July 12, 2006
You have the following question: Can the city reject the low bid and accept the second lowest bid on a certain construction project, where the city’s reason for that action is the documented record of problems four other utilities and one engineering company have had with the low bidder on previous construction projects.
The answer is yes.
The City operates under the Municipal Purchasing Law codified in Tennessee Code Annotated, § 6-56-301 et seq. The city recently opened bids on a sewer extension project that is being financed by a Rural Development loan and grant. The lowest bidder on the project was “A” Construction Company ($1,160,730.00). However, the city is considering awarding the bid to the second lowest bidder, “B” Construction Co. ($1,171, 535.00). The difference in the bid prices is only $10,805.00.
Paragraph 15.1 of the Instructions to Bidders, which I assume were a part of the bid specifications, provides that:
Owner further reserves the right to reject the Bid of any Bidder whom it finds, after reasonable inquiry and evaluation, to be nonresponsible. Owner may also reject the Bid of a Bidder if the Owner believes that it would not be in the best interest of the project to make an award to that Bidder.
The foundation supporting the city’s stated reasons why the bid should not be awarded to the lowest bidder is an investigation into the past performance of the lowest bidder, “A” Construction Company, and the nature of the project. Both the problems with the past performance of “A” and the nature of the project are outlined in the Mayor’s June 30, 2006, letter to Mr. T in Rural Development’s local office. With respect to the past performance of “A”, it points to these problems, which are separately documented by the officers of the utilities and the engineering company indicated:
- “E” Utilities (General Manager, letter, June 20, 2006)
The low bidder for your project, “A” Construction Company, was the contractor on our Community Sanitary Sewer Extension project. After the project was finished, we had a lot of trouble with settlements in the streets and pavements falling in especially “W” Street. This apparently was caused by “A” not following the specifications for compaction of the sewer trench backfill. To makes matters even worse, “A” said the problem was caused by a water line leak, but there was no water line leak. After this didn’t work, he then tried to blame the Engineer for his poor workmanship. This caused a lot of aggravation for the residents of that community, for the Town Officials, and it caused a lot of extra work and legal expense for “E” Utilities.
A letter from “C” Consulting Engineers (Principal, June 22, 2206) indicates that his firm’s experience with both “A” and with “B”, was similarly satisfactory, but says with respect to “A”, that:
To my knowledge, all issues were addressed by the Contractor prior to the end of the warranty period with the exception of the continued settlement of a sewer trench in “W” Street resulting in potholes. After initial attempts to repair the sinks there, the Contractor formally disputed the origin and reasons for the settlement and notified the Town that he had met his contractual obligations and therefore the final repair of the settlement remains unresolved.
-“D” Utility District (Manager, letter June 26, 2006)
Per our conversation Friday afternoon, June 23, about “A”’s performance on a project he did for “D” Utility District in 2001. After many efforts were made to solve disagreement with Mr. “A” a court battle ensued.
Needless to say, we at “D” Utility District would not welcome Mr. “A” to do any work for our District.
- County Gas Utility District (General Manager, letter June 30, 2006)
The County Gas Utility District (District) has limited experience with “A” Construction. Two projects have been constructed in our distribution are (sic) over the past few years. ON both occasion we experience (sic) problems with the contractor breaking gas lines. Multiple requests were made to the contractor to take more caution when digging around the gas lines. Our requests were ignored.....
With respect to the city’s concerns about the project reflected in the bid, the Mayor’s letter to Mr. T indicates that the sewer project will be on a main thoroughfare, and that they cannot afford to risk having problems with the project, and that the risk of problems is less with “B” than with “A”.. In connection with that concern, the Mayor’s letter also points to another possible indicator of trouble with “A”:
Concerning the current bid, the engineer contacted all contractors submitting bids to verify certain size and material issues. Mr. “A” of “A” Construction answer the inquiry but the last part of his response would appear to be an uncooperative and antagonistic attitude that does not bode well for the type of consideration and cooperation we had hoped for to satisfy the request of citizens and businesses who donated easements for the project as set out above.
