We have been hearing from port districts about the challenging public works bidding environment. Contractors are dealing with supply chain issues and material price fluctuations. These uncertainties can be reflected in fewer bidders for a project and/or higher bid prices. This month, Seth Woolson, the head of our construction law practice group, and I explore the causes and some possible solutions.

Supply chain issues have resulted in unexpected delays in delivery of key components needed to timely complete a project. Public work projects typically include a completion date deadline and the possibility of some form of per diem charge levied against a contractor for late completion. Moreover, contractors know that the longer a project takes the more expensive it becomes to complete. When projects are delayed, contractors incur overhead costs such as insurance, the cost of the job trailer, idle equipment at the job site and site utilities. 

Price fluctuations for materials and equipment can also create unexpected costs for contractors.  One port project manager noted that recently, in the spam of several months, the cost of a sheet of plywood went from $40 to over $100 and back to about $60--for larger long-term projects the effects of inflation could add additional uncertainty.

Public works contracts, with limited exception, are fixed price contracts.  For a fixed price, the contractor assumes the risk of completing the project on time and for payment of no more than the bid price.  Contractors must “price in” a risk premium for each public work bid. Supply chain issues and price fluctuations increase the amount of the risk premium. When the risk becomes too large, contractors will decline to bid on projects. Port districts are seeing this increased risk in higher bid prices or a smaller number of contractors willing to bid on a project.

Public works project administrators know that working with the contracting community to mitigate risk results in more cost-effective projects. Here are some concepts that ports could consider employing to mitigate the job risk.  We say “consider” because each project is different.

·       Shorten the bid to contract time.  Most contractors get quotes from subcontractors and suppliers to help generate the final bid number.  Once the project is awarded and the construction contract is signed, the contractor signs contracts with subcontractors and suppliers.  If the time from bid opening to contract award is shortened, then the contractor will have less risk of a change in prices.  The contractor can “lock-in” the quoted prices. For example, one port contracting official told me that they have worked to shorten their bid to contract time to 10 days by scheduling their bid openings days before the next commission meeting where the contract is awarded. The instructions to bidders can explain the timeline from bid opening to executed contract.

·       Include the port’s construction contract in the bid documents.  The best practice is to include the port’s construction contract for the project in the bid documents, which helps remove job risk. First, there is no need to negotiate the contract if it is included in the bid documents, which helps shorten the time from bid award to contract execution as discussed above. Second, there is less risk to contractors when they understand all of the terms and conditions of performance before submitting their bid.

·       Anticipate project delays when developing the schedule.  Conflicts between ports and contractors arise when a project completion is delayed, and the port was counting on getting the project online by a particular date.  For example, a port building that has been promised to a port tenant on a date certain.  Ports may want to consider adding in some time for unanticipated delays into the schedule.  The time in the construction contract can be extended and the port may keep some additional time on its internal schedule in case of delays.  Using the example of a port building that has been promised to a port tenant, make sure the promise date is realistic.

·       Allow for supply chain delays.  The general conditions in a construction contract could be modified to allow for extra time for documented supply chain delays.  These need to be carefully drafted to avoid abuse by the contractor.

·       Provide a secure storage are for contractor materials and components.  Consider a designated warehouse or storage yard where a contractor can store material (for example plywood sheets) or components (for example HVAC systems) for the project.  This may allow a contractor to order materials and components for immediate delivery avoiding or mitigating supply chain delays.

·       Port purchase of critical components.  Generally, so long as the component is “off-the shelf” and not purpose built for the project, ports are permitted to buy components on the open market and have it delivered to the port.  This may shorten critical supply chain issues.  The bid documents could require the contractor to install the port purchased components as part of the public work project.  This has been done in the past for long lead time items such as steel piling for pier rehabilitation projects.

·       Consider component flexibility.  Keep in mind that public work specifications are very detailed and include such things as specific colors and specific component manufactures.  One port project manager told us that they have become more flexible with allowing substitutions of materials and components to keep the projects on schedule. For example, can the port accept a different color of more readily available counter tops?  

·       Utilize the small work roster or direct award procedure.  As an alternative to a full-blown bid process, RCW 53.08.120 authorizes ports to utilize the procedure set forth in RCW 39.04.155(2) for projects where the project estimated cost is less than $300,000 or the procedure set forth in RCW 39.04.155(3) for projects where estimated cost is less than $50,000. Ports are also permitted to directly award a public work to a contractor, without any public bidding process, when the estimated cost of the public work does not exceed $40,000, as set forth in RCW 53.08.120(3). The use of a small works roster or direct award procedure may shorten the time from “bid to contract.”

·       Create a contractual allowance for increase material costs.  The construction contract could include a provision to allow for a documented price increase. This clause would have to be carefully drafted requiring a documented price increase and payment for only the increase and not profit and overhead. Port districts utilizing this approach should also consider a cap on the increase available to the contractor under this provision for cost control purposes.

·       Have port employees build the project.  Port districts (unlike many other municipal governments) are allowed to build their own projects. For example, one port ordered a steel hangar building kit. The concrete pad and electrical work were each bid out, but the port employees did the actual building assembly.

            The overriding goal here is to look for ways to reduce contractor risk caused by supply chain issues and price fluctuations with the goal of obtaining lower priced bids from more contractors.

Thanks to Seth Woolson for his expertise on this issue and, as always, please contact your port counsel with any questions regarding this topic. And, if you have a particular question for a Knowing the Waters please email me at fchmelik@chmelik.com.