Risks And Opportunities In Bidding Public Works Contracts

The 1990s have seen significant judicial and legislative activity on competitive bidding issues. This activity reflects the fact that bid protests have become a common feature in public contracting, while there are few administrative controls on the bid protest process. Courts seem increasingly willing to overturn public agencies’ decisions, and a case now on appeal to the California Supreme Court may radically increase public agencies’ financial liability for improperly rejecting a low bid. In the legislative arena, new statutes will allow local public agencies to prequalify bidders.

These recent developments suggest the following guidelines for public agencies to manage the risks and opportunities in public bidding

As a general rule, bids must be complete as of the deadline for submitting bids, and bidders cannot correct or furnish information necessary to correct a bid after that time. California law allows bidders to withdraw bids after bid time only under the very limited circumstances set forth in Public Contract Code § 5100 et seq. Unless the bidder gives timely notice and can establish that an error occurred in filling out the bid form, the bidder must execute the contract or forfeit its bid security.

Two recent decisions addressed the question of whether low bidders should have an opportunity to correct information in the bid or to provide missing information. The answer was an emphatic "no." Both courts found that allowing bidders to do so would create a material advantage not available to other bidders.

In Valley Crest Landscape v. City of Davis, the bid documents stated that bidders could subcontract no more than fifty percent of the work. North Bay submitted the low bid, but indicated that it would be subcontracting more than eighty percent of the work. In response to the City's inquiry, North Bay responded that the figures were not correct, and supplied modified figures that reduced the subcontractors' participation. Based on the revised information, the City awarded North Bay the contract.

Valley Crest, the second low bidder, argued that North Bay had an unfair advantage since it could have, in effect, withdrawn its bid without penalty. The Third District Court of Appeal agreed, holding that North Bay had an advantage not available to other bidders because it could control whether it received the contract: if North Bay had stood by its original subcontracting figures, the City would have rejected the bid as non-responsive. In other words, the court believed that North Bay had a chance to back out of the contract after seeing all of the other bids without forfeiting its bid security. The Court of Appeal held that the City had acted unlawfully in awarding the contract to North Bay and overturned the award.

The First District Court of Appeal followed a similar analysis in MCM Construction v. City and County of San Francisco. MCM was the low bidder, but failed to include the price of the work to be performed by seven of its nine listed subcontractors. The City rejected MCM's bid as incomplete and non-responsive. MCM protested the award to the next bidder. The Court of Appeal upheld the award and found that by notifying MCM that its bid was incomplete, the City had given MCM a chance to make its bid responsive by furnishing the omitted information, or not. As in Valley Crest, the court concluded that this situation gave MCM an opportunity to withdraw its bid without penalty, an advantage not available to other bidders, and made MCM ineligible to receive the contract.

The purpose of competitive bidding for public contracts is to avoid favoritism, fraud and corruption, avoid misuse of public funds, and stimulate competition in the procurement of goods and services. The protective purpose is so strong that an award will be overturned where it is certain there was in fact no corruption or adverse effect upon the bidding process if the opportunity for abuse was present. Accordingly, procedures that allow a public agency even a chance to play favorites are not allowed.

The Court of Appeal applied this rule in two recent cases: FTR International, Inc. v. City of Pasadena and Tilden Coil v. Court of Appeal. (The decisions have been depublished, but provide useful guidelines for the use of alternates.)

In FTR, the City included several alternates in the bid documents for renovation of a community health center. When it received bids, it selected the low bidder after considering various combinations of the base bid and alternates using the different bidders' prices. The bidders' names were available to the City when it reviewed the bids, evaluated its options and made its selection. As the court noted, "although the procedure helped insure economy, it did not exclude favoritism, … [and] allowed for the appearance of impropriety."

The court concluded that "some form of blind identification of bidders should be used" until after the agency selects the alternates it wants. Another approach the court suggested was to have the City "determine the order of the alternatives prior to opening the bids." Either of these methods would provide the advantages of using alternates and avoid even inadvertent favoritism and the appearance of impropriety.

In Tilden Coil, the Court of Appeal overturned a contract award where the City reviewed bids for a project that included alternates, under circumstances allowing the City to control which contractor would be the "low bidder" by selecting a particular combination of alternates. The Court of Appeal concluded that, due to the potential for abuse, alternates should be limited to items that were "desirable but not necessary changes" to the project.

Kajima/Ray Wilson v. Metropolitan Transportation Authority illustrates the extent to which a court will delve into an agency's procedures for evaluating bids, and introduces potential new financial risks for even good faith errors in awarding contracts.

