Stimulus Funds Include All Federal Contracting Rules

As the stimulus rules are issued by the various agencies dispensing funds and grants, it is very clear that all federal contracting rules apply to all stimulus funds, no matter who actually does the contracting.

For A/E contracts this includes:

Project selection must be by Brooks Act (QBS) procedures

Contracts must be an acceptable federal contract type, and lump sum contracts are the preferred form of agreement

Costs must be estimated and costs accumulated in accordance with Federal Acquisition Regulations (FAR) cost principals

Proposals and contracts are subject to audit

For some local government or agencies, these requirements may not be in synch with their normal A/E contracting policies. Not acceptable contracting includes bidding for A/E contracts and percentage of construction cost contracts.

Agencies the do not adhere to the applicable federal rules risk the revocation of grant funds, which could place agencies at risk for reimbursing stimulus funds.

One message is becoming exceedingly clear as the rules are issued. Not only are all rules applicable to stimulus funds, even past exemptions are prohibited for these funds. Added rules have been enacted on reporting spending progress as well so the contracts must clearly adhere to the stimulus rules.

FAA Issues Stimulus Grant Guidelines

On March 3rd the FAA issued guidance to recipients of grants from the Stimulus bill.

This guidance instructs airports to use all existing contracting regulations for any funds received from the Stimulus bill.

For A/E services, this means projects selections must be by QBS (Brooks Act) procedures.

Contracts are subject to the Federal Acquisition Regulations (FAR) so costs and fees must meet these regulations.

Of particular interest is that airports must not “mix” stimulus funds with other grant funds. This means that stimulus funds may not be used to modify existing contracts funded from other grant sources. Since the local matching funds are 0% for, this should mean all stimulus funs are stand-alone projects, not extensions of other current projects.

Auditors May be Everywhere!

For the projects that will be performed using Stimulus Act funds, there is extra access for auditors on Stimulus funding.

1. The Government Accounting Office (GAO) is granted the right to audit all stimulus funded contracts.

2. The Inspector General (IG) of each agency can audit any contract using stimulus funds.

3. There is going to be a new Accountability and Transparency Board (to be appointed) that will also have the right to audit all stimulus fund contracts

The audit rights of each of these groups have also been expanded. Each of these audit groups will now have the right to interview any officer or employee of the contracted firm.

Another item of note is that these offices may accept information from the public and must investigate the information if they believe it has credibility.

Clearly, stimulus funds are going to be subject to a very high degree of scrutiny.

Ethics Program Requirements

The new more formal requirements for government contractors to have in place ethics programs require firms to have more extensive documentation on business ethics.

Every contractor with a “covered contract” (defined as a contract of over $5 million and lasting more than 120 days) must have:

1. A written business ethics plan.

2. A written process for employees to report possible ethics violations by the business or its subcontractors (supported by notification of employees of how this works)

3. Processes in place to show that all employees have been instructed in how the plan works

4. Principal employees must have sufficient background checks to determine they do not have past ethics violations that would bar them from government contracts. While Principals is not defined, it appears to mean persons with contract responsibility, such as the PM or PIC.

5. That processes are in place to verify that proposed subcontractors meet these ethics requirements

These rules are contained at FAR 52.203-13

Since most A/E contracts will require performance over a longer than 120 period, it is likely that if you have FAR covered contracts, you will need to meet these standards.
Of particular concern is the requirement to verify that subs are in compliance, since this may affect how you select teams even before you are selected for a project.

Contracting with Stimulus Funds

The federal government has promised “unprecedented” oversight to reduce “waste and fraud” in the use of stimulus funds.

OMB has the first guidance to recipients of stimulus funds on the requirements for this spending (OMB Guidance February 18,2009 – Initial Implementing Guidance for the American Recovery and Investment Act of 2009).

The initial guidance (they anticipate a series of directives) offers primary guidance to agencies in documenting on they use funds.

