March 2012

Last month the Commonwealth Court issued an opinion that reiterated the need not deviate from the requirements of the bid specifications when bidding on public work.

Section 1402 of the Pennsylvania Borough Code requires all contracts in excess of the base amount of $18,500 to be made to the lowest responsible and responsive bidder.  Generally, the criteria set forth in the bid documents are mandatory and must be strictly adhered to in order for a bid to be valid in order to “to invite competition and to guard against favoritism, improvidence, extravagance, fraud and corruption in the award of municipal contracts.”. Fedorko Properties, Inc. v. Millcreek Township School District, 755 A.2d 118 (Pa.Cmwlth.2000); Kimmel v. Lower Paxton Township, 159 Pa.Cmwlth. 475, 633 A.2d 1271 (1993); Dunbar v. Downington Area School District, 901 A.2d 1120, 1126–27 (Pa.Cmwlth.2006) (citation omitted).

Yet, a municipality can waive deviations from the criteria in the bid documents and accept a non-compliant bid for public work if: (1) the effect of a waiver will not deprive a municipality of its assurance that the contract will be entered into, performed and guaranteed according to its specified requirements; and (2) a waiver will not adversely affect competitive bidding by placing a bidder in a position of advantage over other bidders. Gaeta v. Ridley School District, 788 A.2d 363 (Pa. 2002).

Recently, in Dragani v. Borough of Ambler, 37 A.3d 27 (Pa. Cmmw. 2012) the Commonwealth Court considered whether a bid that did not conform to the bid specifications by not including a consent of surety from a surety company listed with at least $20 million in underwriting capacity was a material defect that could not be waived.   The Commonwealth Court held it was a material defect that could not be waived and reversed the trial court’s refusal to issue an injunction preventing the award of the contract to the bidder with the defective bid.

On its face, Dragani appears to be similar to Gaeta.  There the Court held that a bidder’s failure to follow the bid specifications requiring a bid bond from a surety with a rating of A- or higher was a waivable defect and a School District could accept a bid when the bid bond posted only had a B rating.   The Gaeta Court held the defect was waivable because “the bid defect at issue was not material [and] the effect of a waiver did not deprive the School District of adequate assurance and did not confer a competitive advantage as would compel bid rejection.”  Gaeta at 509.

While a defect in a bid bond was potential waivable, the DraganiCourt concluded that a defect in a performance bond was not.  The Dragani Court distinguished bid bonds from performance bonds.  Unlike performance bonds, bid bonds do not deprive the municipality of assurance that the project will be completed.  The Court noted that “the restrictive purpose, duration, and scope of liability associated with bid bonds favors a degree of latitude in terms of absolute responsiveness.”  Dragani, at 32.

Moreover, the Dragani Court also held that a defect is not waivable “when the specifications provide that the bid will not be considered if that particular requirement is not met.” Id at 33.  (citing Glasgow v. Pennsylvania Department of Transportation, 851 A.2d 1014 (Pa.Cmwlth.2004)).  The Court noted that the bid specifications at hand stated that no bid would be considered if a confirming performance bond was not posted.  Therefore, the Court held that the municipality removed any discretion it had in waiving the defect in the performance bond.  The Court concluded that the awarded bidder’s failure to provide a consent of surety with an underwriting capacity of $20 million or more was a “legally disqualifying error.”

The Dragani holding is important to both municipalities and contractors bidding on public work.  Municipalities should make sure their bid specifications are not ambiguous.  If the municipality wishes to reserve the right to waive defects in the bid, then it should exclude language from the bid specifications that state bids will not be accepted if certain criteria are not met.  While a defect may ultimately not be deemed waivable, the municipality can assure itself that it will not face an argument that under Dragani it waived the right to waive.  From a contractor’s perspective, the Dragani court once again demonstrates the need not to deviate from any of the bid requirements when bidding on public work.

 

 

 

 

 

 

 

 

Most of the attention given to the  Moving Ahead for Progress in the 21st Century Act (“MAP-21”) highway spending bill that the Senate recently passed has been focused on the potential stimulating effect the bill with have on the construction industry in terms of dollars that will be allocated to certain projects.  Of interest to contractors working on Pennsylvania transportation project is the Bill’s potential effect on Pennsylvania’s competitive bid laws.

Section C of the bill is dedicated to “Acceleration of Project Delivery” and states that is “policy of the United States” that various recipients of Federal Transportation funds “accelerate project delivery and reduce costs.”  The Bill charges the Secretary of Transportation to develop best practices to achieve the goal of accelerating project delivery.

In order to achieve the goal, the Bill amends section 23 U.S.C. 112(b), which regulates bidding on Federal Highway projects, to allow for the use of the “Construction Manager/General Contractor” form of project delivery.  The Construction Manager / General Contractor (CM/GC) project delivery method allows an owner to engage a construction manager during the design process to provide constructibility input. The Construction Manager is generally selected on the basis of qualifications, past experience or a best-value basis. During the design phase, the construction manager provides input regarding scheduling, pricing, phasing and other input that helps the owner design a more constructible project. At approximately an average of 60% to 90% design completion, the owner and the construction manager negotiate a ‘guaranteed maximum price’ for the construction of the project based on the defined scope and schedule. If this price is acceptable to both parties, they execute a contract for construction services, and the construction manager becomes the general contractor. The CM/GC delivery method is also called the Construction Manager at-Risk (CMR) method in some states.

Because the CM/GC method of project delivery does not strictly comply with the lowest responsible bid requirements of Section 112, currently, the CM/GC project delivery method can only be used with the permission of the Federal Highway Administration under its “Special Experiment Project No. 14 – Innovative Contracting” program.”

