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CASH Facility Resource Center

AVOIDING PUBLIC CONSTRUCTION CONTRACT PROBLEMS

  1. PREQUALIFICATION OF BIDDERS:

    1. When a district is planning a construction project or an entire program of construction or modernization, one of its primary concerns is how to obtain bids from competent and qualified bidders, while avoiding the award of contracts to incompetent or underfunded contractors. Recalling projects that required contractor termination or that were riddled with claims for delay or extra work, with stop notices and liens, or with actual delay or poor performance, the district may limit the bidding to competent bidders. One tool for selection is prequalification. Public Contract Code sections 20101 and 20111.5 allow districts to prequalify contractors.

    2. Prequalification is a process for determining in advance whether a contractor is a responsible bidder for a specified project. The due process requirements applicable to any determination of nonresponsibility apply to a prequalification determination. A prequalification procedure may meet the following objectives:

      1. It may allow a district to limit bidding to qualified bidders.

      2. It may avoid legal challenges to bidder responsibility determinations by providing a process for making these determinations and for the requisite due process if a potential bidder challenges a determination.

      3. It may prevent substantial delays in the bid process that can occur when a district decides to declare a bidder nonresponsible after bid opening.

      4. Prequalification may evaluate financial competence and public works experience. It may also include determining whether a contractor meets basic legal requirements including holding the requisite contractor’s license.

  2. COMPETITIVE BIDDING: WHEN IS IT REQUIRED?

    1. Competitive bidding is required when the district is contracting for a public project valued at $15,000 or more, or for services, equipment, materials, supplies, or repairs in excess of $56,900. (Pub. Cont. Code, § 20111.)

      1. Public projects are defined in Public Contract Code section 22002.

      2. The bid limit for services, equipment, materials, supplies, or repairs increases each year by a cost of living factor. (Pub. Cont. Code, § 20111, subd. (d).)

    2. Exceptions include:

      1. Emergencies: Repairs, alterations, work or improvements necessary to permit the continuance of existing school classes, or to avoid danger to life or property. A unanimous vote of the governing board and the approval of the county superintendent are required. (Pub. Cont. Code §§ 20113, 22050.)

      2. Piggybacking: Use of another public entity’s bid if that bid specifically allowed other public agencies to use it. The piggybacking district must meet the bid requirements including bonds, insurance certificate, and a new contract. (Pub. Cont. Code, § 20118.)

      3. Sole Sourcing: Used for non-construction purchasing, for example: patented products, items regulated by government-owned monopoly, or only one of a kind products and only one known vendor. Construction is subject to Public Contract Code section 3400 “or equal” requirement.

      4. Futility: When bidding for the product or service is impractical or futile and would not serve the purposes of competitive bidding. (Graydon v. Pasadena Redevelopment Agency (1980) 104 Cal.App.3d 631.)

      5. Statutory Exemptions: Electronic data processing, telecommunications (one of three lowest responsible bidders), textbooks, library books and instructional materials. (Pub. Cont. Code §§ 20118.1, 20118.3.)

      6. Piggybacking on state contracts, i.e., the California Multiple Award Schedules or CMAS and CalNet. (Ed. Code § 17595; Pub. Cont. Code § 10299.)

      7. Special Services, including architects, construction management and legal services. (Gov. Code § 53060.)

      8. Uniform Public Construction Cost Accounting Procedures: Permits the district to contract for public projects of less than $100,000 using informal bidding procedures. (Pub. Cont. Code, § 22000, et seq.)

        1. Board must adopt a resolution electing to become subject to the Procedures. (Pub. Cont. Code, § 22030, et seq.)

        2. Board must adopt an ordinance specifying contractors and their categories of work. The Commission determines minimum qualifications of the contractors. (Pub. Cont. Code, § 22034.)

        3. Bid limits change every five years. (Pub. Cont. Code, § 22020.)

        4. Provides for an informal bid procedure under $100,000. (Pub. Cont. Code, §§ 22034, 22036.)

      9. Force Account Work. (Pub. Cont. Code, §§ 20114, 22032, subd. (a).)

    3. Districts must not split projects to avoid public bidding. (Pub. Cont. Code, §§ 20116, 22033.)

  3. ADVERTISING FOR BIDS

    1. Publish the notice at least once a week for two weeks.

    2. Publish in a news paper of general circulation in the district or in the county, if none in the district. (Pub. Cont. Code, § 20112.)

