MCLE Article and Self-Assessment Test Bidding Wars
Protests of winning bids in public construction projects must meet the strict standards established by statute and case law By Jean M. Boylan
Jean M. Boylan is a partner with the law firm of Gibbs, Giden, Locher & Acret in Los Angeles. She has lectured throughout California on the subject of public contracts. She is currently teaching business law at California State University at Northridge.
A substantial amount of real estate development and construction in Los Angeles occurs today in the public sector. Attorneys who represent public owners need to be thoroughly familiar with local and state competitive bidding statutes and the issues that arise from them. Attorneys who represent contractors or subcontractors need to be aware of the rights and remedies that flow from the public contract award process.
The competitive bidding process can seem confusing to many attorneys, particularly given the circumstances of some recent local projects. First, the Santa Monica Freeway was rebuilt in record time seemingly without competitive bidding requirements. Then bid protests and litigation put the brakes on the Metropolitan Transit Authority (MTA) and the construction of the Metro Rail Project. This disparate treatment actually stems from the applicability of competitive bidding laws.
The avowed principal purpose of the state legislature in creating the competitive bidding system was to make sure that Californians were provided with high-quality construction at the lowest possible price, while at the same time guarding against corruption, favoritism, and the abuse of discretion by public officials in the award of public contracts.(1) To implement these goals, the legislature mandated specific procedures for the preparation, submission, and evaluation of public bid proposals. The failure of a bidder to comply strictly with these requirements can mean the difference between receiving a contract award or having a bid rejected. The legislature recognized that in certain situations, such as emergency work, other public policy concerns would override the competitive bidding process.
Thus, for lawyers representing public owners and contractors, the first issue to be resolved is whether or not the competitive bidding laws apply to a particular project. If an emergency exists, such as the repair of the Santa Monica Freeway, competitive bidding requirements will not apply.(2) Competitive bidding is also not required for public works projects requiring specialized equipment;(3) architectural, engineering, or construction management contracts; or professional services.(4) A public agency typically selects an architect, engineer, or construction manager on the basis of demonstrated competence and personal qualifications. However, this does not mean that the public entity can violate its internal bid documents. For an architectural and engineering contract, the public agency is required to follow its bid documents and the criteria established by the designated public agency.
Sometimes public agencies manage to avoid competitive bidding requirements by contracting under a joint-powers agreement.(5) Certain charter cities and charter counties may not be subject to the state Public Contract Code.(6) Competitive bidding requirements typically are found in city or county ordinances or charters.
In the current economy where few construction projects are underway and competition is fierce, almost every public procurement has a bid protest. A bid protest is a complaint filed by a disappointed bidder alleging that the competitive bidding statutes or instructions to bidders have been ignored, violated, or circumvented. In bringing the bid protest, the disappointed bidder is attempting to convince the public owner that the violation, error, or discrepancy in the low bid is material and violates the law. If the contest is successful, the bidder filing the protest can obtain a writ mandating that the project go to the next lowest responsive bidder.
Before a bid is even opened, problems may arise. There has been substantial litigation concerning a bidder's right to withdraw or reform a bid because of a mistake. The only remedy historically available in California to a contractor desiring to withdraw a bid because of a mistake in the price was to sue for rescission. According to the court in M. F. Kemper Construction Co. v. City of Los Angeles,(7) a public agency could allow withdrawal of a bid only if the contractor could show that 1) the mistake was the result of a clerical error; 2) adequate notice of the error was given to the public agency prior to acceptance of the bid; and 3) it would be unconscionable to hold the company to its bid at the mistaken price. In Kemper, a contractor inadvertently had omitted a $301,769 item from a total bid of $780,305. The court granted the contractor's request for rescission based on a showing that the mistake was inadvertent and that adequate notice of the error was given to the city.
