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DTCI: Public works statute tested

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By Chris Drewry
drewry-christopher.jpg Drewry

Publicly funded construction projects in Indiana have long been governed by statutes that set forth the procedures by which certain public entities must select the contractors performing the work. The purpose of these statutes is to “safeguard the public against fraud, favoritism, graft, extravagance, improvidence and corruption, and to insure honest competition for the best work or supplies at the lowest reasonable cost.” Angel v. Behnke, 337 N.E.2d 503, 509 (Ind. App. 1975). These design-bid-build statutes generally provide that public construction contracts exceeding certain threshold dollar amounts must be awarded through a competitive bidding process.

At the local government level, public works projects procured by any political subdivision or agency are governed by Title 36 of the Indiana Code, specifically Ind. Code § 36-1-12-1 et seq. This is in contrast to state projects procured by the Indiana Department of Administration under Title 4, other state projects procured under Title 5, or projects procured by the Indiana Department of Transportation under Title 8. The Title 36 public works statute provides that “all public work performed or contracted for by … political subdivisions … and … their agencies” shall be subject to specific bidding procedures and must comply with numerous regulations and specifications. Ind. Code § 36-1-12-1(a).

For instance, contracts for the construction or renovation of school buildings typically must comply with the competitive bidding requirements applicable to public works construction contracts. See Brooks v. Gariup Constr. Co., 722 N.E.2d 834, 839 (Ind. App. 1999), trans. denied; Sch. City of Gary, Ind. v. Cont’l Elec. Co., 273 N.E.2d 293, 296 (Ind. App. 1971). See also 2008 Ind. Op. Att’y Gen. No. 5 (2008) (citing Ind. Code §§ 36-1-2-10 and -13) (“School corporations are political subdivisions for purposes of the public work statute.”)

The types of covered public works projects include the construction, reconstruction, alteration or renovation of a public building, airport facility or other structure that is paid for out of a public fund or out of a special assessment. It also includes the construction, alteration or repair of a highway, street, alley, bridge, sewer, drain or other improvement that is paid for out of a public fund or out of a special assessment. The Title 36 public works statute applies regardless of whether the property upon which the project is to be constructed is actually owned or leased by the political subdivision or agency. Ind. Code § 36-1-12-1.

The Alva Electric case

The coverage and application of the Title 36 public works statute came into question in the very recent case of Alva Electric, Inc. v. Evansville-Vanderburgh School Corp., 2014 WL 1716563 (Ind. 2014). In that case, the Indiana Supreme Court was tasked with deciding whether the specific procedure employed by the Evansville-Vanderburgh School Corporation to renovate one of its buildings violated the Title 36 public works statute requiring competitive bidding.

In 2010, EVSC decided to convert a former warehouse building into administrative offices. However, EVSC subsequently determined that it had insufficient funds to complete or publicly bid the renovations. Thereafter, EVSC contacted contractor Industrial Contractors Inc. about renovating the building and accepting payment for the renovations over time. Specifically, EVSC proposed a plan whereby it would convey the building to a private nonprofit entity (the “EVSC Foundation”) and that entity would then contract with ICI for the renovations without following the competitive bid process.

In early 2011, a group of Evansville-based contractors initiated a lawsuit against EVSC and the EVSC Foundation seeking a declaratory judgment and injunctive relief for an alleged violation of the public bidding statutes under Title 36.

[For purposes of this article, an analysis of the additional claim relating to an alleged violation of Indiana’s Antitrust Act and the court’s discussion of it have been omitted.]

The contractors moved for summary judgment, requesting the trial court declare, among other things, that the project violated public bidding laws, and asking the trial court to void all contracts constituting the transaction and to enjoin any further expenditure of public funds on the project. EVSC and the EVSC Foundation likewise moved for summary judgment to uphold their procurement plan. Following a hearing, the trial court denied the contractors’ motion for summary judgment and determined that the transactions did not constitute a violation of Title 36. The trial court concluded that (1) the EVSC Foundation was the title holder of the building at the time of the renovations, (2) the EVSC Foundation was signatory on the construction agreement with ICI, and (3) payment to ICI, although originating from EVSC, was made from the EVSC Foundation’s bank account.

