University Violates Public Contract Code by Failing to Disclose Bid Package Selection Procedure

In Schram Construction Inc. v. The Regents of the University of California, (— Cal.Rptr.3d —-, Cal.App. 1 Dist., September 22, 2010), the First District Court of Appeal considered whether the University of California violated the Public Contract Code when it failed to adopt and publish procedures to notify prospective bidders of criteria to evaluate bids and select a subcontractor. The court of appeal held the university’s bid package selection procedure in certain practices did violate the Public Contract Code.

Facts

The facts are complex, but a quick review is helpful to avoiding potential liability. The Regents of the University of California (“University”) awarded a general contract to DPR Construction, Inc. (“DPR”) to design and construct a medical center. DPR solicited bids for the mechanical, plumbing and electrical (“MEP”) work. The project was to be awarded in two phases consisting of “an immediate subcontract for design-assist preconstruction services” and “a subsequent change order for construction services” if the University decided to proceed with construction. DPR invited subcontractors to bid on six individual packages and one alternative combination package: (1) heating, ventilation, and air conditioning (“HVAC”) and plumbing for the energy center, (2) HVAC and plumbing for the outpatient building, (3) plumbing for the hospital, (4) “HVAC/Dry” for the hospital, (5) “HVAC/Wet” for the hospital, (6) electrical for all facilities, and (7) an alternate combination of numbers 3, 4, and 5.

Subcontractor, Schram Construction, Inc. (“Schram”) submitted a bid on HVAC and plumbing for the energy center and plumbing for the hospital, but did not submit a bid for HVAC and plumbing for the outpatient building subcontractor. Southland Industries (“Southland”) submitted bids for HVAC and plumbing for both the energy center and the outpatient building and offered a discount of $1,074,000 if it was awarded both.

Only four days after the blind bid opened, DPR notified all bidders that it was rejecting all of the bids and that it would conduct a rebid. For the rebid, DPR invited bidders to bid on all of the categories from the previous bid plus the following alternate combination packages: (1) HVAC and plumbing for the energy center and outpatient building, (2) plumbing and HVAC/Wet for the hospital, and (3) HVAC/wet and HVAC/dry for the hospital. The instructions for bidding stated that mechanical subcontracts could only bid on the package alternates if a bid for a stand-alone package was submitted. Also, the “[s]ubcontractors were allowed to submit a rebid only on the bid packages” for which they previously submitted a bid. Schram protested the previous bid requirement because it precluded Schram from submitting a bid for the first two alternate packages because it did not previously bid on HVAC and plumbing for the outpatient building. Schram argued that the rebid favored subcontractors who previously bid on the HVAC and plumbing for both the energy center and outpatient building. In response, DPR revised the instructions to allow subcontractors who initially bid on HVAC and plumbing for either the energy center or the outpatient building to bid on the other package.

Schram bid on HVAC and plumbing for the energy center, plumbing for the hospital, and submitted “a team bid” for HVAC and plumbing for the outpatient building. Schram did not submit a bid for alternate packages for the HVAC and plumbing for the energy center and outpatient building and plumbing and HVAC/Wet for the hospital. Only two subcontractors submitted bids on these alternatives, one of which was Southland.

DPR announced that four bid packages had been selected: (1) HVAC and plumbing for the energy center and the outpatient building, (2) plumbing for the hospital, (3) wet and dry HVAC for the hospital, and (4) electrical. Although the winning bidders were not identified at that time, Schram filed a formal protest for the bidder selection process, but that protest was overruled. Southland was later revealed as the lowest responsible bidder for the HVAC and plumbing for the energy center and the outpatient building. University and DPR admitted that they structured the packages in a way that would decrease the number of subcontractors on site. Schram appealed that decision, but a hearing officer found in favor of the University. Schram filed a petition for writ of mandate to compel University to award it a contact. The trial court found in favor of University.

On appeal, the question was whether the University did not comply with the competitive bidding requirements for awarding a public contract because the contract was not awarded to the lowest responsible bidder. The University could identify the lowest responsible bidder “on the basis of the best value to the University.” This is known as the “best value method,” which “requires that the contract be awarded to the bidder offering the best combination of price and qualifications, based upon objective criteria.”

Decision

Because University relied on the best value method, it was required under section 10506.4 subdivision (c) of the Public Contract Code to “‘adopt and publish procedures and required criteria that ensure that all selections are conducted in a fair and impartial manner” so to “prevent manipulation of the outcome and after-the-fact justifications.” Under the Public Contract Code, the procedures and criteria must notify the prospective bidders of the criteria and methodology the University would consider in evaluating the bids and the relative importance of each of the criteria. The University was required to evaluate each bid based solely on the criteria set out and the qualification score assigned to each bid. Under section 10506.7, the bidder that represented the best value to the University was to be determined “by dividing each bidder’s price by its qualification score in order to determine the bid that provides ‘[t]he lowest resulting cost per quality point’ (best value ratio).”

Schram asserted University violated the: (1) Public Contract Code section 10506.7 subdivision (c) by failing to award the contract for the mechanical and plumbing work on the Energy Center and Outpatient Building to the “best value contractor;” and (2) Public Contract Code section 10506.4 because it failed to adopt and publish procedures and required criteria that ensure its bid selections were fair and impartial.

First, the court of appeal rejected Schram’s contention because Southland was properly held the best value contractor for the package.

Second, the court of appeal did find in favor of Schram on its claim that University violated section 10506.4 because if failed to adopt and publish the criteria that would be used to select a subcontractor. The University violated this provision by selecting bid packages that would be awarded “based on undisclosed criteria” and “in a manner that allowed it to predetermine the outcome of the bid selection.” University failed to inform the prospective bidders that the primary criterion that it would rely on would be “the purported advantage of using fewer contractors to perform the MEP work” and how important this factor would be in the bid selection package. Also, University did not provide an explanation of how the individual bid packages and the alternative bid packages would be compared, even after Schram asked University to provide this information.

The court of appeal also found that University’s selection procedure” [did] not satisfy section 10506.4, subdivision (c) because it permitted the University to manipulate the bid selection in favor of or against particular bidders.” At the time the selection committee selected the HVAC and plumbing for the energy center and HVAC and plumbing for the outpatient building alternative, it knew the identity of the bidders on each package. The court of appeal found University’s procedure created an appearance of favoritism.

Finally, the court of appeal found that California law does not preclude the use of alternative bid packages. The court of appeal found that although the use of such “packages is not necessarily at odds with competitive bidding law or its purposes . . . like other alternative bid procedures, it offers an easy means of circumventing these requirements and must be closely scrutinized.”

Questions

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