The city’s investigation of “A” also turned up evidence that it performed satisfactory service, but even there the first piece of evidence is nearly a case of damning by faint praise:
- Water Utility District (Utility Manager, letter, June 23, 2006):
Having worked recently with “A” Construction Company on a water line replacement project, we make the following comments:
1. Contract work was completed in a timely manner.
2. Continuous supervision was necessary to ensure quality of workmanship and that work was completed in a timely manner. [Emphasis is mine.]
3. Change orders were requested, but most were denied by the Utility because they were not in the scope of the project.
“B” Construction, Inc. has also worked for the Water Utility District and comments are as follows:
1. Contract work was completed in a timely manner.
2. Workmanship was of good quality.
3. Careful attention to other Utility infrastructure was noteworthy.
- “G”, Inc., which is apparently the city’s engineer on the sewer extension project (Certification of Bids and Recommendations for Award..... (Mr. F, P.E, letter to the city, July 2, 2006 ):
Based on our past working experience with the low bidder, [at this time, “A”] we feel they are capable of implementing the work in a professional and timely manner.
In a July 5, 2006 letter to the city, the same author points to the city’s review of its contract with “E” Utilities and to its “detailed assessments of the two low bidders on the project,” and says that the “they” [apparently meaning the city] now plans to award the contract to “B”. The letter also declares that “Based on our past working experience with the low bidder, [at this time “B”, who was not the low bidder] we feel they are capable of implementing the work in a professional and timely manner.”
Competitive Bidding Generally
The Municipal Purchasing Law requires that contracts over a certain amount be competitively bid. The contract in question is clearly over the amount that triggers the competitive bidding requirement. [Tennessee Code Annotated, § 6-56-304] What does the term “competitive bidding” in the Municipal Purchasing Law mean? The Tennessee Supreme Court in State ex rel. Wright v. Leech, 622 S.W.2d 807 (Tenn. 1981), answered that question:
1. “The request for bids must not unduly restrict competition. All persons or corporations having the ability to furnish the supplies or materials needed, to perform the work to be done, should be allowed to compete freely without any unreasonable restrictions.”
2. “It is essential that bidders, so far as possible, be put on terms of perfect equality so that they may bid on substantially the same proposition and on the same terms.”
3. “In order to attain competitive bidding in its true sense, proposals for bids must be invited under fair circumstances which afford a fair and reasonable opportunity for competition.” [Emphasis is mine.]
4. Among other things, the advertisement for bids should include “[s]pecifications of the supplies or equipment to be purchased and the quantity thereof.”
Those standards are not optional, continued the Court, they must be followed.
The obvious fundamental principles of Leech are that all bidders must be put on a level playing field, and that the bidding process actually be competitive. In fact, it is further said in Metropolitan Air Research Testing Authority, Inc. v. Metro. Government of Nashville & Davidson County (MARTA), 842 S.W.2d 611 (Tenn. Ct. App. 1992), that:
One of the purposes of competitive bidding is to provide bidders with a fair opportunity to compete for public contracts. State ex rel. Leech v. Wright [citation omitted]. Thus, the courts have recognized that the statutes and ordinance requiring competitive bidding impose upon the government an implied obligation to consider all bids honestly and fairly. [Citations omitted.] [At 616] [Emphasis is mine.]
The Lowest Responsible Bidder Standards
The purchasing law of many states, and the purchasing ordinances or regulations of many municipalities require contracts to be awarded to the lowest and best bidder. There is no express lowest and best bidder standard in either the Municipal Purchasing Law nor in the City Charter or Municipal Code. But there is obviously a lowest and best bidder standard inherent in Leech and in MARTA, above. It is difficult to see how the “implied obligation to consider all bids fairly and honestly” can be met if contracts are not awarded to the lowest and best bidder. Where a municipality fails to accept the lowest bid when it has no defensible reason to do so, it has failed in its implied obligation to consider all bids honestly and fairly. At the same time, if the municipality is locked into accepting the lowest bid even when it has a defensible reason not to do so, it cannot consider all bids honestly and fairly.
Generally, a government body has considerable discretion in determining who is the lowest responsible bidder, but that discretion is not unlimited. It is said in MARTA, above, that:
Courts are wary of unwarranted judicial intrusion into the performance of ordinary governmental activities. [Citations omitted by me.] Accordingly, judicial review of the acts of local administrative officials is generally confined to an examination of whether “there is material evidence to support conclusions that are neither arbitrary nor unlawful.” Pace v. Garbage Disposal Dist., 54 Tenn. App. 263, 266, 390 S.W.2d 461, 462 (1965).
