Chapter 12
Public Bidding Process
Summary:
The competitive bidding requirements for public works projects are discussed in this Chapter. “Responsive” and “responsible” bidders are defined. Other provisions are outlined addressing various aspects of the bidding process, including: solicitation, submission, and withdrawal of bids; bid mistakes; the Subletting and Subcontracting Fair Practices Act; bid evaluation; prevailing wages; circumstances under which the courts permit an agency to bypass competitive bidding; as well as the administrative and legal challenges of bid protests by unsuccessful bidders. Supporting case law is cited and discussed. Specialized equipment requirements are addressed in addition to information that must be supplied by the public agency to the bidders.
§ 12.1 Competitive Bidding Requirements
Public works contracts are subject to numerous competitive bidding requirements, which are set forth in the Public Contract Code. The public works bidding process generally involves the submittal of sealed bids by all bidders on a specific date and to a specific place prior to an ironclad time deadline. The bids are then opened and read, and typically the lowest bidder is awarded the contract and becomes the general contractor.
Competitive bidding requirements serve several important purposes. As previously discussed, bidding laws exist to protect the public from misuse or waste of public funds, provide all qualified bidders with a fair opportunity to enter the bidding process, stimulate competition in a manner conducive to sound fiscal practices and eliminate favoritism, fraud, corruption and abuse of discretion in the awarding of public contracts.209
However, the Public Contract Code provisions are narrowly construed so, unless a particular public entity is specifically subject to its provision, the Public Contract Code will not apply. For example, several California courts have held that charter cities are not subject to various provisions of the Public Contract Code competitive bidding provisions, discussed supra. However, the Public Contract Code now states that if a charter city wishes to depart from the Public Contract Code, it must specifically set forth its alternative rules and procedures in its Charter.
The general rules of contract law are applicable to the competitive bidding process. Bids are considered irrevocable offers or options.210 Public agencies generally take the position that competitive bidding requirements exist for the benefit of the public and were not established to protect individual bidders.211
Typically, if the cost of a public works project exceeds a certain dollar amount set forth in the applicable Public Contract Code provision, the contract must be awarded through competitive bidding. During the 1998 legislative session, California raised many of these prior bidding threshold limits to reflect inflation. These thresholds continue to be increased incrementally.
Projects costing less than the threshold amount may be subject to sole source or negotiated contracts in the best interest of the awarding public entity.212 A public works contract is usually awarded to the lowest bidder because the low price is presumed to be the fairest price to the public. However, several statutory exceptions exist to the competitive bidding requirements for public works contracts. For example, Public Contract Code § 10340(b)(1) provides an exception where a contract is necessary for public health, safety, or welfare, or for the protection of government property. Other California statutes provide exceptions for certain types of architectural/engineering contracts. Emergency situations are also typically exempted. In addition, some flexibility is required in situations where the original contractor is being terminated for cause or convenience, and the bonding company has not supplied a substitute contractor.
Mass transit has many specialized equipment requirements and a limited number of suppliers for certain system components. Public Utility Code § 130238 sets forth exceptions to the competitive bidding requirements for public works projects involving specialized rail transit equipment and electronic equipment that are not available in substantial quantities to the general public. “Specialized equipment” includes rail cars, computer equipment, telecommunications and microwave equipment, fare collection systems, and other types of electronic equipment.
However, this exception does not apply to any products, including “specialized equipment,” that are, essentially, off-the-shelf, that is available in substantial quantities to the general public. When two-thirds of the governing body of the awarding agency determines by vote that a particular type of equipment can be properly classified as “specialized” under Public Utility Code §130238, the agency is not required to award the contract to the lowest bidder. In addition to price, an agency may consider factors such as vendor financing, performance reliability, standardization, life-cycle costs, delivery timetables, support logistics, fitness of purchase and manufacturer’s warranties.
California courts have also recognized that exceptions may apply to the competitive bidding requirements in other situations.213 Generally, the courts will permit the awarding agency to bypass competitive bidding when it would be “undesirable or impossible to advertise for bids for particular work.”214 In the case of Constr. Indus. Force Account Council v. Amador Water Agency (1999) 71 Cal.App.4th 810, a local water agency, Amador, installed a water pipeline with its own personnel. The Construction Industry Force Council challenged the agency’s right to complete the project without soliciting bids from outside contractors first. The Council argued that Public Contract Code § 21451 prohibits an agency from using its own employees on a project that costs more than $12,500 (Amador spent approximately $133,000). The trial court held that Public Contract Code § 21451 applies when an agency chooses to contract for a project over $12,500, but does not force an agency to contract for such a project. The Court of Appeal affirmed, holding that the section is ambiguous in regard to a monetary limit for “force accounts,” and that because the Legislature has taken an “ad hoc” approach to granting public agencies authority regarding outside bids, it would be inappropriate to place such limits on agencies themselves.
Any public works contract excepted from the competitive bidding process must be advertised and may be challenged by any company that believes it can do the work at a lower price.215
In the public sector, the use of bid alternatives is allowable. (Public Contract Code §§ 10126, 10780.5, and 20103.8). However, such provisions present the potential for abuse of these alternatives to steer a contract to a favored bidder. Schram Construction, Inc. v. Regents of University of California (2010) 187 Cal.App.4th 1040. These provisions require a set of set procedures to prioritize the alternatives in a pre-set fashion and therefore determine the lowest bid.