On appeal, the Indiana Court of Appeals concluded the project did indeed violate the public bidding laws under Title 36 and therefore reversed the trial court’s judgment. See Alva Elec., Inc. v. Evansville Vanderburgh Sch. Corp., 984 N.E.2d 668 (Ind. App. 2013). EVSC and the EVSC Foundation subsequently sought transfer to the Indiana Supreme Court. However, on transfer, the Supreme Court summarily affirmed the Court of Appeals’ opinion holding that the scheme used by EVSC and the EVSC Foundation violated the state’s public building statutes under Title 36.

In so doing, the Indiana Supreme Court clarified that its holding should not be construed to mean that all (or even most) contracts entered into by private entities like the EVSC Foundation for the ultimate benefit of and in cooperation with a political subdivision like EVSC necessarily run afoul of the public work statutes. Rather, in this particular case, the EVSC Foundation’s actions related to the project were clearly such that it was acting on behalf of EVSC, given EVSC’s heavy involvement in and control over the renovation project from its inception to its completion. As such, the Supreme Court affirmed the Court of Appeals holding on the public bidding violation and reversed the trial court’s grant of summary judgment.

Overview of the competitive bidding process

With the Indiana Supreme Court’s decision in Alva Electric, the state’s public works statute and competitive bidding laws were upheld. Pursuant to Section 4 of the Title 36 public works statutes, any local government project (with some exceptions) in excess of $150,000 is going to be covered by the statute. Ind. Code § 36-1-12-4(a)(1). On those projects, the political subdivision or agency must comply with certain procedures.

These procedures are set forth in Section 4 of the statute. To start, the political subdivision or agency must prepare general plans and specifications describing the kind of public work required, while avoiding specifications that might unduly limit competition, file such plans and specifications, and then publish notice in accordance with Indiana Code § 5-3-1 calling for sealed proposals for the public work needed. Ind. Code § 36-1-12-4(b)(1) through (3). The notice must specify the place where the plans and specifications are on file and the date fixed for receiving bids. Ind. Code § 36-1-12-4(b)(4). Depending on the size of the public works project, the period between the date of first publication and the date of receiving bids is limited to no more than either six weeks (if the estimated cost of the project is less than $25 million) or 10 weeks (if project cost is greater than $25 million). Ind. Code § 36-1-12-4(b)(5).

With respect to the requirements of bidders on a given project, the political subdivision or agency must require the submission of a financial statement, a statement of experience, a proposed plan or plans for performing the public work, and the equipment that the bidder has available for the performance of the public work. Ind. Code § 36-1-12-4(b)(6). In addition, the political subdivision or agency cannot require a bidder to submit a bid before the meeting at which bids are to be received. Ind. Code § 36-1-12-4(b)(7). The meeting for receiving the bids must be open to the public, and all bids received shall be opened publicly and read aloud at the time and place designated and not before. Id.

Alternatively, small projects undertaken by a political subdivision or one of its agencies that are estimated to cost less than $150,000 may be constructed by the subdivision’s own employees so long as the subdivision regularly employs persons capable of performing such work. Similarly, if a project is estimated to cost less than $100,000 and is for a local board of aviation or is estimated to cost less than $50,000 and is for a municipal or county hospital, the project may be completed using their own work forces or by following abbreviated procedures for the award. Ind. Code § 36-1-12-3.

Awarding the contract

Under the Title 36 competitive bidding provisions, following the submission of bids, the political subdivision or agency is required to award the contract for public work or improvements to the lowest responsible and responsive bidder. Ind. Code § 36-1-12-4(b)(8). Alternatively, the political subdivision or agency can reject all bids submitted. Id. If the political subdivision or agency awards the contract to a bidder other than the lowest bidder, the board must state in the minutes or memoranda, at the time the award is made, the factors used to determine which bidder is the lowest responsible and responsive bidder and to justify the award. Ind. Code § 36-1-12-4(b)(9); Koester Contracting, Inc. v. Board of Com’rs of Warrick County, 619 N.E.2d 587 (Ind. Ct. App. 1993).

