October 24, 2014
By Kristine Kroenke & Gregory T. Spalj
When it comes to awarding of government contracts to private contractors, the goal is to make sure that there is free competition among all of the contractors who submit bids such that the government gets the lowest responsive bid from a “responsible” contractor. Competitive public bidding laws are intended to avoid fraud, favoritism, and wasteful spending of taxpayer dollars, and to ensure that a bidder obtains no unearned competitive advantage over its competitors. A public authority has an absolute obligation not to take any action that would interfere with competitive bidding. The award of public contracts usually involves a two step analysis. The first question is, who submitted the lowest bid that is “responsive” to the call for bids. Simply stated, “responsive” means that the bidder followed all of the instructions for the bid and did not deviate from what all bidders were required to do. The second question is whether the lowest responsive bidder is “responsible.” That is, is it qualified to do the work and complete it on time?
The determination of whether a bidder is responsible is an essential step in public procurement. But how should responsibility be determined? The question is being asked by more government bodies1 and their answers may lead to unintended consequences, increasing subjectivity in the public bidding process, and increasing the cost of public construction projects. The City Council for the City of Des Moines, Iowa, recently approved (6 votes in favor to 1 dissenter) a measure establishing a “City of Des Moines Taxpayer Quality Assurance Policy” for “Vertical Infrastructure Projects” (defined below) that are estimated to cost over $1,000,000. The measure implements a lengthy and detailed questionnaire that contractors may be required to submit two weeks before bid opening.
The stated intention of the new policy and the questionnaire is to permit the City of Des Moines to have more information about contractors bidding on the City’s projects. More information sounds like a reasonable basis, but is the measure needed? And is it even a good idea? Critics, including one on the Des Moines City Council, have already spoken out against the new measure as unnecessary, duplicative of contractors’ bond underwriting, and unjustified by increased costs in staff time and the increased potential for higher bids from contractors. Governmental entities have discretion in determining contractor responsibility. This Briefing Paper examines whether the new measure from the Des Moines City Council is a good use of its discretion.
The Taxpayer Quality Assurance Policy was implemented to complement Iowa public bidding law, which requires that contracts for public improvements be awarded to the “lowest responsive, responsible bidder.” Under Iowa law, construction projects for a public improvement that exceed an estimated total cost of $100,000 are subject to the Iowa Construction Bidding Procedures Act, codified at Iowa Code §§ 26.1-.15. Section 26.14 of the statute also requires “competitive quotations” for public improvements on smaller projects for particular entities. Cities with populations of fifty thousand or more must obtain competitive quotations for public improvements on projects that exceed $51,000.
The Iowa Construction Bidding Procedures Act imposes certain requirements on the bidding process for public construction projects, which include that “the contract for the public improvement must be awarded to the lowest responsive, responsible bidder.” Iowa Code § 26.9.2 The statute applies to “governmental entities,” which include “the state, political subdivisions of the state, public school corporations, and all officers, boards, or commissions empowered by law to enter into contracts for the construction of public improvements, excluding the state board of regents and the state department of transportation.” Iowa Code § 26.2. Political subdivisions of the state include cities and counties.
Iowa law provides little detail on how a governmental entity may determine whether a bidder is responsible, but court cases indicate that a significant amount of deference is given to the government entity. As long as the determination is not arbitrary or capricious, it will not be second guessed by the courts.
The Taxpayer Quality Assurance Policy implemented by the Des Moines City Council involves the use of a General Contractor Quality Assurance Questionnaire (“Questionnaire”) for “Vertical Infrastructure Projects” that (1) are to be bid and constructed by the City of Des Moines, Iowa, (2) have an estimated construction cost greater than $1,000,000, and (3) are funded without federal, state or other funding that would prohibit or limit the use of the Questionnaire.
A Vertical Infrastructure Project is defined as “construction, addition, or major alteration of a facility that will require a certificate of occupancy.” The definition therefore excludes construction projects involving roads, bridges, sanitary sewers, and levees, among others.
The Taxpayer Quality Assurance Policy is not mandatory on all Vertical Infrastructure Projects, but it gives the Des Moines City Council the discretion to determine whether “the proposed Vertical Infrastructure is of such magnitude, scope or complexity that Council deems it necessary to request bidders, on the proposed Vertical Infrastructure Project, to complete the General Contractor Quality Assurance Questionnaire (‘Questionnaire’) to assist the City Council in determining the lowest responsible bidder pursuant to Iowa law.” It is similar to a questionnaire already in use by Polk County, Iowa (the County in which Des Moines is located). Because the information is submitted to a public entity, all information provided on the Questionnaire is public.
