Original Author: Hemsley, Sid
Date of Material: 01/04/1994
Purchasing--Laws and regulations
Purchasing--Policies and procedures
Reviewed Date: 05/26/2021
MTAS was asked about splitting work into components to circumvent competitive bid requirements.
Your question, addressed to Mr. Don Ownby, is: If the city has let a contract to construct project A, can it authorize a change order under that contract to construct a project B entirely unrelated to project A? Don Ownby retired a couple of years ago and your question was referred to me.
According to the additional facts you gave me on the telephone, the auditor has questioned certain practices of the city involving the issue of change orders to construct city projects unrelated to the contract under which the change order was issued. Such change orders reflecting a cost of more than $5,000 are approved by the board of mayor and aldermen. The answer is no for two reasons:
- It is prohibited by your municipal charter and code.
- It is prohibited by the case law governing competitive bidding.
The Prohibition in the City Municipal Charter and Code.
Article XX, Section 1 of the Municipal Charter provides that
Any public work or improvement costing more than five thousand dollars ($5,000.00) shall be executed by contract, except where a specific work or improvement is authorized by the board of mayor and aldermen, based on detailed estimates submitted by the department authorized to execute such work or improvement, and approved by the city manager.
All contacts for more than five thousand dollars ($5,000.00), shall be awarded to the lowest responsible bidder in the best interest and advantage to the City.
That section appears ambiguous on the question of what public contracts are required to be competitively bid. The first clause in the first paragraph flatly declares that, "Any public work of improvement costing more than five thousand dollars ($5,000) shall be executed by contract..." The second clause in the first paragraph apparently attempts to exempt a class of public works or improvements--those not done by contract but are authorized by the board of mayor and aldermen and meet the other requirement of that section. In theory, the exemption could be significant because the second paragraph of that section declares that, "All contracts for more than five thousand dollars ($5,000.00) shall be awarded to the lowest responsible bidder..." Arguably, if there is no contract, the requirement for the public work or improvement to be competitively bid is not triggered.
I cannot imagine what public works or improvements would fit within the exempt category, unless they are public works and improvements approved by the board of mayor and aldermen to be done by the department rather than by an outside contractor. It could be argued that change orders are not contracts but modifications to contracts, and that they fit within the exemption contemplated by the second clause of the first paragraph, but that argument is probably weak. In Browning-Ferris Industries of Tennessee, Inc. v. City of Oak Ridge, 644 S.W.2d 400 (1983), the Tennessee Court of Appeals, Eastern Section, declared that "Competitive bidding requirements are strictly construed against the governing authority." In my opinion, the courts would construe Article XX, Section 1 of the City Charter against an interpretation that would permit change orders to be used to defeat the competitive bidding requirements of that provision.
In addition, the courts in other jurisdictions have dealt with the question of what constitutes "extra" work within the meaning of change order provisions of contracts, and some have held that such work refers to work done according to original plans and specifications. [See 1 ALR3d 1273 (Effect of Stipulation, in Public Building or Construction Contract, That Alterations or Extras Must be Ordered in Writing).] In my opinion the Tennessee courts would also hold that change order provisions of public contracts are limited to extra work within that narrow definition, and that such provisions cannot be used to circumvent competitive bidding requirements.
Elaborate competitive bidding requirements for public works are also found in the Municipal Code. Those provisions clarify and amplify Article XX, Section 1 of the City Charter and are consistent with it. Section 2-145 defines "public works contracts" as "any contract involving the city pertaining to the construction of public works or improvements costing five thousand dollars $5,000.00 or more." Section 2-146 provides that the board of mayor and aldermen award public works contracts. Section 2-147.2 says that
All changes in contract work involving an increase in the original contract price excepting minor changes for contingencies as provided herein, or an extension of the time of performance of any public works contract shall be submitted for approval by the city manager to the board of mayor and aldermen.
However, the fact that the board of mayor and aldermen approves change orders of the kind at issue reflecting a cost of more than $5,000 does not make them legal under the Municipal Code. The code draws a distinction between change orders and "new" work, and expressly provides for competitive bidding for new work. Section 2-147.4 says,
Changes in work, additional compensation for extras, etc. are authorized only if said changes involved are merely incidental to or of minor importance in relation to the public works project as specified and bid by the contractor. Additional compensation for new work is prohibited, except in strict compliance with established competitive bidding procedures.
The same section goes on to carefully describe exactly what changes in work qualify for extra compensation. The range of qualifying changes is narrow and contemplates work done only on the project described in the contract.
That provision, whether read alone or in conjunction with the other provisions of Article IV, Division 3 of the Municipal Code, clearly reflect the intent of the Municipal Code, to restrict the use of the change order by everybody, including the city manager, project director and the board of mayor and aldermen, to the project for which the contract was let, and that "new work" costing over $5,000 must be competitively bid. Under Browning-Ferris, above, a municipality is bound by competitive bidding requirements in both statutes and ordinances. Said the Court,
A contact 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.
The Prohibition Under Case Law Governing Competitive Bidding.
Using a change order issued under contract A to perform work on a separate project B is probably also contrary to State ex re. Leech v. Wright, 622 S.W.2d 807 (Tenn. 1981). There the Tennessee Supreme Court declared that the term "competitive bidding" had a legal meaning, and in the absence of prescribed methods or procedures in a law requiring it, "certain minimum standards of competitive bidding [must] be followed." I have chosen to omit the list of six minimum requirements when competitive bidding is required; those are listed in some detail in the case. The point of Wright with respect to the use of change orders in that manner is that there is no competitive bidding on project B, yet competitive bidding is required by both the City Charter and Municipal Code.
Permitting a change order under contract A to be used to perform work on a separate project B probably also constitutes splitting work into components to circumvent competitive bid requirements. Splitting work into components for that purpose has regularly been held illegal, including in Tennessee. [See 53 ALR2d 498 (Determination of amount involved in contract within statutory provision requiring public contracts involving sums exceeding specified amount to be let to lowest bidder); and State ex rel. Butler v. Dugger, 172 Tenn. 281, 111 S.W.2d 1032 (1932).]
Sidney D. Hemsley
Senior Law Consultant