CONTRACTING FOR CAPITAL PROJECTS
this project;
• current financial capability;
• safety ratings on past projects; and
• experienced project team, etc.
Some owners (particularly in the design-build arena) have
held open competitions to prequalify potential contractors
followed by preliminary design competitions among pre-
qualified contractors (with limited remuneration for those
invited to the design competition).
DECISION TO BID
Perhaps one of the toughest decisions in contracting is the
bid/no bid decision that every contractor must make once an
opportunity to bid on a project is identified. The contractor
needs to carefully examine each potential bidding opportu-
nity. Some of the factors the contractor must consider include
the following:
• Expertise—When considering submitting a bid, a con-
tractor has to determine whether its organization has the
expertise to perform the work. A review of past projects
will determine whether the contractor has done anything
like this project in the past. If not, some thought should
be given to whether they are truly capable of performing
the work. In the alternative, a contractor might consider
teaming with another through a joint venture, in order to
assure sufficient expertise to perform the work and to
spread the risk of the project.
• Financial Capability—A contractor considering a bid
must look at insurance and bonding requirements, pay-
ment provisions, and potential project cash flow scenarios
to determine if they have the necessary financial capability
to perform the work and successfully complete the project.
• Bonding Capacity—Many capital projects require both
performance and payment bonds to protect the interests
of the owner in the event of contractor failure to com-
plete the work or failure to pay subcontractors and ven-
dors. In such cases, part of the contractor’s decision to
bid involves their bonding capacity. If a contractor has a
bonding capacity of $100 million and already has $85
million in active projects underway, the contractor may
not be able to bid a new $50 million capital project unless
they can successfully convince their surety (bonding
company) to increase their bonding coverage limits.
• Personnel—A contractor considering as bid must look to
its own staffing to determine whether it has sufficient
experienced personnel to perform the work during the
period of anticipated performance.
• Equipment—If a project requires specialized equipment
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in order to perform the work, a potential bidder deter-
mine whether ther have or can acquire the equipment
through purchase, lease, or rental arrangements.
• Specialized Knowledge—Along with all of the above, a
potential bidder should review pre-bid information to
determine whether their organization has the requisite
skills and knowledge to successfully perform the work
under the known terms and conditions.
• Risk Analysis—A contractor considering bidding on a
potential project should review the general and supple-
mental or special provisions of the contract to determine
how project risk is allocated under the contract. For
example, if there is a no damage for delay clause in the
contract, or if the contract has no differing site condition
clause, then the contractor’s risk if increased substantial-
ly in the event of delay or it encounters materially differ-
ent conditions. This being the case, a potential bidder
needs to determine if their company can survive if such
situations occur during performance of the work.
• Workload and Other Potential Projects—Finally, a con-
tractor considering bidding on a project needs to think
about their current workload to see how that may impact
equipment, key personnel, logistics, bonding and finan-
cial capabilities. Further, a contractor needs to consider
what other projects are likely to be bid in the same time-
frame that they may want to bid on. A potential problem
faced by many contractors is multiple projects being bid
at the same time. If a contractor bids on three projects
simultaneously, serious consideration must be given to
what happens if they are the successful bidder on all
three projects. If this event occurs, can they perform?
KEY CONTRACT CLAUSES
In the administration of contracts, all clauses in the contact
are important and must be adhered to to avoid breach of con-
tract situations. However, some clauses are more important
than others. Among the more important clauses, in alphabet-
ical order, are the following:
• Audit—This clause typically outlines an owner’s right to
perform reviews (audits) of contractor costs or records.
Such clauses ordinarily outline what costs or records are
subject to audit, when, and under what circumstances.
• Changes—This clause is critical. This is the clause that
allows the owner to direct changes to the work, including
plans, specifications, time of performance, means, and
methods. Absent a change clause, an owner is precluded
from making changes to the work. Of particular impor-
tance in this clause is whether the clause allows the owner
to unilaterally direct changes to the work (in which case,
if the contractor refuses to comply with the directive, they