The 26 questions on the Questionnaire are broad and do not distinguish between public and private projects, and a few questions are unlimited on time. The following is a partial list of information that contractors must provide on the Questionnaire under the Taxpayer Quality Assurance Policy:
In the Questionnaire, the contractor must also affirm that it will use only subcontractors that meet the requirements in the “Subcontractor Quality Assurance Bid Requirements” and must also affirm that “it will be responsible for ensuring that each subcontractor” meets such requirements.
On projects where the Questionnaire is used, the bidder must “submit a completed Questionnaire no later than two weeks prior to the deadline for accepting bids.” (Emphasis added). This turns the typical timing for responsibility on its head. Unlike the issue of responsiveness, which is determined from the bid itself, whether a bidder is responsible is traditionally determined at the time of the award of the contract. Thus, if a bidder does not appear to be qualified at the opening of the bid, the bidder could become qualified if it took the necessary steps to become responsible by the time of the award of the contract, which may be weeks after the bid opening. However, under the City of Des Moines Taxpayer Quality Assurance Policy, contractors that do not complete the Questionnaire two weeks before bid opening are subject to being deemed non-responsive.
The City Council’s explanation is that the Questionnaire it to permit it to make better informed decisions about bidders. In its justification for the measure, the policy states that “Iowa court decisions allow public entities to consider factors other than price in determining who is the lowest responsible bidder.” Because responsibility is an entirely different issue from price, by definition, public entities must consider factors other than price when determining contractor responsibility. Iowa courts have explained that the term “responsible” “implies a measure of discretion on the part of a political subdivision in its consideration of what bid to ultimately accept for a project.” Master Builders of Iowa v. Polk County, 653 N.W.2d 382, 394 (Iowa 2002). “‘Responsibility’ may embrace factors other than the low dollar figure, including such considerations as the business judgment of the bidder and the bidder’s record for reliability in performance.” Dickinson Co., Inc. v. City of Des Moines, Iowa, 347 N.W.2d 436, 440 (Iowa App. 1984).
Nowhere in the City’s justification, however, is any statement that previous methods were inadequate to justify the use of the Questionnaire and its associated costs and burdens. It remains to be seen how frequently the Questionnaire will be used. The new policy only applies to Vertical Infrastructure Projects with estimated costs greater than $1,000,000 and then the City has discretion on whether to use the Questionnaire. The City identified only four projects in the last five years that met the definition in the policy (and were not otherwise disqualified by other factors preventing use of the Questionnaire). Based on the current listing of Capital Improvements Projects and other discussions, the City estimates that the new policy might affect four projects over the next five years.
The City has not pointed to any particular need for the Questionnaire. Although the City report stated that the City “experienced some contractor issues in the past related to schedule completion and quality issues,” it also stated, “[i]n general the City of Des Moines has not experienced major issues in its public bid construction program.” Of the four projects that the City identified that would have qualified for the Questionnaire in the past five years, all were evaluated as: from standard quality (1 project, which also won an award) to excellent quality (2 of the 4 projects); all were completed essentially on time; only one had claims (which totaled less than 2% of the contract price); and none involved litigation. That would appear to be a good record of projects involving responsible contractors, not a justification for a new policy.
The City has not explained why the requirement that the contractor provide payment and performance bonds does not already provide adequate protections and, indirectly, the analysis of the same information asked by the Questionnaire. In performing underwriting, sureties conduct the same investigation about the contractor that the Questionnaire is designed to facilitate. An advantage to the contractor is that the surety file is not a public document. The Questionnaire is public information – information that contractors may not want to become public. Additionally, the review by the surety is for the purpose of deciding whether the contractor is of the quality and character such that the surety will financially stand behind it. There is no opportunity for favoritism or bias in favor of one contractor over another to enter into the sureties’ calculus. On the other hand, the whole purpose of the competitive public bidding laws is to limit the effects of favoritism and bias in awarding public contracts. Allowing the City to consider the extensive data required by the Questionnaire increases the opportunity for bias or favoritism to taint the process.
The Questionnaire also expressly asks for details about “arbitration proceedings” in which the contractor has been involved. Arbitration is often preferred because the parties can resolve their dispute in a private proceeding. If the contractor will be required to disclose everything about its arbitration proceedings, that lessens the value of arbitration.
Communications from the City Council show that the estimated average cost for each project in which the Questionnaire is used will be $5,600 for additional staff time to review the Questionnaire. The City noted that “if the program is expanded to other projects, subcontractors, or other than award enforcement then the costs will escalate quite rapidly requiring additional staff and possibly costing hundreds of thousands of dollars.” The City’s estimates do not include the added costs and time required of the contractors to complete the Questionnaire.
