Publicly funded projects draw stiff competition

by Samuel P. Logan and Wyatt A. Hoch

With private-sector projects dropping off, government-authorized construction is now predominant and bidding is under scrutiny.

 

Economic and political trends are refocusing construction toward publicly financed projects. The hangover from insolvencies and meager financing will continue to adversely affect private-sector development and construction in 2010. At the same time, financing for more public-sector projects is supposed to be in the pipeline. Federal spending, including funding of projects for local governments, now accounts for an increasing share—currently about 30 percent—of total construction spending.

As competition for publicly financed projects has heated up, lawyers are receiving more inquiries about laws and regulations governing contract-award processes. Questions about political influence and favoritism, qualification of competing bidders, changes in bid specifications and terms of RFPs, and other complaints may lead to bid protests. The system functions best when there is consensus about what the rules ought to be, and when both the governing bodies of project owners and bidders understand their rights and obligations.

The design contracts for most state and federal projects are awarded under a Qualifications-Based Selection (QBS) process. Many states and the federal government mandate QBS for project-design procurement. Under QBS, a public owner “short-lists” firms based on the firm’s reputation, professional qualifications, and experience; price is intentionally excluded from consideration. After a small number of firms have been short-listed, the public owner negotiates with the top-ranked firm over project specifics, including price for the professional services. If those negotiations fail, the public owner moves on to the second-ranked firm, and so on.

By contrast, most public owners must award the prime construction contract based on some variant of the “lowest responsible bidder” rule. A construction firm’s bid (an offer to perform) generally consists of a price in response to the public owner’s design, a statement of qualifications, and sometimes a proposed project duration. The rules and regulations that govern the award of the construction contract may vary depending on the phase of procurement, project type, project location, and the source of project funding. Some state-financed projects, including Kansas school and county projects, may now be awarded to a construction manager through a quasi-subjective QBS process.

Procurement rules are generally relatively clear, though not always consistent. A state-entity may give preference to awards to local firms, but a preference can conflict with federal rules that prohibit local preferences when federal funds are involved. The rules governing legal challenges under “lowest responsible bidder” statutes and regulations have been clarified and interpreted by decades of case law; challenges under relatively-new QBS procedures lack similar guidance.

Regardless of which rules apply to the bid and award process, public owners must comply with applicable local, state, and federal laws as well as their contractual obligations. The most important rules often stem from the RFP itself, and hence are contractual in nature. State rules and regulations typically establish the requisite procurement process, while federal rules often follow federal funds. Under any stage of the process, things can go wrong, and a challenge to the procurement process may arise—a challenge which is perhaps more likely in turbulent economic times. A failure to abide by the appropriate laws and regulations could result in administrative challenge or litigation, jeopardized funding, and delayed construction.

Legislative Alert: With legislatures now in session in the region, laws affecting the construction industry could change in the next few months. Both Kansas and Missouri currently have statutes capping at 10 percent the retainage that a project owner can withhold from its prime contractor, and the prime can withhold from subcontractors. Kansas House Bill 2238 would prohibit more than 5 percent retainage and forbid any retainage if the contractor’s work is bonded. If passed, the bill could revolutionize the way owners and contractors look at bonding requirements for Kansas projects.

Samuel P. Logan and Wyatt A. Hoch are lawyers with the firm of Foulston Siefkin in Overland Park, Kan.
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