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(Reprinted
from the January 2000 Issue of the Associated General Contractors
of California's Legal Briefs)
ConstructionWebLinks.com
Legislation recently enacted in California
threatens to impose substantial burdens on contractors submitting
bids to local public agencies. The new law may also
allow the prequalification process to be used to bar contractors
considered by public entities to be unwelcome or undesirable
from submitting bids to these entities on California public
works projects. This legislation represents a significant
departure from existing prequalification law and substantially
expands the scope and potential impact of the prequalification
process.
The legislation, Assembly Bill 574, was signed by the Governor
in October 1999, and includes the following elements:
1. Provides a statutory definition
of "responsible bidder" on a "public works contract;"
2. Appears to require any
local public entity that prequalifies bidders to utilize
a single standardized questionnaire;
3. Allows the use of prequalification
to limit bidders according not only to the "size"
but also the "type" of project and the "minimum requirements"
needed to be allowed to submit a bid on a project;
4. Requires the public entity
to establish a process that allows bidders to dispute their
proposed prequalification; and
5. Modifies the Subcontractor
Listing Law to allow an awarding authority to consent to
substitution of a listed subcontractor when the awarding
authority determines that a listed subcontractor is not
a responsible subcontractor.
1. Prequalification Information
The most significant aspect of the new legislation is
the addition of Public Contract Code §20101, which creates
a prequalification system for contractors. Section
20101 falls within the Local Agency Public Construction
Act, and therefore applies to all local public works, including
contracts let by counties, school districts and cities.
a.
Prior Statutory Law
Before reviewing specific aspects of §20101,
it is helpful to summarize pre-existing California statutory
law on public works prequalification. Public Contract
Code §10160, applicable to contracts on state property,
allows (and on contracts in excess of $300,000 requires)
the awarding agency to require prospective bidders to answer
a questionnaire including "a complete statement of the prospective
bidder's financial ability and experience in performing
public works." Under §10163 the awarding authority
is empowered to "adopt and apply a uniform system of rating
bidders . in respect to the size of the contracts upon which
each bidder is qualified to bid." Section 10161 allows
the state to require information on the past safety record
of the bidder and to refuse to prequalify a bidder with
an unsatisfactory safety record. Section 10162 empowers
the State to reject a bid where a bidder had been "disqualified,
removed or otherwise prevented from bidding on, or completing"
a public works project "because of a violation of law or
a safety regulation."
Public Contract Code §10285 et seq., enacted
in 1985, permits suspension of a bidder from public works
contracts where the contractor or certain of its personnel
have been convicted of violating state or federal laws "in
connection with the bidding upon, award of, or performance
of, any public works contract." Public Contract Code
§10303 requires the state department to adopt and apply
uniform standards of rating bidders, on the basis of questionnaires,
"with respect to contracts upon which each bidder is qualified
to bid" and to publish lists of qualified bidders.
The fact that a bidder is not on such a list does not preclude
the bidder from submitting a bid on a given project.
Public Contract Code §10760 et seq. applies to contracts
let by the Trustees of the California State University,
and Public Contract Code §20111.5, enacted in 1986, applies
to contracts in excess of $15,000 let by school districts.
These statutes track the scope of §10163 in utilizing questionnaires
and financial statements to determine the size of contracts
on which contractors are allowed to bid. All three
of these statutory schemes provide that the questionnaires
and financial statements are not public records and are
not open to public inspection.
This group of statutes was fairly non-controversial.
The statutes applied to most state contracts and contracts
let by school districts, and their primary use was to limit
the size of the contracts on which contractors could submit
bids. However, a "size" restriction already existed,
even in the absence of these statutes, based on the requirements
for bid, performance and payment bonds. Beyond this,
a contractor could be found unqualified or not responsible
based on a bad safety record, a violation of a law or a
safety regulation, or a criminal conviction.
b.
Specific Requirements of §20101
New
§20101, like §§10760 and 20111.5, is discretionary in that
the public entity can choose not to use the questionnaires
or to pre-qualify bidders. In many other respects,
however, §20101 represents a radical departure from existing
California pre-qualification law.
The new law extends the pre-qualification procedure to "minimum
requirements permitted for qualification to bid, and the
type and size of the contracts" upon which the bidders
are qualified to bid. Thus, while under prior law
prequalification was generally limited to the "size" of
the project, with debarment limited to violations of law,
the new prequalification law includes the ambiguous "minimum
requirements" criteria and, of course, extends to the hundreds
of local public agencies across the state.
