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[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]

   ALL WORK AND NO PAY: CHANGE ORDERS DELAYED FOR SMALL CONSTRUCTION 
                              CONTRACTORS

=======================================================================

                                 HEARING

                               BEFORE THE

    SUBCOMMITTEES ON CONTRACTING AND WORKFORCE AND INVESTIGATIONS, 
                       OVERSIGHT, AND REGULATIONS

                                 OF THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                              MAY 25, 2017

                               __________

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                               
                               

            Small Business Committee Document Number 115-022
              Available via the GPO Website: www.fdsys.gov
                   
                   
                   
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
25-498                     WASHINGTON : 2017                     
          
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                      STEVE CHABOT, Ohio, Chairman
                            STEVE KING, Iowa
                      BLAINE LUETKEMEYER, Missouri
                          DAVE BRAT, Virginia
             AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
                        STEVE KNIGHT, California
                        TRENT KELLY, Mississippi
                             ROD BLUM, Iowa
                         JAMES COMER, Kentucky
                 JENNIFFER GONZALEZ-COLON, Puerto Rico
                          DON BACON, Nebraska
                    BRIAN FITZPATRICK, Pennsylvania
                         ROGER MARSHALL, Kansas
                           RON ESTES, Kansas
               NYDIA VELAZQUEZ, New York, Ranking Member
                       DWIGHT EVANS, Pennsylvania
                       STEPHANIE MURPHY, Florida
                        AL LAWSON, JR., Florida
                         YVETTE CLARK, New York
                          JUDY CHU, California
                       ALMA ADAMS, North Carolina
                      ADRIANO ESPAILLAT, New York
                        BRAD SCHNEIDER, Illinois
                                 VACANT

               Kevin Fitzpatrick, Majority Staff Director
      Jan Oliver, Majority Deputy Staff Director and Chief Counsel
                     Adam Minehardt, Staff Director
                           
                           
                           C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Steve Knight................................................     1
Hon. Stephanie Murphy............................................     2
Hon. Trent Kelly.................................................     3
Hon. Alma Adams..................................................     4

                               WITNESSES

Mr. Edward DeLisle, Co-Chair, Federal Contracting Group, Cohen 
  Seglias Pallas Greenhall & Furman PC, Philadelphia, PA.........     7
Mr. Andy Brown, Vice President, Glen/Mar Construction, Clackamas, 
  OR, testifying on behalf of the Associated General Contractors 
  of America.....................................................     8
Mr. Greg Long, CEO, Long Electric Company, Napa, CA, testifying 
  on behalf of the National Electrical Contractors Association...    10
Ms. Colette Nelson, Chief Advocacy Officer, American 
  Subcontractors Association, Inc., Alexandria, VA, testifying on 
  behalf of the Construction Procurement Coalition...............    12

                                APPENDIX

Prepared Statements:
    Mr. Edward DeLisle, Co-Chair, Federal Contracting Group, 
      Cohen Seglias Pallas Greenhall & Furman PC, Philadelphia, 
      PA.........................................................    25
    Mr. Andy Brown, Vice President, Glen/Mar Construction, 
      Clackamas, OR, testifying on behalf of the Associated 
      General Contractors of America.............................    32
    Mr. Greg Long, CEO, Long Electric Company, Napa, CA, 
      testifying on behalf of the National Electrical Contractors 
      Association................................................    37
    Ms. Colette Nelson, Chief Advocacy Officer, American 
      Subcontractors Association, Inc., Alexandria, VA, 
      testifying on behalf of the Construction Procurement 
      Coalition..................................................    44
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Statement for the Record from Hon. Steve King................    52

 
   ALL WORK AND NO PAY: CHANGE ORDERS DELAYED FOR SMALL CONSTRUCTION 
                              CONTRACTORS

                              ----------                              

                         THURSDAY, MAY 25, 2017

                  House of Representatives,
               Committee on Small Business,
          Subcommittee on Contracting and Workforce
                                     joint with the
    Subcommittee on Investigations, Oversight, and 
                                        Regulations
                                                    Washington, DC.
    The Subcommittees met, pursuant to call, at 10:00 a.m., in 
Room 2360, Rayburn House Office Building, Hon. Steve Knight 
[chairman of the Subcommittee on Contracting and Workforce] 
presiding.
    Present: Representatives Chabot, King, Knight, Kelly, Blum, 
Bacon, Fitzpatrick, Marshall, Estes, Evans, Murphy, Lawson, 
Clarke, and Adams.
    Chairman KNIGHT. Good morning. This hearing will come to 
order. Thank you all for coming.
    Before we begin today's joint hearing of the Subcommittee 
on Contracting and Work Force and the Subcommittee on 
Investigations, Oversight, and Regulations, I would like to 
thank our witnesses for taking the time to share their insights 
with us today and I look forward to their testimony.
    In 2016, our Federal Government spent $90 billion on 
construction, an industry that is vital to rebuilding our 
Nation's crumbling and aging infrastructure. Our agencies must 
have agile, transparent, and fair processes in place in order 
to ensure high quality structures are built at a reasonable 
cost. Constriction is one particular industry where changes are 
particularly prevalent and flexibility is crucial. Agencies 
should be capable of swiftly adapting to changing conditions 
without engaging in a completely new and lengthy acquisition 
process. Issuing contract modifications through the use of 
formally authorized and document change is one way to 
accomplish this task.
    In contracting, a certain degree of reasonable delay is 
expected when changes are made. However, this becomes 
inexcusable when Federal agencies are unwilling to formally 
execute change orders and fail to pay for work that has been 
completed for months or even years. During this waiting period, 
small contractors are often left to finance new work out of 
pocket. Some of these expenses include paying employees' 
salaries, taxes, building materials, running expensive 
machinery and other costs a small construction firm must 
assume. Unfortunately, this creates untenable situations and 
can result in financial distress, and in some cases, 
bankruptcy.
    Another common problem occurs. Contractors are directed to 
perform change orders, work without following proper notice and 
authorization procedures. If change order work is directed 
without following protocol, contractors may not get paid even 
for work they complete. With the added pressures of staying on 
schedule and not wanting to poison the relationship between the 
parties, small contractors must choose between working without 
a guarantee of payment or risk contract termination for 
nonperformance. Faced with this impossible decision, small 
contractors often decided to go ahead and do the work.
    This issue is not unique to small firms, however. Large 
firms have the flexibility and capital to bear extended periods 
of time waiting for change order payments. In contrast, smaller 
operations require a stable and predictable cash flow to 
replenish their limited working capital.
    Many small contractors rely on bank loans and lines of 
credit to bridge the gap, raising the risk of bad credit or 
worse. When resources are tied up on unprofitable projects, 
small contractors are unable to seek new work. When multiple 
change orders are delayed, the impact is further compounded. By 
engaging in these poor change order practices, agencies end up 
struggling with small construction contractors. We need to make 
it equitable for small businesses to work with the government 
and reduce these barriers that hurt or dissuade small 
businesses from working with government contracts.
    I hope through this testimony of our witnesses we can learn 
more about this issue and discover ways to prevent this 
unfortunate circumstance. I do look forward to the discussion 
today.
    I would now like to yield time to the ranking member, Ms. 
Murphy, for her statement.
    Ms. MURPHY. Thank you, Mr. Chairman.
    For several decades, the Federal Government has relied on 
the private construction industry to build and repair 
infrastructure for its day-to-day operations. Accordingly, a 
thriving small business industrial base has become essential to 
the U.S. economy and to our national security. However, it is 
well documented that government contracts are less than perfect 
when awarded. As we will hear today, more needs to be done to 
reduce the burdens imposed on small construction firms due to 
administrative delays.
    During performance of a contract, many changes may be 
required to fix inaccurate specifications, react to new 
circumstances, or modify the work to better meet agency needs. 
A change order is a unilateral, written order issued by a 
contracting officer directing the contractor to make a contract 
modification. Currently, such directives can be made with or 
without the contractor's consent.
    The ability of Federal agencies to make such unilateral 
decisions has led to persistent problems in which agencies fail 
to follow the proper procedures to issue change orders. 
Agencies routinely delay the approval process for change orders 
or bundle them to ease the administrative burden on contracting 
officers.
    This Committee is concerned that such actions have been 
taken without sufficient consideration of the consequences for 
small construction businesses. Agency delays can create 
significant financial burdens on contractors. Due to the nature 
of construction projects, processing a change order can slow 
down other parts of the project, jeopardizing the ability of 
contractors to meet their obligations. Firms are often left 
with little choice but to comply with changes without receiving 
formal approval of the change order or a guarantee that they 
will receive payment.
    This has created tremendous uncertainty for small 
contractors that do not have the overhead margins of larger 
primes and cannot afford to go unpaid for work performed. 
Without prompt payment, small firms can struggle to meet their 
payroll, let alone pay their bills. In some of the more 
egregious cases, businesses have gone over a year without 
payment for work completed.
    Although equitable adjustment in the contract price enables 
a contractor to receive compensation for additional performance 
costs incurred by a contract modification, this option falls 
short of solving the problem. Requests for equitable 
adjustments (REAs) can allow small business construction 
contractors to afford continuing performance, but any delay 
means the contractor must assume the cost and hope for payment 
after completion of the contract.
    Numerous policies and protections have been enacted to 
incentivize small businesses to continue participating in 
government contracting, but more are necessary to manage the 
change order process. Small businesses have approached this 
Committee with complaints about the effect of bundling or 
consolidation of change orders on their bottom line. I hope 
today's hearing will shed light on these challenges, and I look 
forward to hearing this panel's feedback on legislation that 
Congressman Fitzpatrick, Chairman Knight, and I recently 
introduced to address the issue.
    Whether it comes to change order delays, reductions in 
Federal procurement staff, or an increase in multiple award 
contracts, there will always be new issues for small businesses 
to overcome. We must ensure that the procurement laws evolve 
with this changing landscape. Doing so is essential not only 
for small firms and our Nation's industrial base, but for the 
overall health of our economy.
    I yield back the balance of my time.
    Chairman KNIGHT. Thank you very much. And this is a joint 
hearing, so we have the Chairman from the Subcommittee on 
Investigations, Oversight, and Regulations with us, Chairman 
Kelly, to have his opening statement.
    Chairman KELLY. Thank you, Chairman Knight.
    You know, in the Small Business Committee, I thank our 
Ranking Member Murphy and Ranking Member Adams. We unite in the 
Small Business Committee regardless of party, and we are all 
great advocates for the small business communities that are so 
important to our economy.
    I would also like to thank our witnesses for your 
willingness to testify on the serious problems endangering our 
small businesses' construction contractors caused by the 
actions and often the inactions of Federal agencies.
    As the chairman mentioned in his opening statement, small 
contractors often find themselves at the mercy of Federal 
agencies while they wait for payment on work that they 
completed months ago. Unfortunately, many do not know when that 
payment might be made or if the payment will be made at all. 
The danger of delayed change orders to small construction 
contractors was revealed by the Government Accountability 
Office's study of the Debarment of Veterans Affairs 
construction process in 2013. The GAO found change orders took 
an average of 2 to 3 months to complete from start to finish, 
and sometimes as long as 6 months. In one instance, the VA 
halted change order processing all together for one year 
leaving small contractors without payment or resolution. In 
2013, $41 million in payments to subcontractors from the VA had 
not been made, leaving 33 businesses in financial distress. 
Some contractors were waiting for payment for work they 
completed over 12 months ago and a few filed for bankruptcy. 
Because of these issues, small businesses would rather work in 
the private sector than bid on financially risky and 
potentially unprofitable government projects.
    The agencies also suffer from their own poor practices. 
Projects become less appealing to contractors, which reduces 
competition. To offset this risk of delayed payment or 
nonpayment, small contractors will inflate the prices on bids. 
This forces the agency to accept much higher prices than 
budgeted. Simply said, change order delays can stretch into 
years and cost overruns can reach upwards of tens of millions 
of dollars.
    Furthermore, the Committee is concerned that agencies may 
be engaging in unfair negotiation strategies with construction 
contractors. One such tactic involved delaying multiple change 
order payments until the end of a project to try to leverage 
for a better price.
    Agencies may also be forcing small businesses to rely on 
claims process to litigate their dispute. Small businesses do 
not have the time or resources to litigate claims and often 
settle for lesser amounts than owed, rather than face thousands 
of dollars in legal fees for the potential benefit of being 
paid pennies on the dollar.
    I look forward to hearing more from our distinguished panel 
about whether agencies are, in fact, engaging in this unfair 
treatment and what protective measures might be available.
    Mr. Chairman, I yield back the balance of my time.
    Chairman KNIGHT. Thank you very much.
    And we would like to hear from the ranking member, Ms. 
Adams, for her comments.
    Ms. ADAMS. Thank you, Mr. Chairman. Thank you for holding 
this valuable hearing, and I thank all of the individuals who 
are here to testify today.
    Today's discussion continues our ongoing work to help more 
small businesses compete successfully in the Federal 
Marketplace. As this Committee seeks ways to foster small 
business growth and expansion, we must always carefully 
consider what's being done to maximize entrepreneurs' 
participation, including their experience while performing 
government contracts.
    One longstanding barrier to small business participation in 
the Federal Marketplace has been the practice of bundling 
contract modifications which delays the payments of contractors 
while increasing the risk they take on. When Federal agencies 
group small modification actions together, they reduce the 
negotiating power of the contract. And while we have discussed 
formal contract changes, informal contract change are not 
issued in writing and often result from government conduct 
unforseeing impediments to performance or other factors. Much 
of the time they are disputed, leaving the business with costly 
litigations. These costs hinder the small contractors' ability 
to perform other contracts and cut into the profits of the 
firm.
    Considering the prevalence of this problem, it is vital 
that we ensure the SBA is doing everything possible to 
intervene in unnecessary bundling by giving them more power to 
do so.
    This raises a number of important oversight questions, 
including whether the SBA has sufficient staff to monitor 
contract actions or performance and is truly privy to agency 
actions that negatively impact small businesses generally. 
Because of the nature of the work, construction contracts most 
often have informal changes. This leads to delays associated 
with recognizing them as official and receiving compensation 
for them. As other members have mentioned, this delay greatly 
affects the capital available to small construction contractors 
to cover the cost of suppliers or the proper bonding.
    Often small businesses do not have the capital to support 
large bonds that they need to participate in the Federal 
Marketplace. This difficulty is exacerbated when bundled change 
orders increases the original contract price, thereby requiring 
a larger bond. Given the delays associated with bundling 
modifications that potential increase in bonding could cause a 
small contractor to not be able to complete performance on the 
contract. And in other cases, small contractors avoid bidding 
entirely which diminishes the pool of qualified participants. 
This Committee must examine how well the SBA rulemaking process 
functions to boost small businesses' ability to compete for 
Federal contracts and protect them when completing performance.
    Mr. Chairman, this Committee has a long track record of 
working in a bipartisan manner, particularly when it comes to 
procurement issues. It is my hope that we can continue that 
tradition to further small businesses' role as successful 
Federal contractors. It is all the more critical that this 
Committee and the SBA work to remove barriers that prevent 
small firms from successfully performing Federal work and 
getting paid for all of the work done.
    So I look forward to hearing the witnesses' perspectives 
today on how we can best accomplish the task, and I yield back 
the balance of my time.
    Chairman KNIGHT. Thank you very much. And I firmly agree 
that this is one of those Committees that is a bipartisan 
effort to try and make it so that we get our small businesses 
to work, our small businesses can create opportunities, and we 
can have a robust economy.
    So I am going to go through the rules here real quick. If 
Committee members have an opening statement prepared, I ask 
that they submit it for the record.
    The lights in front are you are kind of our stoplights. So 
as it goes green, you have 4 minutes to give your presentation. 
When it goes yellow, you have a minute to kind of wrap it up. 
And when it is red, you are wrapped up. So we are pretty easy 
around here, but if you can kind of follow that, that would 
help everyone. And we stick to the 5 minutes up here, too, with 
our questions.
    So I would like to introduce our witnesses. Our first 
witness is Mr. Edward DeLisle. He serves as the co-chair of the 
Federal Contracting Group at the Law Firm of Cohen Seglias----
    Mr. DELISLE. Seglias.
    Chairman KNIGHT. Pallas.
    Mr. DELISLE. Pallas.
    Chairman KNIGHT. Greenhall and Furman, and is shareholder 
and member of the firm's board of directors. His practice 
focuses on Federal contracting, construction law, construction 
litigation, and he also counsels clients in all aspects of 
small business procurement. Mr. DeLisle has appeared before 
this Committee in the past, testifying on challenges facing 
small business construction contractors. And we thank him and 
welcome him back today.
    Our second witness is Mr. Michael Andy Brown. Mr. Brown is 
the vice president of Glen/Mar Construction, Inc., a woman-
owned and service-disabled veteran-owned small business 
construction firm. Thank you very much. He has over 18 years of 
experience in the commercial and industrial at-risk 
construction market and in government contracting. Glen/Mar 
holds construction contracts with agencies, including the 
Department of Veterans Affairs, Army Corps of Engineers, and 
the General Services Administration. Mr. Brown will be 
testifying today in his capacity as the co-chair of the Small 
Business Committee on the Federal and Heavy Division of the 
Associated General Contractors. We look forward to his 
testimony.
    And now, since we have shuffled chairs back and forth, back 
and forth, I would like to go to the ranking member to 
introduce Mr. Long.
    Ms. MURPHY. It is my pleasure to introduce Mr. Greg Long, 
CEO of Long Electric Company in Napa, California. Mr. Long is 
testifying on behalf of the National Electrical Contractors 
Association. Mr. Long has been an electrician since 1979. He 
established Long Electric Company in 1990, which now employs 
dozens of workers. The firm serves customers in various 
markets, including biotechnology and pharmaceutical facilities, 
data centers, wineries, education facilities, and commercial 
and industrial facilities. In 2015 and 2016, Mr. Long was 
unanimously elected to serve as the council chair for ELECTRI, 
NECA's educational foundation. He has also served as a 
representative for the Council for the Electrical Contractors 
Trust of Solano and Napa Counties and as chair for the ELECTRI 
Program Review Committee. Welcome, Mr. Long.
    Chairman KNIGHT. Thank you very much.
    And our final witness is Ms. Colette Nelson. She is 
testifying today on behalf of the Construction Procurement 
Coalition, which includes 14 national trade and professional 
organizations, including the American Subcontractors 
Association. Ms. Nelson is the chief advocacy officer of the 
Association, and in her 30-plus years with the association, she 
has been involved in most of the major issues impacting the 
construction industry. We are pleased to welcome Ms. Nelson to 
the Committee.
    We look forward to your testimony. I can tell you that 
Chairman Kelly and I are here to have a robust and aggressive 
program. We are not just here to look pretty as Mr. Kelly and I 
do; we are to actually build a program that can be put into law 
that can help small businesses. And I know I speak for the 
entire, both Committees that that is the goal.
    So with that, we will start with Mr. DeLisle.