In 1971 the legislature passed a statute codifying the grounds for obtaining relief for mistakes made in bids for public jobs,(8) and, in doing so, eliminated the Kemper remedy of rescission--at least for bids submitted to certain state entities, such as a city, district, or public agency. Public Contract Code Sections 5101 through 5103 provide the exclusive remedies for mistakes in bids submitted to agencies covered by the bidding statutes. Under Section 5103(d), the courts now distinguish between errors in judgment (such as mistakes in cost of labor or materials), for which relief will not be given, and mechanical or clerical errors (such as in the tabulation or transcription of figures), where relief will be allowed.
The rules of law regarding mistakes also apply to subcontractors. The telephonic bidding process common throughout the industry does not allow an opportunity for the prime contractor to form a conventional contract with a subcontractor. After the name of the low bidder on a public contract is announced, the low bidder/prime contractor prepares and sends out subcontract forms for the subcontractors' signatures. Problems arise when a subcontractor who has made a telephone bid later refuses to sign a subcontract form.
The landmark case of Drennan v. Star Paving Co.(11) illustrates this point. The plaintiff in Drennan was a prime contractor preparing a bid for a job offered by a school district. Bids were to be submitted before 8 pm on a certain date. In the late afternoon, an estimator for subcontractor Star Paving telephoned in a bid of $7,131.60. Drennan used Star Paving's bid in preparing its own bid as prime contractor. The next morning, Star Paving informed Drennan that there was a mistake in the bid and that it would not perform the work for less than $15,000. Meanwhile, Drennan's bid had already been accepted by the school district. Eventually, Drennan employed another subcontractor to perform the work at a cost of $10,948.60. The court applied the doctrine of promissory estoppel and held that Drennan was entitled to recover the sum of $3,817 from Star Paving (the difference between Star Paving's bid and Drennan's cost). In reaching its holding, the court relied on Section 90 of the Restatement of Contracts, which states that:
A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.(12)
The decision noted that Star Paving should have realized that if its bid were the lowest, there was a substantial possibility that Drennan would rely on it. If, however, a general contractor has reason to believe that a subcontractor's bid is in error, the general contractor cannot justifiably rely on it, and the rule of promissory estoppel will afford no basis for enforcement. The key element in proving a claim based upon promissory estoppel is that the plaintiff's reliance on the promise be reasonable.(13)
In extreme situations, a general contractor's reliance may be held to be reasonable even though the contractor knows that the subcontractor has made an error. For example, in Saliba-Kringlen Corp. v. Allen Engineering Co.,(14) a subcontractor submitted a bid that was $55,000 lower than intended because the plans were presented at half-scale and the estimator forgot to multiply by two. The bids were to be opened at 2 pm. Allen submitted his bid by telephone shortly before noon. The prime contractor submitted its bid to the public entity one hour later. At 1:50 pm, the subcontractor withdrew its bid because of the error. The court found that the prime contractor was entitled to recover the difference between the subcontractor's bid and the cost of the work. The decision noted that it was unrealistic to expect the prime contractor to withdraw its prime bid on only 10 minutes notice.
Once bids have been opened, bid protests may arise when a public agency rejects the bid of the lowest bidder because the bid is nonresponsive to the requirements of the bid solicitation or the agency determines that the bidder is "nonresponsible."
To be responsive, a bid must be in strict and full accordance with the material terms of the invitation for bid. Under both federal and state law, a nonresponsive bid may not be corrected after the bids are opened. A bidder's responsiveness, which is determined by the awarding public body, is challenged on almost every public construction contract, so an attorney representing the lowest monetary bidder can anticipate the need to defend that client's bid as responsive in all material terms. Also, an attorney who is consulted by one of the disappointed bidders must investigate to see if the low bidder submitted a bid that not only was responsive but also complied with the material requirements of the Information for Bidders (IFB) guidelines for bid submission on the project. The material terms of a bid typically are those that could affect price, quantity, quality, or delivery; they also include those items clearly identified by the IFB. The test of whether a bid fails to materially comply with the bid documents is whether the variance gives the bidder a "substantial economic advantage or benefit" not enjoyed by the other bidders.(15) The bidder's lack of intent to gain an unfair advantage is irrelevant.