The new, ambiguous language certainly creates the possibility
that local public agencies will use the prequalification
process to screen out contractors the public agency deems
to be undesirable, regardless of the contractors' financial
capacity or experience. For example, a public entity
could establish a "minimum requirement" that a bidder have
submitted no more than three Government Code claims on public
works project in the last five years or similar requirements
to prevent contractors perceived to be claims-oriented from
submitting bids.
New §20101 also calls for a "standardized questionnaire"
to be developed by the Department of Industrial Relations
("DIR") in consultation with various public agencies, "the
construction industry" and "other interested parties."
Although the new statute is not precise ("the standardized
questionnaire that may be used by public entities"), it
appears that if a local agency does choose to pre-qualify
potential bidders, it must only use the standardized questionnaire
developed by the DIR. This limits the flexibility
of local agencies and heightens the significance of the
contents of the questionnaire. On the other hand,
if only one questionnaire form is used for all California
counties, non-charter cities and local agencies, this will
certainly reduce the administrative burdens of the prequalification
system.
The importance of the final scope and content of the standardized
questionnaire cannot be overstated. If, for example,
the questionnaire is similar to the questionnaire required
under Public Contract Code §14661 (applicable to design-build
contractors), a significant impact could be felt by many
public works contractors. Among other things, §14661
basically eliminates from the bidding process any contractor
whose "members" have had "a surety company finish work on
any project within the last five years" and requires bidders
to submit a declaration concerning "any construction or
design claim or litigation" of a specified value "settled
against any member of the design build entity over the last
five years," violations of the contractor's license law
or conviction of submitting a false or fraudulent claim
over the preceding five years. Naturally the AGCC will be
actively involved in development of the questionnaire.
2. Prequalification Procedures
The statute provides that the DIR will develop "model
guidelines" that "may be used" by the local public entity
in rating bidders. However, public entities are free
to apply their own evaluation criteria, as the statute requires
the public entity to "adopt and apply a uniform system of
rating bidders" that is to be "based on objective criteria."
Thus, the statute is somewhat inconsistent in apparently
requiring the public entities to use a standardized form
but then allowing flexibility in developing the rules that
will, in effect, frame the scope of the impact of the questionnaires.
Depending on the evaluation and rating system used, substantially
divergent results could be obtained. For example,
one county may deduct 10 points for each Government Code
claim filed by the bidder within the prior five years while
the next county may deduct only 1 point.
If the public entity chooses to prequalify bidders, it must
"establish a process that will allow prospective bidders
to dispute their proposed prequalification rating prior
to the closing time for receipt of bids." The public
entity is required, upon request, to provide the prospective
bidder with the "basis for the prospective bidder's disqualification,"
and the prospective bidder must be "given the opportunity
to rebut the evidence used as a basis for the disqualification
and to present evidence" why the bidder should be found
qualified.
At least on larger public works projects, this protest procedure
may be of little aid to disqualified contractors.
By the time contractors have prevailed and established their
qualifications, it likely will be too late for contractors
to prepare a proper bid unless they have continued to invest
time and resources preparing a bid on a project on which
they have been disqualified, based on the expectation of
overturning the finding of lack of qualification.
Nonetheless, for reasons discussed below, disqualified contractors
may have no choice but to pursue the protest in order to
avoid having the finding operate to bar them from submitting
bids on future, similar projects.
Section 20101 also allows public entities to establish a
process for prequalifying bidders on a quarterly basis,
with such prequalification remaining valid for one year.
As with prior prequalification law, the questionnaires and
financial statements are not public records and are not
open to public inspection.
There are many areas of uncertainty in the new statute.
The ability to mount an effective legal challenge to the
statute will depend on the factual circumstances of a given
case when a contractor is disqualified. Certainly
the fact that the information submitted by the bidders is
to remain undisclosed to the public (and, presumably, to
disqualified potential bidders) raises some due process
questions. Unless a rejected bidder can look at the other
bidders' prequalification materials, the disappointed bidder
never can be sure that the prequalification materials were,
in fact, objectively and impartially evaluated.
| 3. | Substitution of Non-Responsible Subcontractors |
AB 574 adds Public Contract Code §4107(a)(9) to the Subletting and Subcontracting Fair Practices Act. This new section allows a contractor to substitute a new
subcontractor for a listed subcontractor "when the awarding
authority determines that a listed subcontractor is not
a responsible contractor." This law applies to all
California public works projects.
It is difficult to conceive of the circumstances under which
the new statutory language will be utilized. Pursuant
to §4104 subcontractors are to be listed in the contractor's
"bid or offer." The new language would therefore appear
to apply only when a pre-qualified contractor has received
an award and has listed a subcontractor. At that point,
either the public agency or the contractor may seek to replace
the subcontractor on the basis of the subcontractor not
being "responsible."