  STATEMENTS OF EDWARD DELISLE, CO-CHAIR, FEDERAL CONTRACTING 
GROUP, COHEN SEGLIAS PALLAS GREENHALL & FURMAN PC; ANDY BROWN, 
  VICE PRESIDENT, GLEN/MAR CONSTRUCTION; GREG LONG, CEO, LONG 
   ELECTRIC COMPANY; COLETTE NELSON, CHIEF ADVOCACY OFFICER, 
           AMERICAN SUBCONTRACTORS ASSOCIATION, INC.

                  STATEMENT OF EDWARD DELISLE

    Mr. DELISLE. Thank you, Mr. Chairman.
    As you indicated, the crux of my practice centers around 
the representation of construction contractors that perform 
work for the Federal Government, many of whom are small. So I 
am very familiar with the issue that we are here to discuss 
today, which is the problems associated with government delay 
in issuing contract modifications or change orders. I thank 
members of the joint Subcommittee for inviting me to testify 
today.
    If you travel to Washington, D.C., as I do from 
Philadelphia on the train and you take a cab from Union Station 
toward the White House, if you look across the sky, you will 
see that it is littered with cranes, and those cranes sit on 
construction projects. And as you make your way toward the 
White House an you stop in front of one of those construction 
projects, you will see teams of people working, going up and 
down ladders, pouring concrete, setting steel, operating 
equipment. You see dust and debris everywhere, and it is quite 
chaotic. And it is quite chaotic to the construction 
contractors that are performing, but it is something that they 
are accustomed to. There are a million risks associated with 
getting a construction project successfully performed, but a 
good contractor can manage many of the risks that you see as 
you drive past. Safety plans are in place to keep workers free 
from harm. Detailed performance and delivery schedules are in 
place so that work can be accomplished orderly and timely. But 
what happens when an unexpected change occurs on a project? 
What happens, for example, when the contractor realizes that it 
cannot build what is depicted on the plans and specifications? 
Or a situation where the government decides to change the 
configuration of a room in the middle of performance? That is 
where the real risk lies for a construction contractor, 
especially a small one. And they happen all the time. Changes 
in and additions to scopes of work represent unknown, and to a 
large extent, uncontrollable risk that can have an enormous 
impact on the time of performance and cost.
    The keys to mitigating that risk are to quickly identify 
the problem, modify the contract as soon as possible so that 
the performance issues can be addressed, fixed, and paid for. 
Unfortunately, the government often does not move as quickly as 
it should, which puts the contractor, especially a small 
government contractor, in a difficult position.
    I will discuss by way of example what can happen in a 
situation where the government fails to act, but first, let us 
talk about what should happen.
    The Federal acquisition regulations provide the contractor 
with guidance on how to proceed when faced with an unexpected 
or a change in condition. If a contractor runs into such a 
situation, it must generally notify government and ask for 
guidance. If the contracting officer responds with a directive 
to do something that the contractor thinks is over and above 
what it is required to do by contract, under FAR part 52.243-4, 
which is the changes clause that is typically included in a 
government construction contract, the contractor is supposed to 
tell the contracting officer that its directive will have a 
cost and time consequence if that is the case. Most of the time 
that is precisely what happens. Contractors know when they are 
going to incur unexpected cost, and it has all the incentive in 
the world to let the government know that that is the case.
    The problem is that the timely recognition of the change by 
the government does not happen when it should, does not happen 
like it should. FAR 52.243-4 states that once a change is made 
or occurs, the contracting officer shall make an equitable 
adjustment and modify the contract in writing. That notion 
mirrors FAR 43.204, which is the FAR section that pertains to 
contract modifications, which states that the contracting 
officer shall negotiate equitable adjustments resulting from 
change orders in the shortest, practicable time.
    So when there are changes, the contracting officer is 
supposed to recognize them and negotiate an appropriate 
adjustment. That process does not happen the way that it 
should. Oftentimes what happens is that the change is not dealt 
with or recognized at all, and here is how that can play out in 
reality.
    I represented a service-disabled, veteran-owned small 
business on a job for the Department of Veterans Affairs. It 
was a $6 million renovation project with a performance period 
of 400 days. There were a myriad of changes that occurred on 
that project, all of which were obvious. After 700 days of 
performance and very few change orders issued, and a million 
dollars of his own money spent, this service-disabled veteran 
gave up and left. His reward for leaving was a termination for 
default. After 2 years of litigation, we finally settled. The 
contractor received $960,000 in compensation and the 
termination for default was rescinded, but it was too late. The 
contractor had already closed its doors. That is precisely why 
we are here. Thank you.
    Chairman KNIGHT. Thank you very much.
    And Mr. Brown, you are now recognized for 5 minutes.

                    STATEMENT OF ANDY BROWN

    Mr. BROWN. Thank you. Members of the Committee, thank you 
for inviting me to testify on this important topic impacting 
small business contractors.
    I am vice president of Glen/Mar Construction, a family-
owned and operated general contractor. As a woman-owned and 
service-disabled veteran-owned small business, Glen/Mar 
performs vertical building construction, seismic renovations, 
and horizontal construction for Federal, state, and local 
agencies. I currently serve as co-chair of the Small Business 
Committee for the Associated General Contractors of America. 
For years, AGC has worked with the House Small Business 
Committee to establish more protections and better governing 
policies for America's small business contractors. The agency 
appreciates and thanks the Committee for its continued efforts 
to help our Nation's small businesses.
    Change orders are an inherent process within the 
construction industry. Most contractors refer to it as a 
necessary evil as a perfect construction project simply does 
not exist. As with any construction project, unforeseen issues 
may emerge, resulting in a change order. However, in the 
Federal construction industry, change orders have become the 
bane of all contractors with significant financial impact to 
small business.
    The financial impact has a ripple effect that extends 
beyond just the prime contractor. It impacts the prime 
contractor, our subcontractors, and the project as a whole. 
Delays in processing change orders disrupt cash flow on the 
project. Cash flow is critical, and in my business, we often 
view it to be more important than profitability. Without 
sufficient cash flow, a company will never reach the finish 
line where profitability resides.
    When a Federal Agency fails to timely process and pay 
change orders, the contractor is left with few options. The 
contractor can either finance the work to meet the project 
schedule or stop work all together. Either option brings real 
problems to small businesses. To keep the project moving, often 
small businesses finance the work to complete the project and 
to avoid unnecessary Miller Act or payment bond claims filed by 
subcontractors and suppliers.
    It should come as no surprise that this adversely impacts 
our overall bonding capacity, which is necessary to pursue 
additional Federal contracts. The ripple effect begins when 
untimely processing and payment of change orders on one project 
prevents a small business from competing for additional Federal 
projects.
    In the past, my company has been unable to bid on projects 
because our equity was tied up while waiting on payment of 
change orders. The result is a decrease in competition for 
Federal projects, less efficient use of taxpayer dollars, and 
fewer opportunities for small business.
    The current state of change order processing continues to 
limit the pool of qualified contractors who desire to pursue 
work in the Federal Marketplace. Simply put, this has become a 
barrier to entry. Contractors, especially small businesses, can 
only finance these projects for so long. Slow payment impacts 
not only the prime contractor but all lower tier 
subcontractors.
    As an example, I have an active VA project in California. 
From September through December of 2016, we submitted 15 change 
orders totaling nearly half a million dollars. These change 
orders are undisputed by the agency, but as of today's 
testimony, some 5 to 7 months later, the work is done but we 
have not been paid. Therefore, I have been unable to pay a key 
subcontractor 100 percent for the additional work they have 
completed. As a result, this subcontractor is now under a 
Department of Labor investigation due to their inability to 
make timely payments in their employees' 401(k) plan. This 
example shows the ripple effect small businesses face because 
of untimely payment of change orders.
    Conversely, stopping work due to agency indecision or 
inaction can lead to negative past performance evaluations. 
Negative evaluations can adversely impact a contractor's 
ability to gain future work. And in extreme cases, stopping 
work could give rise to the agency terminating the contract for 
default. Either option is detrimental to small business 
contractors.
    What I have described in my testimony today is quickly 
becoming the norm rather than the exception with regards to 
timely processing any payment of change orders. Just as Federal 
agencies try to avoid poor performing contractors, contractors 
in turn try to avoid poor performing agencies, facilities, and/
or government personnel, or at least bids accordingly.
    To highlight the irony, when we do not pay our bills, our 
utilities shut off, our cars are repossessed, our houses 
foreclosed. However, when the government fails to pay their 
bills, small businesses go out of business.
    In closing, I would like to thank you again for inviting me 
on behalf of AGC to testify before the Committee today. I look 
forward to answering any questions you have.
    Chairman KNIGHT. Thank you very much.
    Mr. Long, you are now recognized for 5 minutes.

