What strings come with stimulus projects?

I haven't talked to many contractors who are seeing a big resurgence in private development yet, but I do know some who have survived because of an American Recovery and Rehabilitation Act (Stimulus) funded project. Small towns that needed but couldn't afford a sewer upgrade or road extension took advantage of federal funds to quickly get a project going. But along with the Stimulus funds are Stimulus rules, and more of them than you might expect. So, you have to decide: is it worth it?

In June I wrote about some of the laws that come into play when a project is considered "federal" such as The Truth in Negotiations and False Claims Acts. Many contractors don't appreciate that, beyond these fairly and intentionally scary laws, Stimulus projects have many smaller, more subtle extra requirements that can make projects a lot less profitable if contractors hadn't anticipated them and included the extra effort in their pricing.

Perhaps the biggest problem area of Stimulus work for contractors who haven't done public work before is the requirement to pay "prevailing wages." The intent is to "level the playing field" between union and open shop contractors, generally by requiring the equivalent of union wages, which can be significantly higher than standard open-shop wages in many communities.

Not only are wages higher, but there are a lot of rules and paperwork to prove that you are in compliance with the rules. Contractors have to submit completed certified payrolls not only for all of their own employees, but for all subcontractor employees as well. These are easy forms to make mistakes on, and you can be sure that a government employee is being paid to read every one of them and to look for errors. If the subcontractor doesn't submit them, or makes an error in how it classified a worker (classified as a laborer, for example, while the auditor saw the person working with tools), the contractor gets hit with a significant penalty. A contractor can be hit with an audit long after the project is over.

Beyond this risk, there are internal "political" problems created where prevailing wages are paid — problems among those employees who get to work on the higher-paying project and those who do not. If a company gives its employees benefits, such as health insurance or retirement plan contributions, it may be able to count these payments towards the prevailing wages, but again there are limits and rules provided by law that have to be researched in advance. And what if the employee is only working on the Stimulus project part of the time — how are the benefits accounted for then? There is a lot of paperwork to be done. Is it worth it?

Stimulus projects require the contractors to comply with the Buy America Act — although not generally to the same extent as purely federal projects. While on a typical federal project, the Federal Acquisition Regulation (FAR) requires component parts to be domestic as well as the assembly, most Stimulus-funded projects only have to show that the assembly is domestic. The burden is on the contractor to be able to prove the origin of all the materials and equipment that go into the job.

Not all Stimulus projects have minority business enterprises (MBE) and woman business enterprises (WBE) requirements, but they all have serious Equal Opportunity clauses, and you can expect allegations of violations to be thoroughly investigated.

None of this is to say that you shouldn't do work that has federal strings attached, but if you take it on, contractors need to appreciate what they are getting themselves into. If they typically do federal work, they should have no problem (true federal projects have far more regulations and restrictions than Stimulus work). But if you are not used to doing public work, remember that the burden is on you to know all the laws and make sure that you are in compliance.

You cannot take the word of your local customer, who may not know much more than you do about what it takes to comply with federal laws. A director of public works who has previously only spent town funds may not have any idea of how these federal funds have to be accounted for. There are stringent record-keeping requirements (among other reasons, to allow the administration to back up its claims of how many people it put back to work). While these requirements are imposed on the local grantee agency, the agency will pass the bulk of the work on to the contractors. So, expect extra office staff time (and wages) in preparing your estimate, and remember that getting it wrong carries penalties – also passed on to the contractor.

You all know that there is risk all around construction each and every day. The good news here is that this is a risk that you can control by educating yourself and being prepared.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].