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Magic Words to Stop the Worst DBE and MWBE Abuse (Part 2)

In our last article we identified the issue—a terrible problem plaguing DBE and MWBE subcontractors—wasting their time, draining their resources and crushing their expectations. We heard from a lot of you in response and appreciate your feedback and encouragement in addressing this problem that no one in the industry seems to want to talk about. That problem is, the practice of prime contractors soliciting proposals from you, including them in their bid, and then, after the prime contract is awarded to them, forgetting that you exist.

What makes this bad practice all the more galling is that they’re using and enjoying the benefit of your DBE and MWBE certification to make their bids look more attractive to procurement officers under pressure to meet DBE and MWBE contracting goals. (State agencies receiving federal money often get audited to check if the DBE and MWBE goals they claim to have met are backed up by proof of dollars actually paid to DBEs and MWBEs.)

So prime contractors are using you to help them win bids and then kicking you to the curb upon award. Sound familiar? You’re committed to them, but they’re not committed to you. The law would require you to honor your proposal and enter a subcontract upon award. But they can legally cast you aside. How is this legal? It’s complicated. But don’t let that get you depressed.

Rather than bore you with a long-drawn explanation of the prevailing contract law that might inform but not really help, we’re going to give you some language that you can insert in your subcontract proposals that might, emphasis on the might, bind the prime contractor to honor his commitment and enter a subcontract with you upon award. (Magic words don’t work all the time, right?)

The idea is based on the legal concept called “promissory estoppel.” If the prime contractor has led you to believe that he would enter a subcontract with you upon contract award—assured you in some way that you would get the subcontract—and you relied (perhaps to your detriment) on that assurance (perhaps a promise), and acted on your belief by committing time and resources to the cause with the expectation that the subcontract would be yours—if all this were the case, then you may have a shot at making the prime contractor live up to his commitment. It is this idea that the following language puts in writing:

“Subcontractor has devoted time, money, and resources toward preparing this bid in exchange for Customer’s express agreement that the parties shall have a binding contract consistent with the terms of this bid proposal and Customer unconditionally and irrevocably accepts this bid proposal if it (A) in any way uses or relies on the bid proposal or information therein to prepare “Customer’s bid” for the project at issue and Customer is awarded a contract for the work; or (B) divulges the bid or any information therein to others competing with Subcontractor for the work.”

This isn’t our language. It was developed and proposed by the American Subcontractor’s Association in 2013 to combat bid shopping, and probably largely ignored or forgotten because, generally speaking, the problem we’re talking about is not as huge a problem for non-MWBE and non-DBE subcontractors as it is for you. They’re being hired on the basis of price, efficiency and quality of work, and not because of the bidding preference an MWBE or DBE certification provides.

But that’s beside the point. The point is, this language has new value now because it can be used by you—all the hopeful and hardworking DBEs and MWBEs out there—to protect yourselves from wasting time and resources and from disappointment. It has value for those of you operating in a public contract bidding system, which, by establishing minority and women contacting goals and trying to level the playing field for DBEs and MWBEs, has created a perverse incentive for prime contractors to solicit subcontracting proposals simply for the purpose of winning the bid, while never intending to actually hire you.

More on this to come…

The Worst Abuse of MWBEs and DBEs (and it’s legal!)—Part 1

It happens all the time. The prime contractor of your dreams asks you, yes, you, your small subcontracting company, to give them a proposal, which they will then include as part of their bid for a major public works contract. So, excitedly, you spend hour upon hour, as a team of one (maybe two), pouring over the plans and specifications, doing take-offs and getting quotes for materials, to arrive at the subcontract price, knowing that the prime contractor is probably talking to other subcontractors just like you — bid shopping, as it’s called. Well, maybe the other subcontractors aren’t exactly like you, it may be hard to find other certified MWBEs and DBEs that do this type of work.

“You are the most competitive and we want to use you. You’re hired” the prime contractor calls and says, finally. “Plus, I like you. We’ll include your proposal in our bid package and hope for the best, fingers crossed.”

The hopeful subcontractor waits and waits, and waits and waits, until she gets busy with other work and forgets about the bid, then eventually she assumes that this prime contractor of her dreams lost the bid, even with the strength of her certified MWBE or DBE status and the ability that that gives the prime contractor to meet participation goals and thus make his bid even more attractive to procurement officers.