                     STATEMENT OF GREG LONG

    Mr. LONG. Okay. First of all, I would like to thank you, 
Chairman Knight, Chairman Kelly, Ranking Member Murphy, Ranking 
Member Adams, and members of both Subcommittees for inviting me 
to testify today on behalf of the National Electrical 
Contractors Association (NECA). I greatly appreciate the 
opportunity to speak before you. The Subcommittees are to be 
commended for holding this important hearing to address the 
critical issues of change orders.
    My name is Greg Long, and I am president of Long Electric 
Company located in Napa, California. Since founding the company 
in 1990 at the age of 28, our family-owned business has 
provided electrical construction services on everything, 
including schools, hospitals, wineries, and various sustainable 
energy projects, to name a few.
    We at Long Electric are proud members of the National 
Electrical Contractors Association, where I have had the honor 
of serving on a number of industry committees and on the Board 
of Directors for the Northern California chapter since 1994.
    NECA is a national recognized voice of the $130 billion 
electrical construction industry, and our 4,000 members bring 
power, light, and communication technology to communities 
across the United States.
    Change orders are a part of every construction project. 
That said, our focus as contractors is to complete the job on 
time and under budget with safety as a priority. When we 
receive a proposed change order, we want to execute and address 
it in a timely manner. Unfortunately, there is a lot of back 
and forth negotiating the cost of the change order--direct 
cost, indirect cost, and consequential cost.
    A refusal by a contractor to complete a change order, 
refusal to begin on a change order until all paperwork is 
complete can result in loss of payment, potential lawsuits, and 
other punitive actions. Because of this, contractors typically 
proceed with the work under a change directive, requiring them 
to perform the work even prior to an agreement over the 
contract price and time.
    Navigating the challenges presented by change orders often 
forces us to collide with the very title of this hearing, ``All 
work and no pay.'' Change orders thrive in a realm where 
contractors have limited leverage in agreeing to the work and 
even less in extracting payment for the hard work they 
successfully perform. Often, we are not recouping our costs. In 
some cases, we are not paid in a timely manner. Sometimes we 
may not be paid for as long as 18 months or longer. This can be 
crippling to a small business.
    According to a study commissioned by ELECTRI International 
performed by Michigan State University, profits for change 
orders are slim. On average, a mere 3 percent. This also does 
not account for the litany of risk factors previously 
identified. To make matters worse, if this payment process is 
delayed, subcontractors run the risk of not making any profit 
at all. It can even impact our ability to bid future work due 
to lack of working capital.
    Despite these challenges, there are a handful of 
opportunities that have contractors like myself optimistic, but 
first is the construction industry growth over the past year, 
with a nearly 4 percent increase since March of 2016, the 
industry is expanding. And secondly, legislatively it is 
twofold. The first is Representative Bacon's recently 
introduced bill H.R. 2350, the Small Business Know before you 
Bid Construction Transparency Act of 2017. This legislation 
aims to address the length of time it takes for the Federal 
Government to review, approve, and pay for equitable changes. 
The validity of payment assurances, such as payment bonds and 
the timeliness of monthly payments.
    The second, introduced by Representative Fitzpatrick, 
Representative Murphy, and Chairman Knight, is H.R. 2594, the 
Small Business Payment for Performance Act of 2017, offers our 
contractors the ability to continue work without fear of 
withheld payments for change orders. The bill requires a 
partial payment of 50 percent within the timeframe specified by 
the Prompt Payment Act for any additional work.
    These reforms streamline the process of bidding on Federal 
construction work and allows subcontractors to adequately 
address the undue risk they assume when completing change order 
work. We urge the Committee to take positive action on these 
bills as soon as possible and welcome any and all questioning 
regarding their intricacies.
    With all of this in mind, I would like to thank you again 
for the opportunity to testify before you. NECA applies the 
Committee's unwavering efforts to examine these important 
components of our expanding construction industry. We are 
pleased and remain optimistic at this Committee's efforts to 
address change order concerns.
    Chairman KNIGHT. Thank you very much, Mr. Long.
    And Ms. Nelson, you are next for 5 minutes.