It would indeed be rare for a public entity to seek to replace
a listed subcontractor, as the general contractor is responsible
for whatever problems may arise on the project. Further,
Public Contract Code §4107(a)(7) allowed the general contractor
to substitute a new subcontractor when there was a determination
that the listed subcontractor's work was "substantially
unsatisfactory" or when the subcontractor was "substantially
delaying or disrupting the progress of the work."
Thus, prior law provided a tool for contractors to replace
non-performing listed subcontractors.
The new language may have been intended, in part, to facilitate
removal of subcontractors who submit what are perceived
to be inflated or false claims. General contractors
always have faced the risk, in submitting a subcontractor's
pass-through claim on a public works project, of being accused
of submitting a false claim by virtue of their sponsorship
of the subcontractor's claim. The new law may allow
the contractor an option not previously available: seeking
to replace the claims oriented subcontractor.
In any event, because the practical utility and application
of this new exception is not clear, prudent general contractors
will add a provision to their subcontracts that provides
for termination of the subcontractor when the awarding authority
determines that the listed subcontractor is not a responsible
subcontractor. Without such language, contractors
could find themselves in the uncomfortable position of having
the public entity find their subcontractor to be not responsible
but with the contractor having no contractual right to terminate
the non-responsible subcontractor.
4. Responsible Bidder
Perhaps the least controversial aspect of the new legislation
is the addition of Public Contract Code §1103, which provides:
"1103. 'Responsible bidder,' as used in this part,
means a bidder who has demonstrated the attribute of trustworthiness,
as well as quality, fitness, capacity, and experience to
satisfactorily perform the public works contract."
Section 1103 also applies to all California public works
contracts. The definition is sufficiently vague that it
grants public entities broad discretion in setting the parameters
for who is, and is not, a responsible bidder.
There are only a few reported California decisions interpreting
the phrase "responsible bidder." These cases have held that
public entities have wide latitude in making a determination
of responsibility. Thus, a finding of non-responsibility
can be justified by a showing that a bidder's product was
not satisfactory to fulfill the intended purpose of the
contract (West v. Oakland (1916) 30 Cal.App. 556),
because the bidder was found to have provided poor workmanship
and failed to complete another project for the same owner
(Raymond v. Fresno City Unified School District (1954)
123 Cal.App.2d 626) or because the bidder submitted an "unrealistic"
and impractical bid (R.A.Vending Services, Inc. v. City
of Los Angeles (1985) 172 Cal.App.3d 1188).
Finally, where two bidders have been determined to be "responsible"
and a statute requires a contract to be awarded to the lowest
responsible bidder, the "contract must be awarded to the
lowest bidder unless it is found that he is not responsible,
i.e. not qualified to do the particular work under consideration."
City of Inglewood-L.A. County Civic Center Authority
v. Superior Court (1972) 7 Cal.3d 861, 867. See
also Boydston v. Napa Sanitation District (1990) 222
Cal.App.3d 1362. The public entity may not make the
award to one other than the lowest bidder based on the "relative
superiority" of the other bid.
5. Practical Considerations
Section 20101 operates on two levels. It allows
a pubic entity to prequalify bidders on a project-by-project
basis ("each prospective bidder for a contract" is to complete
the questionnaire), and it allows the public entity to prequalify
bidders for given types and sizes of projects for a period
of one year.
Unfortunately, for larger contractors the annual prequalification
process can present a significant administrative burden,
as they may submit dozens of bids to many different local
agencies every year. Rather than prequalifying project
by project, as a practical matter contractors should apply
for annual prequalification with the local public agencies
to whom they most commonly submit bids. Because the
public agencies are not required to offer annual prequalification,
contractor trade associations should lobby those public
agencies that choose to prequalify bidders to adopt annual
prequalification.
Finally, contractors cannot take lightly a finding that
they are not qualified or responsible enough to submit a
bid on a given public project. Recall that the prior
statutes generally allowed public entities to refuse prequalification
based on lack of financial capacity ("size of project"),
a violation of law or a bad safety record. Under the
new statute, a contractor may be found to lack the "minimum
requirements permitted for qualification" based on other,
lesser factors that are not related to financial capacity.
Such a finding may have to be disclosed on future bids,
leading to disqualification on future projects, not only
by the entity that disqualified the contractor, but by other
local public agencies. This potential cascading effect
should cause contractors to be more selective about the
projects on which they seek to prequalify and to seriously
consider protesting any disqualifications.
While the potential impact of this legislation is
great, it may be that the actual impact will, like
the prior prequalification laws, be insubstantial.
Local public agencies may, like contractors, feel that the
prequalification process adds further administrative burdens
to an already over-legislated and overburdened public bidding
process.
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