Legal Corner

Editor's note: Following is part two of a two-part series addressing the competitive bidding process. Part one, "Responsibility and responsiveness," was published in the October issue, page 14.

When there is a slowdown in private work, more contractors submit bids for public construction projects in accordance with competitive bidding procedures. Public construction projects are awarded to the responsible bidder who submits the lowest responsive bid. Frequently, bid protests are filed by a contractor who believes a public agency erred in awarding a contract.

A sampling of several bid protest cases, including cases concerning discrepancies in bid bonds, illustrates the circumstances when bid protests are sustained or denied.

Protests

In the 2001 case J.F. White Contracting Co. v. Massachusetts Port Authority, the Massachusetts Port Authority (Massport) solicited bids for the fifth phase of renovation of Tobin Memorial Bridge in Boston. Massport requested all interested bidders submit one bid based on using Type 5 cement concrete and another using silica fume concrete.

Framingham, Mass.-based J.F. White Contracting's bid using Type 5 cement concrete was the lowest overall bid. M. DeMatteo Construction Co., Boston, submitted a bid that was $11,262 higher using silica fume cement. Massport awarded the bid to M. DeMatteo Construction because it preferred to use silica fume cement, which it believed was more resistant to water, salt and other corrosive substances. Massport had accepted alternative bids on previous phases and installed silica fume cement because its increased cost was acceptable.

J.F. White Contracting sought to enjoin the contract's award on the grounds that such an award violated Massachusetts' public bid statute. The statute requires public contracts be awarded to the lowest responsible, eligible bidder on the basis of competitive bids publicly being opened and read. The company argued that allowing Massport to award the contract to M. DeMatteo Construction on the basis that M. DeMatteo Construction was the lowest bidder for the silica fume alternative opened the door to favoritism because it allowed the decision to be made after bids were known.

Although there was no evidence of favoritism in this case, the argument was that the alternative-bid approach could be used as a subterfuge for favoritism. The court refused to disallow Massport from using the alternative-bid approach finding that the approach could provide useful cost-benefit information. There was no prohibition in the public bid statute concerning obtaining alternative bids. As long as a government agency accepts the lowest bid pertaining to the alternative of its choice, the agency is acting within its authority.

In Fratello Construction Corp. v. Tuxedo Union Free School District, the school district's bid solicitation called for a base bid and two alternative bids. However, the bid form included within the bid package did not contain a line for the second alternative. Fratello Construction, Uniondale, N.Y., added an addendum to its bid submittal to state its price for the second alternative. Another bidder, Building Matrix Inc., New Rochelle, N.Y., submitted a bid for the first alternative, but no price for the second alternative was apparent on its bid submittal.

Within one hour of the bid opening, Building Matrix told the school district's architect it intended the same bid for both alternatives and did not include a separate price because no line was provided. The school district awarded the contract to Building Matrix as the lowest bidder. Fratello Construction filed a bid protest.

The New York appellate court found that the school district acted improperly by privately conferring with Building Matrix to allow it to correct its bid. The court stated, "When essential information is missing from a bid at the time of opening, it may not later be supplied by a private understanding between the bidder and the municipality or otherwise."

Because Building Matrix did not give a price for the second alternative, its bid should have been found nonresponsive. The court considered the school district's solicitation defective because a line for the second alternative was omitted. The remedy was to reject all bids and reopen the bidding process.

Bid bonds

Problems with bid bonds that fail to comply with solicitation requirements often have been the subject of bid protests.

For public construction projects, bidders are required to furnish a bid bond or guarantee with their bids. Failure to do so generally requires a bid be disregarded on grounds of being nonresponsive. The penal sum of the bid bond may be a percentage of the bid—typically 10 percent or 20 percent—or the difference between the contractor's bid and the next highest bid.

In the 2002 Pennsylvania case Gaeta v. Ridley School District, the school district's bid package required contractors' bids be accompanied by a bid bond issued by a surety with a minimum Best Rating of A- or better. The bid package expressly reserved the school district's right to waive bid irregularities.

IBE Construction Inc., Palmyra, Pa., submitted the lowest bid. However, the surety on its bid bond had a Best Rating of B. The school district notified IBE Construction about the discrepancy and requested a compliant bond. The next day, IBE Construction submitted a new bond from another surety, which had an A rating. The school district subsequently awarded the contract to IBE Construction. Both sureties were owned by the same parent company. The award was challenged.

The school district argued it was allowed to waive the irregularity in the surety's rating. The trial court allowed the school district to proceed. The intermediate appellate court enjoined the school district. The Pennsylvania Supreme Court reversed the ruling stating the improper surety rating was a minor irregularity that could be waived. The Pennsylvania Supreme Court engaged in a two-prong analysis to come to this conclusion. It considered whether the waiver would deprive the school district of its assurance that the contract would be entered into and performed and place the bidder in a position of advantage compared with other bidders.