                  STATEMENT OF COLETTE NELSON

    Ms. NELSON. Thank you. Thank the members of the Committee.
    For those of you who have worked with the construction 
industry before, and I am sure that is all of you in your 
capacity, you know that sometimes, frequently, we have trouble 
coming together and agreeing on anything. On these issues, on 
this change order issue, we are united, and that is why we have 
this Construction Industry Procurement Coalition that I am 
representing today.
    You know, change orders are ubiquitous in the construction 
industry. I live across the street from the Federal Courthouse 
in Alexandria, and as I was getting ready for this hearing last 
night, I got a notice that the government sewer connection does 
not line up with the city's sewer connection, which will create 
a delay in the project and a change order.
    I would like to spend my time talking about solutions that 
the coalition has identified for this problem that we would ask 
that you consider. So we have several solutions that we have 
debated and agreed upon.
    The first would be to provide notice of agency policy and 
procedures on change orders in the RF process. This proposal is 
incorporated in H.R. 2350, and it is a very simple concept. 
Contractors and subcontractors are bidding on Federal projects, 
sometimes without knowing what they are getting into. As a 
quick example, on the National Geospatial Intelligence Agency 
campus outside of St. Louis, a several billion dollar, 5-year 
project at a recent event to brief small and emerging firms and 
encourage them to bid as subcontractors, a question was asked 
about, does the Corps of Engineers delay change orders until 
the end of the project? The answer was yes, and some small 
businesses who would otherwise have considered bidding left the 
room. They could not risk a delay of years for what will be 
certainly change order work.
    The second proposal that we make would be to establish 
deadlines for agency responses to requests for equitable 
adjustment. The Federal Acquisition Regulation sets a deadline 
for contractors. Contractors have to respond in 30 days. They 
have to submit their REA in 30 days. The FAR simply says that 
the contracting agency has to respond in a reasonable amount of 
time. That is not defined. We would suggest that at least for 
projects on which small businesses are the prime contractor, 
that a specific time be set. If we can compile a bid and a 
proposal in 30 days, certainly, the agency should be able to 
review and approve that within the same amount of time.
    The third proposal was incorporated in H.R. 2594, and that 
would be to require provisional payment of 50 percent of a 
request for equitable adjustment. That is a practice in the 
private sector, and it does not prejudice either the government 
or the contractor on future claims, but it keeps the cash 
flowing. So it is payment for performance that if the 
contracting officer has directed unilaterally the contractor to 
perform a change, that the contractor can request payment for 
up to 50 percent of its actual work on that change. Again, it 
keeps that cash flowing.
    The fourth proposal is to require regular reports on the 
status of REAs. What we have found is that the REAs go in and 
get put on the corner of the contracting officer's desk for the 
duration of the project. By providing contractors, and thus, 
subcontractors and suppliers, with regular information, perhaps 
incorporated with the monthly progress payments, that at least 
the contractors would know when and if payment would be 
forthcoming. It would have the additional benefit of providing 
the Congress and other oversight entities informed on when 
those contracting orders are being processed. You know, one 
thing those of us in management know is that you do what is 
measured. So this would be an opportunity to measure those 
approvals.
    Now, I want to add just two more things. Some payment 
transparency assistance. Any time the contractor knows what is 
being done, the better we can perform, so we have two more 
proposals.
    One, to require the government to post in a public 
environment the prime contractor's payment bond, and secondly, 
to notify, to provide in a public environment when the prime 
contractor is paid. So thank you very much for your time, and I 
am happy to respond to questions.
    Chairman KNIGHT. Thank you very much.
    And we will go now to our questions. I will take 5 minutes 
to start off the questioning. And just a basic question because 
I think you all hit on it, and we have all worked with 
contractors in a very small arena, whether working on our house 
or working in a business or something of that nature. And I 
know a lot of us have been in just that situation that Ms. 
Nelson said, that we come up with 50 percent, they get going on 
the job, and as the job gets to its completion, then the second 
payment is made. And I think that is kind of a regular thing 
that happens with small contractors around the area.
    And so my first question is, what are the reasons that the 
government gives for withholding a million dollars or 
withholding payments to small businesses that have completed 
the work and now they are asking for payment? Is there a reason 
from the government or is there just no response? And I will--
--
    Mr. DELISLE. Yes, Mr. Chairman. The reasoning that 
contractors will get can certainly vary. It can vary from ``I 
did not receive all the paperwork that I needed,'' which 
oftentimes is not the case. ``I have not gotten around to it 
yet. I am busy.'' Oftentimes what you will hear is, ``Well, we 
dispute the basis that there is a change,'' when very clearly 
you can demonstrate to them that it is a change. So there is 
this guise of a dispute that really should not be there.
    Chairman KNIGHT. So there I am just going to add on to my 
second question because we are talking about change orders. If 
I do work in my house and I say, you know what, I want a 
different door than I requested, that is basically a change 
order right there. I am asking for an upgrade in door, and I 
initial there and say now I want this door that is going to 
cost X number of dollars more. And good contractors will do 
that, and they will say, okay, well, you acknowledge that you 
are doing this and you are saying that you are going to pay for 
this. Is that something that the government or that the 
subcontractor could require of the government? If we are going 
through these change orders, then there should be something 
that goes back and forth. I see a lot of nodding heads going 
back and forth like this. But is that something that, you know, 
this Committee is looking for answers and things that we do not 
get to these payments at the end where there is a dispute. And 
if there is no dispute when the work is done, there should not 
be any dispute when the work should be paid. But if they do not 
acknowledge it and they say, yes, there is a change order now 
but 6 months later they say, was that really a change order or 
did you just do the work?
    Mr. DELISLE. I can give you a quick example. I alluded to 
this contractor that ended up going out of business in my 
opening statement. In that particular case, there were a series 
of change order discussions that took place between the 
government and the contractor. There were 2 weeks' worth of 
meetings that happened, and at the end of that meeting period 
there was a handshake deal about what the cost should be. It 
was a negotiated agreement. What we found out later was despite 
that handshake agreement, the government simply did not have 
the money to pay for it. She was then going to try to get the 
money and it did not happen. So what they did was they forced 
the contractor into a claim situation, litigation, and the 
contractor never was able to recover from that.
    Chairman KNIGHT. And, you know, I am going to get to 
another question here but I am kind of going down this road 
because I know a lot of other questions will come about other 
things, but we are trying to fix something. And, you know, I 
would not shake hands with the government, and I am part of the 
government. So I think that what we are trying to say is things 
have got to be, you know, more concrete in everything that goes 
for a project. And especially if we are talking about a mammoth 
project where you might have 90 subcontractors coming in and 
doing work on a VA situation or building a hospital in Colorado 
that who knows when they will get done. You know, it is those 
kinds of things I would think that we could do something 
legislatively.
    But, and lastly, and I will never be the person to say we 
should collect more data in the government, but I guess I am 
this time. Is there a data collecting process of this? 
Everybody is shaking their head like this. No, there is not 
that shows that there are this type of activity that is going 
on year after year and we can kind of chart it and say we did 
not pay these subcontractors on time last year at a rate of 17 
percent and the year before it was 12 percent. There is no data 
collecting in that arena, is there, Ms. Nelson?
    Ms. NELSON. Mr. Knight, there is a requirement in the 
Prompt Payment Act to report to Congress on late payments, but 
these are not late payments because they are not approved 
payments.
    Chairman KNIGHT. Okay. Well, we are going to move on to Ms. 
Murphy for her questions.
    Ms. MURPHY. This question is for Mr. Long.
    You know, each construction project has its own unique set 
of factors that help determine the overall cost of the project. 
For example, a project in Florida would have a different set of 
conditions than maybe a similar project in New York. Do you 
think that the change order process allows the agencies to 
consider the different variables that construction projects 
face?
    Mr. LONG. I think that a lot of times the proper procedures 
and protocol does not allow for a lot of issues and impacts 
with regards to change orders period. They are not recognized 
by all as far as the circumstance we could have in California 
or if it is in Florida. It could be taken into effect, but in 
most cases there is just a lot of--the problem is people are 
not recognizing the true cost impacts of the change order and, 
again, those could be the direct costs that are pretty 
obvious--labor materials, subcontractors and equipment, or it 
could be the indirect or consequential costs that you are 
speaking of. So they are just not recognizing the entire costs 
and allowable overhead and profit on top of that. That is a 
major problem and that is a major excuse you might say of these 
change orders getting delayed is the first part of that delay 
is them recognizing our true costs, followed by then the lack 
of prompt processing and payment thereof, which basically 
handcuffs us in doing business when this is just continual, one 
after the other on each project that we are contracted for.
    Ms. MURPHY. And so if you have laid out some of these 
problems that a lot of the similar, like small businesses are 
experiencing with change orders, is it possible that other 
industries are also facing the same challenges? And if they are 
also facing the same challenges, should the use of 
consolidation be prohibited for change orders at a certain 
stage in the performance of the contract?
    Mr. LONG. Do you mean the other trades?
    Ms. MURPHY. Yes. Other industries.
    Mr. LONG. Yeah. It is happening to all of us. So, you know, 
you could have a change order and it could involve 12 
subcontractors in that one change order. It might not be just 
adding 20 outlets and 40 light fixtures, you know. We could be 
adding a generator or some mechanical equipment, and there are 
a lot of people involved in that change order, and it is 
happening to, like you stated, it is happening all the way down 
the line. So it is impacting all the industries. They all fill 
in exactly the same thing.
    Ms. MURPHY. And Mr. Brown, you had testified to the follow-
on consequences or the flow-down consequences of change order 
delays and the role that this plays in negatively impacting 
prime contractors and subcontractors. How can this Committee 
work to lessen the financial burden of untimely payments on 
small construction firms at every level in the contracting 
process?
    Mr. BROWN. The way our subcontract typically is set up, and 
this is universal, and I am sure Mr. Long will confirm, we have 
a pay-when-pay clause. So if we do not get paid as the prime, 
the sub does not get paid, unless we decide to finance the job 
for the benefit of the project and the sub. And oftentimes we 
have to make that call. So yeah, transparency about the 
process, I would say it is described as consistently 
inconsistent across the government, across agencies, within 
agencies, different divisions. You get different answers about 
why it is being held up. And I think Ms. Nelson noted it is not 
late until they have accepted it. So the change order that I 
described in my testimony this morning, I actually recently had 
to reach out to VA headquarters to inquire about the status, 
and coincidentally, that same day I received a follow-on email 
saying that the additional funds request had been received. 
That would have been 7 months to the day. In reading the email 
string, the agency did not submit the request until the end of 
March. I had already been talking to the contracting head in 
October about what is the status and was being told it is going 
through the process.
    Ms. MURPHY. You all have shared really egregious stories. 
Are there any particular agencies that are worse than others?
    Mr. DELISLE. Just in my experience, I will tell you the 
answer is absolutely yes. I have had my clients, not me 
personally, but I have suffered through it with them, my 
clients have had a horrible time with the Department of 
Veterans Affairs. I, unfortunately, was involved in that mess 
in Aurora, Colorado. I represented a service-disabled, veteran-
owned small business there, and but for the grace of God, we 
were able to maneuver him through and he survived. But his $18 
million project cost him $32 million. And this is a small 
business. And when you do not get paid that kind of money, most 
of the time it does not work out very well for you. So that was 
a VA job.
    The instance that I described earlier during my testimony, 
that was a VA job and the list goes on and on. There are many 
of them.
    Ms. NELSON. I might suggest that frequently the differences 
are by region rather than by agency. And sometimes it is just 
by the skill and experience of the contracting officer. One of 
the problems that we face is over the last several decades 
funding for the number and the education of contracting 
officers or contracting staff for the Federal Government has 
deteriorated. Their ability to do things that we would like to 
have done promptly also has deteriorated. So sometimes it is 
just administrative convenience for an agency to put these 
requests for equitable adjustments to the side and audit and 
process them at the end of the project.
    Ms. MURPHY. Thank you. Thank you, Mr. Chairman, for 
allowing me a couple extra minutes.
    Chairman KNIGHT. Absolutely.
    And we are graced by the chairman of the Full Committee. 
Chairman Chabot is here.
    And I would like to now yield 5 minutes to Chairman Kelly 
for his questions.
    Chairman KELLY. And I am going to yield my position to 
Representative Fitzpatrick, who is a leader in pushing 
legislation in this matter, and he has another engagement, and 
so I want to yield that to him because I want to make sure he 
gets his questions. So I yield my time, or yield my position to 
Mr. Fitzpatrick.
    Chairman KNIGHT. Very well.
    Mr. FITZPATRICK. Thank you, Chairman Kelly, and Chairman 
Knight, and also Chairman Chabot, for bringing this important 
issue to the Committee.
    Our small contractors, as we all know, have endured unfair, 
one-sided treatment for far too long. And as was referenced 
with the help and leadership of both Chairman Knight and 
Ranking Member Murphy, together we introduced H.R. 2594, the 
Small Business Payment for Performance Act, which we believe is 
a common-sense bill which recognizes that cash flow is the 
lifeblood of small business contractors. So with that being 
said, I want to open it up to the panel of experts starting 
with Mr. Long from NECA, as to what you think this legislation 
will accomplish and what remains unaccomplished. What steps do 
we need to take to further close that gap?
    Mr. LONG. Well, any time that you are going to put 
something on a bill out there that is going to provide some 
kind of payment relief, that is a good thing. The fact that 
change orders are being recognized as an issue and a problem in 
all sectors quite frankly, and it will be helpful in that 
manner. Again, cash flow is really everything, you know, to our 
small business. And if you have a $100,000 change order and you 
have 5 percent profit on it, that means you have $90,000 out 
there that you have already spent on that job, on that change 
order that is not getting approved. That is money out of your 
working capital. You times that by, you know, 10 or 20 or 50 or 
100 change orders and over the course of 10 or 15 or 20 jobs, 
you know, we are not going to be able to sustain that. So 
promptly what needs to be done still I would say, if there is 
anything I could recommend, we need standardized change order 
protocol. There is a document that ELECTRI put out that is 
change order guidelines for electrical contractors right here. 
If that was used in creating a standardized change order 
document, we would take of a lot of the problems of at least 
getting to the approval process. Okay? And we still have the 
issue of timely handling and payment. So I would say another 
thing that needs to happen is a timeframe that becomes standard 
as well. You know, a deadline. And there has to be 
accountability and responsibility with that. In other words, 
what happens if they do not meet the deadline? You know, there 
has to be a hammer. There has to be leverage. There has to be 
something there to not just go over that deadline. But timely 
processing of change orders and receiving fair payment for 
those change orders, any legislation that can meet that end is 
what I know I am after.
    Mr. FITZPATRICK. What consequences would you suggest for 
delayed payments?
    Mr. LONG. Well, obviously, the best thing for me is I am 
not going to keep continuing to do work when I am not getting 
paid, so I am going to stop work. And I think entities do not 
want to see that work stop but I want to see payment, too. I do 
not want to see my whole company go away and all of our team, 
our employees, and that whole company that was referenced 
earlier that did not make it. And we are not doing anything 
wrong. You know, they have asked us to do the change order 
work. We have priced it fairly. If you follow this document, it 
is a fair price. Like I said, we are making 5 percent on a 
change order, possibly 3 to 5 percent. So I do not understand 
what the hang up is with approving that when we have provided 
the backup and we are continually dealing with no approval. 
Because there is no hammer. They have to be held accountable 
and it has to be if you do not pay, then we are going to stop 
work.
    Mr. FITZPATRICK. I yield back.
    Chairman KNIGHT. Thank you very much.
    And we will now go to the ranking member, Ms. Adams, for 
her questions.
    Ms. ADAMS. Thank you, Mr. Chair.
    To Mr. Long, small businesses play an important role in the 
American economy and national security. So as we continue to 
try to grow our economy, it is vital that we provide small 
businesses with the necessary opportunities to thrive to remain 
in the supply chain and to maintain our industrial base. If 
barriers continue to prevent new and existing small businesses 
from participating in the Federal Marketplace, such as delays 
in change orders and packing their bottom line, what will this 
mean for the industrial base and businesses like yours?
    Mr. LONG. Well, again, our company--I can only speak for 
our company. We will not work under those conditions because we 
would be out of business. When you are performing a service and 
paying out that labor and materials, subcontractors, equipment, 
and you are not getting paid, you are not going to be around 
long. So I would say that personally, if we find a contract 