Then, about a year later, she picks up the newspaper and splashed across the front page is a photo of the prime contractor cutting a ribbon in celebration of the completion of the big bridge project. The very bridge project for which you were supposed to be a subcontractor. His big cheesy grin infuriates you. But isn’t your subcontract proposal a binding contract between you and the prime? Don’t you have contractual rights and remedies? Legal recourse? Can you sue that SOB?

The answer to these questions, generally, in a situation like this, is “no.” A prime contractor has no legal obligation to honor a subcontracting proposal even after he included that proposal in his bid. This holds true even if the prime tells the subcontractor that she’s hired (as in our example above), because usually prime contractors specify in writing that they will not be bound by oral promises until a subcontract is signed. On the other hand, the subcontractor, in her proposal, usually presents, as she must, all of the essential terms of a valid contract that would be binding on her, namely, the price, scope of work, and time of performance. And the prime contractor will say that he relied upon those terms.

But it gets even worse. If the reverse were true—if the prime contractor in our example above had called upon our subcontractor to perform in accordance with her proposal, and she said,

“eh, well, thank but no thanks, you never sent me a written subcontract to sign and it’s been a long time since I heard from you and I’ve had other, bigger opportunities pop up and I just don’t have the resources available right now to devote to this.”

If she had said something like that, guess what? Courts wouldn’t let the subcontractor off the hook. She would be forced to honor her bid and perform, or risk being sued for breach of contract. Courts see the subcontractor’s bid as a promise binding on the subcontractor. But not vice-a-versa. The prime contractor is not bound to a subcontract with the subcontractor or otherwise legally obligated to use her as a subcontractor even though her proposal was part of the prime’s bid.

The injustice! Totally unfair, unjust, right?

It’s worth repeating: the subcontractor’s bid proposal is binding on the subcontractor once the prime contractor accepts the proposal and includes it in his bid for award of the prime contract. But it doesn’t work both ways. A subcontractor’s proposal binds the subcontractor but not the prime contractor. How is this possible? How is that legal? The reasons are based on highly technical aspects of contract law that frankly don’t make a lot of sense.

Now, what makes matters even worse for MWBEs and DBEs, is that prime contractors get an additional and very valuable benefit by including your subcontract proposal, because it makes their bid more attractive to procurement officers who are desperate to satisfy participation goals. So, prime contractors have a huge incentive to solicit subcontracting proposals from MWBEs and DBEs that perhaps they have no intention for ultimately hiring and using.

If you’re a subcontractor, don’t despair. Possible solutions to this predicament, which represents a terrible injustice, will be addressed in our next article.

Let’s Bravely Face What Really Scares Contractors

The night is long for contractors who can’t sleep. Project problems and money worries are the monsters under their bed. But their biggest fear, the thing that keeps them up most, is not what they know—it’s what they don’t know. It’s the unknowns—risks and liabilities they don’t see coming until it’s too late—like a car you don’t see until it’s running you over. These unknown and potentially catastrophic risks lurking in the shadows of every project are what really worry contractors, because they can’t be controlled.

In this article we drag unknown risks and liabilities into the light and let you examine them. Because it’s not a question of “if,” but rather, “when” they will threaten you. Contractors who’ve been in business for long enough have encountered many of the risks we’re identifying today. They learned the hard way. And if their company survived, it is now stronger because of the experience. Because now they will be able to see a potential disaster coming in time to avoid it.

In our last article we described a common contract provision used by contractors to limit their liability on the project—a cap on liability. But there are some liabilities that smart owners would never agree to cap. And such risks and liabilities are often expressly excluded from such a cap. That is, the contract identifies the liability by name—like personal injury—and says that the liability cap does not apply to that kind of event. But remember that everything is negotiable, so as part of the negotiations regarding the amount of the cap (which our readers will recall from the last article should be the contract amount) you may also wish to discuss exactly what liabilities are included and excluded from the cap. First, your failure to perform the contract, for whatever reason, should always be included as one of the events to which the liability cap applies. But let’s consider some others.

Third Party Indemnification

This is very often excluded from liability caps. But what is it? These are lawsuits against you by people or entities that aren’t a party to your contract with the project owner. So, for example, a personal injury lawsuit brought against you by someone who was allegedly injured by your work. Maybe a pedestrian falls into one of your excavation trenches and is crushed. Another example—maybe an adjacent property owner sues you for damage to his property and alleges that a sinkhole was caused by your work. Another example—maybe a subcontractor on the project sues you for fraud. The project owner could potentially be dragged into any and all of these lawsuits, and since his liability to the third party isn’t capped, the owner would want to make sure that your liability to him isn’t capped either.