A bid also may be rejected via a technical challenge if there is a possibility that the bidder will obtain an unfair advantage. For example, it is considered an unfair advantage to give the winning bidder a chance to decide whether (and possibly under what circumstances) it will accept the contract after the bids are opened.
Although full compliance with each provision of the IFB is preferred, an immaterial IFB requirement may be waived without prejudicing the consideration of the bid. A "minor irregularity" constitutes a failure to meet an IFB requirement that does not bear on the bidder's commitment to perform the contract, either because 1) the requirement is merely procedural; 2) the requirement is substantive but is satisfactorily met, although not in the precise manner contemplated by the IFB; or 3) the requirement not met is one calling for information that relates not to the promise to perform but to independently verifiable facts regarding the bidder's status. In addition, the failure to meet an IFB requirement may be deemed a minor irregularity if the bid is affected only in a trivial way.
In Menefee v. County of Fresno,(16) a case that demonstrates the application of the materiality standard to bidding on public works projects, Brewer-Kalar was the low bidder on a contract for the construction of water, sewer, and street repairs. Brewer-Kalar's bid was deemed nonresponsive because of its failure to sign the bid proposal sheet. However, the bid was initialed by Brewer-Kalar's principals elsewhere on the bid form and the bid bond was signed properly. The court upheld the award of the contract to Brewer-Kalar by holding that if the bid was signed by the appropriate parties, the placement of the signatures did not matter. The court concluded that since Brewer-Kalar gained no advantage from the defect, the public agency should be allowed to waive this immaterial defect.
Menefee did not establish a categorical rule. Rather, the facts of each particular procurement need to be thoroughly evaluated. Under different facts, the failure to properly sign a bid proposal may be viewed as material. The key is whether the low bidder could have avoided entering into the contract and gained an unfair advantage by the mistake.
It is thus important that public agencies make certain that they specifically reserve the right to waive discrepancies or errors under the contract. This will give the public agency a certain amount of discretion to determine if the error or discrepancy is material. However, it is important that the public agency realize that it is responsible for ensuring that the bid substantially complies with the contract requirements.(17) In Konica Business Machines U.S.A., Inc. v. Regents of University of California, the public entity accepted a bid that deviated from the project specifications incorporated in the Request for Quotation (RFQ). The court held that strict adherence to the specifications would be required even in the absence of evidence of corruption in the bidding process and in light of the fact that the public entity would save money as a result of the deviation.
In addition to the issue of responsiveness, many bid protests also involve disputes over responsibility. The term "lowest responsible bidder" is defined as the lowest bidder whose offer responds in quality, fitness, and capacity to the particular requirements of the proposed work.(18) The word "responsible" in this context is not necessarily employed to denote a bidder who is trustworthy but instead refers to the bidder's ability to perform the work in accordance with the requirements of the bid solicitation.(19)
Rather than looking at the contractor's general ability and references, the contracting public agency must focus upon the contractor's specific ability to do the job. The awarding agency cannot adopt a concept of relative superiority in evaluating whether a bidder is responsible. If the awarding agency makes a finding that the low bidder is capable of performing the desired work, the contract cannot be awarded to another bidder on the basis of that bidder's otherwise superior technical ability.
The relative-superiority concept made an appearance in City of Inglewood-Los Angeles County Civic Center Authority v. Superior Court,(20) in which the public entity attempted to award a contract for the construction of a civic center to one company, Swinerton & Walberg Co., despite the fact that another company, Argo Construction Co., was the low bidder. The public entity applied the concept of relative superiority based upon the architect's recommendation; Swinerton's qualifications were considered to be so superior as to justify its selection as the lowest responsible bidder. The court held that to permit the entity to reject the bid of the lowest qualified bidder and award the contract to a more qualified bidder would frustrate the very purposes of the competitive bidding system and would promote favoritism in the award of public contracts.