like that, we will not bid it, so we will just go to other 
sectors to still remain, you know, a growing company in our 
community.
    Ms. ADAMS. Okay. Would other members of the panel like to 
respond? Mr. Brown?
    Mr. BROWN. Could you repeat the question real quick?
    Ms. ADAMS. If barriers continue to prevent new and existing 
small businesses from participating in the Federal Marketplace, 
such as delays in change orders that impact your bottom line, 
what will this mean for the industrial base and businesses like 
yours?
    Mr. BROWN. Yeah, I think Mr. Long hit it. There is a huge 
sector with the government contracting and small business 
programs that are there to encourage participation and really 
help start-up companies. It would be fool-hearted to say that 
that is the right place to go if you are just starting out. And 
change orders do become a barrier because you are forced to 
either proceed with the work or not proceed with the work. And 
as I kind of alluded in my testimony, we are faced with adverse 
past performance evaluations or the threat of termination for 
default. And that does not give us a lot of leeway to have any 
say unless you are prepared to go down that path. It is kind of 
a buyer beware as you try to enter the government marketplace. 
But just as the testimony up here earlier, I think one thing 
that is missing, it is clear in the FAR and in the contract 
terms that we have timeframes by which we are supposed to 
provide notice and get in pricing. The back half is missing and 
it sits there unbeknownst in the process.
    Ms. ADAMS. Okay. Thank you very much.
    Ms. NELSON. Ms. Adams, may I?
    Ms. ADAMS. Yes.
    Ms. NELSON. When we talk about the industrial base, we too 
often talk about other than small businesses, but every other 
than small business was a small business at some point. And if 
we do not encourage the development and growth of small 
businesses, we will not have those large businesses for our 
industrial base in the future.
    Ms. ADAMS. Okay. Thank you very much.
    So Mr. Brown, what has been the impact of contract 
modification delays on small business past performance rating?
    Mr. BROWN. Oftentimes, the issues in the past performance 
when you get an adverse rating, it is dictated by the morale 
that was created during the project and that issue is never 
identified as being a source of conflict during the course of 
construction. So it leaves the contractor to reply to the, I 
would say misleading or mischaracterization of our performance 
by having to kind of sling a little mud about what the other 
side of the story was. And so, but it is in the record, right? 
And then it is up for other agencies who are reviewing our past 
performance as to whether they are going to decide are we 
qualified enough, or do they want to hire us for the 
procurement that is in progress?
    Ms. ADAMS. Thank you. I am just curious about how change 
orders impact women and minority-owned construction firms when 
completing contracts, and do they face any different challenges 
when they are navigating from this process than their 
counterparts? If anybody, we have got about 18 seconds.
    Ms. NELSON. I think it is a problem for any small and 
emerging firm. The smaller and less experience you are, the 
more serious the problem.
    Ms. ADAMS. Okay, 7 seconds.
    Mr. BROWN. Yes. The change order issues I do not think sees 
small business versus large, women-owned versus emerging. It is 
universal.
    Ms. ADAMS. Thank you, sir.
    I yield back, Mr. Chair.
    Chairman KNIGHT. Thank you very much.
    And I now yield 5 minutes to Chairman Kelly for his 
questions.
    Chairman KELLY. As a former small business owner, I know 
cash flow is the lifeblood of a small business. Even if you are 
not getting paid what you are worth or what it costs you, to 
not have that cash flow absolutely forces you to appoint a 
bankruptcy or the inability to honor your obligations to 
others. So cash flow and timely cash flow is very huge.
    That being said, Ms. Nelson, as you noted in your 
testimony, the Federal Acquisition Regulation, FAR, does not 
define how long the shortest practicable time is for the 
government to review and request an equitable adjustment. In 
fact, you state an agency like the Army Corps waited for all 
requests for equitable adjustments until the end of the 
construction project likely for funding reasons. Can you talk 
about how the small business payment for performance acts would 
impact how agencies like the Army Corps pay out their change 
orders?
    Ms. NELSON. Well, it is really quite simple. On a 
unilateral change order, if the Corps of Engineers were to 
direct a prime contractor to do some extra work, the contractor 
would be required to submit its request for equitable 
adjustment within 30 days under the current FAR, and as that 
prime contractor performed, it could then invoice for up to 50 
percent of the request for equitable adjustment that it 
submitted to the government. That would prejudice neither the 
government nor the contractor, but it would keep that cash 
flowing. Under the Prompt Payment Act, the prime contractor has 
to pay its subs and suppliers within 7 days of receipt of 
payment by the government, so it would then make sure that that 
cash flow went to the lower tiers as well so that those who 
need to pay labor, who need to purchase materials to get the 
government's work done, will have the cash to do it.
    Chairman KELLY. And I have spent my whole life fighting for 
the little guy. I do not know if it is my southern DNA or what 
it is, but I have got a chip on my shoulder. But you know, I 
find they use that leverage, and so they know that small 
businesses have to have that cash flow just like I talked about 
initially, and they use that as leverage to make them take less 
than what they are worth, and also, the longer they drag it 
out, the less they will take. And we have just got to break 
that thing where they cannot do that.
    My next question is to Mr. Brown. In your testimony, you 
identify one of the greatest challenges Federal contractors 
face is obtaining timely decisions from Federal employees. 
Could you elaborate on any ideas you might have to motivate the 
government to act more efficiently and swiftly?
    Mr. BROWN. Well, you know, we get the contract thrown at us 
any chance the agency can. And unfortunately, we do not have 
much leverage when it comes to getting timely decisions. Even 
if we are talking about undisputed change orders, maybe just 
RFIs and submittals. I mean, there is a guideline and a 
timeline that everybody has to participate in. It is a project. 
It is a team.
    I think the thing that is missing is with regards to the 
change order FAR is a requirement of the timeliness to get the 
approval. It cannot just sit on somebody's desk. We cannot just 
be told it is going through the process. We are requesting 
prior year funds. As a small business, I do not know what that 
is. I do not know if it is true. I go talk to another VA 
employee and that is not the answer I get. So it is hard to 
figure out what is really going on, and you are trying to just 
develop some trust and rapport, and I am taking it on face 
value. But not until I send an email up to headquarters does 
the tree get rattled. I cannot do that every day. I hope that 
answers your question.
    Chairman KELLY. It does. And I guess one of the things is 
people have to have skin in the game. There has got to be some 
personal accountability of those government employees so it 
costs them, not the agency, it costs them something for bad 
acts or acts of bad conduct or bad faith. And I do not know 
what the right answer is but I know this; if people are not 
held personally accountable and there is some big bureaucracy, 
they do not have that sense of urgency which is required. And 
trust me, our small businesses, each and every one, unless they 
are a whole lot more fortunate than I was and a lot better 
businessmen, those cash flow and timeliness of that cash flow 
is very important.
    With that, I yield back, Mr. Chairman.
    Chairman KNIGHT. I think that says a lot right there.
    We are going to go to Mr. Lawson, the ranking member on the 
Subcommittee on Health and Technology.
    Mr. LAWSON. Thank you, Mr. Chairman. I want to thank you 
all for being here.
    And I do not know a lot about this particular area, and so 
I will need your help because I would like to be able to help 
you all.
    You know, when you are building a house and there is a 
change order, the contractor normally will inform you. Like 
your wife said she wants Pella windows, unlike the windows that 
were being bidded on. And so as a result, then you go back to 
talk to the bank and say we are going to need a little bit more 
money in order to do it. In a situation where you all are 
involved in, who determines the change order? Is it the agency 
that determines the change order? And when they say that we 
want different a different kind of fixtures now in our 
restrooms, better access for handicap and so forth like that, 
at that point, do you start to talk dollars with them? Or what 
really happens? Which I do not quite understand, because I know 
cash flow ends. I have been in business for 36 years but we did 
not have change orders in the insurance business. So I have to 
understand a little bit better about the contract. Maybe some 
of you all can enlighten me. What happens when this occurs?
    Mr. BROWN. In construction, there are really three 
scenarios that kind of give rise to a change order. One is the 
one where the agency requests the change. We want a bigger 
space or a new door or a different type of window. The other is 
if there is a different site condition. We encounter something 
typically subsurface that we did not anticipate. There is a 
sewer line that was not noted on the drawings. We have got to 
deal with it. Or there are conflicts within the drawings. The 
drawings and specs are not accurate, and as we are getting out 
into the field, what is drawn on paper is not really working in 
the field, and those give rise to change orders when we have to 
change the course of action or the fix.
    Mr. LAWSON. And if I may follow up, Mr. Chairman, then how 
does the agency start to handle that? When you see those things 
that did not appear on the specs and it is going to be $10,000-
$15,000 more to be able to fix it correctly, how long does it 
take the agency to really determine whether they are going to 
give you the resources that you need in order to be able to do 
it?
    Mr. BROWN. Well, this is the consistently inconsistent 
part. It varies from project teams, both the government and the 
contractor side. Some will acknowledge, yep, this is a change 
and will go down the change order place. They will say, yes, 
and the agency will issue us an RFP. Here is how we want you to 
change it, price it. We negotiate it and we move forward. Other 
times, they will want to dispute the entitlement of the change 
order and they will try and find different ways within the 
contract or a clause in the specs and play that kind of game 
which only delays the project. And then once the change order 
finally comes to fruition, your $20,000 change order became 
$40,000 or $60,000 because of the delay, and there is really no 
added value on that additional $20,000 to $40,000. Nothing. 
Right? The building did not get any bigger. And as a change 
order, we do not make any money in change orders. Mr. Long 
alluded to that. We are recovering costs at that time. Costs. 
And if we settle for anything less, we are settling for 30 
cents on the dollar. Or if they tell us, hey, if it is really 
egregious, they will say, hey, why do you not file a claim and 
you can go access money from the judgment fund. And that has 
been a common response that we have received as a small 
business.
    Mr. LAWSON. And at that point, and then you can talk, Ms. 
Nelson, what do you do with the subs?
    Mr. BROWN. We hold hands. I mean, you know, it depends. We 
will get subcontractor pricing, and then depending on, as a 
prime, just a case-by-case basis, and depending how many other 
projects we have similar, we will fund it ourselves or we will 
split it and try and give enough cash to the subcontractor to 
keep them going. Because the worst thing that could happen is 
they would pull off the job. We do not want that. Or they go 
out of business and then the cost to the contractor becomes 
greater to find a replacement contractor. So it is a dance.
    Mr. DELISLE. Representative Lawson, on that Aurora, 
Colorado project, the prime contractor was very large. It was a 
joint venture between two very large companies. And what it 
decided to do in that case was pay millions of dollars to 
various small, individual companies, service-disabled 
companies, 8(a) companies, to prevent them from filing 
bankruptcy, because those companies could not finance carrying 
on the work. They had to be paid in some way. So luckily, the 
prime in that case had the wherewithal to pay them or it would 
have been all over. Two companies filed bankruptcy out of 33. 
You would have had them all go down but the prime stepped up.
    Mr. LAWSON. Well, thank you.
    I yield back, Mr. Chairman.
    Chairman KNIGHT. Very good. And we are going to take one 
more. We are voting, but we have got a little bit of time so we 
will go to Mr. Bacon for his questions.
    Mr. BACON. Thank you to both chairmen, and to our ranking 
members. I appreciate you all being here today.
    I heard really loud and clear during our campaign and when 
I get back to the district that small businesses are struggling 
with getting their contracts with government delayed payments, 
the rescinded orders or the change orders like you have already 
mentioned and so forth, lack of transparency. And so we worked 
with a variety of folks that put this bill together called Know 
before You Bid, so I want to thank Mr. Long for your support 
today during testimony.
    I just wanted to ask if the other three may have had a 
chance to read it. I would love to have your feedback on this 
bill. And I know Mr. Fitzpatrick is also submitting a bill. But 
what else do we need to do? What can we do to better support 
the small business team with contracts for government?
    Ms. NELSON. Mr. Bacon, the members of the coalition all 
support the bill as introduced.
    Mr. BACON. Thank you. It is great to hear that.
    What other work do we need to do then? Is there another 
bill here we need to work on or what is some other target areas 
that we should be focusing on?
    Ms. NELSON. I outlined in my written testimony four 
proposals, including yours. But I would like to expand on one 
of those items. Mr. Fitzpatrick had asked what is the 
enforcement mechanism that if you establish a timeframe as we 
have recommended for when the government must approve a request 
for equitable adjustment, how does one enforce that?
    My response would include two options. The option that the 
contractors might prefer is that if the government does not 
respond in a timely manner, the request for equitable 
adjustment is automatically approved. As a taxpayer, I might 
suggest that another alternative would be that if the 
contracting officer does not respond in a timely manner, that 
the request for equitable adjustment is automatically denied. 
That allows the contractor to file a claim if it chooses to do 
so.
    Mr. BACON. Thank you very much.
    Any other comments from our panel?
    Mr. DELISLE. Very quickly. One of the issues I think that 
still needs to be tackled is this issue of creating a dispute 
where one does not exist. And Mr. Brown made reference to it. I 
mean, these construction contracts are 3 and 4 inches thick. 
And if the government wants to find a dispute in there 
somewhere, they can. And the problem is when it does find a 
dispute, it can just simply deny a change order which could 
very well be legitimate and obviously so. So I think one thing 
to think about in terms of moving forward is how can we create 
a resolution process that is quicker than what the contractor 
has available to him now? Because what is available to him now 
is filing a claim, waiting 60 days, having that claim denied, 
appealing that denial and going through a very long, protracted 
litigation process. There needs to be some mechanism, a better 
mechanism in place to assist the contractor through that type 
of problem.
    Mr. BACON. Thank you very much. I yield back.
    Chairman KNIGHT. Thank you very much.
    And we are going to go to Ms. Clarke. And you can wrap this 
whole thing together and figure everything out in 5 minutes.
    Ms. CLARKE. Thank you very much, Mr. Chairman. I am afraid 
it looks like it is going to take a bit more time from all of 
us to sort this thing through.
    I want to thank all of our witnesses for testifying here 
this morning. This has been a pretty vexing problem for quite 
some time. As a New Yorker, I travel across a Brooklyn Bridge 
that looks like it is suffering from change order-itis.
    Mr. DeLisle, in your testimony, you gave an example of a 
contracting officer that had a practice of issuing unilateral 
change orders for 10 percent of the value claimed for the 
additional work. With agencies having so much control in the 
contract modification process, how can we reverse this trend?
    Mr. DELISLE. Well, I think as we have discussed this 
morning, Congressman Fitzpatrick's bill would certainly assist 
in doing that because it would not be 10 percent that the 
contracting officer would be justifying, if you will; it would 
be 50. Okay? So there would be more cash flow for the 
contractor, so I think that would certainly help. It is a big 
part. Cash flow is a big part of the problem.
    Ms. CLARKE. And then just to the panel, the covering 
contract modification process is causing anxiety among small 
business contractors and in some cases inhibiting them from 
participating in the Federal Marketplace. In your opinion, what 
is the number one challenge that small businesses in your 
industry are facing when it comes to using the change order 
process? The number one.
    Ms. NELSON. Cash flow, cash flow, and cash flow.
    Mr. LONG. Yeah, the position we are being put in right now 
is not one that I do not think we should be responsible for. We 
are not a bank and that is the position that we are all being 
put in. We are being put in the position of the bank. We are 
financing these jobs, and that is the easiest way to explain 
it, you know. Yeah.
    Ms. CLARKE. Anyone else?
    Mr. BROWN. I guess part of the cash flow is time, right? So 
in our world, time is money. Our proposals and our costs are 
based on time. So the sooner we can close the change order 
negotiation, the better off we are, and it will help with the 
cash flow. But cash flow is king.
    Ms. CLARKE. Do you agree, Mr. DeLisle?
    Mr. DELISLE. For sure. One of the other issues, and Mr. 
Brown just mentioned, is the time factor. If the government is 
held to strict accountability in terms of how long it has to 
resolve these change order issues, it would go a long way for 
sure.
    Ms. CLARKE. Very well. Mr. Chairman, I yield back the 
balance of my time.
    Chairman KNIGHT. Well, thank you very much.
    I think this has been a robust Committee hearing. You have 
already heard two pieces of legislation have come out of this. 
I would expect we are going to see more. We are going to be 
continuing to talk about this because it affects every district 
in every state with every subcontractor and every small 
business across the country. We have heard that cash is the 
issue and that is for a small business. Your biggest assets are 
your employees and how much money you can leverage. Whether you 
have it or you can get it. And if it is all out, then there is 
problems. And so we always like to see small businesses 
bringing more money in than putting out. And so you will see 
more ideas and more pieces of legislation coming out of small 
business, but we appreciate you being here. Thank you very 
much.
    And we are, hang on, I always have smart people next to me.
    All right. I ask unanimous consent that members have 5 
legislative days to submit statements and supporting materials 
for the record. Every member hear that?
    Without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 11:19 a.m., the Subcommittees were 
adjourned.]
                            A P P E N D I X