One last note in this area is that when a contract is subject to competitive bidding requirements and has been executed without compliance, the courts have concluded the contract is void and unenforceable.216 Under a Public Contract Code § 5110, a contractor who proceeds with construction “based upon a good faith belief that the contract was valid” is able to recover the reasonable costs of the work performed, irrespective of a later determination that the contract is “invalid due to a defect or defects in the competitive bidding process caused solely by the public entity.”
§ 12.2 Bid “Responsiveness”
Bids are often rejected as “non-responsive bids” for highly technical reasons. Here are just a few examples of the kinds of situations where bids have been rejected for apparently minor reasons:
• The bid submission envelope failed to properly identify the project in question, even though the public agency at that time had no other proposals out for bid;
• The bidder delivered its bid bond one minute after the opening of the bids began;
• The bidder failed to fill in one line item in the bid package, even though the package contained numerous pages of documents;
• The bid specifications required that certain corporate officers were to sign the bid proposal. The officers were not available, so someone other than a specified corporate officer signed the bid proposal; and
• The bidder submitted a proposal that acknowledged only twelve of the fourteen addenda presented in the bid package.
On the other side of the coin, the general contractor’s bid is not considered “unresponsive” if it includes the price and lists the name of an unlicensed subcontractor. D.H. Williams Construction Inc., v. Clovis Unified School Dist. (2007) 146 Cal.App.4th 757. Usually, a public entity will expressly reserve in the bidding documents the right to reject any or all bids.217 This is the result in many bid protests — the agency simply rebids the job.
The public entity will generally attempt to ensure the bidding process is fair and objective by insisting that all bidders compete on a level playing field. Therefore, forms are used so that all bids are identical in content except for price.
To maintain fairness in the bidding process, the public entity must reject any bid that is not “responsive.” A bid is considered responsive “if it promises to do what the bidding instructions demand.”218
The courts have made numerous reported decisions that can assist agencies considering whether or not to accept the lowest bid. Considering these factors is important as automatic rejection of a bid for trivial reasons will result in substantial disruption of the bidding process and higher construction cost for the public entity. These guidelines are discussed on the following pages.
§ 12.2.1 “Responsiveness” Defined
A “responsive” bid is one that is in strict and full accordance with all material terms of the bid package.219 For example, the bidder has used the correct bid forms, has fully completed all questionnaires, has submitted all requisite enclosures, and has provided a proper bid bond when security is required. Any material variations will place the bidder at risk of being rejected by the public entity as non-responsive.
Material terms include: (1) terms that could affect price, quantity, quality or delivery; and (2) terms that are clearly identified by the public entity and that must be complied with at the risk of bid rejection. For example, failing to fill in all of the blanks or failing to submit all required attachments may be the basis for characterizing the bid as non-responsive.
§ 12.2.2 Immaterial Variances May Be Waived
Although full compliance with each provision of a bid package is the best way for a contractor to ensure that its bid is responsive, an immaterial requirement may be waived by the public entity without prejudicing unsuccessful bidders.220 The failure to comply with an immaterial provision is called a “minor informality.”
These may include:
• Failure to meet procedural requirements;
• Failure to meet substantive requirements that do not strictly comply with the bidding documents but that satisfactorily meet such requirements;
• Failure to meet requirements calling for information that relate only to independently verifiable facts regarding the bidder and do not relate to the bidder’s ability or promise to perform the contract; and
• Minor clerical errors.
Minor informalities may also be dismissed if they affect the bid in a trivial or negligible manner. But although a “minor variance” in bid responsiveness may be the excuse, any deviation from the requirements of the bid package, no matter how small or seemingly insignificant, puts a bid at risk for being rejected due to non-responsiveness. For this reason, a bidder may find it useful to prepare a checklist for all bid requirements and submittals and to produce a schedule for obtaining the required items.
The case of Ghilotti Constr. Co. v. City of Richmond,221 is an example of a low responsible bidder being awarded a contract even after failing to adhere to a fairly important bid specification. In Ghilotti, a city awarded a contract for a road construction project to the lowest bidder, even though the low bid deviated by a margin of 5.5 percent from contract specifications that limited subcontracting to 50 percent of the total bid. The trial court denied the second lowest bidder’s petition for a writ of mandate or prohibition to prevent the city from contracting with the lowest bidder.222 The court of appeal affirmed, holding that the trial court properly denied the second lowest bidder’s writ petition since the city had correctly concluded that the low bid’s deviation from the contract specifications was inconsequential. The plaintiff’s counsel conceded that there was no evidence showing that the low bidder would have submitted a higher bid had it complied with the specification restricting the use of subcontractors. Furthermore, the plaintiff failed to show that the low bidder had an unfair competitive advantage since the low bidder could comply with the subcontracting limitation without changing the amount of its bid by purchasing some materials directly instead of through subcontractors. The court also held that the city’s award to the low bidder did not violate public policy since there was no evidence of favoritism toward the low bidder, corruption, fraud, extravagance, or uncompetitive bidding practices.
§ 12.3 Bidder Responsibility
§ 12.3.1 “Responsibility” Defined
A responsive bid may be rejected if the public entity determines the bidding company is not “responsible.” A bidder is not responsible if it is not inherently capable of performing a contract as promised.223 This is an important area for public entities since the contractor will argue that the performance bond is ample protection for the public entity and that the license held by the bidder is sufficient evidence of competency. The following are a few of the major public works provisions that address the topic of bidder responsibility. Public Contract Code § 10162 provides that a state agency may reject any bidder that has previously been “disqualified, removed, or otherwise prevented from bidding on, or completing a federal, state or local government project because of a violation of law or a safety regulation.” Public Contract Code § 10303, relating to state agencies, permits rejection of a bidder for 6 months to 36 months where the bidder’s performance on prior state contracts “has demonstrated a lack of reliability in complying with and completing previously awarded contracts.”