  4. HOW TO EVALUATE BIDS

    1. Districts cannot weigh the relative superiority of bidders. (City of Inglewood - L.A. County Civic Center Authority v. Superior Court (1972) 7 Cal.3d 861, 867.)

    2. Selecting the “Lowest Responsible Bidder Submitting a Responsive Bid”: The district must award the bid to the responsible bidder who submits the lowest responsive monetary.

      1. Use of Alternates to Select the Lowest Bidder:

        1. Alternates are additions or deletions of scope of work that the district asks the bidder to bid separately from the base bid. For example, the bid may be for the construction of a new kitchen and the base bid assumes an all electric kitchen, and an alternate could ask for a bid to replace the electric ovens and grills with natural gas.

        2. Because the lowest responsive bid from a responsible bidder could change depending on whether a district awarded a contract on the base bid or on the base bid plus alternate(s), districts must follow a specified process to select the low bidder.

        3. The purpose of Public Contract Code section 20103.8 is to prevent favoritism or other subjective factors from entering into the contract award process.

        4. If the district does not select a method, it must use the base bid price only.

        5. The notice to bidders must specify the method of selection.

        6. The law allows for four different ways for districts to rank bidders where the bid package includes alternates:

          1. The base bid only;

          2. The base bid plus specified alternates;

          3. The base bid plus a predetermined order of alternates to come within an available amount identified in the request for bids; or

          4. A process that hides the identity of bidders from the district until the bids have been ranked. (Pub. Cont. Code, §§ 20103.8.)

      2. Responsibility:

        1. Determining if a bidder is “responsible” involves judgements as to fitness, capacity and ability to perform the work. (Boydston v. Napa Sanitation district (1990) 222 Cal.App.3d 1362, 1368; City of Inglewood - L.A. County Civic Center Authority v. Superior Court, supra, 7 Cal.3d at p. 867.) It “is a complex matter dependent, often, on information received outside the bidding process requiring, in many cases, the application of subtle judgement.” (Taylor Bus Service, Inc. v. San Diego Board of Education (1987) 195 Cal.App.3d 1331, 1340.)

        2. Determination of the responsibility of a bidder involves an exercise of discretion by the governing board or its designee to determine whether the potential bidder is qualified to do the particular work under consideration. (City of Inglewood - L.A. County Civic Center Authority v. Superior Court, supra, 7 Cal.3d at p. 867; Boydston v. Napa Sanitation district, supra, 222 Cal.App.3d at p. 1369.)

        3. Factors can include a contractor’s experience on other public projects; its experience doing the same type of work, its length of tenure with its bonding company or insurance company, its financial stability, whether it has been terminated or assessed liquidated damages on other projects, etc.

        4. If a district finds a bidder non-responsible, the district must notify the bidder of that determination, and if the bidder requests it, the district must give the rejected bidder the following due process.

          1. Notification of any evidence reflecting upon its responsibility received from others or determined from an independent investigation;

          2. An opportunity to rebut the evidence; and

          3. The opportunity to present evidence that it is qualified to perform the contract. (Taylor Bus Service, Inc. v. San Diego Board of Education (1988) 195 Cal.App.3d 1331, 1341, citing City of Inglewood - L.A. County Civic Center Authority v. Superior Court, supra, 7 Cal.3d at pp. 870-871.) Due process requires neither a quasi judicial proceeding nor specific findings. (Ibid.; Raymond v. Fresno City Unified School district (1954) 123 Cal.App.2d 626, 629-630.)

      3. Responsiveness: This can often be determined from the face of the bid, and usually does not require the application of subtle judgement. The bidder must be given notice of the defect in its bid.

        1. Examples of Non-Responsiveness:

          1. Failure to provide licensing information;
          2. Inconsistent or missing dollar amounts;
          3. Lack of proper notarizations;
          4. Incomplete subcontractor listings;
          5. No acknowledgment of addenda; or
          6. Other failure to provide information plainly called for by the bid documents.

        2. No Due Process Hearing: If a district finds a bidder non-responsive, the district must notify the bidder of that determination but the district does not need to give the rejected bidder a due process hearing.

      4. Waiver of Irregularities:

        1. A district can sometimes elect to waive deficiencies if the omission or “irregularity’ is not significant. These are called “minor waivable irregularities.” For example, a bidder that neglects to sign the bid may still be awarded the contract if its signature appears in other places on the bid.

        2. This is not always an easy determination. There are apparently inconsistent rules that govern whether an error in a bid can be waived:

          1. A defect in a bid cannot be waived if the defect would have given the bidder the right to withdraw its bid due to mistake. (Valley Crest Landscape Inc. v. City Council (1996) 41 Cal.App.4th 1432.)