However, an awarding authority is given a great deal of discretion in determining whether a bidder is even minimally responsible. In Raymond v. Fresno City Unified School Dist.,(21) the public agency rejected a low bid based upon the low bidder's poor construction of another school building. The court rejected the low bidder's suit for declaratory relief and held in favor of the public agency, stating:
There are many occasions in the experiences of municipal government when the quality of the thing to be supplied in the course of the public service depends upon conditions which differentiate bidders, and requireÉsound discretion on the part of city officials in determining whether the wares or device which each individual bidder offers in the form of his own exclusive design are such as will meet the particular requirements of the intended work.(22)
A bidder contesting as improper a rejection based on responsibility may seek a writ of mandate directing the public agency to rescind a previously awarded contract. Exactly what evidence must be presented in order to prevail is unclear, although there is some authority in California that a disappointed bidder must show fraud or collusion by the public agency. In West v. City of Oakland,(23) a dispute over a jail-construction contract, the city council rejected the lowest bid because it determined that the locking device the bidder intended to use did not meet the project's specifications. The disappointed bidder instituted a taxpayer's suit seeking to enjoin performance of the contract. In upholding the lower court's judgment in favor of the city, the appellate court stated:
The term "lowest responsible bidder" has been held to mean the lowest bidder whose offer best responds in quality, fitness and capacity to the particular requirements of the proposed work; and that whereby the use of these terms the council has been invested with discretionary power as to which is the lowest responsible bidder, having regard to the quality and adaptability of the material or article to the particular requirements of its use, such discretion will not be interfered with by the courts in the absence of direct averments and proof of fraud.(24)
The majority of the California bid-protest cases have expressed the view that a writ of mandate will be granted if the contract award constitutes an abuse of a public agency's discretion to determine the lowest responsible bidder.(25) However, the conflict as to what standard applies has not been resolved. The supreme court in Inglewood-Los Angeles merely identified the issue: "The parties argue at some length about the question whether the findings of a governing body that a contractor is not the lowest responsible bidder may only be attacked for fraud and collusion or whether it is sufficient to establish an abuse of discretion."(26) In the absence of clear guidance, it appears that a showing of abuse of discretion is often all that is required.(27)
Prior to rejecting a low bidder on the basis of nonresponsibility, the public agency is required to notify the contractor of the evidence supporting the finding, and the contractor must be afforded an opportunity to demonstrate its qualifications to perform the contract. The public agency need not conduct a quasi-judicial hearing prior to rejecting the low bidder.(28)
An awarding authority always has the discretion by law to reject all bids and readvertise and thus may seek to rebid a project in any circumstance.(29) Nonetheless, the awarding authority should specify in the IFB that it has the direct authority to reject all bids. Practical considerations such as timing and rebid costs certainly may be among the factors in the determination of whether the public entity exercises its right to reject all bids and rebid the project. A disappointed bidder should realize that the lowest bidder has no right to compel the acceptance of its bid by a writ of mandate to prevent the public entity from rejecting all bids.(30) Even if a writ prevails, ultimately the project may be rebid and the contract may be lost.
Perhaps the largest percentage of bid protests are brought as a result of programs inviting the participation of minority business enterprises (MBE) and women business enterprises (WBE). These programs require that the prime contractor include in its bid a commitment to award a certain percentage of its subcontracts to qualified MBE or WBE contractors or establish that it has made a good-faith effort to do so. Such programs have come under considerable scrutiny by the courts and have become highly politicized.
Recently, the United States Supreme Court in Adarand Constructors, Inc. v. Pena, Secretary of Transportation, et al.(31) held that "all racial classifications, imposed by whatever federal, state, or local government actor, must be analyzed by a reviewing court under strict scrutiny." Adarand overruled Metro Broadcasting, Inc. v. FCC,(32) which adopted intermediate scrutiny as the standard of review for congressionally mandated benign racial classifications. Adarand has led to doubts that existing MBE programs will survive the strict scrutiny that is now required. The widespread implications of Adarand for local and public construction projects have yet to be discerned.(33)
Prior to Adarand, the Supreme Court in City of Richmond v. J. A. Croson(34) ruled that a local minority set-aside program was unconstitutional under the Fourteenth Amendment. The court held that in order for an affirmative action plan to be valid, the public entity must demonstrate that there is a compelling governmental interest that justifies the plan, and the plan must be narrowly tailored to remedy the effects of prior discrimination. The city of Richmond had declared that its plan was "remedial" in nature and enacted for the purposes of promoting wider participation by MBEs in the construction of public projects. The Court determined that the city failed to demonstrate both a compelling governmental interest and a narrowly tailored remedy.(35) MBE/WBE requirements certainly will be evaluated and revised in light of the recent trend toward eliminating or minimizing affirmative action programs.
