10 Common Pitfalls of Obtaining a Contract: A CPA’s Perspective

By Katie A. Beck, CPA – Audit Manager

Most contractors bid on a contract thinking that the job will be both profitable and good work for their company.  A careful review and understanding of the most up-to-date set of plans and contract specifications, including the composition and timing of the bid, is critical to the overall success of the job.

Below are ten factors to consider when bidding on a contract to increase the odds of success: 

1. Is this a type of work/size of contract that fits with your skill set?

By taking on a job that is outside your scope/size of expertise, you may have additional exposure to risk.    Contractors that take on a job substantially larger than any they have performed in the past may have difficulty managing such a larger contract.  A larger contract may require having a dedicated foreman, project manager or superintendent assigned to the job.  In addition, the job may require advance planning to obtain the materials, equipment and subcontractors needed for a specific stage. The job schedule may be more complex and require coordination with other contractors on the job.  The job may also require additional documentation to obtain payment for the work performed and may be held to a higher performance standard than smaller jobs.  Not only do contractors have to consider a job’s direct material, labor, equipment and subcontract costs, they must factor in indirect job costs, general overhead and financing costs

2. Can the contract be completed in the time frame specified in the contract?

Determine whether there are damages incurred if the work cannot be completed in time due to weather delays or other situations beyond your control.

3. Do you have the capacity to take on the job?

Many contractors will bid on any potential work without considering if they have the capacity to handle the job.  Do you have the resources in place to perform the work, or will you have to hire new employees or employees with specialized skills?  Will you have to hire additional managerial employees to handle the job?  If you do not have the employees needed, will you have to utilize subcontractors to perform parts of the job?  Will you need to acquire or rent equipment that you do not currently have?  You must consider the costs of obtaining the additional required resources when you price out the contract that you are bidding on.

4. Is the work in a jurisdiction that you are familiar with?

Rules, regulations and building codes vary by state and county.  You will need to find out where you must register to do business and what fees may apply.  You may be restricted as to the hours/days you can work.  You should also determine if the jurisdiction or the contract requires the use of Union labor.  

5. Are you able to comply with the additional standards that the contract may require?

Performing a contract for a governmental agency may be more complicated than performing a contract for a commercial customer.  Governmental jobs are often subject to the Davis-Bacon Act, which requires the payment of prevailing wages on public works projects for laborers and mechanics.  It applies to contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000.  These wages may be higher than you are currently paying your employees.  Many states have also passed prevailing wage laws with varying threshold amounts.  Certain governmental jobs may require the use of a specific percentage of disadvantaged employees or subcontractors.  Governmental jobs may also be subject to more stringent safety and compliance regulations than a commercial job.

6. What is the reputation of the potential customer?

Have you done your due diligence on the customer if you have not worked with them before?  What is their reputation in the community? Is the customer financially viable?  Will they try to push through low-margin change orders on the job, or ask you to perform work outside the scope of the contract without additional compensation?  Do they pay in a reasonable amount of time?  If you have a “pay-when-paid” clause in a contract and you are a subcontractor of another subcontractor, you may have a substantial delay before receiving payment.

7. Do you understand the type of contract?

Are you bidding on a fixed-price contract, a time-and-materials contract, a unit price contract, or some other type of contract?  If it is a fixed-price contract, have you considered all the components of the contact and priced it accordingly?  If it is a time-and materials-contract, is there a cap on the amount that you can charge?  If it is a unit price contract, have you properly priced the amounts of the components.

8. What are the payment terms in the contract?

A contractor may have a good profit margin on a contract but still have cash flow problems due to the payment terms in the contract.   The contractor will often front the costs of the job and may not be paid by the customer for 30-90 days after the invoice is submitted.  If there is a “pay-when-paid” or a “paid-if-paid” clause in the contract, the payment may be delayed for an additional amount of time depending on the timing of others’ work.  The contractor should attempt to have the same terms with their subcontractors as they do with the customer.    The contractor will need to have adequate cash reserves or access to financing to fund their operations.

9. What are the retention terms?

Many contracts have retention ranging from five to ten percent of each invoice submitted.  This is money that you front but are not paid for until the end of the contract.  For many contracts this is the entire profit on the job.   Try to negotiate a lower retention on the contract.  If that is not possible, negotiate to get a portion of the retention released at certain milestones.  You will also need to negotiate when the final retention can be billed. 

10. Will you need to obtain bonding for the job?

A contract may require the contractor to obtain bonding for a job.  Many sureties will require the contractor to provide financial statements that have been reviewed by a CPA.  The surety will look at financial and operational aspects of the contractor before determining if they will issue a bond.  The contractor may have to expend time and resources if they do not have a relationship with a surety or have not had to obtain a bond previously.

Performing due diligence before you bid on a new contract will enable you to identify issues before they arise and provide a greater chance of a successful outcome on the job.


About the Author:

Katie Beck has been in the practice of public accounting since 1996. She joined Thompson Greenspon in 2004 and is an audit manager of the firm. Prior to joining Thompson Greenspon, she worked in public accounting in Charlotte, North Carolina.

Katie is responsible for providing accounting, auditing and tax services to clients in various industries such as nonprofit organizations, construction, small business and employee benefit plans.

A graduate of State University of New York at Geneseo, she obtained a Bachelor of Science degree with a major in accounting. She has throughout her career participated in continuing education programs. She is a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants. 

Read more of Katie’s bio here

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