Of note to contractors performing transportation work in Pennsylvania is the potential effect on how PENNDOT projects are bid.  Currently, the Pennsylvania Procurement Code requires PENNDOT to award a construction contract to the lowest responsible bidding in a competitive bid process.  See Pa.C.S.A. Section 512.   However, under the CM/GC delivery method, PENNDOT can negotiate a contract with the CM without utilizing the competitive bid process.  Moreover, the Highway Bill states that in selecting the CM PENNDOT can award the contract on the basis of (a) qualifications; (b) experience; (c) best value; or (d) any combination of these factors.

Therefore, under the Highway Bill, PENNDOT could theoretically solicit bids for construction management services and award the CM contract based upon a “best value” approach which Pennsylvania law does not currently allow.  Moreover, once the CM is engaged it can negotiate a construction contract with that CM with utilizing the Procurement Code’s competitive bid requirements at all.

Importantly, the new provisions of Section 112 do not create a carve out permitting state law to limit the use of the CM/GC project delivery method as it does with the design-build delivery method.   In light of the challenges to PENNDOT’s “Innovative Bidding” procedures in Brayman Construction Corp. v. PENNDOT, 13 A.3d 925 (Pa. 2011), it will be interesting to watch how this newly authorized project delivery method effect bidding on PENNDOT projects should the Highway Bill be signed into law.

Opponents of project labor agreements are no doubt cheering two recent developments concerning wasteful PLA’s.

In New York, a state court has ordered the NYDOT to cancel an interchange project because NYDOT violated New York competitive bidding laws by requiring a PLA on the project.  According to ENR, at issue was a $72.4 million Orange County interchange project.  NYDOT awarded the project to A.Servidone/B. Anthony Construction Corp., a joint venture.  The JV’s bid complied with the PLA but was higher than the low bid, which did not comply.

However, NYDOT originally advertised the bid without the PLA.  However, after receiving a “proposal” from a “union group,” NYDOT changed its mind and 11 days prior to the date, revised the bid specification to include the PLA.

The objecting low bidder, Lancaster Development, bid the project without the PLA.  Although its bid was lowest, NYDOT rejected the bid because it did not comply with the bid specification requiring compliance with the PLA.

However, the Court overturned NYDOT rejection of Lancaster’s bid and ordered NYDOT to rebid the job.  No word on whether the rebid job will include a PLA from the outset.

In Washington, ENR reports that Metropolitan Washington Airports Authority has canceled a PLA for the extension to the Metrorail system to Dulles airport.  The article states that the design build team that will be selected for Phase II of the project can “voluntarily” sign the PLA, which will now only apply to the prime contractor.  The article does not elaborate to what impact the elimination of the PLA to all but the prime contractor will have on the overall participation of merit shop contractors on the project.  If the design-build team anticipates entering into a single contractor with the prime contractor for all of the work, presumably the PLA would have the same effect overall.

The contract specifications will often instruct the contractor to do more than simply build a particular building element using certain materials. While sometimes the specifications will simply instruct the contractor to build an element in a particular fashion, other times the specifications will instruct the contractor to construct a building element in a manner that achieves certain objectives. The difference between these two types of specification is important because it dictates the level of risk a contractor is assuming.

A performance specification sets forth the standard of performance to be achieved. The contractor is expected to exercise it judgment in how best to achieve the performance standard. A basic example of a performance specification is if a specification states that the contractor shall construct a HVAC system shall maintain a certain level of temperature and humidity level, but leaves the design of the system necessary to achieve the required temperature and humidity levels up to the contractor performing the work.

Conversely, a design specification describes in detail the materials and equipment the contractor must use and the manner in which the work must be performed. As one court put it, “design specifications state how the contract is to be performed and permit no deviations. Performance specifications, on the other hand, specify the results to be obtained, and leave it to the contractor to determine how to achieve those results.”

This distinction is critical because when a contractor agrees to design a system to meet a performance specification, it warrants that the system will perform as promised. Conversely, a contractor that designs a system simply to meet the design specification guidelines makes no warranty that the system will perform in any particular way. In fact, under the so called Spearin Doctrine, which gets its name from a 1918 Supreme Court decision United States v. Spearin, a contractor who has constructed a system according to a design specification has a defense to any claim that the system is not performing as intended.

The Spearin Doctrine applies onto to design specifications. Often, determining whether a specification is a performance versus design specification is difficult as a specification may blend elements of both. In order to differentiate between performance versus design specifications, courts look to the level of discretion that exists within the given specification. A contractor arguing that a specification is a design specification – and thus subject to the Spearin Doctrine – must show that the specification “does not permit meaningful discretion.”

Specifying a certain manufacturer of a product alone is not depositive of whether a specification is design rather than performance, especially when a specification permits substitution of a specified product with “an approved equal.” In determining whether a specification is design over performance, courts also look to how much oversight the owner exercised over the contractors work and whether the specifications lay out the contractors means and methods of contraction.

Additionally, the difference between design and performance specification and the liabilities each creates is of particular importance to design builders because specifications in design build contracts are performance specifications. Therefore, design-build contractors should not only confirm that the system is capable of being constructed to perform as required, but also that it can be constructed a price acceptable to the design-build contractor. A design-build contractor that learns after contracting that although the system is capable of construction, albeit at an exorbitant price, will not be entitled to an adjustment in the contract price. Moreover, if they are financial incapable of constructing the system at the price necessary for it to perform, it is at risk for a bond claim.