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In the Magazine

Business Matters: Government vs. private sector contracting

May 28, 2009 |

Although some construction companies get all the work they need in the private sector, many develop a mixture of private and govern ment work. Since the flow of government dollars is fairly steady, these companies will increase their government work when the economy is slow and migrate back into more private work when the economy is booming. And if your company is small and you want to grow you need to seriously consider grabbing a slice of the government work – whether it be city, state or federal.

But getting into government work is not as easy as it may sound. The rules are different, the margins slim and the competition tough. There are no handshake contracts. You don’t market your company on the golf course and you have to run your company and your jobs exactly the way the government dictates or you won’t even qualify to bid.

Financials and bonding
“For government work you have to have an extremely strong balance sheet, all the necessary bonding and incredible liquidity,” says Rick Macchiarulo, CFO for Tully Construction, Flushing, New York. “Without those it’s virtually impossible to secure major government projects. That’s a major barrier to entry for a lot of small companies and something they have to develop over time. A lot of smaller companies wind up subbing for us because they can’t get the bonding.”

Each state has different requirements when it comes to prequalifying contractors, but most follow a similar formula. To work for the Texas Department of Transportation, contractors have to requalify every year, says Larry Wagner, chief financial officer of Infrastructure Services in Houston. This involves completing and submitting a lengthy questionnaire that shows your financial capability, equipment assets, resources, relationships with vendors, the experience of the owners and key personnel and the types of work you’ve done in the past. “But the main thing they look at is your financial ratio,” Wagner says. “It works out to 20 times your working capital, fully audited, of course. So if you have $10 million in working capital, that means you can do up to $200 million in work for them.”

Bonding requirements can vary considerably on private sector contracts, but by law almost all government agencies require bid bonds, performance bonds and payment bonds on any public project, according to the National Association of Surety Bond Producers. These bonds protect the owner of the project (the government or the public) against contractor failure, and since mechanics liens can’t be levied against the government, they protect laborers, material suppliers and subcontractors against non-payment.

Low-bid, low-margin business
In the private sector a strong working relationship or a good track record can win you jobs even when your prices aren’t the lowest. In government jobs that doesn’t happen. Everything, by law, goes to the lowest bidder; and that can put a real squeeze on profit margins or turn small errors in bidding into big financial setbacks.

“We don’t make much money on government work,” says Rebecca Fitzsimmons, vice president of finance for J.H. Rudolph & Company, Evansville, Indiana, a company that performs a mixture of public and private sector work. “There’s not much profit in it. It’s very competitive.” Margins are better on the private side, but the public jobs also help pay for overhead which can help the company be more competitive on the private side as well, she says.

Nonetheless, there are companies such as Tully that do government work almost exclusively. For them the key to keeping margins from being squeezed in a low bid environment is to run a rigorously efficient operation with no mistakes or loose ends, to watch cash flow and to manage change orders, Macchiarulo says.