          2. A defect in a bid cannot be waived if the defect affects the amount of the bid by giving the bidder an advantage not enjoyed by other bidders. (Ghilotti Construction Co. v. City of Richmond (1996) 45 Cal.App.4th 897.)

          3. Waiver of a minor defect in a bid is up to the district’s discretion. (MCM Construction, Inc. v. City and County of San Francisco (1998) 66 Cal.App.4th 359.)

      5. Reject All Bids: The district always retains the right to reject all bids. The district can then decide to rebid, redesign and then rebid, or just abandon the project.

      6. When bids are identical, the district may determine the low bidder by lot. (Pub. Cont. Code, § 20117.)

      7. When A Bidder Wants Out: A bidder may withdraw its bid due to mistake if it notifies the district within five days of the bid opening of the mistake and provides detail as to how it occurred. The district may relieve the bidder of its bid if it finds and documents the following:

        1. A mistake was made in filling out the bid and not due to error in judgment or carelessness inspecting the site or reading the plans or specs. This is sometimes characterized as a “clerical error.” (Pub. Cont. Code, § 5103.)

        2. The mistake made the bid materially different from what the bidder intended. (Pub. Cont. Code, § 5103.)

        3. The contract should not be awarded until the five days has expired.

        4. The withdrawing bidder cannot bid again on this contract. (Pub. Cont. Code, § 5105.)

        5. A bidder may substitute out a listed subcontractor because of an inadvertent clerical error on the subcontractor list if it notifies the district in writing within two (2) working days of the bid opening and the district holds the required hearing. (Pub. Cont. Code § 4107.5.)

  5. BID PROTESTS

    1. When the second low bidder believes that the district has made an incorrect determination as to the “responsible bidder submitting the lowest responsive bid,” it may file a bid protest.

      1. Contract documents can include a procedure for handling bid protests.

      2. The protest must be written.

      3. The Instructions to Bidders should limit the time to submit a bid protest.

    2. Along with legal counsel, allow exchange of allegations and authority and determine risks of granting or denying protest. Complete this process before award of contract.

    3. Protesting bidder must exhaust its administrative remedies before bringing a legal challenge by petition for writ of mandate.

      1. Protesting bidder may seek a temporary restraining order to stop the project.

      2. A protesting bidder’s damages are limited to:

        1. Bid preparation expenses.
        2. Bid protest expenses.
        3. Unabsorbed overhead.
        4. Prejudgment interest.

      3. A protesting bidder cannot recover for lost profits. (Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305.)

  6. AVOIDING CONSTRUCTION CLAIMS

    1. Claims arise in several situations:

      1. The parties cannot agree on scope of work, compensation, or cause of project delays.

      2. The contractor claims that it is entitled to additional payment even though there is no writing (“constructive change order”).

      3. The changes are so numerous that the contractor claims the original contract has been abandoned (“cardinal change” or “abandonment” of contract).

    2. How to avoid these situations:

      1. Constructibility review

      2. Putting timelines for turn-around of change orders in the architect/construction manager agreement; if the parties cannot agree during the time set to proceed with the work, and resolve the dispute later. Keep records of what is done, when, costs and how long it took.

      3. Delegate to one person authority to order changes; if not in writing, a change order is not valid; however, courts will honor changes when the conduct of the parties shows a pattern.

      4. The plans and specifications must be clear and complete.

      5. Prequalification

      6. Good bidder marketing and outreach

      7. Requiring a feasible construction schedule with regular updates

      8. Resolve change orders and claims as they arise. Do not wait until the end of the project.

      9. Document the project

    3. Bottom line: Keep the project moving!

    4. Defective Specifications

      1. If the plans and specifications are defective, the contractor may claim increased performance costs. These include “wasted effort” costs of trying to comply with defective specifications, costs incurred in proving the specs are defective, and costs of correcting the defect.

      2. If this occurs, district should seek indemnification from design professional.

    5. Changed Conditions

      1. The contractor may claim that the contract documents are in error due to soils, underground infrastructure, or other unforeseen conditions. The district must decide if the condition really is a change, and if the contractor could or should have known about it.

      2. Public Contract Code section 7107 requires notice by contractor, district investigation, and district financial liability if unknown conditions are discovered in excavations over four (4) feet deep.

  7. CLAIMS FOR DELAY

    1. One of the greatest sources of construction claims lies in claims for delay – either on the part of the contractor or the district. These claims may result in liquidated or actual damages, depending on the nature of the claim and the language of the contract.