During this process contractors bidding on state public jobs still must be familiar with statutory and agency requirements on MBE/WBE compliance. Assuming the validity of an MBE program, a bidder failing to comply with the bid solicitation requirements may have its bid rejected because it is nonresponsive. This occurred in Rossetti Contracting Co. v. Brennan,(36) where a low bidder failed to submit the appropriate commitment required by the applicable minority-hiring program along with its bid. The bid was held to be nonresponsive even though the defect was inadvertent and did not go to the price, quantity, or quality of the services requested.
California law on the listing of subcontractors offers another common foundation of bid protests. Pursuant to Public Contract Code Section 4104, all bidders must designate in their bids the name and address of each subcontractor who will perform work exceeding one-half of 1 percent of the prime contractor's total bid. The policy reason behind the section--also known as the Subletting and Subcontracting Fair Practices Act--is to prevent bid shopping. Many IFBs require contractors to identify material suppliers for the same reason.
Other new sections of the Public Contract Code require bidders on public jobs to list the name and address of each of their subcontractors that is certified as a minority, woman, or disabled veteran business enterprise.(7 )The Subletting and Subcontracting Fair Practices Act applies to these contractors as well, thus mandating the conditions and procedures under which subcontractors may be substituted.
Under the statute, only one subcontractor can be listed for each portion of the work. If a prime contractor fails to name a subcontractor for a particular area in its bid, then the prime contractor will itself be obligated to perform the work.(38) The awarding authority may either cancel the contract or assess a penalty of not more than 10 percent of the contract price if the prime contractor is unwilling or unable to do the work.(39) A violation of the listing law is cause for disciplinary action by the Contractors State License Board.(40)
A contractor whose bid is accepted by the awarding authority is prohibited from substituting any person as a subcontractor in place of the subcontractor listed in the original bid without the awarding authority's consent.(41) The awarding authority may consent to a substitution of a subcontractor when one of the events specified in Public Contract Code Section 4107(a) occurs (including the subcontractor's failure to execute a contract, bankruptcy, default, or failure to post a bond, or if the subcontractor is not licensed).
The prime contractor may not assert a claim of inadvertent clerical error relating to subcontractors unless, within two days after the bid opening, it gives written notice of the claim to the awarding authority with copies to the subcontractor involved. However, a recent case held that a prime contractor substantially complied with the two-day written notice requirement by giving telephone notice to the subcontractor.(42) The subcontractor has six working days from the bid opening to submit to the awarding authority any written objection to the prime contractor's claim of clerical error.(43)
If the prime contractor unlawfully substitutes a subcontractor, the listed subcontractor has a cause of action against the prime contractor for damages incurred as a consequence.(44) If the prime contractor unlawfully substitutes one subcontractor for another, the contractor may not file suit against the new subcontractor because the illegally substituted contract is unenforceable.(45) Additionally, the failure to conform properly to the requirements of the subcontractor-listing law may render a bid nonresponsive. The awarding authority has the option to cancel the contract or waive the error as an immaterial deviation.
There are times when a prime contractor may want to protest the award of a public contract. However, all remedies available at the agency level must first be pursued before judicial relief is sought. The contractor must scrutinize carefully the bid documents and/or any applicable agency regulations that provide for specific procedures to protest the awarding of a contract. After the awarding authority makes its final decision, a contractor then may seek judicial relief, which may include an injunction halting the construction or an order that the entity reconsider the bids.