Public Contract Code § 10285.1 permits suspension of a bidder from public works contracts for up to three years where the contractor or any partner, member, officer, director, responsible managing officer, or responsible managing employee of the company has been convicted of fraud, bribery, collusion, conspiracy, or other violation of any state of federal antitrust law in connection with bidding on any public works contract.
A bidder may be able to satisfy the “responsibility” requirement through a prequalification process. For example, the State General Services Administration has pre-qualification programs for a variety of work categories.
§ 12.3.2 Standard of Review
Most public entities are required by statute, code, or city charter to award contracts through competitive bidding to the “lowest responsible bidder.” Often the second or third lowest bidder on a project will complain that the public entity has erred in determining that the low bidder was “responsible.” Though public agencies are given broad discretion when awarding public works contracts, courts will overturn a contract award decision if the public entity is judged to have acted arbitrarily or capriciously.224
California courts have held that when a statute requires a public works contract to be awarded to the lowest responsible bidder, it must be awarded to the lowest bidder unless that bidder is found to be not responsible, i.e., not qualified to perform the particular work.225 In this context, “responsible” refers not only to the attribute of trustworthiness, but also to the quality, fitness, and capacity of the bidder to perform the proposed agreement satisfactorily.226
Although public entities have discretion in determining which bidders are responsible, the agency may not choose the superior bidder from a field of qualified bidders. If the agency determines that more than one bidder is responsible, it may not award the contract on the basis of “relative superiority” or “superior technical ability.” Making a determination on such a basis ignores the fact that there are several contractors able to perform the work and thrusts the public entity into the dubious process of assessing on the relative strength of the bidders’ qualifications. Under these circumstances, the public agency is expected to award the contract to the lowest bidder of the qualified group.
The following are two examples of cases where a bidder was not considered to be responsible: In Raymond v. Fresno City Unified School Dist.,227 the Board of Education determined that the low bidder was not responsible because of numerous complaints and poor workmanship by the contractor on a prior school project. The appellate court affirmed the award to the second lowest bidder, finding that the Board of Education had not abused its discretion in determining that the plaintiff contractor’s bid was not the “offer which best responded in quality, fitness, and capacity to the particular requirement of the proposed work.”
In a second case, R. & A. Vending Services, Inc. v. City of Los Angeles,228 the lowest bidder was not entitled to the contract because among other reasons, R & A’s “‘pro-forma was unrealistic and contained admitted accuracies.”’
§ 12.3.3 Notice & Opportunity to be Heard for Unsuccessful Bidders
Prior to rejecting the lowest bidder on the basis of non-responsibility, the awarding agency must notify the bidder of the evidence supporting its findings and afford the bidder an opportunity to rebut this evidence and demonstrate that it is qualified to perform the work. It is not necessary, however, for the public agency to conduct a quasi-judicial hearing prior to rejecting the low bidder.229
§ 12.4 Solicitation of Bids
A public agency must publish a notice inviting bids for each project, which is essentially an advertisement soliciting the submission of formal bids by prospective bidders. The circulation requirements of such notices are defined by statute.230 The contents of the public notice are also defined by statute. The notice must include information such as the time and place for receiving and opening bids and a description of the work to be performed. Other information to be included in the public notice and associated bid package is outlined below.
§ 12.4.1 Pre-qualification
Bidders often are asked to pre-qualify before submitting a major bid to a public entity. If pre-qualification is required, the criteria should be provided by the public entity prior to the invitation to bid. The subject of pre-qualification of contractors is somewhat controversial. The traditional view of the general contracting community and its sureties was that as long as a contractor was properly licensed, could provide a surety bond, and was licensed to do business in California, the contractor should be allowed to bid on any project within the scope of its qualifications. The contrary view is that the public entity has the responsibility for assuring that contractors bidding on work are responsible not only for the work they performed in the past, but also for the size, scope and scale of the project on which they are currently bidding.
Attempts have been made in the California legislature to codify what is considered responsible and to provide pre-qualification procedures, but these efforts have been piecemeal. The California Legislature has codified the ability to require such standardized questionnaires under Public Contract Code §§ 10160 – 10162. It has also specified similar procedures for specific entities, such as Local Agencies (Public Contract Code § 20101 (added 1999)) and Community College Districts (Public Contract Code § 20651.5 (added 1998)).
On major projects, public entities often include in bidding materials their own questionnaires to draw out the qualifications, financial strength and experience of contractors so the public entities can do an adequate and comprehensive job of determining the responsibility of the contractors. In pre-qualification, contractors are asked to submit all information pertinent to the determination of responsibility several weeks (or months) before the bid date.
The public agency can review the prior experience of each contractor, verify its references on similar work, and cross-check issues such as safety records and experience modifiers on multi-state workers’ compensation ratings to determine if the contractor is, in fact, qualified to do the job. One favorable aspect of this approach is a contractor that is deemed to have insufficient experience to bid on a job is apprised of the fact well in advance of the bid deadline so it will not spend the time to estimate and bid the project unnecessarily. On the other hand, under the case Inglewood-Los Angeles County Civic Center Authority v. Superior Court,231 a contractor that is denied an opportunity to bid would have a due process right to be heard and state its qualifications.
Under Public Contract Code §§ 10160-10164, prospective bidders may be required to disclose items such as financial information and past safety records prior to the award of a contract. Typically, this information is presented on a questionnaire that is included in the bid package.
