Hiawatha Light Rail Transit

Hiawatha Light Rail Transit

April 1, 2000

Introduction

Fabyanske attorneys Dean Thomson and Aaron Dean successfully challenged MnDOT’s procurement process for the $580 million Hiawatha Light Rail Transit (“LRT”) project in what is probably the largest bid protest in Minnesota’s history. This month’s Briefing Paper will first review the procurement procedures designed by MnDOT for the LRT project and then discuss the bid protest that successfully challenged that process.

For the last several months, on a seemingly daily basis, Minnesotans have been informed about the progress and pitfalls of the LRT project. In 1999, MnDOT received special permission from the Legislature to use a design-build procurement method to select the successful entity to both design and build the LRT project. Typically, designs for public projects are fully prepared by an independent design firm. Contractors then submit sealed bids to construct the design and the award must be made to the lowest responsible bidder.

Design-build procurement changes this paradigm by allowing the public owner a great deal of discretion to select the entity that will both design and build the project in question. Instead of awarding the project to the lowest responsible bidder, design-build procurement allows award based upon the owner’s subjective determination of whether the proposer will give the owner the “Best Value.” The question presented in the LRT bid protest was whether MnDOT and its consultants properly used the discretion inherent in this new procurement process.

MnDOT’S Two-Part Qualification Process

MnDOT modeled its design-build procurement process after the federal government’s two phase design-build selection method. In Phase 1, MnDOT requested all bidders to submit their “qualifications” for the project involving matters such as experience, financial strength, and capacity to provide payment and performance bonds. MnDOT then intended to create a “short list” of proposers to compete in Phase 2 of the process for actual award of the project.

Raytheon Engineers & Constructors, Inc. (a Raytheon Corporation subsidiary), Ames Construction, Inc., and Edward Kraemer & Sons, Inc. formed a joint venture, “the R/A/K Team,” to bid on the LRT project as a design-builder. The R/A/K Team is competing with four other joint ventures for the award of the LRT design-build contract.

The R/A/K Team is a mix of: (1) large local contractors, Ames and Kraemer, and (2) an international corporation, Raytheon, that has one of the world’s largest engineering firms as a subsidiary. Significantly, Raytheon recently completed the $1.0 billion Hudson-Bergen Light Rail Project in New Jersey on time and under budget, so the R/A/K Team believes it has a significant advantage to bid on Minnesota’s LRT project.

For $32 million, MnDOT hired the New York based firm, Parsons Brinckerhoff, as a consultant to help MnDOT select the “short list” of proposers for Phase 2 and the eventual successful proposer who would be awarded the contract to design-build the LRT project.

In early December 1999, the R/A/K Team submitted a response to Phase 1 of MnDOT’s Request for Proposal (“RFP”), but MnDOT disqualified the R/A/K Team a few weeks later, finding that the R/A/K Team failed MnDOT’s financial criteria. The R/A/K Team immediately asked MnDOT to administratively reverse this decision for several reasons, including:

• Raytheon’s annual revenue exceeds $20 billion.
• Liberty Mutual (A+ rating), the insurer and surety for Raytheon, offered an unrestricted guarantee.
• Raytheon has more than $1.0 billion available from its Citibank line of credit.
• The R/A/K Team submitted more than $750 million of surety bonds.

Despite these facts, and others too detailed to set forth in this paper, MnDOT illogically continued to disqualify the R/A/K Team and refused to accept additional information from the R/A/K Team establishing its financial qualifications. After MnDOT refused to reverse its “financial disqualification decision,” the R/A/K Team sued MnDOT in Ramsey County District Court to protest the R/A/K Team’s exclusion from Phase 2.

The Judge Rules

The Honorable A. James Dickinson was assigned to the R/A/K Team’s lawsuit, presiding during a non-jury trial in January 2000. Judge Dickinson ruled in favor of the R/A/K Team and found that:

• MnDOT acted arbitrarily and capriciously in failing to conduct “meaningful discussions” with the R/A/K Team about its financial capabilities, especially because these types of discussions were specifically authorized in the RFP.