Primary recipients of funds are defined as Federal agencies and the first level of recipients from the federal level (with an exception for tribal entities). This first level could be a state, a local government or a contractor. Levels below that first tier are not subject to the same reporting rules. Thus state grants to cities, or state or local contracts with contractors would not be subject to the tier 1 reporting rules.

Two key points are evident in the spending requirements:

First, contracts are expected to be lump sum contracts in accordance with FAR Part 16. Other types of federal contracts are permissible, but only if the decision to use other than a fixed price contract is approved by the granting authority.

This means percentage of construction cost, cost plus a percentage of cost and some other contract types are prohibited in the use of stimulus funds. The risk to grant recipients is that the grant can be rescinded if an improper contract type is used.

The other key requirement is reporting of jobs created or sustained in the use of funds. This will require firms using stimulus funds to report somewhat different information, equivalent to the FTE expectations for a contract.

Agencies should start adding this requirement immediately to contract proposals in order to meet OMB and stimulus legislative requirements.

Notes on Stimulus Funding

The recently enacted Stimulus bill, while not immediately helping design firms does offer some hope for increasing project opportunities going forward.

The initial infrastructure spending is going to “shovel-ready” projects where design, permitting and all right of way and utility issues are finished. These projects are ready for construction bidding, so there will be no design work beyond any construction period services required.

However, this does clear out a backlog of projects on infrastructure work that had been started, but was stopped as tax revenues declined going into the recession. This clears a backlog of work that was blocking new starts. By clearing this backlog, agencies should be able to get started with new projects sooner.

Will the clearing of unfinished projects help? It is really too early to tell. Unknown at this time are how much of the stimulus money will be used to clear this backlog, and how current tax receipts will translate into new funding for agencies.

Current evidence is mixed at best, with some agencies preparing to initiate new projects, and other agencies are still facing cuts in future funding. This is an agency by agency situation and likely will not be resolved until the first round of stimulus money and the current governmental budgeting cycle is much further along.

Our advice, stay in touch regularly with all of you agency clients. Don’t wait for the RFP development process (after they receive their budgets) as that may be too late to be in line for new projects.

3% Tax Witholding on A/E Fees

3% Withholding on Government contracts

The Stimulus Bill has extended the requirement for governmental agencies to withhold 3% of the payments to contractors has been pushed back to 2012.

This “tax compliance” measure may still undergo some changes, delays (or even repeal) but here is what is in the draft regulations currently contain

All governmental entities (which is basically every government except tribal governments) that has more than $100 million in qualified purchases must implement the withholding. Qualifying payments are virtually everything a government buys except for their own payroll and benefits and real property.

All payments in excess of $10,000 must be withheld on. Note that payments are defined as the contact, and not individual payments. A $20,000 contract that is invoiced in 4 monthly invoices of $5,000 would still be a covered purchase, subject to the withholding even though non of the individual payments were in excess of $10,000.

The 3% will be applied at the time of payment, as of the date of payment.

The governmental entity will withhold the 3% unless the receiving party can demonstrate it is a qualified non-profit entity for tax purposes.

The government will report the amounts withheld via an annual 1099 form to persons or firms that the government has applied the 3% withholding to.

Contracts in force prior to the implementation date are not subject to the withholding

Of special interest to A/E firms, this 3% withholding can only be applied to federal income tax payments, and can not be applied to other federal liabilities, such as payroll taxes.

This amount is to be applied to the prime contractor and can not be passed on to subconsultants. Thus if you have a state law, or contractual requirement to “pay when paid, you will need to remit 100% of the money due to the sub (thus creating a gap in your firm’s cash flow)

As a practical matter, this means almost every substantial government entity will have to implement this withholding on A/E contracts. Given the current cost of construction, all it will take is a single capital project to throw even medium size agencies into the high dollar value needed to qualify for this withholding plan. Since virtually all of the government spending except payroll and benefits counts towards the $100 million threshold, we estimate this any agency with a total annual budget in excess of $250 million is likely to qualify.

There are still comments being gathered on this, so we can expect further changes or delays, but you should be aware of this potential impact on your future cash flow.