§ 12.4.2 Licensing Requirements
The Contractor’s State Licensing Law232 requires a license for any person or entity that constructs, alters, repairs, wrecks, demolishes, or improves any building. The licensing law was discussed in more detail in Chapter 11, but a bit of further explanation is needed at this point.
Any contractor submitting a bid to a public agency is required to possess a valid license. If a contract is executed between a public entity and an unlicensed person acting in the capacity of a contractor, the contract will be void with certain exceptions.233 Minor or inconsequential projects are exempt from the licensing laws, as well as any person furnishing materials or supplies for a project.234
In the case of M & B Constr. v. Yuba County Water Agency (1999) 68 Cal.App.4th 1353, the Yuba County Water Agency requested bids from contractors with class “A” licenses. M & B Construction submitted the lowest bid, but was not class “A” licensed, so its bid was rejected. M & B Construction filed suit against the water agency, claiming that its decision was based on favoritism and bias. The trial court agreed, mandating that all contractors licensed to perform the work in question be allowed to submit bids. The court of appeal reversed, holding that the water agency had the right to require class “A” licensing for its project, because the agency’s decision affected only the category of licensee (as opposed to who may actually be licensed), and related only to dealings between the agency and contractors, not to contractors
and third parties.
§ 12.4.3 Information to Be Supplied to Bidders
A bid package is supplied to all prospective bidders responding to a public notice. The package typically contains a standard proposal form that must be completed by a bidder for submittal to the public entity.235 The package also typically requires the bidder to supply other substantial information as outlined below. The public entity provides general instructions to bidders regarding time, place, and date of submission; delivery requirements (sealed bid requirement); and opening of bids. In addition, specifications, which must be sufficiently detailed, definite, and precise, are provided for bidding.236 The bid specifications may provide for a designated material, product, or thing to be used in the construction of the project. The material or product specification must list at least two brand names or trade names of comparable quality and must be followed by the words “or equal” so bidders can propose a product substitution equal to the design specifications. This is termed an “or equal” clause.
If bids will be subject to review based upon a preference statute (giving preference to domestic or local contractors and material suppliers), the bid specifications should refer to the preference. The specifications must set forth any Disadvantaged Business Enterprise or similar requirements. In addition, the specifications should set forth bond and security requirements, if applicable, or alternatives to bonds such as letters of credit or certificates of deposits.
Prevailing wage rate requirements, as well as workers compensation insurance and other insurance requirements should also be included in the bid specifications. It is important to remember that worker's compensation insurance is required for all employers. Labor Code § 3700. A common evasion of this requirement is a contractor stating they have no employees. Or that they are the sole employee. This line of thinking is extremely dangerous, given the strong bias against independent contractor classification in California (See Vazquez v. Jan-Pro Franchising Int’l, Inc. (9th Cir. Sep. 24, 2019, No. 17-16096) 2019 U.S. App. LEXIS 28999). It is also a grounds for finding the contractor is practicing as an unlicensed individual (see Licensing Chapter 11, Section 11.5.).
Interestingly, the California Constitution states the following: “Worktime of mechanics or workers on public works may not exceed eight hours a day except in wartime or extraordinary emergencies that endanger life or property. The Legislature shall provide for enforcement of this section.” Cal. Const., art XIV, § 2.
Because the last sentence of this Article says the Legislature is the enforcer, the legislature has carved out exceptions. The goal of this Article (originally adopted in 1879) was to prevent oppressive daily work hours.
See Labor Code § 1815, which states:
Notwithstanding the provisions of Sections 1810 to 1814, inclusive, of this code, and notwithstanding any stipulation inserted in any contract pursuant to the requirements of said sections, work performed by employees of contractors in excess of 8 hours per day, and 40 hours during any one week, shall be permitted upon public work upon compensation for all hours worked in excess of 8 hours per day at not less than 1½ times the basic rate of pay.
See Cal. Labor Code § 510 (for any type of employee, not necessarily public works):
(a) Eight hours of labor constitutes a day’s work. Any work in excess of eight hours in one workday and any work in excess of 40 hours in any one workweek and the first eight hours worked on the seventh day of work in any one workweek shall be compensated at the rate of no less than one and one–half times the regular rate of pay for an employee. Any work in excess of 12 hours in one day shall be compensated at the rate of no less than twice the regular rate of pay for an employee. In addition, any work in excess of eight hours on any seventh day of a workweek shall be compensated at the rate of no less than twice the regular rate of pay of an employee. Nothing in this section requires an employer to combine more than one rate of overtime compensation in order to calculate the amount to be paid to an employee for any hour of overtime work. The requirements of this section do not apply to the payment of overtime compensation to an employee working pursuant to any of the following:
(1) An alternative workweek schedule adopted pursuant to Section 511.
(2) An alternative workweek schedule adopted pursuant to a collective bargaining agreement pursuant to Section 514.
(3) An alternative workweek schedule to which this chapter is inapplicable pursuant to Section 554.