Warranty of Title

We’re not talking about workmanship or the quality and conformity of materials. We’re talking about liens. If you don’t pay your subcontractors or suppliers, they could file mechanic’s liens. The liens attach to the owner’s property and thus injure it. Liens diminish the value of the owner’s property, make it difficult for the owner to obtain or continue financing, and make it virtually impossible to sell. So owners obviously would want to be able to sue you for the full amount of the liability you allegedly created by failing to pay subcontractors and suppliers.

Environmental Hazards

This one works both ways. Contractors don’t want to cap owner’s liability for preexisting conditions like hazardous materials discovered onsite once work gets underway. And likewise, the owner would never agree to limit or cap the liability of a contractor who improperly uses or releases hazardous materials onsite.

Gross Negligence or Willful Misconduct

Usually liability for mere negligence that is, acting in a way that is unreasonable under the circumstances, is often included as part of the cap. But gross negligence or willful misconduct—doing wrong on purpose maliciously or with what the law calls a “conscious disregard,” for the consequences, should of course be excluded from the cap, as liability for such extreme conduct is generally severe. This would include liability for fraud as well—which in many states can’t be capped by law.

Don’t forget about using sub-caps, as a possible negotiating tool. These caps are often referred to in contracts as “liquidated damages.” For example, you may wish to quantify the damages for certain events in give them their own caps. Take delays, for instance—“10% of contract price for delay liquidated damages, but 15% of the contract price for delay liquidated damages.”

And finally, here is something you may not know but should look for it in the contract. Owner’s, like you, buy insurance to protect themselves from some of the risks and liabilities and losses, and their contracts usually say that that coverage doesn’t reduce the cap on your liability to them. The reason, they say, is that they bought the insurance at their expense and you shouldn’t be able to benefit from it, and also because it was purchased to protect them, the owner, and not intended to alleviate your liability.

Stop Lawsuits Against Contractors and Cut Losses in Two Easy Steps (Step One)

Our contractor is excited. A big time government authority awarded her a multi-million dollar contract. But all she can think about is the money she will make—the economics—cutting costs, maximizing profit, efficiency, speed, quality and safety.

She knows that something could go wrong that will derail performance and eat her profits. She knows that bad circumstances outside of her control on this project might create a disaster that will put her company and perhaps even her into bankruptcy. That is a risk she’s willing to take. It’s a risk that all successful contractors are willing to take.

What our contractor doesn’t know, however, is how to use the law—particularly the provisions, terms and conditions of the contract—to limit that risk. And that is what we’re talking about here today. Contractors can use the written language of their contracts to protect themselves against all kinds of common disasters, crises and pitfalls that befall them from time to time.

We’re going to show you provisions that contractors sometimes use to shield themselves from claims and lawsuits and from getting impaled on additional costs and liabilities when things go bad.


The first thing to consider is a liability cap, sometimes referred to in a contract as a “limitation of liability.”

A typical provision may be drafted as follows:

“In no event shall the maximum aggregate liability of Contractor in respect of all claims arising out of or in connection with this Agreement or otherwise exceed [stated percentage] of the Contract Price regardless of whether any such liability may be based on contract, guarantee, indemnity, warranty, tort, including negligence or gross negligence, strict liability, or otherwise.”

“The maximum aggregate liability of each Party (other than the payment by Owner of the Contract Price) in respect of all claims arising out of or in connection with this Agreement, whether based in contract (including breach, warranty or indemnity) or tort (including fault, negligence or strict liability), or otherwise shall not exceed [stated percentage] of the Contract Price.”

Provisions like this should be in BOLD typeface, so that the other party can’t say weren’t aware of it. Of course if you sign a contract courts will presume you have read it. But if you’ve been involved in litigation before, you know that every little bit helps when you’re trying to enforce the terms of a contract.

Similar provisions limiting liability for consequential, incidental, punitive or special damages could also be used to make sure the downside is bottomless if something goes terribly wrong.

Why is contract language like this important? Because the other parties involved, the owners, the engineers, other contractors, are trying all the time to shift the risk of loss to you. Lenders want contractors, not the owner, to assume much of the risk of the project. Taking on some risk is what contracting is all about. But smart contractors make sure that they are assuming only those risks that are appropriate under the circumstances.

