Magazine article The Small Business Advocate

Reform of Procurement Rule Will Save Small Architectural & Engineering Firms $335 Million

Magazine article The Small Business Advocate

Reform of Procurement Rule Will Save Small Architectural & Engineering Firms $335 Million

Article excerpt

A final rule issued on March 19 will save $355 million for small architectural and engineering (A&E) firms that contract with the federal government and improve these small firms' ability to compete for federal procurement dollars. The rule by the Federal Acquisition Council (FAR) revises the "retainage" clause applied to federal contracts for A&E services, which mandated that 10 percent of fees be withheld or retained from a firm, regardless of the firm's history of performance.

The retainage rule became a focus of Advocacy's r3 initiative - Regulatory Review and Reform. It was nominated to the r3 Top Ten List of Rules in Need of Review and Reform in 2008 by the Council on Federal Procurement of Architectural and Engineering Services (COFPAES). Designation on the Top Ten list triggered a process under Section 610 of the Regulatory Flexibility Act for agencies to consider whether the current regulations were still needed, and the degree to which technology, economic conditions, or other factors may have changed since the rules were first promulgated.

The practice of retainage can be traced backed to the construction industry of 1 84Os England. Essentially, it is an acquisition cost accounting tool allowing the buyer of services to withhold money from a contractor until the work is completed. The original intent was to have a pool of money available to finish the project if the contractor failed to do so. It was also justified as an incentive to complete the work. The American Subcontractors Association has found retainage to be unnecessary for the majority of contractors and subcontractors.

In testimony in 2008 before a House Small Business Subcommittee on Regulations, Health Care, and Trade, Paul Renker of the American Institute of Architects explained that "Having 10 percent (or greater) of their fee held back for what could be years," is very troubling for small firms with tight cash flows and profit margins. "The rule is causing significant financial hardships on small A&E firms contracting with the federal government," Renker stated.

The federal and state governments have required retainage in the construction industry for many years. It is unclear as to when retainage became applicable to federal contracts. …

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