The City also estimates that the Questionnaire could lead to higher bids. If contractors must spend additional time preparing their bids two weeks in advance, these costs may be reflected in the bids. It may also cause bidders to forgo bidding altogether. The City admits that it cannot determine whether the Questionnaire might deter bidders “and therefore result in higher bids.” However, the City estimated that the potential increased cost on the four qualifying projects, discussed above, alone could have been $408,466.
Critics of the new policy state that (1) it is unnecessary and duplicative of bond underwriting; (2) it will increase City staff time costs; (3) it will decrease competition; and (4) it will lead to higher bids. The policy has been criticized “as an unnecessary expense that duplicates measures already in place.” Timothy Meinch, “Contractors for big D.M. projects face greater scrutiny,” The Des Moines Register (online), October 12, 2014. Some are concerned, including the lone dissenter on the City Council, that the policy may benefit union contractors. Id. Other critics fear it will “chill the bidding pool,” particularly discouraging DBE contractors.
Supporters of the measure disagree with many of the criticisms and believe that obtaining more information about the contractors is “common sense” and that the market, not the Questionnaire, determines the number of bidders on a project. Other supporters argue that the “policy is a victory for employees and subcontractors who have been mistreated and denied earned wages by contractors,” citing court judgments on labor disputes. Timothy Meinch, “Contractors for big D.M. projects face greater scrutiny,” The Des Moines Register (online), October 12, 2014. Some supporters want the policy to be implemented on all projects, not just those greater than $1,000,000.
It remains to be seen how often the Des Moines City Council will use the Questionnaire, particularly given the costs and the fact that its previous methods for selecting contractors appear to have worked well. However, other cities in Iowa are following suit. Cedar Rapids already requires a two-page “contractor qualifications” form with nine questions that are similar to those on the Questionnaire. Dubuque officials also report they are developing a policy.
The unfortunate reality is that these types of measures often lead to other government entities jumping on the bandwagon without having fully vetted all the consequences. It sounds like a good idea to require contractors to provide detailed information about their business so the government entity is fully informed when determining contractor responsibility. But increased information and scrutiny can come at a cost, in higher contract prices, increased staff costs, the opportunity to use this subjective analysis in a way to favor one contractor over another, and lower competition. The measure also confuses the concepts of responsiveness and responsibility by making the responsibility Questionnaire an issue of responsiveness, requiring its completion before the bids are even received. Responsibility is not intended to be a continuum allowing government entities to interfere with the public bidding process by letting them subjectively determine who they believe is the most responsible bidder. It begs the question why the City of Des Moines wants a measure that appears likely to increase the costs to the public and to contractors when the City has cited no need for the measure.
1 For example, the Minnesota Legislature recently enacted the “Responsible Contractor” bill, codified at Minn. Stat. § 16C.285, which was examined in last month’s Briefing Paper and can be read here.
2 Certain contracts for public utilities are excluded from this requirement: “However, contracts relating to public utilities or extensions or improvements thereof, as described in sections 384.80 through 384.94, may be awarded by the city as it deems to be in the best interests of the city.” Iowa Code § 26.9.
Gary Eidson and Rory Duggan will be presenting at The 2014 Real Estate Institute on November 13 and 14, 2014, at the Saint Paul RiverCentre. Gary will be a member of a panel of experienced faculty presenting a discussion of issues arising in commercial leasing transactions, and, on the second afternoon of the Institute, will also be a member of a panel discussing current issues affecting the development of commercial real estate. Rory will be a member of a panel of key participants discussing the JW Marriott mixed-use expansion at the Mall of America. For more information, contact Gary at 612.359.7621, firstname.lastname@example.org or Rory at 612.359.7675, email@example.com.
Greg Spalj and Julia Douglass will be presenting for Bankruptcy/Debtor-Creditor Series: Debtor-Creditor Handbook – Mechanics’ Liens sponsored by Minnesota Continuing Legal Education on Thursday, January 22, 2015, from 12:00-1:00 p.m. If you would like information about this seminar, contact Greg Spalj at 612.359.7631 or firstname.lastname@example.org or Julia Douglass at 612.359.7622 or email@example.com.
Dean Thomson will be speaking at the National AGC’s 2015 Conference on Surety Bonding and Construction Risk Management being held in Naples, Florida on February 1-3, 2015. For more information please contact Dean Thomson at 612.359.7624 or firstname.lastname@example.org.
Fabyanske, Westra, Hart & Thomson, P.A. is pleased to welcome Colin Bruns as an associate in the Construction and Commercial Litigation group. Colin earned his J.D. from the University of Minnesota Law School in May 2014 and his B.A. from the University of Wisconsin in May 2010. Colin will be admitted to the Minnesota Bar on October 31, 2014.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2014 FWH&T.