• The Court also determined that the public’s interest demands “a fair process and MnDOT is obligated to engage in meaningful discussions” with the R/A/K Team.

• The R/A/K Team satisfied all financial criteria contained in MnDOT’s RFP.

• MnDOT’s criticism of the R/A/K Team for providing the exact information required in MnDOT drafted forms “makes no sense.”

• MnDOT’s consultant, Parsons Brinckerhoff, has an existing $1.0 billion dollar contract in Boston with Bechtel, one of the other four proposers for the LRT contract. The Court then explained its concern about Parsons Brinckerhoff’s role as consultant to MnDOT while simultaneously having a strong relationship with Bechtel on another project.

• Raytheon and Bechtel were the only proposers to previously build a light rail system and it was, therefore, in Bechtel’s interest to eliminate the only other proposer who had built a light rail system.

• MnDOT only allocated one week to evaluate the five responses to its RFP even though the R/A/K Team and the other proposers spent hundreds of man days assembling a response to MnDOT’s RFP. The Court then expressly found: “It is clear to the Court the Phase 1 RFP process of evaluations was compressed into a very short period of time and MnDOT either overlooked or ignored many of the provisions of the RFP.”
• MnDOT failed to follow its own RFP, did not understand the financial information submitted by the R/A/K Team, and the Court was left with the “inescapable conclusion” that MnDOT did not have as much design-build experience as Raytheon.

• In addition to MnDOT’s arbitrary and capricious actions, “simply on the basis of the ability, credibility and achievements” of Raytheon “it is difficult to conceive” why MnDOT disqualified Raytheon.

• The “real reason” the R/A/K Team was disqualified in December 1999 was “MnDOT’s failure to follow its own RFP.”

• MnDOT’s decision to eliminate the R/A/K Team was not in the best interests of Minnesota citizens.

• The R/A/K Team was not required to administratively appeal MnDOT’s decision because, given the history of MnDOT’s lack of response, “nothing would have been gained and valuable time would have been lost” so an administrative appeal “would serve no useful purpose.”

After making these findings, Judge Dickinson ruled that the R/A/K Team must be allowed to fully and fairly participate in Phase 2 of MnDOT’s process to award the LRT contract. Judge Dickinson also issued a permanent injunction, prohibiting the LRT project to proceed unless the R/A/K Team was allowed to fully and fairly participate to compete for award of the LRT contract. Further, Judge Dickinson also prohibited Parsons Brinckerhoff from voting on proposals made by the five competing joint ventures during Phase 2.

As the above facts make clear, one advantage of competitive bidding and the sealed bid process is that the potential for fraud, favoritism, or other abuse when awarding public construction contracts is reduced because cost is the predominate factor examined to let contracts. The Court was clearly concerned that the design-build procurement process as implemented by MnDOT was not being properly or rationally administered, raising the potential of abuse in the award of a contract worth hundreds of millions of taxpayer dollars.

 

Recent Developments

Since Judge Dickinson issued his Order in favor of the R/A/K Team, the Federal Highway Administration questioned Parsons Brinckerhoff’s role in the LRT project, causing $274 million of federal funding for the LRT project to be at risk. Consequently, two senior Parsons Brinckerhoff employees, serving as consultants to MnDOT, were reassigned and they have entirely left the LRT project.

Also, since Judge Dickinson issued his Order in favor of the R/A/K Team, the Minnesota House of Representatives is even considering a bill prohibiting the design-build delivery method for Minnesota public construction projects. See House File No. 2699.

As of this date, it is not apparent what, if anything, will happen to the “design-build moratorium” during the 2000 Legislative session. But what is clear is that some state lawmakers are concerned that, if and when design-build legislation is passed, it contain safeguards ensuring the procedural integrity of the process.

Conclusion

Each year, Fabyanske, Westra & Hart, P.A. handles dozens of bid protests in state and federal courts and administrative proceedings. If your company has bid on a public contract and believes that a government agency is unfairly awarding the contract to your competitor, then call us immediately.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

Fabyanske Westra Hart & Thomson
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