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                 Statement of Edward T. DeLisle

   Cohen Seglias Pallas Greenhall & Furman PC, Philadelphia, 
                          Pennsylvania

Subcommittees on Contracting and Workforce and Investigations, 
                   Oversight, and Regulations

                  Committee on Small Business

             United States House of Representatives

                          May 25, 2017

    Chairman Knight, Chairman Kelly, Ranking Member Murphy, 
Ranking Member Adams and members of the committee, thank you 
for inviting me to testify on the important topic of change 
order delays in the federal construction market. My name is Ed 
DeLisle. I am a partner with the law firm of Cohen Seglias, 
where I co-chaired our federal contracting group and work very 
closely with our federal construction clients. I regularly 
counsel federal contractors on a wide variety of small business 
issues, including advice on affiliation rules; mentor-protege 
programs; small business and set-aside strategy and compliance 
(8(a) contracting, ANC, NAC, HUBZone, SDVOSB); small business 
subcontracting plan compliance; and small business size 
protests.

    Construction projects are subject to a wide array of 
variables that may require a federal agency to alter their 
initial plans. Consequently, reasonable delays and changes may 
be required to meet conditions on the ground. The concern is 
not with reasonable delays and changes to the initial contract. 
Rather, the concern rests with agencies failing to execute 
change orders and make payment to contractors for months--and 
even years--at a time. Unsurprisingly, this delay causes 
serious harm to the project schedule and has a deleterious 
impact upon payment to the prime and subcontractors, especially 
small businesses which depend upon that cash flow to remain in 
business. To avoid these impacts, small business prime 
contractors, or subcontractors, may walk off a job, as a 
protracted change order delays can impede the small business's 
very ability to operate and survive. When that occurs, small 
businesses can be with non-small business prime contractors or 
subcontractors.

    In this testimony, I will discuss:

           Define change orders;

           How they typically come about on a 
        construction project;

           The steps involved in submitting a change 
        order;

           The FAR provisions giving authority to 
        change orders; and

           The significant challenges small businesses 
        face in the change order and claims processes when 
        working for federal agencies.

    Overview of Change Order Process

    Change orders and contract modifications describe the same 
action. You may hear these terms used interchangeably, but 
these terms are essentially synonymous. In this context, we are 
referring to contractual changes between construction 
contractors and the federal government. Broadly speaking, a 
change order is any change to the scope of work of an already 
existing contract and the price to be paid, and/or the time to 
complete, the new work. Federal construction contracts contain 
a ``Changes'' clause, which permits the government to make 
changes in the general scope of the contract, including 
modifications to the drawings, specifications, materials, 
manners of performance or method of performance. See, e.g., 
Federal Acquisition Regulations (FAR) Part 52.243-4. This 
clause requires the government to make an equitable adjustment 
in the contract price for these changes. This clause also 
permits the contractor to assert that a change has occurred if 
the government gives any written or oral order (such as an 
instruction, interpretation, direction) that causes a change to 
the contract. This concept is known as a constructive change. 
Under the language of the clause, these changes are treated as 
if the government ordered the change, entitling the contractor 
to an equitable adjustment.

    Differing Site Conditions

    Changes orders can arise through several avenues. Federal 
construction projects are typically large and complex. The 
agency may realize that a size of a room does not match the 
intended purpose, and may need to expand, or reconfigure it. 
This is a common issue for federally owned hospitals, where 
modern medical equipment, such as Magnetic Resonance Imaging 
(MRI), may change size in the years since the design 
specifications were agreed upon. This problem occurred on the 
much maligned VA hospital project in Aurora, Colorado and 
resulted in increased costs of approximately $1.1 billion.

    There may be a differing site condition at the worksite 
that was unknown to either party or not listed in the contract 
specifications. Differing site conditions \1\ generally arise 
in two way, and are sometimes referred to as ``Type 1'' or 
``Type 2.'' Type 1 conditions are physical conditions that are 
materially different from those described in the contract. An 
example of a Type 1 condition occurs when the contract 
documents identify the expected ground conditions, do not show 
rock and the contractor encounters rock during excavation, 
which requires extensive, unanticipated effort to remove. Type 
2 conditions are ``unknown physical conditions of an unusual 
nature which differ materially from those ordinarily 
encountered and generally recognized as inhering in work of the 
character provided for in the contract.'' For example, the 
contractor begins to excavate the site and there is an unknown 
subterranean issue, such as a high, undisclosed water table in 
a place where water would not be expected. Finding such a 
condition would require different, extensive excavation efforts 
and increase the cost to the project.
---------------------------------------------------------------------------
    \1\ FAR 52.236-2

    When either Type 1 or Type 2 differing site conditions 
occur, the contractor must notify the federal agency's 
contracting officer, who is obliged to investigate the site 
conditions and determine if an equitable adjustment should be 
made and the contract modified to reflect the actual cost to 
---------------------------------------------------------------------------
perform given the unexpected conditions.

    Bilateral and Unilateral Change Orders

    FAR Part 43.103 discusses the different types of change 
orders available to a contractor. On a federal construction 
project, there are bilateral change orders and unilateral 
change orders. A bilateral change order, or modification, to a 
contract is a supplemental agreement where the parties have 
negotiated and agreed the specified additional work that will 
be accomplished in return for specified consideration, normally 
additional money and/or time. Where a contractor accepts and 
signs without reservation or protest a bilateral contract 
modification, it is generally barred by accord and satisfaction 
from later claiming an additional adjustment.

    A unilateral change order, or modification, is one which is 
issued by the contracting officer without requiring the consent 
or signature of the contractor. Unilateral change orders 
typically arise when the parties agree that there is a changed 
condition, but cannot agree on the extent of the change, price 
and/or impact on schedule. It is a one-sided directive from the 
federal agency to perform and, although a contractor must abide 
by a unilateral directive, it is free to file a claim for the 
additional costs or time incurred beyond what set forth in the 
modification. Since a unilateral change order does not require 
the contractor's signature, the change order cannot act as a 
release of further claims.

    Submitting a Change Order

    Bilateral change orders are common in both the federal and 
private construction markets. In either context, parties can 
agree upon changes in scope of work. The difference in the 
federal market is that a federal agency does not act like a 
private entity. The federal agency does not have the same 
incentives to quickly finish a project or act in the best 
interest of the construction project. The federal agency has 
the luxury of time and vast resources that small businesses, in 
particular, simply do not have. To that end, contracting 
officers will often try to force a contractor to sign a 
bilateral modification for less time and money than a 
contractor has requested knowing that the bilateral contains 
binding release language. A contractor may sign that 
modification for the sake of certainty, particularly if the CO 
has indicated that there may be some dispute regarding scope of 
work. That said, the contractor at least has a choice.

    Unilateral change orders are a different story and are 
unique to the federal market. Here, the government holds all 
the cards and can decree by fiat that a contractor will change 
the scope of work. There is no ``submission'' process per say. 
The government agency simply issues a modification, requiring 
the contractor to proceed for the price indicated. The 
contractor, especially a small business contractor, has little 
recourse but to comply with the federal agency's directive, or 
suffer the consequences, financial or otherwise.

    The process for submitting a bilateral change order begins 
when a party to the contract realizes a desire or need to 
modify the scope of work. A request for a change order may be 
generated from the contractor and sent to the federal agency, 
typically to the CO. FAR Part 43.204 states that a CO ``shall 
negotiate equitable adjustments resulting from change orders in 
the shortest practicable time.'' Unfortunately, the time is 
seldom short, but the contractor is told that it must continue 
to perform and not delay job completion. Failure to comply 
could result in default, a poor performance rating, or both. 
Alternatively, a change may be requested or directed by the 
government and sent to the contractor. The contractor will 
price the cost for additional work and submit it to the CO. 
Only contracting officers can sign change orders and bind the 
government.\2\
---------------------------------------------------------------------------
    \2\ FAR 43.102

    Often the COs are not very involved on a construction 
project. Typically, the project engineer, or other lower level 
government personnel, are the only ones who are personally 
involved in and physically at the project and understand the 
problem. This is especially problematic when a change order is 
needed quickly. Lower level government personnel will often 
tell a contractor to do the extra work prior to receiving a 
change order. This puts the contractor in a difficult bind. 
Delays in changing the scope of work can have a ripple effect, 
costing the government and contractor excess money and delaying 
the overall completion of the project. If the contractor 
proceeds without a change order, however, the contractor is put 
---------------------------------------------------------------------------
at risk and faces potential liability should an issue arise.

    Issues Facing Small Businesses with Claims against Federal 
Agencies

    When small business contractors and federal agencies 
disagree as to when work is, or is not, covered under a 
construction contract, a contractor may file a claim for 
equitable adjustment, or a certified claim, wherein it demands 
payment from the government. The claims process is often long, 
expensive and risky. Small businesses neither have the luxury 
of deep pockets to bear long periods of time without payment, 
nor can they generally handle such risk. The claims process 
generally takes years--sometimes five or more years--to 
conclude. During that time, small businesses may have to pay 
thousands, or tens of thousands, of dollars in legal fees for 
the potential benefit of being paid pennies on the dollar later 
through a settlement that it is forced to accept simply to cut 
its losses and survive. That is the simple reality of the 
process.

    These problems were most recently publicized on the 
Department of Veterans Affairs' Aurora Hospital project in 
Colorado, which was referenced above. On the VA Aurora Hospital 
project, the refusal of the VA to process appropriate contract 
modifications left the general contractor and its 
subcontractors without proper payment for extended periods of 
time with severe consequences. The contracting officer there 
had a practice of issuing unilateral change orders for 10% of 
the value claimed for the additional work. He promised that 
these modifications represented ``part one'' of what would be a 
``two part'' change order. The problem was that ``part two'' 
often never came and the costs for additional work totaled tens 
of millions of dollars. Along the way, the VA simply stopped 
processing change orders.\3\ Small companies rely on prompt 
payments to meet payroll and expenses, often unable to cover 
those costs for very long.\4\ Many rely on bank loans and lines 
of credit to bridge the gap, but on the Aurora project some 
banks balked at letting small business clients rely on its 
money to continue work.\5\ According to the Colorado SBA, at 
least 33 small businesses were not paid for work in a timely 
fashion, and some were waiting more than a year after work was 
completed for payment.\6\ Of those 33 companies, at least two 
filed for bankruptcy.\7\ The prime contractor even paid 
subcontractors several million dollars out of its own pockets 
while waiting for payment from the VA, which was highly 
unusual.\8\ While the project in Aurora is a recent and, 
unfortunately, well-known example, problems with processing 
change orders happen in every federal construction agency on a 
regular basis. The problem is that those change order delays 
are happening on projects worth $5 million, $10 million and 
$100 million, over which Congress does not ordinarily conduct 
oversight. The issue is that when the dollar amount is not 
high, and media attention is not existent, meaning that there's 
a lack of public outrage, the problems persist but go unnoticed 
by everyone except the small business that may have to close 
its doors.
---------------------------------------------------------------------------
    \3\ David Migoya & Mark Matthews, Aurora VA Hospital Project 
Spooked Subcontractors, Causing Cost Hikes, Denv. Post, May 15, 2015 
available at http://www.denverpost.com/news/ci--28125325/
aurora-va-hospital-project-spooked-subcontractors-causing-cost
    \4\ Id.
    \5\ Id.
    \6\ Cathy Proctor, SBA: Progress being made on Helping Unpaid VA 
Hospital Subcontractors, Denv. Bus. J., April 4, 2013 available at 
http://www.bizjournals.com/denver/news/2013/04/04/sba-urges-va-to-
speed-payments-for.html
    \7\ Id.
    \8\ Id.

    There will always be legitimate discrepancies between a 
small business contractor and the government based on the terms 
and scope of a contract. That's normal. However, our concern is 
when the claims process is used unfairly--where the government 
fails to act in good faith--to the detriment of small 
businesses. Generally speaking, project funds comes from a 
different budget account than the funds used to litigate and 
pay claims. Consequently, with project budgets tight, some 
federal contracting officers may tell contractors that there 
will be no change orders issued on a project, or no further 
change orders issued, regardless of how apparent the need may 
be for a modification. That happens. If there is an issue, the 
contractor will have to do the work and file a claim. The 
expense of litigating the claim, in the long run, will often 
cost more to the government and taxpayers than issuing the 
change order in the ordinary course. It will certainly result 
in additional costs to the contractor. However, forcing a 
contractor into this situation is not something that will 
typically impact the contracting officer on the project or that 
project's budget. As such, it is easier for the government to 
simply kick the can down the road and use the unlimited time 
and financial resources of the federal government to wait the 
small business out until it can no longer afford to continue, 
---------------------------------------------------------------------------
forcing it to settle.