§ 12.5 Bid Submission
Before submitting its bid proposal, a bidder should carefully review all submittals to confirm all bid requirements have been satisfied. Delivery requirements must be met as well. The bid must be delivered on time to the exact location listed in the bid package. Under most statutory, code, and charter provisions, the public entity cannot receive any late bids.237 The bid should also be sealed to ensure fairness in the review process. An unsealed bid may be deemed non-responsive for failing to meet the “sealed bid” requirement.238 Finally, a bid for public works contracts usually must include a bid security, either in the form of cash, a cashier’s check, a certified check or a bid bond issued by an approved surety. The statutory minimum for a bidder’s security is 10 percent of the bid amount.239 If the bidder is required to provide a performance bond, the bidder may wish to use a bid bond as security because a surety will rarely issue a bid bond without also issuing a performance bond. When a bidder’s security is required, failure to provide such security may result in rejection of the bid as non-responsive.240
§ 12.6 Withdrawal of Bids
Once its bid has been submitted, the bidder has made a binding offer for the contract work that the public entity can accept upon bid opening. A bidder may withdraw its bid by submitting a written request to the public entity before the deadline for bid submissions or, in some cases, before the bids are opened. A bidder who has withdrawn a bid may submit a new bid if the bid submission deadline has not already passed.241
§ 12.7 Bid Mistakes
A bidder who discovers that it has made a mistake in its bid after the bids have been opened must immediately advise the agency of the mistake. Then it can bring an action for any forfeited bid guarantee.242 The legal action usually must be brought within ninety days of the bid opening.243 The bidder must show that the mistake made a material difference in its bid. The bidder usually must notify the awarding public entity of the mistake within five days, or less, of the bid opening and must specify how the mistake occurred.244 California courts have generally permitted successful bidders to rescind contracts based on bid mistakes involving clerical errors.245
§ 12.8 Subletting and Subcontracting Fair Practices Act
The purpose of the Subletting and Subcontracting Fair Practices Act is to protect both the public and subcontractors from the practices of bid shopping and bid peddling in connection with public works projects.246 Bid shopping and bid peddling usually result in poor quality service and lead to insolvencies and losses of wages, among other things.247
The Public Contract Code requires that bids include a list of the names and places of business of all subcontractors that will perform specified work on a public works project.248 If the prime contractor fails to specify subcontractors in its bid, it is assumed the prime contractor is fully qualified to perform and must perform the relevant portion of the work.249 If a prime contractor fails to specify subcontractors, then fails to perform the relevant contract work, the prime contractor is subject to subcontractor substitution penalties and other penalties.250 Generally, a prime contractor may not substitute a subcontractor listed on its bid once the bid has been accepted.251 However, the public entity may consent to substitutions under certain circumstances. Public Contract Code § 4107 permits subcontractor substitution in the following situations:
• When a listed subcontractor fails or refuses to execute a written contract;
• When a listed subcontractor becomes insolvent or bankrupt;
• When a listed subcontractor fails or refuses to perform a subcontract;
• When a listed subcontractor fails to meet the requisite bond requirements;
• When the prime contractor demonstrates to the awarding public entity that the name of the subcontractor was listed as the result of an inadvertent clerical error;
• When the listed subcontractor is not licensed; and
• When the awarding public entity determines that the work performed by the listed subcontractor is substantially unsatisfactory.
Once a prime contractor has requested a substitution, but prior to approval by the public entity, the listed subcontractor is entitled to notice of the substitution and a hearing, if so requested in writing.252
§ 12.8.1 Post-Substitution Litigation
The substituted subcontractor typically retains certain remedies against the prime contractor after the substitution hearing. In many job critical situations, the offending subcontractor will be asked to leave the job site well prior to the agency hearing authorizing a formal substitution under Public Contract Code § 4107. If it is done right, it is a directive, not a termination of the subcontract. In many cases, the offending subcontractor’s remaining work under the subcontract is simply deleted under the changes clause.
While the General Contractor may ask for an expedited hearing, the Agency will usually proceed with “all deliberate speed.” A glaring example might be an incompetent crane operator that needed to be substituted after a major accident, and this would be especially so if the new crane was needed to clear debris. A more typical example is a subcontractor that refuses to show up, potentially delaying the entire project and unrelated trades and crews for weeks until the hearing would typically take place. (The owner rarely will want the job to shut down until the hearing.)
Furthermore, the issuance of a subcontractor notice of termination (2 days, 5 days, 10 days, etc.) has motivated a large number of subcontractors to actually perform their work, prior to the expiration of the cure date. If the General Contractor had to simultaneously pursue a Public Contract Code § 4107 substitution hearing each time, those letters would have no teeth.
However, the code section says:
A prime contractor whose bid is accepted may not:
(a) Substitute a person as subcontractor in place of the subcontractor listed in the original bid, except that the awarding authority, or its duly authorized officer, may, except as otherwise provided in Section 4107.5, consent to the substitution of another person as a subcontractor in any of the following situations:
• When a listed subcontractor fails or refuses to execute a written contract;
• When a listed subcontractor becomes insolvent or bankrupt;
• When a listed subcontractor fails or refuses to perform a subcontract;
• When a listed subcontractor fails to meet the requisite bond requirements;
• When the prime contractor demonstrates to the awarding public entity that the name of the subcontractor was listed as the result of an inadvertent clerical error;
• When the listed subcontractor is not licensed; and
• When the awarding public entity determines that the work performed by the listed subcontractor is substantially unsatisfactory.
The statute does not state when the hearing takes place. It does not prohibit a hearing after the substitution. It does not explicitly allow for exigent circumstances, self-help or interim relief. That is exactly what the offended subcontractor will often argue.
In many subcontractor termination situations, the subcontractors typically object to the substitution hearing and various procedural details as an adverse ruling is in their view an endorsement of the termination of their firm. In previous editions, this book has focused upon the problems of the admissibility of a ruling by a quasi-formal agency body (typically done by a contracting officer or informal meeting) and determined that is largely inadmissible hearsay. Or, at least that is what is argued by a subcontractor’s lawyer.
