Pre-Qualification of Bidders
May 3, 2019
On too many projects, especially in the public bid market, facility owners are exposed to horrific problems due to work undertaken by a contractor unqualified to perform the required scope of work. That contractor may have been chosen because they submitted the lowest price; but in many cases, this selection criteria can be the beginning of a nightmare for the owner.
One red flag you can look for during the bid evaluation process is the low-price bidder being significantly lower than the other bidders. Additionally, if most of the other (higher) bidders are similar in price, that should raise another red flag related to the low bidder not fully understanding the scope of the project they are seeking to win.
If you are in a situation that you have to (or just prefer to) accept the low bidder in this process, there are some things public and private owners can do during the pre-bid period to avoid selecting a vendor that is unqualified to fulfill the project’s full scope of work. Consider establishing a robust pre-qualification process that, at a minimum, seeks facts on the following items:
- Documentation illustrating the contractor’s financial standing/strength.
- Request at least five (5) references from recent projects completed by the contractor within the past twelve months. Ideally, these projects should be similar to your project’s scope of work.
- Confirmation from the contractor’s surety (bonding company) that the contractor has the means to successfully complete the project, and the surety will provide Payment and Performance bonds, should the contractor be the lowest bidder.
- Documentation explaining the contractor’s safety program.
Other items that a qualified contractor should be able to provide could include:
- Audited Balance Sheet for prior year. The owner can apply certain liquidity tests related to the information on the balance sheet, primarily the Quick Ratio, also known as Acid-Test Ratio. The ratio is calculated as follows: Cash-on-Hand plus Accounts Receivable divided by Current Liabilities. Special attention should also be paid to the short and long-term debt levels. This information can often help provide an illustration of the contractor’s ability to meet financial obligations to vendors and keep their employees working vs. owners witnessing employees walking off the job because the proper materials to complete the job have not been provided or the contractor has failed to keep payroll current.
- A Letter of Credit from the contractor’s bank of at least $250,000. This helps assure a proper level of access to funds to meet the needs of projects during inevitable cash-on-hand fluctuations.
- A job-specific letter from the specified roof system manufacturer that the contractor is an approved applicator and the contractor (subject to satisfactory final inspections and completion of any punch list generated from the inspections) is able to obtain the specified warranty from the manufacturer for the owner. The manufacturer’s letter should state how many years the contractor has been an approved applicator of the specified roofing system and how many such applications have been successfully completed by the contractor. Any number of years less than five should be a red flag for the owner.
- A Certificate of Insurance (COI) confirming the contractor has adequate levels of required insurance coverage – Workers’ Compensation, General Liability, Auto Liability, and Excess Coverage. Note: The Excess Coverage, also known as an Umbrella policy, should carry no less than a $5 million limit. Depending on the complexity of the project, the interior contents of the building and the interruption sensitivity of the building’s operations, the Excess Coverage limit may be increased to $10 - $20 million. The COI should provide at least 30 days advance notice to the owner of cancellation of any policy.
- A list of any General Liability, Automotive and Excess Coverage claims the contractor has filed with its carrier within the past five years. The list should include a brief description of the claim and the contact information for the owner of the facility where the loss occurred.
- A copy of the contractor’s Experience Modified Rating (EMR). An EMR of 1.0 or greater indicates the contractor likely does not maintain a safe workplace and the owner should seriously consider disqualifying the contractor. The contractor can obtain the document from its insurance agent.
- A list of litigation, if any, the contractor has entered into with any owner or general contractor, architect or consultant within the past five years. Any litigation noted should be accompanied by a description of the litigation, the defendants and plaintiffs and the outcome of the litigation.
- An OSHA 300 Log from the prior year, signed by an officer of the contractor. If any violations occurred, request a list of violations incurred within the past three (3) years along with contact information for the OSHA officer who issued the citation.
- Copies of the contractor’s licenses for business and approval to work in the state where the proposed project is to take place. Example: Many states including Florida, Louisiana, Virginia and North Carolina require specialty contractors to pass written tests prior to being issued a license to perform work in the state for the particular specialty – roofing, electrical, mechanical, structural, etc.
- Number of years in continuous operation, if the contractor has ever filed for bankruptcy and if the contractor has any liens in place against it.
- Any subsidiaries, parent companies or other related entities.
In the interest of due diligence, the owner would:
- Contact the contractor’s insurance agent (listed on the COI) to confirm the provided coverages and levels are in place.
- Contact all references provided by the contractor to confirm the contractor’s statements.
- Contact all owners (if any) that have experienced an insurance claim to confirm satisfactory resolution of the claim by subject contractor.
By instituting a rigorous pre-qualification process for all contractors invited to bid, the owner and its representatives can do a more thorough job protecting the owner’s stakeholders – the tax-paying public, employees, students, administrators, board members, insurers, etc. – from unscrupulous contractors, hazardous operations and poor workmanship.