    Thank you again for inviting me to testify before the 
committee on this important topic. I look forward to answering 
your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                   Statement of Mr. Greg Long

          President and Owner of Long Electric Company

 On behalf of the National Electrical Contractors Association 
                             (NECA)

         Subcommittee on Contracting and the Workforce

   Subcommittee on Investigations, Oversight, and Regulations

                  Committee on Small Business

                          May 25, 2017

    Thank you Chairman Knight, Chairman Kelly, Ranking Member 
Murphy, Ranking Member Adams, and members of the both 
Subcommittees for inviting me to testify today at this very 
important hearing. On behalf of the National Electrical 
Contractors Association (NECA), we greatly appreciate the 
opportunity to submit a statement for the record to the 
Subcommittee on Contracting and the Workforce and the 
Subcommittee on Investigations, Oversight, and Regulations on 
``All Work and No Pay: Change Orders Delayed for Small 
Construction Contractors.'' The subcommittees are to be 
commended for holding this important hearing to address the 
critical issue of change orders and their effect on small 
businesses, particularly within the construction industry.

    My name is Greg Long and I am the President and CEO of Long 
Electric Company located in Napa Valley, California. Shortly 
after graduating from Napa High School, I entered the 
electrical trades in 1979 and quickly moved through the ranks. 
Later, I founded Long Electric company in 1990. Over the years, 
our family-owned business has provided its services for 
everything from local schools to hospitals, wineries, and 
various sustainable energy projects. Our business has never 
seen more exciting times as we continue to promise that ``not 
only are we large enough to do the job, we are small enough to 
care.''

    We at Long Electric are proud members of the National 
Electrical Contractors Association (NECA), where I have had the 
honor of serving as a member of the NECA Northern California 
Chapter's Board of Directors since 1994. NECA is the nationally 
recognized voice of the $130 billion electrical construction 
industry, that brings power, light, and communication 
technology to buildings and communities across the United 
States. NECA, as a member of the Construction Procurement 
Coalition, continues to build on a legacy of protecting the 
public and making innovation possible in construction 
contracting. We, as member contractors, strive to be solution-
providers for our customers and our industry expertise benefits 
everyone working on an electrical construction projects.

    Workforce Development and the Apprenticeship Program

    One of the ways which Long Electric and NECA are able to 
provide the highest level of electrical work comes from our 
involvement in a rigorous and rewarding training program. We 
are extremely proud of the level of skill and professionalism 
that is crafted in each-and-every one of our electricians 
nationwide by these programs. While there is true merit to a 
traditional college education, our programs offer an 
experience, education and career path that rivals the colleges 
and universities of this country, all without the burden of 
graduating with hundreds of thousands of dollars in student 
loan debt and no guarantee of employment.

    Over 70 years ago, NECA and the International Brotherhood 
of Electrical Workers (IBEW) embarked on a joint venture to 
develop the National Joint Apprenticeship Training Program 
(NJATC). The newly rechristened ``Electrical Training 
Alliance'' invests $100 million in private funds annually in 
what we believe is the largest and most successful 
apprenticeship and training program in the nation. Today, there 
are more than 300 jointly administered local programs that are 
trust financed and together we have trained over 350,000 
apprentices to journeyman status.

    Our apprenticeship program is a well-organized and 
supervised method to train people with little or no prior 
knowledge of a craft or trade to become capable, qualified 
craftpersons or journeypersons. It is an ``earn while you learn 
program.'' The ``on-the-job'' portion of the training is a 
full-time, well-paid job. The goal is to provide the electrical 
construction industry with the highest level of training and 
highly skilled workforce possible. To accomplish this goal, 
apprentices receive the highest level of training in the 
industry, with a requirement of 8,000 hours of on-the-job 
training and 900 hours of classroom time over a five-year 
period. Upon completion of the curriculum and on-the-job 
training, apprentices receive certificates documenting their 
successful completion of the program. Incidentally, all 
electrical apprentices receive incremental raises as they reach 
certain set milestones. They are not a burden to the taxpayers 
because the training is fully funded by the industry without 
any taxpayer assistance. Perhaps the greatest benefit is that 
in the end they are earning while they are learning. Each year, 
participants in the program contribute in excess of $600 
million dollars in federal, state, and local taxes. Lastly, 
they also receive retirement plans and medial coverage for 
themselves and their families that are also provided at no cost 
to the American taxpayer.

    Addressing our nation's current and future employment needs 
is critically important to our industry and we believe the 
existing apprenticeship infrastructure provided by construction 
trades is a sure-fire bet for success, particularly for small 
businesses. More important, the program is 100 percent industry 
designed and funded and is a wheel that does not need to be 
reinvented.

    The apprentices that graduate from our training centers 
work across the commercial and industrial sectors and 
specialize in a broad range of areas including traditional 
power and lighting, power quality, lighting controls, fire, 
life safety and security systems, backup power generation, 
communication and connectivity systems, automation controls and 
energy efficiency projects.

    While successfully completing this work, we on the 
management side of the business, often run into the topic of 
today's hearing, change orders.

    Change Orders: Their Current State and Effect on Small 
Construction Businesses

    Change orders are an essential part of every construction 
project. In a perfect world, we would have zero change orders 
and all jobs would be bid exactly as is, with no hiccups or 
complications in their completion., But that is not the world 
we live in. That said, our goal as contractors is to be as 
adaptable and accommodating as possible to the contracting 
officer's needs and to respond efficiency and effectively to 
their request for an equitable change.

    Today, a change order is defined as a written order, agreed 
upon by the owner, contractor and designer, authorizing changes 
to the scope of the work, the contract sum, and the contract 
time. While this appears to be a clear-cut definition, the 
processes that formalizes and compensates a contractor for a 
change order is not so. Due to the lack of a clear standard for 
administering change orders, beyond the requirement that they 
be within the ``scope of the project,'' much of the onus of 
risk falls directly on contractors like myself to accommodate 
contracting officers working on behalf of the federal 
government.

    A refusal to complete an order or to challenge the validity 
of a change order can result in a loss of payment or potential 
lawsuit by the contracting officer or even the prime 
contractor. Therefore, contractors proceed with the work and do 
their best to account for the consequential costs and risks 
incurred when the timing and scope of a job is altered.

    These costs and risk factors generally present themselves 
in one of three forms, either: 1) project and field conditions, 
known for delaying project completion like capacity issues, or 
season and weather changes; 2) added cost factors, including 
increased contract administration, supervision time for another 
job, and/or lost profits due to delayed scheduling; and, 3) 
labor productivity-related factors, involving the stacking of 
trades, morale and attitude, and/or crew size inefficiency. The 
combination of these factors amounts to one anxious estimator 
and project manager. This pair of individuals, in conjunction 
with the job's foreman, are then expected to issue a hastily 
revised and accurate bid proposal, where both parties 
expeditiously and in good faith can negotiate and adjust the 
contract price and/or the contract timing.

    Once we are able to navigate the various challenges change 
orders present, too often we collide with the very title of 
this hearing, All Work and No Pay. As stated previously, change 
orders do not exist in a perfect world. Instead, they thrive in 
a realm where contractors have extremely limited leverage in 
agreeing to completing the work and even less in extracting 
payment for their hard work. In some cases, contractors are not 
paid for as long as 18 months. In some cases, this can last 
even longer. This elongated period can be crippling to a small 
business like my own who must balance the books monthly and 
anticipate capital for upcoming project. If we are unable to 
anticipate prompt pay, or to receive prompt payment as 
guaranteed under the Prompt Payment Act of 1982 (PPA), our 
business is unable to function, let alone prosper.

    When timely payments are made under the PPA by the 
contracting officer to the prime contractor, subcontractors 
have no ability for knowing when that transaction takes place. 
This again adds another layer of complexity for subcontractors 
when it is time to be paid themselves. Jobs that have multiple 
layers of subcontractors can be extremely tough to navigate 
when the date of payment from the government to the prime 
contractor is unknown. Any solution that requires a notice of 
payment by the contracting officer would be gratefully welcomed 
by all contractors involved in this process.

    It is clear that the single most common area of dispute in 
the change order process leading to delayed work or payment is 
cost. In fact, a 2014 study by Michigan State University found 
that ``among cost-related disputes, items related to 
recoverable direct cost, overhead-profit percentages, and 
impact factors resulting in inconsequential costs constitute 
the clear majority of the disagreements.'' Every change order 
could hypothetically run into these problems, but those that 
are most prone are the ones that have not addressed an ``agreed 
upon price or percentage amount (for such costs) in the initial 
contract.'' This is disturbingly common as ``most standard 
contract documents do not provide specific guidance'' on these 
percentages. To make matters more complicated, subcontractors 
must deal with multiple parties, including other 
subcontractors, designers, prime contractors, and of course the 
owner of the project.

    The ultimate challenge for these issues is the true lack of 
any real profit for our business in the completion of a change 
order. In reality, most electrical contractors consider change 
orders as not profitable. Cases where change orders are truly 
profitable are few and far between. The same Michigan State 
University study mentioned previously found that change order 
work results in a profit of merely two-to-five percent, as 
opposed to the generally anticipated ten to 15 percent for the 
job as a whole. Once all other costs like overhead or direct 
material costs have been accounted for, electrical contractors 
have been found to make a profit of only 3.54 percent. This is 
drastically low and does not adequately account for the risk 
factors previously identified.

    Payment Bonds

    Branching out from the topic of change orders, one key 
component of the construction world that comes into play 
concerns bonds. Payment bonds are an essential investment where 
a financier provides a prime contractor with the backing of 
funding necessary to assure payment of its subcontractors and 
suppliers. These bonds are generally defined for a set amount 
of time and are held at a fixed interest rate. Typically bonds 
and the assurance we as contractors receive from them do not 
come into play until a contractor is unable to complete their 
work or pay for the work of subcontractors, in such a case the 
bonding company would then be obligated to do so.

    When considering change orders and the effect they may have 
on the bonding process it is paramount to recognize that in any 
dispute that may delay the construction timeline or negate the 
contract altogether, the bonding agency is obligated to provide 
services or payment in lieu of the faltering company. As a 
subcontractor, our main concern for such disputes generally 
arises over concerns of receiving payment for services. When a 
prime contractor becomes unable or unwilling to pay for 
services rendered, subcontractor are able to file a claim to 
the bonding agent. Under the Federal Miller Act of 1935, 
Federal Acquisition Regulation requires that payment bonds of 
this type be utilized on all jobs exceeding $150,000.

    Too often the information for contracting bonding officers 
or the text of the bond itself is either kept private or it 
remains privy to a handful of people involved on the job, 
making is extremely difficult for a subcontractor to extract 
the information from a contracting officer when need be. There 
is an industry wide need for and easier method to access bond 
information which could be fixed through the already existing 
network of internet platforms that house so many of todays 
construction documents.

    Opportunities Lay Ahead

    Although I have painted a gloomy picture of the current 
state of change orders, there are a handful of opportunities in 
the near future that have contractors like myself optimistic 
for the industry as a whole. The first, is the growth that the 
construction industry has experienced over the past year.

    At nearly a four percent increase since March 2016, our 
markets continue to expand. This growth, combined with the 
current political support for a nationwide infrastructure plan 
have the entire industry tinted with a positive glow.

    On a legislative note, we at NECA were delighted to learn 
about two recently introduced bills. The first, introduced by 
Rep. Bacon, H.R. 2350, the ``Small Business Know-Before-You-Bid 
Construction Transparency Act of 2017.'' This legislation aims 
at addressing the length of time it takes the federal 
government to review, approve and pay for equitable changes; 
the validity of payment assurances, such as payment bonds; and 
the timeliness of monthly payments. These reforms will 
streamline the process of bidding on federal construction work 
and allow subcontractors to adequately address the consistent 
and undue risk they assume when completing change order work.

    The second, introduced by Rep. Fitzpatrick, Rep. Murphy, 
and Chairman Knight, the ``Small Business Payment for 
Performance Act of 2017'' offers our contractors the ability to 
continue work without fear of withheld payments for change 
orders. The bill requires a partial payment of 50 percent 
within the time frame specified by the Prompt Payment Act for 
any additional work performed. This bill does note that the 50 
percent payment does not amount to a mutual agreement on price 
itself.

    Conclusion

    The issues this Committee is willing to tackle concerning 
change orders, bonds, and contract information are ones that do 
not just affect Long Electric's work in California or solely 
the electrical contracting industry; these are issues that 
affect each-and-every small business contractor and others 
bidding on government contracts nationwide.

    Thank you for the opportunity to testify at this very 
important hearing. NECA applauds the committee's unwavering 
efforts to examine these important components of our expanding 
construction economy. We are pleased and remain optimistic at 
this committee's efforts to address change order concerns. We 
will continue to offer our support in helping advance the 
committee's agenda and look forward to working with you all as 
you move forward in enacting smart and sound policy for the 
entirety of the construction industry.
                              Statement of

                           E. Colette Nelson

                         Chief Advocacy Officer

               American Subcontractors Association, Inc.