So let’s talk a little more about the liability cap. What should the amount of the cap be? It could be as high as the contract price, but try to negotiate for a lower one. Contractors usually do. Getting cap anywhere between 30 to 50% of the contract price is a win. Here are some things to take into consideration when negotiating a liability cap. How risky is the project? Is this an unusual project involving untested or new technology or means and methods developed specifically for this work? If so, you should be less willing to put the whole contract price at risk. Did you draft the plans and specifications? Or did the owner and his architects and engineers or some other third party. If you didn’t, if you’re relying on someone else’s design, then the risk of running into an unforeseen problem is greater, and you should try to get a cap that puts less than the whole contract price on the line. Consider the size of project in negotiating the cap as well. On big jobs, with many contractors and component parts, it’s unlikely that your default will damage the owner in amounts equal to your contract price. Do you have a great history of prior performance? Use that to get a more protective cap. Is your company one of only a few that can perform this kind of contract? Use that to get a bigger cap on your ultimate liabilities.

Can’t wait to send you Step 2 of this valuable article, valuable because the old adage is true: an ounce of prevention is worth a pound of cure.

Contractors and Architects Suing Each Other Architects Should Read This.

It’s a multi-million dollar construction contract and it’s halfway done. Then a snag—a terrible design error, so terrible that doing it the way the architect wants will cause the project to quite literally cave in on itself. What to do? Request a change? Denied.

“Proceed as planned,” says an unreasonable owner’s rep. and rejects your shop drawings that change the design and double the cost of the project. “You read the original plans and specifications before you bid this job.” She yells. “And you had a chance to visit the project site.”

“Terminate my contract and walk? Can I legally do that?” The contractor wonders aloud.

The owner finally agrees to some costly changes that will save the project from imploding, but refuses to admit that her architect made a mistake, and even worse, she hides behind the contract she made with the contractor and refuses to pay the contractor for the additional work.

“This is on you.” She says.

A lawyer advises the contractor that the contract’s one-sided terms in favor of the owner are going to make it very difficult to get paid for the additional work.

“What about the architect?” the contractor says. “He’s the one the made the mistake. He’s the one that should be on the hook. He’s the one that should pay. Can I sue the architect?”

The short answer is “no.” Generally, if you don’t have a contract with someone, then you can’t sue him for purely economic loss. By economic loss I mean money—your costs and expenses—payments made because of someone else’s actions. On a construction project, contractors typically don’t enter into contracts with architect. The owner is the party that has the contract with the architect. Contractors are therefore not in “privity,” with the architect, so can’t sue him for economic loss. Privity is a weird concept, sounds almost obscene. It’s a contractual relationship—an agreement with definite terms and a bargained-for exchange, you know, a quid pro quo. Without privity with someone, in this case an architect, that someone cannot be held responsible for causing you to lose money in a business transaction. Liability in a contractual relationship—for breach of contract—is based solely on whether one party performed the promises contained in his contract with the other.

And when you have a contract with someone, you usually can’t also sue him for negligence. By negligence we mean some action or failure to act that causes you harm. Harm, like injury, not economic loss. You need a contract with someone to sue him for economic loss, remember?

It works the other way too. If an owner sues both an architect and a contractor for defective construction, the architect can’t sue the contractor because there is no privity between them.

But, as with almost everything, there are exceptions. If a party (such as a contractor) can establish that the relationship was so close as to be the “functional equivalent of privity,” it may recover damages. So close, that the architect has a “duty of care” to the contractor. What does that mean? Here’s what: the contractor and architect are working closely together and the architect acts in a way or says things that make the contractor rely on the architect. Here’s what New York State’s highest court said:

“The rule is not that ‘recovery will not be granted to a third person for pecuniary loss arising from the negligent representations of a professional with whom he or she has had no contractual relationship.’ The long-standing rule is that recovery may be had for pecuniary loss arising from negligent representations where there is actual privity of contract between the parties or a relationship so close as to approach that of privity.”

“A relationship so close as to approach that of privity”—here are some examples of that taken from a legal treatise on the issue:

  • When an architect communicates with contractor in a way that is misleading, makes an affirmative misrepresentation to the contractor that cause the contractor harm.
  • The relationship between the prime contractor and the architectwas the functional equivalent of privity where 1) the architect was aware that its drawings would be used for the construction of the project by the contractor, 2) the contractor relied on the architect’s drawings and the architect was required to oversee construction. 3) There was actual “linking conduct” between the architect and the contractor. The architect reviewed submissions from the contractor and oversaw the actual construction.
  • Architect exercised a substantial amount of control over the project, which established a nexus between the parties sufficient to “substitute for privityof contract.”
  • The architect assumed extensive responsibility with respect to the project including, negotiation of the contract, interpretation of the contract, supervision of the work, and ultimately deciding to remove the contractor from the job.
  • The architect’scontract required the architect to administer the construction contract, to become familiar with the progress and quality of the work, and to determine if the work was proceeding in accordance with the contract documents. The architect also had the duty to interpret the contract documents, review the contractor’s payment requests, determine when the project was substantially completed, and the owner could terminate the contractor’s work if notified by the architect of the contractor’s “delay, neglect, or default.”