For a bidder to be considered for award of the contract, its bid must be responsive. This is the initial determination by the reviewing owner. In determining whether a bidder is responsive, the political subdivision may consider whether the bidder has submitted a bid or quote that conforms in all material respects to the specifications, whether the bidder has submitted a bid that complies specifically with the invitation to bid and the instructions to bidders, and whether the bidder has complied with all applicable statutes, ordinances, resolutions or rules pertaining to the award of a public contract. Ind. Code § 36-1-12-4(b)(10).

Once the pool of responsive bidders is determined, the next determination is which one is lowest. This is a price-driven analysis. Once the lowest responsive bidder is determined, the third criteria for award must be met. This is whether that bidder is a responsible bidder. In determining whether a bidder is responsible, the political subdivision or agency may consider the ability and capacity of the bidder to perform the work; the integrity, character and reputation of the bidder; and the competence and experience of the bidder. Ind. Code § 36-1-12-4(b)(11). It is worth noting that there are no degrees of responsibility – it is a threshold litmus test. A bidder is either responsible or it is not. If it is determined to be responsible and is the lowest responsive bidder, it should receive the award. The fact that the awarding agency or owner believes that another bidder may be better or more responsible does not change this result.

In addition, the bidder is required to submit an affidavit that the bidder has not entered into a combination or agreement relative to the price to be bid by a person, to prevent a person from bidding or to induce a person to refrain from bidding. Ind. Code § 36-1-12-4(b)(12). The affidavit must also state that the bidder’s bid was made without reference to any other bid. Id.

Also, every bidder must also submit bid security in an amount of not more than 10 percent of the bid amount. Ind. Code § 36-1-12-4.5. In addition, the successful bidder must post a payment bond (see Ind. Code § 36-1-12-13.1) and performance bond (see Ind. Code § 36-1-12-14) on projects of value greater than $200,000. Contracts greater than $200,000 must also contain provisions for a retainage escrow. Ind. Code § 36-1-12-14.

Finally, within 60 days after bids are opened, the political subdivision must award and enter into a contract and provide the successful bidder with notice to proceed. Ind. Code § 36-1-12-6. However, if the project is to be financed through general obligation bonds, this timeframe is extended to 90 days. If the project is financed through revenue bonds, the project must be awarded, a contract must be entered into and a notice to proceed issued within 150 days after bids are opened. Within 15 days before the expiration of any of these dates, the successful contractor may notify the subdivision of its intent to withdraw its bid or extend the time for the award. Id.

Conclusion

Indiana’s competitive bidding statutes are an integral part of public works projects, be it Title 36 local public works or one of the other public works related statutes (under Titles 4, 5, or 8). There are a number of requirements that protect the public and satisfy the purpose for which these statutes were adopted, that being to “safeguard the public against fraud, favoritism, graft, extravagance, improvidence and corruption, and to insure honest competition for the best work or supplies at the lowest reasonable cost.” Behnke, 337 N.E.2d at 509. The Indiana Supreme Court’s recent decision in Alva Electric reinforces the stability of the public works statutes and ensures that government-funded construction projects will continue to be protected by the statutory competitive bidding requirements. In a construction environment in which alternative delivery systems are being considered, such as design-build, multi-prime construction management through an agency construction-manager or the newly enacted construction-manager-at-risk delivery model, the judicial reaffirmation of the ongoing viability of the traditional design-bid-build project delivery process is well timed.•

Chris Drewry is a partner with the construction law firm of Drewry Simmons Vornehm LLP, with offices in Carmel, Indianapolis and Merrillville, Ind. Chris is the chair of DTCI’s Construction Law Section and focuses his practice on construction law and litigation as well as labor and employment law. The opinions expressed in this article are those of the author.

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