The purpose of the § 4107 hearing is quite different — to maintain the integrity of the public bidding process (specifically bid shopping after the award) and prevent unfair treatment of subcontractors. The standard of proof and substantive basis of the § 4107 hearing is quite different from a civil suit or arbitration regarding the issues of breach of contract and excuse. Furthermore, the right of a jury trial (or arbitration if the parties have so stipulated) is denied the general and subcontractor in the § 4107 hearing. The rules of evidence are rarely followed. And there are generally little appeal rights since it is an administrative action of an agency that the courts will generally defer to the agency.
As such, the basic due process requirements are not met in the § 4107 hearing for the purposes of later damages. The sanctions for breach of the subcontracting and subletting law (as enforced in the § 4107 hearing process) is a discretionary 10 percent penalty, the cancellation of the prime contract and perhaps a state license board disciplinary action or fine.
There is no provision for the subcontractor recovering breach of contract or lost profits in that proceeding. So, the stakes are different and the level of proof and evidence is not up to judicial standards. This is another fine piece of draftsmanship by the Legislature:
“The failure on the part of a contractor to comply with any provision of this chapter does not constitute a defense to the contractor in any action brought against the contractor by a subcontractor.” Public Contract Code § 4112
The first reader who can parse that legislative sentence in a logical and sensible way will get a free copy of the next update of this book.
Under the current state of the law, the result of the public agency or hearing officer’s decision on a general contractor’s right to substitute a subcontractor does not apparently affect the rights of the parties to later litigate the underlying subcontract disputes. In Kemp Bros. Construction, Inc. v. Titan Electric Corp. (2007) 146 Cal.App.4th 1474, the court of appeal found that an Administrative Law Judge’s decision regarding the general contractor’s decision to substitute a subcontractor on public works project did not bar subsequent litigation regarding the underlying subcontract.
In another case, a subcontractor sued the prime contractor under the Subletting and Subcontracting Fair Practices Act, R.J. Land & Assocs. Constr. Co. v. Kiewit-Shea (1999) 69 Cal.App.4th 416. The subcontractor ,R.J. Land, was listed in a prime contractor’s (Kiewit-Shea) successful bid but was not actually used to do the work it was supposed to do. Although Kiewit-Shea did not intend to use R.J. Land for the work in question (they received a lower bid from another subcontractor at the last minute, and intended to use them instead of R.J. Land), it neglected to make the appropriate changes to its final bid submission. The trial court granted Kiewit-Shea’s motion for summary judgment, but the court of appeal reversed, stating that: (1) Kiewit-Shea had the opportunity to correct its final bid submission, and failed to do so, leaving R.J. Land as the listed subcontractor; (2) R.J. Land’s ability to assert its rights under the Act was not barred simply because Kiewit-Shea made a mistake, as Kiewit-Shea had argued at trial; and (3) issues in dispute should have precluded summary judgment.
Practice Pointer: A subcontractor substitution hearing is intended as an expedited proceeding for the benefit of protecting the public agency’s bidding process and preventing bid shopping. It is not the form to ultimately resolve any subcontract disputes between the general contractor and subcontractor. The legal remedies supplied by the Subletting Act are those of the agency, namely the 10 percent penalty or termination of the general contract. As such, the parties to that hearing should focus on the needs of the project and the integrity of the process, not focus on whether the subcontractor has a valid cause of action against the General Contractor.
§ 12.9 Bid Evaluation
New issues have arisen regarding public entities’ discretion in evaluating bids. There is now a question whether public entities governed by low responsible bidder statutes have unrestricted freedom to award contracts based upon evaluations of various project alternatives, as demonstrated below.
In a 1997 unpublished case,253 a trial court denied a contractor’s petition for a writ of mandate challenging a city’s use of alternative bidding for a construction project. It is an important case that raised a significant issue that was later addressed with special legislation. In the unpublished case, the city divided the project into three phases and eventually determined that the cost of one phase would exceed its budget. The city separated the various elements of that phase, requested “base bids” for the portion of the phase the city was sure it wanted built, and also requested bids on nine alternatives so it could choose which of the alternatives would fit its budget. The plaintiff offered the lowest base bid, but after opening all the bids, the city decided that five alternatives were feasible and determined that in light of these chosen alternatives, another bidder was actually the lowest bidder. In entering a judgment for the city, the trial court found no evidence that the city had manipulated the award of the contract or violated applicable competitive bidding principles.255 The court of appeal reversed the decision and directed the trial court to inform the city that any alternative bidding procedure must ensure that the names of the bidders are kept confidential until after the city determines which alternative to include. The Court held that the city’s use of alternative bidding was not valid to the extent it allowed the city to choose alternatives after learning the bidders’ identities. Although the city’s charter did not expressly authorize alternative bidding, the use of this procedure did not violate the city’s competitive bidding law since it allowed the city to make the most economical use of its resources and deal with a problem in a sensible and practical way. However, the determination of alternatives after the bids were opened afforded the city an opportunity to favor a bidder and was, therefore not proper.256 The Court preliminarily held that the contractor’s appeal was not rendered moot by the completion of the project since the city conceded that it used alternative bids at times and the issue of whether such a procedure violated competitive bidding laws was of continuing public interest.257
§ 12.10 Prevailing Wages
Bid invitations generally state that prevailing wages must be paid by general contractors and subcontractors on most public works projects in California (See Labor Code § 1775). These wages are calculated and published by the Division of Labor Statistics and Research.