Because the irregularity pertained to a bid bond that served a limited purpose of short duration (to ensure the contractor will enter into a contract), the Pennsylvania Supreme Court was inclined to allow the school district some latitude rather than demand absolute responsiveness. Because there was evidence there was no cost difference associated with the lower-rated bond and the surety's rating had no bearing on the amount of IBE Construction's bid, the court found there was no advantage given to IBE in allowing the waiver.

In federal cases, bid bond defects frequently are grounds for finding a bid nonresponsive and awarding a contract to the next lowest bidder. Federal acquisition regulations explicitly state a bid that does not have a valid bid bond at the time of bid opening must be rejected.

The test to determine whether a bid bond is adequate is whether the bid bond would be enforceable against the contractor and surety issuing the bid bond. If the government cannot enforce a claim against the surety and contractor for some reason related to the bond, the contractor's bid must be considered nonresponsive.

In the 2001 case Interstate Rock Products Inc. v. United States, the U.S. Court of Federal Claims considered whether the failure of the submitted bid bond to include a penal sum was grounds to reject the contractor's bid as nonresponsive. On April 25, 2001, the contractor received a United States Fidelity & Guarantee Co., Baltimore, bid bond from his bonding agent that included the 20 percent penal sum. The bid was due May 10, 2001. The contractor's $10.4 million bid was low by about $600,000. Because parts of the original bid bond were illegible as a result of a faxed transmission, the contractor asked his bonding agent to obtain another bid bond. This bid bond inadvertently left blank the line reserved for the penal sum amount. The bid bond without the penal sum was submitted with the contractor's bid.

Following the bid opening, the agency declared the contractor's bid was nonresponsive because of the penal sum's omission on the bid bond. The contractor promptly furnished the original bid bond that contained no omissions but was partially illegible. The contractor argued its surety was legally bound and omission of the penal sum on the second bond was a clerical error that should be viewed as a minor informality. Relying on earlier General Accounting Office (GAO) decisions, the agency and court rejected the contractor's argument. Finding there was a rational basis for the agency to determine the contractor's bid was nonresponsive, the agency's decision was affirmed by the court.

In the event of bidder default, a surety could challenge a blank bond, and the bid bond's purpose would be defeated. The question presented in cases where bonds do not comply with invitation requirements is whether the government obtains the same protection in all material respects under the bond actually submitted as it would under a bond fully complying with the bid requirements. A bid bond lacking a penal sum is a material defect because it would provide a contractor and surety with a defense to enforcement. The absence of a penal sum creates an ambiguity.

In two recent federal cases, low bids have been found nonresponsive because the power-of-attorney forms accompanying the bid bonds were faxed documents. In Kemper Construction Co., the fourth-lowest bidder on a U.S. Army Corps of Engineers construction project was able to persuade the Army Corps of Engineers to reject the three lower bids because the power-of-attorney forms attached to the bid bonds were faxed documents. The Army Corps of Engineers concluded the faxed signatures on the forms were insufficient to show the bond bound the surety.

The lowest bidder, Kemper Construction, New Orleans, protested the decision to reject its bid to GAO. Upholding the decision, GAO ruled that, without having an original power-of-attorney form, the Army Corps of Engineers could not be certain alterations had not been made to the faxed document to which the surety had not given its consent. Therefore, the Army Corps of Engineers could not be certain Kemper Construction's surety was obligated on the bid bond in the event Kemper Construction failed to enter into a contract.

In Schrepfer Industries Inc., the Army Corps of Engineers rejected the low bid of Schrepfer Industries, Trinidad, Colo., as nonresponsive on the grounds that the power-of-attorney form accompanying the bid bond was a photocopy. When Schrepfer Industries filed a bid protest, GAO again ruled the Army Corps of Engineers reasonably had concluded the photocopied document did not unequivocally show the bond would be enforceable against the surety.

To avoid the possibility of having a bid thrown out based on some perceived problem with the bid bond, submit an original bid bond with an original power-of-attorney form.

In the know

If you are active in the public construction arena, you should become familiar with the procedures and criteria applicable to bid protests. You will want to be certain your bid is responsive to the bid solicitation requirements. If your bid is the second or third lowest or you have reason to question the agency's award to another contractor, you may want to carefully review bids and consider filing a bid protest. Bid protests should be filed as promptly as possible.

Stephen M. Phillips is a partner with the law firm Hendrick, Phillips, Salzman & Flatt, Atlanta.