Upshot seems to be that anything more by the architect than simply preparing the plans and specifications prior to bid, and then disappearing from the scene, could make them liable for errors and omissions with respect to design.

Joint Ventures Part II: How NOT to commit DBE fraud

So another contactor tells you, “Joint ventures are a great way to win big contracts. Join up with me on this next one. Look at the money you can make. Look at the money I have made.”

You look. What he says is true. He HAS won big contracts and made beaucoup bucks. And you realize that you can too. His firm is not DBE certified. That’s why he’s talking to you. You’re a woman and a minority, so partnering with your firm will keep  doors open to lucrative new world of contracting opportunities for his firm. It’s a match made in contractor’s heaven.

But he wants to keep the arrangement loose. No need for a written joint venture agreement,” he says. “The details of our deal—how profits and losses are allocated, who is responsible for what work—will work themselves out during contract performance.”

How does that sound? What do you say? What should you say?

Federal and state regulations dictate how DBE / MWBEs must run their joint ventures.

Here’s the U.S. Government’s take on it:

“A DBE joint venture partner must be responsible for specific contract items of work, or clearly defined portions thereof. Responsibility means actually performing, managing and supervising the work with its own forces.”

In New York, a similar regulation defines a joint venture this way:

“A contractual agreement joining together two or more business enterprises, one of which is a certified minority – or woman – owned business enterprise, for the purpose of performing on a State contract. The certified minority – or woman – owned business enterprise must provide a percentage of value added services representing an equitable interest in the joint venture.”

Does that mean you can simply put your partner’s non-DBE employees on your payroll? Or, hire them as consultants and let them do the work? Do you have any special knowledge or expertise that your non-DBE partner doesn’t? Are you making decisions concerning the contract work, communicating with owners, architects and engineers? Are you personally attending important meeting and speaking for the joint venture?

What have you contributed to the joint venture in terms of money and property and credit? The federal regulations are very specific on what you, the DBE / MWBE need to bring to the table in order for your arrangement to be legit in the eyes of the law.

Here’s what the federal regulation says:

“The DBE joint venture partner must share in the capital contribution, control, management, risks and profits of the joint venture commensurate with its ownership interest.”

And in New York, “All parties [must] agree to share in the profits and losses of the business endeavor according to their percentage of equitable interest.”

So, a regulatory enforcement officer might ask, “What did you give in order to get a 50% stake in the joint venture? Your non-DBE partner put in all the manpower, put up all the working capital, has all the bonding capacity. All you appear to have contributed was your DBE certification. You have no special knowledge or expertise or experience doing the type of the contract work involved. Your non-DBE partner paid almost all the upfront costs of bidding and performing the contract. What’s up with that? On paper you own 50% of the joint venture, but it looks like the amount you’ve earned is a flat fee equal to 5% of the contract price. If there were a loss on this contract, your non-DBE partner would eat it, not you—because he has funded the cost of performance.”

And finally, “how is it that your joint venture can take credit for $X amount of dollars toward DBE / MWBE contacting goals when your firm has done little or nothing to advance the performance of the contract work?”

Here’s how is DBE participation is counted toward goals in a joint venture:

When a DBE performs as a participant in a  joint venture, count a portion of the total dollar value of the contract equal to the distinct, clearly defined portion of the work of the  contract that the DBE performs with its own forces toward DBE goals.

If you are a contractor bidding on a public contract, don’t be the bad guy and try to take advantage of the starving DBE / MWBE firm. Try your best to find a qualified and competent DBE to perform work on your contract. Pass-through or fronting schemes designed to satisfy DBE goals could lead to criminal charges. Can’t meet the DBE goal? Make sure to document your efforts to meet it, because you can fight for the contract award if you are the low bidder. Using those documents, if you can demonstrate “good faith efforts” to meet the DBE goal, you cannot be denied contract award.