If a contractor fails to pay these wages, it is liable to the public entity and the workers for repayment and fines, whether or not the contractor is a union contractor. It is common for all contractors on a particular project to sign a project labor agreement, whether they belong to a union or not. However, it is strongly recommended that specialized review of such an agreement be conducted to determine whether its provisions place nonunion contractors at a disadvantage in future labor-organizing activities or disputes. Strict adherence to the prevailing wage laws is an absolute issue of survival for California contractors.
In addition, the California Industrial Welfare Commission further regulates the wage and employment relationship under Wage Order No. 16-2001, regulating wages, hours and working conditions for certain on-site occupations in the construction, drilling, logging and mining industries (effective January 1, 2001, as amended, updated as of January 1, 2002). This wide ranging order encompasses such new requirements as make up time, travel time, recording time, record-keeping, deductions from pay, uniforms and equipment, meal periods, rest periods and alternative work week schedules. Employees governed by collective bargaining agreements are exempt from certain provisions of the Wage Order, so long as they are paid at least 30 percent more than the California Minimum Wage.
In Small v. Superior Court (2007) 148 Cal.App.4th 222, the Court of Appeals upheld Wage Order No. 16-2001, including those portions which require a new alternative workweek schedule election when employees in a work unit increase by 50 percent or more.
Another case258 involved a painting subcontractor, working under a public works contract between a county and a general contractor, which violated the prevailing wage law. The labor commissioner issued an initial “notice to withhold,” directing the county to withhold payment and penalties assessed at $50 per worker per day, the maximum statutory rate, from the general contractor based on the subcontractor’s wage law violations. Although the commissioner ultimately concluded that the subcontractor’s wage law violations were deliberate and fraudulent, and again assessed the maximum statutory penalty, the trial court granted the subcontractor’s petition for a writ of mandate and set aside the initial notice to withhold as premature.259 The court of appeal reversed the trial court’s decision, holding that the painting subcontractor possessed a “beneficial interest” and standing sufficient to maintain the mandamus proceeding, and that no adequate remedy at law was available (Code of Civil Procedure § 1086). The appeals court reversed, but not on the issue of standing. The plaintiff was the painting company. The Labor Commissioner appealed arguing that the painting company had no standing to bring a writ of mandamus and the court of appeal upheld the painting company standing to bring the suit. The reversal was on the issue of the Labor Commissioner’s right to issue a withholding order before the determination of a penalty. The trial court had held that the commissioner had no power to assess the penalty of a withholding order until a determination of the amount of the penalty. The court of appeal held that the withholding was not a penalty, but merely a guaranty to assure future enforcement when a penalty was determined. The Court actually quotes John Locke for an illustration of the definition of “forfeit.” The Labor Commissioner is not really assessing a penalty so much as reducing the maximum penalty based on criteria that permit leniency. There has been no overruling authority to J & K Painting. All subsequent references have been to the standing issue.
The court of appeal also held that the trial court erred in setting aside the notice to withhold as premature. Although the commissioner did not determine the amount of penalties owed pursuant to Labor Code § 1775 before issuance of the initial notice to withhold, the subcontractor forfeited underpaid wages and penalties when it violated the prevailing wage law. Hence, the county’s power and duty to withhold penalties could be predicated on a preliminary or tentative estimation of penalties. Furthermore, the power to withhold funds is a device that can be used to aid in collection. The purpose of the 1989 amendments to Labor Code § 1775 was not to impede the use of this device, but to increase the flexibility in its application.260
In another case,261 the trial court granted a surety’s motion for judgment on the pleadings in an action by the State of California Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE), brought on behalf of workers on a public works project262 for prevailing wages263 against the surety that had furnished the payment bond required for the project. The trial court found that the action was barred by the ninety-day statute of limitations of Labor Code § 1775. The court of appeal reversed the decision, holding that the applicable limitations period was the six-month period of Civil Code § 3249 (action against surety, since repealed) and that the action was timely under that statute. The DLSE has the authority to bring an action on behalf of workers whose statutory rights to prevailing wages allegedly have been violated. See Civil Code § 9558 (operative July 1, 2012).
Statutory provisions other than Lab. Code § 1775 also spell out the right to prevailing wages. Thus, the Labor Code § 1775 remedy against the contractor is not the only mean by which the DLSE may seek to collect prevailing wages under the prevailing wage law. Moreover, by its terms, Labor Code § 1775 becomes applicable when the DLSE’s suit is against a contractor, not another entity such as a surety. Thus, the ninety-day limitation of Labor Code § 1775 does not apply to an action for payment of prevailing wages against a surety on a payment bond.
In yet another case,264 the trial court granted summary judgment for a contractor and related defendants in an action by the DLSE to recover unpaid wages for labor performed on a public works contract, based on the finding that the Employee Retirement Income Security Act (ERISA)265 preempted California’s prevailing wage law (Labor Code § 1720, et seq.).266 The court of appeal reversed the judgment. The court held that in determining whether a state law relates to an ERISA plan because it has a “connection with” such a plan and is thus preempted, the court must consider whether the state law: (1) regulates the types of benefits in ERISA employee welfare benefit plans; (2) requires that a separate employee benefit plan be established to comply with the law; (3) imposes reporting, disclosure, funding, or vesting requirements for ERISA plans; and (4) regulates certain ERISA relationships, such as those between an ERISA plan and an employer or between an employer and employee. Applying that test, the court held that the trial court erred in granting summary judgment for defendants.267 The defendants were liable under the prevailing wage law, not because they failed to contribute to the employee benefit plan, but because they failed to pay their employees the prevailing wage.
