Where Contractors Go Broke

A new contractor wins their first government bid. The award letter feels like a milestone. Sometimes it is. Sometimes it's a warning sign hiding in plain sight.

If a bid wins because it's significantly lower than all the others, the contractor may not have priced the work correctly. The agency picks the bid because the rules require them to. The contractor performs the work at a loss — sometimes a small one, sometimes catastrophic — and learns the lesson the expensive way.

The difference between a winning bid and a winning profitable bid lives in line items most new contractors don't know to include: overhead allocation, contingencies, compliance costs, retention timing.

On any construction project, the scope of work changes. New conditions get discovered. The owner changes their mind. A subcontractor surfaces a real problem. These changes cost money, and the contractor performs the additional work.

The question is whether the contractor gets paid for it.

A change order is the document that authorizes additional work outside the original contract scope and obligates the owner to pay for it. Without one, the contractor has done extra work for free. With one — properly documented, properly priced, properly signed — the contractor preserves their margin.

Most contractors who lose money on government work lose it through changes that never got documented as change orders.

Retainage is a portion of each payment held back until conditions are met. The rate and the release conditions are in the contract and can differ from job to job.

Across several jobs the total adds up, and it is easy to lose track of what is held, what has been released, and what you are holding back from your own subs.

Keep a short list for every job: amount held, amount released, and the condition for release. When a job is nearing completion, that list tells you what money is waiting on which paper.