Get Big Government Contracts with Joint Ventures (Part I).

Many DBEs or MWBEs starting out don’t understand what joint ventures are, how they work or why they’re important. This lack of knowledge can get you into big trouble and make joint ventures a dangerous proposition.

You may have a vague sense of what “joint venture” means—working together with someone else on something—but if you’ve never been involved in one, it’s hard to know the risks and rewards or whether the arrangement is right for your business. This article (and the next), we hope, will expand your understanding of joint ventures so that you can see the possibilities they hold, see them in the context of a larger strategic business plan, comply with strict DBE/MWBE regulations concerning joint ventures, weigh your options, engage in meaningful discussion with colleagues and associates, and, when it comes down to negotiating the terms of a joint venture, be smart about them and have a firm grasp of the important issues.

Essentially, joint ventures function as a partnership but for a specific purpose and usually for a limited period of time. They exist by voluntary agreement with another person or business, and have as their aim the accomplishment of certain concrete, defined objectives. In our industry those objectives are the successful and complete performance of contracts. How to properly structure your joint venture will depend largely on what those objectives are, what the subject matter of your contract is. By subject matter, we mean—are you performing public construction? Perhaps it’s research and development? Professional services? Supply?

In any case, there are some basic elements to joint ventures, and very importantly, special requirements for non-DBE/DBE or non-MWBE/MWBE joint ventures—strict regulations that must be complied with, regulations designed to circumvent fraud—the situation where the DBE/MWBE is not really bringing anything to the table besides its certification and the preference to contract award that come with that certification. Beware of the non-DBE that wants to join up and bid a contract but doesn’t ask anything of you—already has all the capability to perform the contract itself. That’s a recipe for criminal liability.

With joint venture agreements, as with any agreement, the devil is in the details. If your joint venture is more of a long term arrangement, where you’ll be bidding or working on multiple contracts with your partner for an extended period of time, you may wish to consider creating a new business entity with your partner. Other arrangements include special purpose vehicles, joint marketing agreements, license agreements and subcontracts, among others. But basically all of these arrangements boil down to written language—whether in the form of a partnership agreement or LLC operating agreement, for example—the terms of which are negotiable. The following is a checklist of topics you should consider at the beginning of these negotiations:

  • Clear business objectives
  • Communication arrangements between organizations/teams
  • Financial structure
  • Protection of your interests (trade secrets, customer lists)
  • Daily/strategic decision making responsibilities
  • Dispute resolution procedures
  • Legal structure for your joint venture (contractual co-operation for a defined project, partnership or unlimited partnership, limited liability company)
  • Bank account arrangements will depend on the legal model chosen, although a new account can be set up for a single project.
  • Single point of contact for client communication
  • Sales and marketing activities
  • New business generation (if applicable)
  • Termination procedures—how and when will the joint end?
  • Ownership of assets in the joint venture
  • Allocation of any profit and liabilities resulting from the joint venture

So, there’s a lot to think about, a lot to think through in structuring any joint venture. Plus, with joint ventures between DBEs and non-DBEs, there’s the added pressure of regulatory compliance. Non-DBEs are strongly encouraged by regulations and procurement agency policy, to partner with DBEs or MWBEs on public work. And in many instances, a non-DBE’s inability to secure such partnerships has cost them contracts. In this context, joint ventures become an important tool. They function in the arena of public contracting to unlock the door to big contracts.

Federal regulations define them as “an association of a DBE firm and one or more other firms to carry out a single, for-profit business enterprise, for which the parties combine their property, capital, efforts, skills and knowledge, and in which the DBE is responsible for a distinct, clearly defined portion of the work of the contract and whose share in the capital contribution, control, management, risks, and profits of the joint venture are commensurate with its ownership interest.” (See 49 CFR 26.5 – What do the terms used in this part mean?)

Notice the emphasis here on the DBE bringing something to the table, and being “responsible,” for certain, specified work. So, in your joint venture agreement, do you think that it might be good to clearly delineate, spell out separately, the DBE and non-DBE’s respective scopes of work? Of course it would. And do you think it would be smart to layout in clear detail the duties and responsibilities of both the DBE and non-DBE partners? Yes, obviously.

Our regular readers will see similarities here to the regulatory requirement that a DBE perform a “commercially useful function.”

We’ll have more on joint ventures in the next article. Stay tuned.