Where a legal requirement may be satisfied through means unconnected to ERISA plans, and relates only to ERISA plans at the election of an employer, it affects employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law “relates to” the plan so as to be preempted. The prevailing wage law does not single out ERISA plans for special treatment, nor was it designed to affect such plans specifically. The provisions of the prevailing wage law at issue regulate wages generally and create no rights and restrictions predicated on the existence of any employee benefit plans. The prevailing wage law, which was designed to protect and benefit employees on public works projects, is an example of the broad authority States possess to protect workers.268
§ 12.11 Bid Protests - Administrative Challenges
Most bid protests are brought by unsuccessful bidders (typically the second lowest prime contractor or the second lowest subcontractor listed on the prime contractor’s bid) after the public agency or staff has indicated its intent to award the contract. If a contractor does not immediately lodge a protest in writing to the public entity, the bid protest right may be waived.
Bid protest procedures vary with each public entity. Some procedures are informal and have not been put in writing.269 However, the following steps are typical in bid protests handled by public entities.
§ 12.11.1 Notice of Award
The public agency opens the bids and notifies the public who will be awarded the contract.270
§ 12.11.2 Request for Hearing and Notice
Upon receipt of the notice of intention to award, any person or firm protesting the award must, within a certain period of time, file a written protest and request a hearing on that protest. The public agency then sets a time for the hearing.
§ 12.11.3 Hearing and Decision
Normally, witnesses are called and testimony is given. Generally, a transcript is made of the hearing. In addition, witnesses are often required to testify under oath even though the hearing is administrative. The public agency then makes a decision and gives notice of that decision.
§ 12.12 Bid Protests - Legal Challenges
Several legal challenges are also available to an unsuccessful bidder when it has exhausted its administrative remedies and is not satisfied with a public agency’s decision. The following are some examples of claims that may be alleged.
§ 12.12.1 Interference with Prospective Economic Advantage
Typically, a prime contractor awarded a contract may respond to a bid protest by an unsuccessful bidder with a counter-claim that the protest is malicious and interferes with the prime contractor’s economic interests.
§ 12.12.2 Breach of Contract
A subcontractor may allege an oral agreement with the prime contractor in which the prime contractor promised to use the subcontractor’s bid in the proposal submitted to the public agency. In addition, detrimental reliance by a bidder may be alleged on the theory of promissory estoppel.271 Also, a subcontractor may have begun performance in accordance with a bid and would, therefore, have a claim for breach of contract with performance consisting of acceptance.
§ 12.12.3 Abuse of Discretion
Unsuccessful bidders often complain that public entities fail to properly follow applicable competitive bidding requirements. A disappointed bidder or any taxpayer may seek a writ of mandate to restrain a public body from awarding a contract to one other than the lowest responsible bidder if it can show that the award is an abuse of discretion.272 Regarding this third legal challenge, a public entity has wide discretion in awarding public works contracts, as long as it exercises its discretion in good faith.273 For example, the public entity may reject a low bid if it determines in good faith that the low bidder is not responsible.274
Under California law, a bid protester must demonstrate the awarding agency abused its discretion in awarding the contract. Abuse of discretion can be shown by demonstrating the public entity acted illogically, capriciously, or arbitrarily.275 For example, a protestor may argue that the public entity failed to comply with competitive bidding requirements, i.e., failed to award the contract to the lowest responsible bidder276 or committed fraud based upon favoritism.277
Another abuse of discretion is collusion with other contractors. Most major projects require a certificate of non-collusion, whereby the bidder states under penalty of perjury that there was no collusion, including such things as bid rigging among the bidders or bribery of public officials to manipulate or control the bid.278
Finally, abuse of discretion may be shown by inappropriate quotas regarding minority, women, and disabled business enterprises. In the past, disabled business enterprise participation programs (DBEs) and minority business enterprise participation programs (MBEs) were upheld, and bidders that refused
to comply with these quotas were rejected for non-responsibility. However, courts are increasingly refusing to enforce such programs unless the agencies can demonstrate a “firm basis for believing that remedial action is required.”279
A public agency must narrowly tailor its MBE plan to specifically remedy past discriminatory practices. Otherwise, the plan fails under the equal protection clause of the U.S. Constitution.280
In Associated General Contractors, Inc. v. San Francisco,281 the Association challenged a city ordinance that permitted preferential hiring of minority, women, and local businesses, claiming that the ordinance violated the city charter, which required public works contracts to be awarded to the lowest bidder. The court cited Inglewood-Los Angeles County Civic Center Authority v. Superior Court,282 which interpreted the term “responsible” as being qualified to do the particular work under consideration with regard to quality, fitness, and capacity, only. The court refused to extend the scope of the term “responsible” to mean “socially responsible.”283
There has been substantial litigation and decisions regarding the strict scrutiny review of these DBE programs. The case of Associated Gen. Contrs. of Am. v. California DOT (9th Cir. 2013) 713 F.3d 1187 dealt with CalTrans’ DBE programs.
It is important to note that when a public works contract is governed by a statute calling for an award to the lowest responsible bidder, any hiring preferences will be closely scrutinized by the courts. The damages recoverable by a contractor who submits the low bid but is not awarded the project are set forth in Kajima/Ray Wilson v. Los Angeles County Metropolitan (2000) 23 Cal.4th 305.
The abusive use of alternatives in the bidding and award of public contracts has now been limited by Public Contract Code § 10126 (State Agencies), § 10780.5 (California State Universities), and § 20103.8 (Local Agencies).
Practice Pointer: An action for judicial review of an agency decision must usually be brought within 90 days of when the decision becomes final (Code of Civil Procedure § 1094.6).