Apples to apples?

Billions of dollars are spent every year by state and local governments to build and repair schools, libraries, prisons, government buildings and other public projects. Virtually every roofing contractor knows a public contract is supposed to be awarded to the lowest responsive and responsible bidder; however, less widely known are the ways many states undercut this standard by attempting to favor certain bidders.

Although some of this favoritism is achieved through unofficial policy, the more prejudicial policies—those that conflict to the greatest extent with the "lowest responsive and responsible bidder" standard—have been enacted into law. Throughout the years, many states and local jurisdictions have passed or attempted to pass laws favoring residents in the award of public contracts.

By understanding how the states in which you conduct business favor certain contractors, you can take advantage of the preferences offered, make informed decisions about which projects you should pursue, and more accurately assess your chances of successfully pursuing or defending a bid protest.

The standard

The lowest responsive and responsible bidder standard, which is law in most states, simply requires that the lowest bidder be awarded a contract, provided the bid corresponds to the work as outlined by the awarding entity and the low bidder appears capable of performing the work. This standard is designed to ensure the efficient use of tax dollars, promote competition, restrict corruption and influence by local officials, and provide that unsuccessful bidders know and understand why their bids were rejected.

But preferences, in some cases, wholly cut against the lowest responsive and responsible bidder standard by outlining situations in which a higher bidder is awarded a contract. Typically, the justifications for these deviations are that they combat unemployment; assist the state in collecting taxes; reward local contractors who have, through payment of taxes, contributed to the funds from which they are to reap a benefit; and provide an advantage to local contractors who incur direct tax liability to the state through property ownership, collectively resulting in a greater benefit to the state than simply saving money on a bid.

Although some preference statutes have been ruled unconstitutional, many have withstood constitutional scrutiny. In addition, after a statute has been deemed unconstitutional, the state legislature is likely to write new legislation to accomplish the same objectives in a manner that will withstand constitutional scrutiny. Illinois, for example, had two preference laws struck down as unconstitutional before it enacted a new preference law in 1998.

State legislatures will continue to design preference laws that pass constitutional muster with the goal of fighting local unemployment and benefiting residents to the greatest extent possible. Therefore, it is important to understand what preference laws are working for or against you.

Preference types

Many states have enacted some type of preference statute that provides an exception to the lowest responsive and responsible bidder standard in the case of certain favored contractors. The first step in evaluating the preference laws that apply to your business is understanding how the preference benefits certain contractors. The most common preference statutes are fixed percentage, or pure, preferences; tie-bid-only preferences; and reciprocal, or retaliatory, preferences. It is important to note these statutes vary in their scopes of coverage and do not necessarily apply to every public project.

Pure preferences

Pure preference statutes grant a certain percentage fixed by law as a preference in favor of certain bidders. If a preferred contractor's bid does not exceed the nonpreferred contractor's bid by more than the set percentage, the preferred contractor receives the contract. Although a nonpreferred bidder may be the lowest responsive and responsible bidder, the contract may be awarded to a higher bidder because he is a preferred contractor, and the increased costs will be absorbed by taxpayers.

Nevada has a pure preference statute that requires local governments to award contracts for public works for which the estimated cost exceeds $250,000 to the contractor who submits the "best bid." However, the best bid is not necessarily the lowest responsive bid from a responsible bidder. The statute includes a procedure by which certain bidders can obtain certificates of eligibility to receive a preference in bidding on public works from the State Contractors Board. Any contractor, including an out-of-state contractor, who has been licensed in Nevada for at least five years and met threshold requirements for payment of sales and use and motor vehicle privilege taxes during each of those five years, is entitled to a 5 percent preference over noneligible bidders.

As a result, the best bid is defined as the lowest bid submitted by a responsible and responsive contractor who has obtained a certificate of eligibility, provided the contractor's bid is not more than 5 percent higher than the bid submitted by the lowest responsive and responsible bidder who does not have a valid certificate of eligibility.

In Bud Mahas Construction Inc. v. Clark County School District, Bud Mahas Construction Inc., Salt Lake City, had submitted the lowest bid of $11,551,000 to construct Thurman White Middle School in Henderson, Nev. However, the Clark County School District awarded the contract to Sletten Construction of Nevada Inc., Las Vegas, who had submitted a bid of $11,644,000 because it did not believe Bud Mahas Construction qualified for the preference.

Bud Mahas Construction argued it was entitled to the preference and filed suit, requesting a preliminary injunction to prevent Sletten Construction of Nevada from proceeding with construction. Relying on the broad discretion given to the awarding entity to judge the best bidder, the court found there was no arbitrary refusal by the school district to award the contract to the lowest bidder, and the contract was allowed to be awarded to Sletten Construction of Nevada.

Other states with pure preference statutes include Alaska, Arizona, Hawaii, Indiana, New Mexico and Wyoming.

Tie-bid-only preferences

Unlike fixed percentage preferences, which are highly prejudicial against nonpreferred bidders, tie-bid-only preferences offer preferred bidders only a slight advantage. A tie-bid-only preference provides that when two or more bidders submit tie bids and meet all other requirements, a local contractor will be awarded a proj­ect over an out-of-state contractor.

According to a 1995 survey conducted by the National Institute of Governmental Purchasing Inc., every state, either by law or public policy, grants in-state preferences in the case of a tie bid. So even if there is no statute specifically stating local contractors will be given this preference, you always should assume that is the case.

South Carolina has a prototypical tie-bid-only preference statute. Its Code 1976 § 11-35-1520 states, "If there is a South Carolina firm tied with an out-of-state firm, the award must be made automatically to the South Carolina firm."