On November 29, 2017, the U.S. Department of Defense (DoD) issued its STTR 18.A Program Broad Agency Announcement and its SBIR 18.1 Program Broad Agency Announcement, beginning the 30-day pre-release window during which small businesses can communicate directly and privately with the Technical Points of Contact who authored the BAA topics. Discussions with topic authors during the pre-release period often can be invaluable opportunities to obtain not only useful information about a particular topic, but also technical clarifications that can help companies assess how well their technologies align with technology needs reflected in the DoD topics.
Once the pre-release period is over, small businesses can obtain technical clarifications only by posting questions publicly and anonymously on the SBIR/STTR Interactive Topic Information System. Responses to questions will likewise be posted publicly.

DoD will begin accepting proposals on January 8, 2018, which must be received by 8:00 pm on February 7, 2018.

To download the BAA’s go to DoD’s SBIR & STTR website here.

Creative, Effective, Efficient Legal Fee Arrangements

Today more than ever, clients require creative, flexible, and predictable approaches to the delivery and pricing of legal services. If implemented successfully, alternative fee arrangements provide substantial value and are mutually beneficial for the firm and the client.

Below are some examples of the alternative fee plans legal clients have find attractive.

Alternative Hourly Rates

Blended Hourly Rates – For some matters, a law firm may agree to bill the same rate for all lawyers who work on a client’s matters, regardless of each lawyer’s level or individual billing rate. Blended rates are determined on the basis of work the law firm expects to be provided for a matter and the billing rates of those lawyers the firm anticipates will work on the matter.

Volume Discounts – In situations where a client prefers traditional hourly rates, a law firm may consider providing hourly rate discounts on a sliding scale in return for that client guaranteeing a set level or volume of legal work.

Fixed or Flat Fees

Straight Fixed or Flat Fees – A law firm may be willing to provide some services for a set fee. This fee could cover a particular matter (e.g., a fixed fee for all work provided on an internal investigation) or a particular service (e.g., a flat fee for consulting services provided on a monthly basis). Fixed fees typically are set for individual matters or for an entire portfolio of matters, and may cover the entire life of a matter or be limited to a specific period of time or a particular task.

Fixed Fee or Pre-Agreed Upon Budget with Collar – Some fixed fee arrangements (and matters with pre-agreed upon budgets) will warrant a “collaring” arrangement. This fee arrangement anticipates engagements in which the amount of effort needed to fulfill the law firm’s obligation as responsible legal counsel is greater or less than what both the law firm and the client initially thought the effort would require.

Under such a collaring arrangement, the law firm and the client would agree that if the hourly value of the firm’s lawyer time expended on a matter falls considerably outside the fixed fee (or pre-agreed upon budget), the parties will share the fee upsides and downsides with each other.

Monthly Access and Advice Retainers – Although this is a variation of the straight fixed fee approach described above, an advice and access retainer has benefits that warrant further explanation. This approach makes sense in situations where a client wishes to be proactive in seeking legal advice to avoid legal exposure, but does not want to pay for expensive legal research every time a potential legal issue arises. This arrangement offers clients ready access to relatively inexpensive legal advice and offers the law firm the chance to add value to the client. It helps the law firm distinguish early on between those situations that are easily dealt with and others that, unaddressed, might expose the company to significant liability.

Phase-Based Fees – The firm will estimate a specific fee for each phase of a matter based on the work anticipated for each phase. In litigation, for example, this arrangement might result in a separate fee for each of the following phases:

  • Motion to dismiss
  • Discovery
  • Dispositive motions
  • Trial preparation
  • Trial

In transactional matters, phases of work might include due diligence, drafting of specific agreements, negotiating the terms and amount of the purchase/sale price, closing activities, etc. This approach could be implemented in a variety of ways. For example, the arrangement may be based on fixed fees, where the law firm charges a fixed fee for each matter phase. Another approach that might be taken would require the client to pay an estimated (budgeted) fee for each phase with a rationalization against actual billings at agreed-upon times, e.g., quarterly, annually, or when the matter is concluded.

Fee Caps – For matters in which the scope is understood and well defined beforehand, the firm may agree to cap its fees. Fee caps are determined based upon anticipated fees for the scope of work, and they can be set for the entirety of the matter or for each phase.

Risk Sharing Arrangements

Fee Holdbacks – In certain situations, the law firm can hold back an agreed-upon percentage from its monthly billings. In return, the law firm will have the opportunity to earn and be paid the full holdback amount at the client’s discretion. Whether the law firm earns back all or some of the holdback amount will be based on the client’s assessment of our performance against certain predetermined criteria, e.g., work quality, results, creativity, efficiency, cost-consciousness, collaboration with other outside counsel, and effective utilization of the client’s own resources. In these situations, the criteria are established up front. The client’s holdback determinations could be made annually or when the matter concludes. A fee holdback arrangement could be applied to a litigation or transactional matter.