                            on behalf of the

              Construction Industry Procurement Coalition

                                 to the

                     U.S. House of Representatives

                      Committee on Small Business

               Subcommittee on Contracting and Workforce

       Subcommittee on Investigations, Oversight, and Regulations

                            for a hearing on

  ``All Work and No Pay: Change Orders Delayed for Small Construction 
                             Contractors''

                              May 25, 2017

                 Statement of E. Colette Nelson

          Construction Industry Procurement Coalition

    On behalf of the Construction Industry Procurement 
Coalition, I'd like to thank the Committee on Small Business, 
its members and staff for taking seriously construction 
industry concerns about processing and paying for change orders 
on federal construction projects. The Coalition is a 14-member 
group of trade associations representing construction design 
professionals, prime contractors, specialty trade contractors, 
subcontractors, suppliers, sureties and surety bond producers. 
For those of you who have worked with the construction industry 
on other issues, you know that all too frequently it is 
difficult for us to agree on almost anything. Thus, I am 
pleased to report to you that the construction industry is 
united on both the problem and possible solutions to the 
problem of slow approval and payment of change orders on 
federal construction projects.

    Since the United States government began purchasing 
construction services and materials--that is, since its 
inception--there have been disagreements between the government 
and its suppliers about payment. Indeed, even before the 
Declaration of Independence was signed, the states issued ``war 
bonds'' promising to pay the Continental Army's suppliers.

    In the construction industry, even in the private sector, 
we have more than our share of payment challenges. While George 
Washington was in charge of buying for the war effort, one of 
Virginia's other founding fathers, Thomas Jefferson, introduced 
the concept of a mechanics lien into the New World's statutory 
system. That is, since a construction contractor's work is 
incorporated into the real property and cannot easily be 
removed, the contractor who has not been paid may reduce its 
financial risk by acquiring an interest in that real property 
in the form of a mechanics lien. Eventually, the courts rules 
that a contractor cannot lien public property--the king's land. 
Congress responded by passing the Heard Act in 1894; this law 
required a prime contractor to provide a single performance and 
payment bond to protect the government and subcontractors, 
respectively. In 1935, Congress replaced the Heard Act with the 
Miller Act, which requires a federal prime construction 
contractor to post bonds guaranteeing both the performance of 
their contractual duties and the payment of their 
subcontractors and material suppliers.

    By the 1980's, the construction industry was again 
reporting challenges with getting paid on federal projects. 
Congress responded by enacting the Prompt Payment Act of 1982, 
and, when problems persisted, the Prompt Payment Act Amendments 
of 1988. The law established very specific time frames for the 
government to pay its construction prime contractors for work 
performed and for those prime contractors to pay their 
subcontractors and so on through the construction tiers. These 
laws have done an excellent job in assuring prompt payment on 
federal construction for progress payments and final payment--
but, unfortunately, not for requests for equitable adjustment, 
more commonly called change orders.

    I review this history both to show the insidious nature of 
payment problems on federal construction and to demonstrate 
Congress's willingness to address them. The legislative history 
also demonstrates that while the current statutory structure 
helps assure contractor payment, it also protects the federal 
government. For example, when a federal prime contractor 
submits an invoice for payment, it must include the following 
certification:

          ``I hereby certify, to the best of my knowledge and 
        belief, that--
          (1) The amounts requested are only for performance in 
        accordance with the specifications, terms, and 
        conditions of the contract;
          (2) All payments due to subcontractors and suppliers 
        from previous payments received under the contract have 
        been made, and timely payments will be made from the 
        proceeds of the payment covered by this certification, 
        in accordance with subcontract agreements and the 
        requirements of Chapter 39 of Title 31, Untied States 
        Code;
          (3) This request for progress payments does not 
        include any amounts which the prime contractor intends 
        to withhold or retain from a subcontractor or supplier 
        in accordance with the terms and conditions of the 
        subcontract; and
          (4) This certification is not to be construed as 
        final acceptance of a subcontractor's performance.''

    Penalties for a contractor who falsely certifies to the 
government are between $10,781.40 and $21,562.80 per claim, 
plus three times the amount of damages that the federal 
government sustains because of the false claim--certainly a 
deterrent to a false certification.

    As other witnesses will testify, existing payment 
protections for contractors on federal construction are not 
working when it comes to changes, more commonly referred to as 
change orders or requests for equitable adjustment. A change 
order, in its simplest form, is an agreement to affect a change 
to the already executed contract. Often, it is necessitated by 
added, deleted or simply changed work from the plans and 
specifications already bid and agreed upon. While a change 
order typically adds value to the contract in exchange for the 
changed scope, it also can delete funds, change work without 
affecting price, and add or subtract time to completion of the 
work. The change order process is complex, and involves the 
construction owner, the prime contractor and the subcontractor 
tasked with the change.

    In federal construction, the most easily identifiable 
change orders come from the federal government in what is 
commonly called a directed change--a ``written order designated 
or indicated to be a change order, make changes in the work 
within the general scope of the contract.'' This includes 
changes in the specifications, in the method or manner of 
performance, in the government-furnished property or services, 
or acceleration of the work.

    The Federal Acquisition Regulation requires a contractor to 
submit a request for payment for the increased cost of 
performing the revised contract within a fairly tight time 
frame--within 30 days after receipt of the written change order 
or notice. The FAR provides an additional incentive for a 
contractor to act expeditiously by stating that ``except for an 
adjustment based on defective specifications,'' no adjustment 
in cost can made for any costs incurred by the contractor 
``more than 20 days before the Contractor gives written notice 
as required.'' That means during a 20 to 30 day window, the 
prime contractor must consult with its subcontractors, and put 
together a cost estimate that will stand up to the federal 
government's strict pricing and audit requirements.

    Yet the federal government's rules establish no minimum 
requirements on when the government itself must review and 
approve the contractor's request for equitable adjustment. 
Instead, the FAR requires a contracting officer to ``negotiate 
equitable adjustments from change orders in the shortest 
practicable time'' with no further specificity. Thus, while the 
prime contractor and its subcontractors must act swiftly to 
price their increased work, all the while performing the work 
at the direction of the government, federal agencies apparently 
have interpreted ``shortest practicable time'' to mean a time 
that is administratively convenient for them.

    As an example, let's look at the stated policies and 
procedures of just one federal construction agency, the U.S. 
Army Corps of Engineers (USACE). Again, nothing in the FAR, the 
Department of Defense FAR Supplement (DFAR), the U.S. Army 
Supplement to the DFAR (AFARS) or the USACE Acquisition 
Instruction (UCI) [Version 3; 1Nov14) specifies time periods 
during which a contracting officer is required to act on a 
contractor's REA, on the contractor's request for additional 
funding or a schedule adjustment to accommodate the 
government's unilateral change order. In addition, the UCI 
specifies that any contract modification in excess of the 
Simplified Acquisition Threshold ($150,000) requires a formal 
Independent Government Cost Estimate (IGE), pursuant to USACE 
Procurement Instruction Letter (PIL) 2012-03-R1 (Requirements 
for Development, Review and Approval of the Independent 
Government Estimates (IGE)).

    Further, under USACE procedures, a contracting officer is 
authorized to bundle the contractor's requests for written 
change orders ``for ease of administrative processing,'' which 
is exclusively beneficial to the government. The USACE 
contracting officers routinely defer consideration of all of a 
contractor's REAs to the end of the construction project when 
they an be ``resolved as an omnibus settlement.'' Again, this 
is solely to the benefit of the government, since the 
contractor and all of the subcontractors and suppliers are 
funding the performance of the multiple unilateral change 
orders issued by the government during the total duration of 
contract performance. Most likely, such unconscionable deferral 
of action by the government flows from the desire to conduct 
only one IGE and the necessity to make certain that adequate 
funding is available to fund the ``omnibus settlement.''

    The Construction Industry Procurement Coalition hereby 
petitions this Committee and others in Congress to take action 
to provide relief to prime construction contractors and 
subcontractors from the slow processing and payment of change 
orders on federal construction. The Coalition has identified 
and supports several legislative solutions to the problems 
experienced by construction contractors and subcontractors with 
respect to change orders.

    Provide Notice of Agency Policy and Procedures on Change 
Orders

    The CIPC recommends that Congress require federal agencies 
to advise competing offerors about the agencies' policies with 
respect to the time for processing and paying for change 
orders, so that they make appropriate business judgments prior 
to submission of bids or offers.

    For example, if this proposal were in place, the USACE 
would have to tell its prospective bidders that it has the 
right to ``bundle'' the processing of change orders until the 
end of the project. By obtaining this information in advance, 
prospective offerors could factor into their offers to the 
federal government the risk and resulting cost of delayed 
payment for change orders. On projects with a short time frame, 
businesses simply may increase their bids to take into account 
the cost of money. On projects with a longer time frame, many 
businesses, particularly small and emerging firms, may choose 
not to participate.

    The proposed ``Small Business Know-Before-You-Bid 
Construction Transparency Act'' (H.R. 2350) takes one approach 
to this notice requirement by requiring a federal agency to 
actually report information about the agency's past performance 
in processing requests for equitable adjustment in its IFBs and 
RFPs. The Coalition supports H.R. 2350.

    Establish Deadlines for Agency Response to an REA

    The CIPC recommends that Congress specify deadlines for the 
issuance of a written change order and a response to the 
contractor's proposal for modification to the construction 
contract schedule and additional funding to cover the 
contractor's estimate of the additional costs associated with 
performing the work flowing from a unilateral change order. As 
noted previously, the FAR establishes deadlines for a 
contractor to submit an REA, but establishes no such deadlines 
for agency action.

    Such a directive, for example, could require that a 
contracting officer issue a final decision regarding an REA 
submitted by a small business within 14 days with respect to a 
request in the amount of $1 million or less and 28 days with 
respect to a request in an amount more than $1 million.

    Require Provisional Payment of 50 Percent of an REA

    The CIPC recommends that Congress establish a requirement 
that when an agency issues a unilateral change order, that the 
contracting officer provisionally authorize the payment of 50 
percent of the additional funds requested by the contractor to 
cover the government's unilateral change order, without an IGE.

    Such provisional payment is considered a best practice in 
the private construction market. For example, model documents 
published by ConsensusDocs--a coalition of more than 40 
construction owner, design professionals, contractor, 
subcontractor and surety organizations--state in their changes 
clause:

          ``8.2.2 The Parties shall negotiate expeditiously and 
        in good faith for appropriate adjustments, as 
        applicable, to the Contract Price or Contract Time 
        arising out of an Interim Directive. As the directed 
        Work is performed, Constructor shall submit its costs 
        for such Work with its application for payment 
        beginning with the next application for payment within 
        thirty (30) Days of the issuance of the Interim 
        Directive. If there is a dispute as to the cost to 
        Owner, Owner shall pay Constructor fifty percent (50%) 
        of its actual (incurred or committed) cost to perform 
        such Work. In such event, the Parties reserve their 
        rights as to the disputed amount, subject to the 
        requirements of ARTICLE 12 [Dispute Resolution and 
        Mitigation]. Owner's payment does not prejudice its 
        right to be reimbursed should it be determined that the 
        disputed work was within the scope of the Work. 
        Constructor's receipt of payment for the disputed work 
        does not prejudice its right to receive full payment 
        for the disputed work should it be determined that the 
        disputed work is not within the scope of the Work. 
        Undisputed amounts may be included in applications for 
        payment and shall be paid by Owner in accordance with 
        this Agreement.''

    Excerpt from ConsensusDocs Form 200, Standard Agreement and 
General Conditions Between Owner and Constructor (Lump Sum) 
(2017).

    The CIPC notes that, under the Prompt Payment Act 
Amendments of 1988, such payment to a prime contractor would be 
required to flow through to subcontractors for their 
performance on such change order work.

    Require Regular Reports on the Status of REAs

    The CIPC recommends that Congress require federal agencies 
to regularly report to their prime contractors, actions taken 
on requests for equitable adjustment. Specifically, CIPC 
suggests that a federal agency include with each progress 
payment to a prime contractor, information on the status of 
each REA submitted by the contractor. Contractors, particularly 
small and emerging firms, must plan and carefully manage their 
cash flow. A status report on its REAs would alert a contractor 
whether or when it can expect payment for change order work 
performed. Alternatively, a federal agency could post such 
information on an appropriate government Web site.

    A requirement for regular status reports on REA would 
complement other payment transparency provisions supported by 
the CIPC. This includes language included in H.R. 2350, which 
would require a federal agency to post on a Web site each 
payment made to the prime contractor, including the date of 
payment and the amount paid, specifying any amounts withheld 
from the amount requested by the prime contractor and a general 
explanation of why an amount was withheld. This information 
would allow a subcontractor or supplier to determine when its 
payment is due, without resorting to contacting directly the 
already harried federal contracting officer or the prime 
contractor. Further, the prime contractor would benefit from 
having a clear statement of why its federal customer did not 
issue full payment so that it can more expeditiously address 
and correct any problems.

    The CIPC also supports the provision in H.R. 2350, which 
would require a federal agency to post on a Web site a copy of 
any payment bond provided for the contract and any modification 
to such bond required by the agency. This information will 
allow a subcontractor or supplier to obtain a copy of the 
payment bond without resorting to contracting directly the 
contracting officer or the prime contractor. Subcontractors and 
suppliers need a copy of the bond to determine its existence 
and validity and where required notices must be provided.

    Thank you again for inviting the Construction Industry 
Procurement Coalition to testify before the committee today. I 
look forward to answering any questions you may have now or 
subsequent to the hearing.
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