A well-managed public construction project requires considerable care and caution from the public agency in charge and the prospective bidders. A clear and legally consistent IFB will greatly reduce the number of bid protests as well as the time needed for their resolution. Also, a bidder must take every step to ensure that its bid strictly complies with all requirements. A public construction project will have a greater chance of success if all parties take the necessary precautions.
- Graydon v. Pasadena Redevelopment Agency, 104 Cal. App. 3d 631 (1980), cert. denied, 449 U.S. 983 (1981), reh'g denied, 449 U.S. 1104 (1981).
- Pub. Cont. Code Section 10371.
- Pub. Util. Code Section 13028.
- See Gov't Code Section 4526.
- Gov't Code Section 6508-09.
- Committee of Seven Thousand v. Superior Court, 45 Cal. 3d 491, 247 Cal. Rptr. 362 (1988).
- M. F. Kemper Construction Co. v. City of Los Angeles, 37 Cal. 2d 696 (1951).
- Pub. Cont. Code Section 5100, et seq.
- A&A Electric, Inc. v. City of King, 54 Cal. App. 3d 457 (1976).
- Lemoge Electric v. County of San Mateo, 46 Cal. 2d 659 (1956).
- Drennan v. Star Paving Co., 51 Cal. 2d 409 (1958).
- Id., citing Restatement of Contracts ¤90.
- MacIsaac & Menke Co. v. C. L. Freeman, 194 Cal. App. 2d 327 (1961).
- Saliba-Kringlen Corp. v. Allen Engineering Co., 15 Cal. App. 3d 95 (1971).
- Leo Michuda & Son Co. v. The Metropolitan Sanitary District of Greater Chicago, 97 Ill. App. 3d 340, 422 N.E. 2d 1078 (1981).
- Menefee v. County of Fresno, 163 Cal. App. 3d 1175 (1985).
- Konica Business Machines U.S.A., Inc. v. Regents of Univ. of California, 206 Cal. App. 3d 449 (1988).
- West v. City of Oakland, 30 Cal. App. 556 (1916).
- City of Inglewood-Los Angeles County Civic Center Authority v. Superior Court, 7 Cal. 3d 861, 867 (1972).
- Raymond v. Fresno City Unified School Dist., 123 Cal. App. 2d 626 (1954).
- Id. at 628.
- West, 30 Cal. App. 556.
- Id. at 560-61.
- See, e.g., Old Town Development Corp. v. Urban Renewal Agency, 249 Cal. App. 2d 313 (1967); Baldwin-Lima-Hamilton Corp. v. Superior Court, 208 Cal. App. 2d 803 (1962).
- Inglewood-Los Angeles, 7 Cal. 3d at 860 n.8.
- Charles L. Harney, Inc. v. Durkee, 107 Cal. App. 2d 570 (1951).
- Rubino v. Lolli, 10 Cal. App. 3d 1059 (1970).
- Adarand Constructors, Inc. v. Pena, Secretary of Transportation, et al., 115 S. Ct. 2097 (1995).
- Metro Broadcasting, Inc. v. FCC, 497 U.S. 547 (1990).
- See Joseph S. Avila, Color Bind, Los Angeles Lawyer, Dec. 1995, at 28.
- City of Richmond v. J. A. Croson, 488 U.S. 469 (1989).
- Id. at 729-30.
- Rossetti Contracting Co. v. Brennan, 508 F. 2d 1039 (7th Cir. 1975).
- Pub. Cont. Code Section 10115.2.
- Pub. Cont. Code Section 4106.
- Pub. Cont. Code Section 4110.
- Pub. Cont. Code Section 4111.
- Pub. Cont. Code Section 4107.
- Cal-Air Conditioning, Inc. v. Auburn Union School Dist., 21 Cal. App. 4th 655 (1993).
- Pub. Cont. Code Section 4107.5.
- Southern Cal. Acoustics Co. v. C. V. Holder, Inc., 71 Cal. 2d 719 (1960); C. L. Smith Co. v. Roger Ducharme, Inc., 65 Cal. App. 3d 735 (1977).
- Kiely Corp. v. Gibson, 231 Cal. App. 2d 39 (1964).
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