    2. There are four types of delays:

      1. “Unexcused” which result in no time extensions and no payment to the contractor for additional costs, and which make the contractor liable for the district’s costs of delay. Examples: Contractor orders materials late, foreseeable bad weather.

      2. “Excused, non-compensable” which result in extensions of time for the contractor, but no damages for additional costs. Examples: Unforeseeable events, abnormal weather, unusual delay in transportation, fire, labor disputes; events beyond the control of contractor.

      3. “Excused Compensable” which entitle the contractor to be paid the costs incurred by reason of the delay. Examples: district breaches contract, fails to provide access or information in a timely fashion, issues change order (see above) or late notice to proceed.

      4. “Concurrent,” for which the district, the contractor, the architect and/or the construction manager may be liable. Examples: The district is slow in responding to requests for information; but the contractor files an excessive number of requests for information.

    3. The Remedy: The injured party may seek damages to recover the costs of the delay.

      1. The contractor may claim damages for delay or schedule disruption, which will include its costs for idle workers, idle equipment, job site overhead, storage costs, home office overhead, extended insurance costs, or even telephone charges. Loss of efficiency, or costs incurred by having to escalate the project may also be claimed.

      2. The district may seek costs of housing the program elsewhere, busing, related insurance, transportation, project consultant fees, or other costs incurred due to the delay.

      3. Liquidated damage provisions commonly state an amount which the parties agree will compensate them for delay, in lieu of trying to prove actual damages. These amounts must be reasonably related to damages that could be incurred.

  8. HANDLING THE CONTRACTOR’S CLAIM.

    1. Bases for contractor claims

      1. Delay and disruption
      2. Differing site conditions
      3. Inaccurate plans and specs
      4. Weather (time, but no money)
      5. Extra cost
      6. Owner changes

    2. If the architect, construction manager, or the inspector is informed of a potential contract claim, that information should be provided to the district.

    3. The district and its agents should attempt to resolve all actual and/or potential contract claims through the change order process during the project or before filing of the notice of completion.

    4. Upon receipt of notice of a contract or Government Code claim, the district should provide copies of the claim to the architect, construction manager and district representative.

    5. The district may want to inform legal counsel.

      1. Legal counsel should provide advice concerning any further processing of the claim.

      2. Legal counsel, in consultation with the architect or construction manager, should provide the district an analysis of the potential merits of the claim.

    6. The project accountant should provide an analysis of the impact of the claim on the district’s construction budget.

    7. Dispute resolution.

      1. If the claim is for three hundred seventy-five thousand dollars ($375,000) or less, the district should follow the requirements of Public Contract Code section 20104 et seq., usually incorporated in the contract as contractual requirements.

      2. If the claim is for over three hundred seventy-five thousand dollars ($375,000), the district should follow the contractual requirements.

    8. Subcontractor “Pass Through Claims”

      1. A “pass through claim” is a construction claim brought on behalf of a subcontractor by the contractor.

      2. Most construction contracts will contain language like the following:

        Nothing in the Contract Documents shall create any contractual relationship between any Subcontractor and the Owner (the District).

      3. If there is no contractual relationship between the subcontractor and the district, the subcontractor cannot sue the district.

      4. If the subcontractor has a claim, how does it recover its damages if it cannot sue the district?

        1. File a stop notice.

        2. File a claim against the contractor, which the contractor “passes through.”

      5. Final payment can block or preserve a pass through claim.

        1. Many construction contracts state: “Acceptance of final payment by the Contractor shall constitute a waiver of claims except those previously made in writing and identified by the payee as unsettled at the time of final Application for Payment.”

        2. Final payment can be conditioned on waiver of claims except those which are disputed. These “exceptions” must be in writing.

      6. Civil Code section 3262 provides specific means by which final payment requests can provide for exceptions. See attached waiver forms.

      7. If the subcontractor has not filed a stop notice, and if the contractor neglects to except the subcontractor’s claim as a “disputed amount,” can the subcontractor’s claim be “passed through”?

        1. No California state law on this question.

        2. Some federal courts permit the claim if contractor demonstrates a good faith belief that the claim is legitimate.

        3. The federal court for the Ninth Circuit (California) holds that the contractor may not pass through the claim if the contractor is insulated from liability to its subcontractor. (Umpqua River Navigation Company v. Crescent City, 618 F.2d 588 (9th Cir. 1980).)