Since procuring goods and services is the type of routine activity that is best left to governmental officials, most courts have recognized that public procurement authorities have wide discretion with regard to accenting bids or any of the other details of entering into a contract. [Citations omitted by me.]
Purchasing officials must not be arbitrary, unreasonable, or capricious. Wood Hopkins Contracting Co. v. Roger J. Au & Sons, Inc., 354 S.W.2d 446, 449-50 (Fla. Dist. Ct. App. 1978). Thus in the absence of fraud, corruption, or palatable abuse of discretion, the courts will not ordinarily interfere with governmental procurement decisions. Burt v. Board of Educ., 132 Ill. App. 2d 393, 87 Ill. Dec. 500, 508, 4777 N.E.2d 247, 250 (1985); Schekel v. Jackson County, 467 N.W2d 286, 290 (Iowa Ct. App. 1991); McQuillin, supra, § 29.83. [At 619]
I assume that there is no fraud or corruption involved in the city’s determination of to whom to award the bid. If that is so, the only question left is whether the city’s decision to award the contract is a “palpable abuse of discretion.”
It is said in 10 McQuillin, Municipal Corporations, § 29.73, that there must be a plausible reason for a rejection of the lowest bid. Owen of Georgia, Inc. v. Shelby County, 648 F.2d 1084, 1992 (6th Cir. 1981), is even more clear. There, Shelby County, Tennessee, rejected the lowest bid on a certain contract on the grounds that the second lowest bidder was a local firm, and had a better minority hiring record. Shelby County argued that the “good cause” provision of the statute that governed the county’s competitive bidding gave it grounds to reject the lowest bid. The good cause provision read:
All open market purchase orders or contracts shall be awarded to the lowest bidder who is financially responsible, taking into consideration the qualities of the articles to be supplied, their
conformity to specifications, their suitability to the requirements of the County government and the delivery terms. And any and all bids may be rejected for good cause. [At 1088]
The Court rejected Shelby County’s argument, reasoning that:
While a bid may be rejected for reasons other than those enumerated, the County must cite factors similar to the ones listed, i.e. factors which go to the heart of the contract. In order for rejection to be based on “good cause,” the proffered reason must be related to something which affects the County bargain to substantially the same degree that, for example, inferior quality goods or non-conforming goods affect it. Poor workmanship on a previous job is one example of such a factor. [Emphasis is mine.]
The reasons cited by the County in the present case–that Pidgeon Thomas employs a higher proportion of minorities and is a local concern–do not constitute “good cause” for rejecting the other bid. These factors simply do not affect the County’s bargain to the same extent that factors such as those specifically enumerated affect it. [At 1092]
Similarly, in Marriott Corporation v. Metropolitan Dade County, 383 So.2d 662 (1980), it is said that:
While the law imposes no mandatory obligation upon a public agency in respect to the letting of competitive contracts that will require the agency in every case to consider the lowest dollars and cents bid as being “the lowest responsible bid” to the exclusion of all other pertinent factors that may be taken into consideration, the law does require that where discretion is vested in a public agency with respect to letting public contracts on a competitive basis, the discretion may not be exercised arbitrarily or capriciously but must be based upon facts reasonably tending to support the conclusions reached by such agency. [At 668]
It appears to me that the facts would reasonably support a decision by the city to award the bid to the second lowest bidder, “B”. The city has documentation supporting the proposition that “A” have left unhappy utilities in the wake of work done for them. But the city obviously cannot prove that “A” is actually guilty of the kind of conduct on previous projects that would make it an irresponsible bidder. In fact, the city’s own engineer, “G”, Inc., first wrote to the city that based on its past experience with “A”, the latter was able to implement the work in a professional and timely manner, and recommended that it receive the bid. After the city did it’s investigation of “A”, “G” wrote to the city almost exactly the same thing with respect to “B”, and recommended that “B” receive the bid.
