By Bruce Jervis
Many construction contracts, particularly for public works, include a limitation on subcontracting, effectively requiring the prime contractor to perform a certain percentage of the value of the contract with its own forces. This encourages hands-on management of the project by the prime. It also discourages the “brokering” of the work, bidding by entities that bring capital and bonding capacity, but little else.
On a recent federal project, a clause limited subcontracting to 50% of the value of the contract work. The low bidder was challenged on its subcontracting plan. The bidder responded it would meet the limitation by directly hiring personnel from one of its key subcontractors. Those personnel would be responsible for specific on-site tasks.
The Court of Federal Claims said there was no indication this was a sham arrangement. The subcontractor’s personnel would be supervised and compensated by the prime contractor. Compliance with a limitation on subcontracting clause is a matter of contract administration. That is, violation is a breach that can subject the contractor to a default termination. Award of the contract was proper.
Is this a wise ruling? Aren’t subcontracting limitations subject to enough gaming without allowing subcontractor employees to become direct hires of the prime contractor? Are these clauses even effective? In practice, there seems to be extensive “brokering” of public work. Your comments are welcomed.