The case arose from bidding on a $60+ million contract to construct parts of Los Angeles' subway system. Kajima submitted the lowest monetary bid, which the MTA rejected because it found that Kajima did not meet the project goal of 30% for Disadvantaged Business Enterprise ("DBE") participation. Kajima's participation fell short by less than one-half of one percent. Tutor Saliba submitted the second low bid, with DBE participation of 30.88%, and received the contract.

The difference between the two companies' DBE participation was the result of the MTA's use of an administrative shortcut. Both bidders listed Manual Tejeda Trucking ("Tejeda"), a DBE trucking company, among their DBE participants. Tejeda was to provide identical services to both contractors. However, Kajima identified Tejeda as a broker, while Tutor Saliba listed him as a subcontractor. The MTA had an unwritten internal policy of allowing DBE participation credit for only 5% of the amount paid to trucking brokers. Applying that policy left Kajima short of the DBE goal. Tutor Saliba received DBE participation credit for 100% of Tejeda's "subcontract" price and met the goal.

The trial court found that, but for the MTA's policy, Kajima would have qualified for and received the contract. Because the policy was "unwritten, unannounced, and unknown to [Kajima]" the Court of Appeal concluded that the MTA had acted in a manner that was "arbitrary, violated federal regulations, and was an abuse of discretion." That being said, the Court of Appeal upheld the trial court's award to Kajima of more than $650,000 for lost profits and unabsorbed overhead, plus nearly $90,000 in bid protest expenses and $44,869 for bid preparation costs.

This decision marks the first time that a public agency has been ordered to pay anything more than bid preparation costs to a disappointed bidder. Those costs are small compared to lost profits and other contract damages. The case is on appeal to the California Supreme Court. If it is upheld, it will create a financial incentive for rejected low bidders to pursue claims against public agencies that does not exist under current law.

For public agencies, the most disturbing aspect of this decision is that the court rejected the MTA's argument that it should not be liable absent evidence that it had acted with the intent to defraud the low bidder. In the wake of this decision, public agencies must be extremely careful to state in the bid documents all terms on which bids will be evaluated and the rules that will be applied. If an agency is implementing another entity's regulations, as the MTA was applying federal regulations, the implementing agency should follow the regulations closely, and obtain written clarification from the regulating authority for any questions. Given public agencies' potential exposure to substantial financial damages for improperly rejecting a low bid, administrative shortcuts -- however practical -- are not worth the risk.

There are no statutory deadlines for bringing bid protests in connection with the award of a contract by a local agency. Contractors and agencies alike risk going forward without knowing whether another bidder will pursue a protest through the courts.

Public agencies may be able to exercise some control over this uncertainty by including a bid protest procedure in the bid documents. In MCM Construction, Inc. v. City and County of San Francisco, the court rejected a low bidder's protest of an award because the protester had not filed its protest within ten working days, as the bid documents required. The court held that this provision barred the low bidder's untimely protest of the winning bid. Although the agency's procedure did not restrict the time for filing suit, it defined a time after which the agency and contractor could proceed with the assurance that no new protests would arise.

Before awarding a contract, public agencies must make two determinations: who submitted the lowest bid, and is that bidder "responsible"? Effective 1/1/2000, local agencies in California can address the second issue by "prequalifying" prospective bidders based on the contractor's financial, safety, labor and performance history. To do so, agencies must adopt a uniform system of rating bidders on the basis of information from standardized questionnaires and financial statements. This process offers local agencies a chance to exercise additional control in selecting contractors. It may also be fertile ground for protests over contract awards.

The 1990s have produced a contentious bidding climate in which California public agencies face increased judicial scrutiny and new financial risks. Recent judicial decisions have complicated the public bidding process, but also provide guidance for public agencies on how to avoid some of the pitfalls. Declining bidder "modifications," using "blind" selection procedures, avoiding administrative shortcuts and setting deadlines for bid protests are just some of the ways public agencies can protect themselves.

1. Public Contract Code §§ 5102 et seq.
2. Valley Crest Landscape, Inc. v. City Council of the City of Davis (1996) 41 Cal.App.4th 1432.
3. Konica Business Machines U.S.A., Inc. v. Regents of University of California (1988) 206 Cal. App. 3d 449, 456-457.
4. Tilden Coil Constructors, Inc. v. Court of Appeal (1997) 59 Cal.App.4th 404; FTR International, Inc. v. Court of Appeal of California (1997) 53 Cal.App.4th 634. Note: these cases have been depublished.
5. Kajima/Wilson v. Los Angeles Metropolitan Transportation Authority (1999) 69 Cal.App.4th 1458, review granted, May 26, 1999.
6. MCM Construction, Inc. v. City and County of San Francisco (1998) 66 Cal.App.4th 359.