-hour lawyers assemble to battle each other.

Finally, check the contractor’s incorporation papers in its state of record (information that’s usually available through the office of the Secretary of State). Find answers to the following questions.

1. Does the business have tangible assets and community connections? In other words, how fast could the contractor disappear to another state if cash-flow troubles occurred on your project?

2. Has the contractor only recently been incorporated?  

3. Have officers of the contractor’s business traded positions in a series of related past enterprises over a short period of time?

4. Is the contractor’s business connected to other companies (like holding companies, through which assets can be shifted around)?

Before the job begins, define clearly who is in charge of whom, and for what and when. Make sure that both management and employees of the company and management and employees of the contractor understand who is in charge (and, just as important, who is not). Then, stick to the agreement. Remember the sign that used to be standard issue in many auto-mechanic shops: “Labor $25/hr.—$50/hr. if you offer advice and help.” The same type of admonition could be applied to contract projects.

Much like defining lines of authority before the contract work begins, clarify whose rules will be followed and where. Make sure contractor employees and company employees all know the rules and stick to the agreement. This is especially important with respect to safety rules and those involving company security issues, as well as rules of conduct—as in where people are allowed to smoke or are prohibited from doing so, for example. Remember, however, that not all safety rules are the same. Disputes between a contractor and a company frequently arise because the contractor is adhering to one set of safety and work rules, while the company’s employees are required to adhere to another set. Sometimes, seemingly trivial things, like where smoking is or is not permitted, can touch off amazingly out-of-proportion disagreements.

Let contractors do their job
From experience, I have found that a contractor typically knows his business better than company personnel, and vice-versa. So, allow your contractors to do what they do best. Whenever possible, set goals and objectives in the RFP or request for bid rather than specify each and every detail and each schedule milestone. Let contractors apply their knowledge and experience about how the work will be done and what constitutes a reasonable schedule. Often, an arbitrary completion schedule detailed by the company will lead to unnecessary costs that could be avoided if the contractor were allowed more leeway.

As you would if you were dealing with a London cabbie, tell your contractor where you want to go and let it choose the best route based on distance, time of day, expected traffic and road conditions. (Note: London cabbies are granted licenses based upon their knowledge of the streets and byways of London and the most efficient ways of getting from one point to another. The test must be darn hard. Most applicants reportedly fail it twelve times or more before they are granted a license.) MT&AP

Randy Noon is a Root Cause Team Leader at Nebraska’s Cooper Nuclear Station. A noted author and frequent contributor to MT, he has been investigating failures for more three decades. Email: rknoon@nppd.com.