The statute also lists its other tie­breakers in order of priority: products or items that are manufactured or produced in South Carolina; businesses certified as Minority Business Enterprises; and firms located in the same taxing jurisdiction as the governmental body's consuming location if tie bids involve two South Carolina firms. Because the preference given to contractors in tie-bid-only states is so slight—applying only in the rare event that two bids are for the same amount—an out-of-state contractor should not be overly concerned about competing with South Carolina contractors on local public projects.

Reciprocal preferences

The use of preference statutes has escalated competition among states while increasing concern for the economic security of local contractors. Although some states respond to these concerns by adopting fixed percentage or tie-bid-only preferences to protect local contractors, other states simply retaliate against those contractors who receive home-state preferences. These retaliatory preferences grant a preference in favor of residents that is equal to the preference an out-of-state contractor receives in his home state.

For example, if a South Carolina contractor went to a state with a reciprocal preference statute, the in-state contractor, when his bid is compared with the contractor from South Carolina, would only be entitled to the same tie-bid-only preference as has been enacted in South Carolina.

Ohio's reciprocal preference statute states, "Where a preference is provided by another state for contractors of that state, contractors having their principal place of business in Ohio are to be granted in Ohio the same preference over them in the same manner and on the same basis and to the same extent as the preference is granted in letting contracts for the same type of work by the other state."

Texas also has enacted a reciprocal preference but has constructed its statute differently from Ohio's. Structured similarly to a fixed percentage preference, Texas' law states an entity may not award a government contract to a nonresident bidder unless the nonresident underbids the lowest responsible bid submitted by a resident bidder "by an amount that is not less than the amount by which a resident bidder would be required to underbid the nonresident bidder to obtain a comparable contract in the state in which the nonresident's principal place of business is located."

If your home state has a reciprocal preference, it may become important to consider the preferences enacted by any number of states in the course of comparing your bid with others. If your home state has a reciprocal preference and you bid on a project in another state with a reciprocal preference, a local contractor will not be entitled to any preference over you.

Reciprocal preferences are the most common type of statutory local preference and have been enacted in a number of states, including Alabama, California, Colorado, Maryland, Michigan, Mississippi, Ohio, Pennsylvania, Tennessee and Virginia.

Who benefits?

In addition to determining the type of preference offered by a given state, you must determine who may benefit from the preference. Never assume preferences are reserved solely for state residents even if the word "resident" is used in the statute. Although it sometimes is the case that preferences are strictly reserved for resident contractors, especially in tie-bid-only states, many states allow qualified nonresidents to receive identical preferences.

Maryland, Ohio and Texas are examples of states that strictly reserve any preference for in-state contractors. Maryland's procurement law states the awarding authority "may give a preference to the resident bidder who submits the lowest responsive bid" if a reciprocal preference is offered to the nonresident bidder by its home state. The statute goes on to define a resident bidder as a bidder whose principal office is located in the state.

Ohio also uses the principal place of business standard when requiring "preference shall be given to contractors having their principle place of business in Ohio over contrctors [sic] having their principle place of business in a state which provides a preference in that state in favor of contractors of that state for the same type of work."

Texas expands the definition of resident bidders slightly, imposing a reciprocal preference in favor of persons or entities "whose principal place of business is in this state, including a contractor whose ultimate parent company or majority owner has its principal place of business in this state."

Although Maryland, Ohio and Texas are clear and deliberate in reserving preferences for residents regardless of the circumstances, many other states allow contractors whose principal places of business are out-of-state to benefit from the preference statute provided other factors are met, such as maintaining an in-state office, paying certain taxes or both.

Illinois broadly offers its resident preference to any contractor operating a place of business within the state without a minimum requirement as to volume of business or the length of time business has been transacted in Illinois. Illinois provides that a resident bidder can be a foreign corporation duly authorized to transact business in Illinois "that has a bona fide establishment for transacting business within this State where it was actually transacting business on the date when any bid for a public contract is first advertised or announced."

Conversely, Alabama's preference extends only to foreign contractors who have maintained a permanent branch office in Alabama for at least five consecutive years. Requirements relating to physical presence in the state are simpler than those relating to taxes in that they are easy to prove and less subject to change once established.

Requirements relating to paying taxes, on the other hand, may change as a company's volume of business increases and decreases.

In Michigan, for example, one way a contractor may qualify as a resident contractor is if, during the previous 12 months, the contractor filed a Michigan income tax return showing income generated in or attributed to the state of Michigan. However, the statute goes on to provide that the filing or withholding must be more than a nominal filing for the purpose of gaining the status of a Michigan business. Instead, the filing must indicate "significant business presence in the state, considering the size of the business and the nature of its activities." This standard leaves much to be interpreted by official discretion, especially compared with a simple requirement that a place of business be physically present in the state at the time a bid is submitted.

Similarly, California will waive its reciprocal preference statute against contractors with their principal places of business elsewhere if the contractors have paid at least $5,000 in sales or use taxes to California for construction-related activity for each of the immediately preceding five years.

Colorado combines requirements of physical presence and payment of taxes. Resident contractors include "a person or entity which is authorized to transact business, which maintains a place of business in Colorado, and which has paid Colorado unemployment compensation taxes in at least 6 of the 8 quarters immediately prior to bidding for a public project."

Be proactive

Being considered a resident contractor may mean the difference between being awarded a contract or not. As the statutes demonstrate, various states have taken widely different approaches to deter­mining who is a resident contractor and what benefits resident contractors can enjoy.

Instead of waiting for a potential bid protest action, seek out ways to become recognized as a resident contractor in every state in which you conduct business or desire to do so. But understand how such recognition will affect you if those states have reciprocal preference statutes.

David M. Gersh is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.