Success Fees – Under this arrangement, the law firm would be eligible for a success fee or premium in addition to its prior billings, in the form of a performance bonus at the client’s discretion. A success fee can be a set fee, a graduated fee according to a mutually developed schedule, or a percentage of the law firm’s billings. As with a holdback, whether we earn a success fee will be based upon the client’s evaluation of our performance against predetermined criteria.

Broken Deal Discounts – The law firm would consider a discount off of its fees in the event that a project did not proceed beyond a certain stage of the transaction. For example, there would be an agreed upon substantial discount if the client chose not to proceed after completing its due diligence, followed by separate discounts should the client elect to proceed with documentation after completing due diligence, but then failed to reach a financial closing of the project.

Contingency Fees

Traditional Contingency – Under a traditional or full contingency arrangement, the law firm will defer its fees entirely in exchange for receiving an agreed upon portion of the client’s ultimate recovery. Typically, the client pays the expenses of the litigation.

Partial Contingency – In a partial contingency arrangement, the firm handles a matter at a reduced hourly rate and shares in a favorable recovery or resolution at a smaller percentage. Partial contingency arrangements reduce legal expenses during the course of a matter, and provide a mechanism for the firm to share litigation risk with the client. Defense cases can also be structured as partial contingency fees with success contingent on specific predetermined results or milestones being achieved.

For transactional matters, the firm may conduct the work at reduced hourly rates in exchange for a percentage of the value the client receives upon liquidation or sale.

Hybrid Fee Arrangements

Hybrid Fee Arrangements by Matter Phase – In certain situations, the billing arrangement that makes the greatest sense is a combination of several arrangements described above. For example, the law firm could estimate fixed fees for some matter phases, holdbacks on hourly rates for other phases, and success fees for other phases.

“Frequent-Flyer” Credits toward New Legal Services – The law firm may agree to provide a significant reduction in fees for one matter in exchange for the client’s commitment to assign other matters to us where we have not yet served the client. This could take the form of a discount on the instant matter, a credit against future billings for the new matters, or some combination.

To ensure alternative fee arrangements are successful, at the initiation of a new engagement, Kernan and Associates will invest significant time and effort to better understand the client’s ultimate objectives and preferred approach and legal strategy, as well as agree on the scope and parameters of the project. Because details of the matter are disclosed and discussed at the outset, the resulting fee arrangements typically provide the optimal balance between risk and reward for both parties.


Financial Forecasting – Cornerstone of a Successful Project

Everything seems to be going well in your contracting or consulting business… but there could be serious financial trouble lurking under the surface.

There is a strong correlation between “business confidence” and increasing profits, until the market shifts and uncovers business strategies have become stagnant and no longer apply to the changing industry. It is the fundamentally sound processes and relatively accurate estimation of the project that are critical tools needed for developing any successful venture, especially in lean times.

Professional accounting and financial forecasting throughout bidding and contract management is essential to achieving the greatest amount of profit on any given project. First, financial estimating involvement in the bidding process ensures a solid financial foundation for the project. The failure to keep realistic and accurate estimates at the outset, resulting in not forecasted revenue loss, is when the ineffective and failed business strategies become apparent. Moreover, during bidding, the special tools of accounting analysis and financial forecasting can help find construction funding; offer invaluable guidance on selecting markets, rating sites, raising capital, understanding financing options; and mastering cash flow management.

During the project, financial analysis can identify key performance indicators as the project is ongoing that will show red flags that the project is about to be under financial stress before the loss is catastrophic. Proper financial analysis is the canary in the coal mine for catastrophic problems. Additionally, financial planning allows estimates for delay costs and contract changes. A rudimentary spreadsheet will be unlikely to support government payment for additional delay costs.

To avoid these late reactors which may be quite costly…

NEEDED real-time access to forecast and industry trends

ABILITY to identify key performance indicators to assist in estimate costs of delay

ACCOUNTANT that is interested in estimating the project as it unfolds not just providing the filing on the quarterly reports.

Accurate financial analysis and forecasting allows contractors to avoid pitfalls and find profit centers. Make a practice doing it in your contracting business. It is the cornerstone of growth.