But the city is not required to prove that “A” is a nonresponsible bidder. It’s documentation of problems with utilities on previous projects is enough. It can use its discretion to weigh the evidence for and against “A” on that point. It is said in Advance Tank and Construction Company, Inc. v. Arab Water Works, 910 F.2d 761 (11th Cir. 1990), that:
The choice of a qualified, responsible contractor for a specialized construction project entails, to a great extent, the selection of “goods” “sight unseen.” Such decisions are entitled to the application of a standard of review that is sensitive to the concerns of the Board in selecting a company to carry out the task. Even tightly drawn bidding specifications and surety bonds cannot adequately protect against the forced selection of a contractor later discovered to be “irresponsible” or that performs unsatisfactory work. In the absence of improper influence, the Board need not be correct in its assessment of a bidder’s “responsibility”; it need only have bona fide, rational and articulable reasons for its decision. [At 76-68] [Emphasis is mine.]
That case applied Alabama law to the decision of a city to reject the lowest bid on the construction of a water plant under a standard of review that is the same in both Alabama and Tennessee: abuse of discretion.
The City has “bona fide, rational and articulable reasons for its decisions.” If other utilities have had what they consider bad experiences with a contractor, those experiences reflect on the contractor’s reputation. Perhaps those experiences do not tell the whole story about the contractor. Perhaps they can even be explained away as a bad rap the contractor did not deserve. Indeed, in this case, Rural Development itself says that “A” is not on the list of banned contractors and that it would not use the city’s decision to award the contract to the second lowest bidder against “A” in the future. But it, too, determined that the City laid a proper foundation for awarding the contract to the second lowest bidder. The city does not need to be correct in its assessment that the low bidder is not responsible.
But if “A” challenges the award of the bid to the second lowest bidder, the city has only to show that there is material evidence to support its decision. That showing requires a much lower standard of proof than a preponderance of evidence. What it has learned about the contractor from other utilities that have done business with it, its sensitivity to the prospect that based on that information “A” will not accommodate itself to the nature of the project, its concern that the utility that the utility that will operate the sewer extension for the city will be reluctant to assume its operation if “A” constructs it, and apparently its perception that even before the bid was awarded “A” exhibited an “uncooperative and antagonistic attitude” toward certain queries by the city’s engineer, is enough combined to meet the material evidence standard.
Remedies for Improper Bid Processes
The city may also want to take into account what remedies “A” might have if the city rejects its bid.
It is clear in Tennessee that any unhappy bidder has standing to challenge the award of a bid on the ground that the bid process was illegal in some manner. [See MARTA, above; Browning-Ferris Industries of Tennessee, Inc. v. City of Oak Ridge, 644 S.W.2d 400 (Tenn. App. 1983); Owen of Georgia, Inc. v. Shelby County, 648 F.2d 1084 (6thCir. 1981)]. It is also said in Browning-Ferris Industries of Tennessee, Inc., above, that:
A contract entered in violation of bidding statutes or ordinances is void and it is not necessary to show that the governmental authority acted in bad faith or fraud was involved. Johnson City Realty Co., 166 Tenn. 655, 64 S.W.2d 507 (1933). [At 403]
But that does not mean that the unhappy bidder gets the contract. It is not entirely clear what remedy is available to an unhappy bidder in Tennessee. It is said in MARTA, above, that:
However in the absence of a statute, an unsuccessful bidder’s standing extends only to equitable or declaratory relief to ensure enforcement of required competitive bidding procedures. [Citations omitted by me.] [At 617]
But when a bid is set aside, such relief may also include at least the cost of preparing his bid, and perhaps the cost of his lawsuit. In Browning-Ferris Industries, the Court awarded the unhappy bidder for the reasonable expenses for preparing and presenting its bid. In Owen of Georgia, Inc. v. Shelby County, above, the Court found the County liable on the theory of promissory estoppel, reasoning that, “In its solicitation of bids pursuant to the Restructure Act, Shelby County clearly promised to award the contract to the lowest financially responsible bidder if it awarded the contract at all.” [At 1095] The measure of damages, continued the Court,was “the expenses it incurred in its unsuccessful participation in the competitive bidding process as well as the costs incurred in its successful attempt to have the award to Pidgeon-Thomas rescinded as having been made in the violation of the statute.” [At 1096]
Sidney D. Hemsley
Senior Law Consultant