        4. Courts in other jurisdictions require that there be a judgement against the contractor or a settlement agreement which makes the contractor liable, before the claim may be passed through. (Mars Associates, Inc. v. New York City Educational Construction Fund 513 N.Y.S.2d 125 (N.Y. A. D. 1987).)

    9. Public Contract Code section 7100 states:

      Void contract provisions. Provisions in public works contracts with public entities which provide that acceptance of a payment otherwise due a contractor is a waiver of all claims against the public entity arising out of the work performed under the contract or which condition the right to payment upon submission of a release by the contractor of all claims against the public entity arising out of performance of the public work are against public policy and null and void. This section shall not prohibit a public entity from placing in a public works contract and enforcing a contract provision which provides that payment of undisputed contract amounts is contingent upon the contractor furnishing the public entity with a release of all claims against the public entity arising by virtue of the public works contract related to those amounts. Disputed contract claims in stated amounts may be specifically excluded by the contractor from the operation of the release.

    10. Preventive Measures:

      1. Obtain final payment request in writing with provision for exceptions.

      2. Ensure contract with contractor precludes contractual relation between subcontractor and district.

      3. Ensure contract states application for final payment is waiver of all claims except those in dispute.

  9. THE DISTRICT’S CLAIMS

    1. Liquidated Damages

      1. The district may assess liquidated damages for each day’s delay in completing the contract, or any specified phase or part of it, beyond the time allowed in the contract plus any excused delays.

    2. The district may backcharge the contractor for incomplete work or work needing correction.

    3. The district may assert warranty claims.

    4. The district may assert claims for latent defects.

  10. PROCESSING STOP NOTICES AND OTHER LIENS

    1. The contractors and subcontractors should be informed of the appropriate party with whom to file stop notices, however, stop notices are valid even if served on other district agents.

    2. A stop notice lets the district know that a subcontractor claims a right to payment.

    3. A stop notice must be filed by the subcontractor with the district within thirty (30) days of recording of the notice of completion; it states the amount owed and for what work.

    4. Whenever a stop notice is received by the district, construction manager or the architect, that party should provide the original to the project accountant.

    5. The district through its designee should provide a copy to the prime contractor and its surety, informing them of the amount of retention, which should be the amount of the stop notice and a sufficient amount to provide for the cost of litigation of the stop notice, usually one hundred twenty-five percent (125%) of the stop notice amount. (Civ. Code, §§ 3186, 3196.)

    6. The district should verify that a preliminary twenty (20) day lien notice was filed if the stop notice is not filed by a first tier subcontractor, one who contracted with a prime or general contractor. (Civ. Code, § 3098.)

    7. If the stop notice appears to be invalid, either because a required preliminary lien notice was not filed, it was not timely, or the contents appear to be insufficient or incorrect, the district should verify with legal counsel and inform the subcontractor of this apparent problem.

    8. If the stop notice is valid, the district should follow the statutory requirements and advice of its legal counsel for determining the appropriate further actions. (Civ. Code, § 3196 et seq.)

    9. Whenever a release of stop notice, a stop notice release bond, a general contractor’s complaint challenging the validity or amount of the stop notice, a Notice of Commencement of Action or some other document concerning a stop notice, other than a complaint to enforce a stop notice, is received by the district, the district should:

      1. Provide a copy to its legal counsel;

      2. Provide copies to the general contractor and its surety;

      3. Inform the subcontractor that filed the stop notice of any action it intends to take with regard to that document; and

      4. Follow the legal requirements for processing that document.

    10. If a summons and complaint to enforce a stop notice are served on the district, the party receiving the summons and complaint shall provide a copy to the district who should provide it to its legal counsel and the project accountant.

    11. Since the Civil Code requires that each contractor obtain a labor and materials payment bond, legal counsel may tender indemnity and defense of the district to both the general contractor and its surety. (Civ. Code, § 32470.)

    12. District legal counsel may:

      1. Represent the district in any action filed to enforce a stop notice; or

      2. Monitor representation of the district by the general contractor or its surety.

    13. The architect and construction manager should provide any assistance requested by the district and its legal counsel in the defense of the action.

    14. After a summons and complaint to enforce a stop notice is filed, the stop notice retention should not be released until legal counsel has confirmed that it has received:

      1. Required releases and waivers; and

      2. A dismissal with prejudice of the district from the action; or

      3. A judgment; or

      4. Otherwise verified that the district has been dismissed from the action.

    15. If any notice from DLSE or other legal notice purporting to affect the project is served on the district or its representatives, the same notification process should be followed.