State And Local Bid Protests: Sunk Costs and the Meaning of a “Win”
By: Amy Anderson Partner, Jones Walker LLP
Across the United States, state and local agencies often use competitive bidding to award contracts for various types of work. Generally speaking, a bid protest is when an unsuccessful bidder challenges the award by the state or local agency to another competitive bidder. Procurement at this level is entirely distinct from federal procurement.
The details of any bid protest will be specific to the locality. However, a question that very often comes up when a state or local agency uses competitive bidding: what happens when I lose the bid? More specifically, if I should not have lost because my bid was the lowest or best value, can I make the state or local agency award the bid to me?
As with almost anything, the answer depends on a lot of things. Most directly, the right to protest will depend on the specific state’s governing statutes or administrative regulations related to competitive procurement. Each locality will have specific requirements for almost every stage of a protest:
- administrative exhaustion (is there an administrative filing or hearing that you have to do before a lawsuit),
- timing (how quickly you must file your protest), and
- other central questions as to how you protest a bid (do you need to be the second-lowest bidder? Have submitted an accepted bid?).
All pre-requisites are incredibly important and cannot be ignored.
Putting aside the logistics of how, when, and where to protest, the next central question is what effect a bid protest will have. In almost all circumstances, it is nearly impossible to force an award on a particular entity (you!).
You may be able to require that the agency resolicit bids or reverse course in its original award, although the merits are likely to depend heavily on the regulations in your specific state or municipality. You are unlikely to force the award in your favor. In trying to do so, you may put at risk current or future business from the agency and will almost certainly incur significant cost. Whether that trade-off is worth it is incredibly situation and business-specific.
Local Law Governs
State and local agency procurement is not federal procurement. Any entity engaging in competitive bidding on the state and local level must be aware of the specific statutory or regulatory requirements that apply to the entity soliciting bids. This will guide both the contents of any given solicitation, bid, response, or protest. Failure to correctly comply with requirements for a response to a bid, for example, may doom any protest before it begins.
Additionally, the basis of any protest will be governed by local law. For example, is the agency required to award the project to the lowest bidder or can it take into account other factors and make a decision on which entity will provide the “best value?” If it is the latter and you protest the award because you were the lowest bidder, it is important to know on the front-end that the local agency may have used other factors to determine the winning bid provided the best value to the community.
Another important aspect to local law: assuming another entity is awarded the project and you want to protest the bid, you need to know how quickly you must do so. Failure to comply with the deadline for a protest will almost certainly be a death knell to your protest. In some jurisdictions and for certain agencies, the deadline to file may be as short as 72 hours after the award announcement (e.g., protests related to the Texas Lottery Commission and the deadline to file a notice of protest in Florida). In others, like certain administrative agencies in New York, the deadline is ten days from the date the bid is awarded. For many protests in Texas, the deadline is fifteen calendar days following the bid award.
The importance of being well-versed in the statutes and regulations governing both the bid award and any bid protest cannot be overstated.
If we assume you checked all the boxes: you have the right to protest the award; you are going to timely file your protest in the right place (administrative agency, expedited court action?); and you have considered the merits of your protest. The next, perhaps most important consideration is: what does a protest get you, and is it worth it?
We all understand the investment in the first competitive bid. The sting of the loss is real. However, if the bid protest grows out of an emotional reaction to the sting or the idea that you already sunk costs into the competitive bid and need to recover them, you may be surprised by the ultimate results of a protest when you are likely still left without the award. Understanding the implications of a “win” at the bid protest level will allow you to consider whether the potentially significant cost (both of money and time) in filing a bid protest is worth the ultimate reward.
As one overarching example in Texas: if a local government agency announces the bid award to your competitor, you have no more than 15 business days to evaluate your options and file a request for emergency relief with a court in the correct Texas county with the power over that agency. You will likely need to request emergency relief (for example, a temporary restraining order) prohibiting the agency from proceeding with the award until the court can determine its validity.
If the court determines the award was improper for any reason, the most likely outcome is that the agency must resolicit the bid. In other words, the agency starts from scratch and everyone re-submits the responses. The agency of course should not use the lawsuit against you when considering your responsive proposal. But, the agency also is not required to award it to you.
In that event, you spent the time and effort to submit responses twice and you filed a lawsuit. In the end, you have the same amount of income-producing projects as you did before the first bid submission. Of course, the agency could have a second look, based on your protest, and determine you were the best value, most responsive bid, or some other metric. It is not guaranteed.
There is no question that bid protests are a complex area fraught with potential pitfalls for the unwary. Because the issue is nuanced from start to finish and so highly dependent on both state, local, and administrative laws and regulations, it is imperative to understand the framework before jumping in to either respond to a competitive bid or protest a bid award. Although it is easy to get caught up in wanting justice or the ‘win’ of the award, perhaps the most important consideration is what happens when you win? Because of the tight timeline for most protests, you will be well-served to have thought through in advance: is the juice worth the squeeze?
“The Construction Industry Team at Jones Walker LLP is one of the most highly regarded and award-winning construction law practices in the nation. Our experienced construction attorneys understand the complex dynamics between — and the unique priorities of — project participants and can craft effective solutions that minimize disputes, manage risks, and help keep projects moving from conception to completion.”
A Brief Discussion – Liquidating Agreements
By: Gerard J. Onorata Partner, Peckar & Abramson, P.C.
During a construction project, it is not uncommon for disputes to arise between a general contractor and a subcontractor. Frequently, these disputes involve claims for extra work and delay damages that can be attributed to the owner of the project due to deficient design or unforeseen conditions. When these occasions arise, the parties can often resolve these claims without the need for litigation or arbitration by entering into a “liquidating agreement.”
What is a Liquidating Agreement?
Because there is no direct contractual relationship between a subcontractor and an owner, there does not exist a legal basis for a subcontractor to assert a breach of contract claim against a project owner. In legal parlance, this is known as “lack of contractual privity.” A liquidating agreement bridges this contractual gap and allows a subcontractor to pass its claim against the owner through the general contractor. Essentially, with a liquidating agreement, the general contractor acts as a conduit for passing through the subcontractor’s claim.
How the Courts Treat Liquidating Agreements
Liquidating agreements have traditionally been upheld by the New York courts, which have permitted a general contractor to prosecute a subcontractor’s claim against the owner. There is no set form that a liquidating agreement has to take. Some courts have recognized that a liquidating agreement can be comprised of several documents written over a period of time. Nonetheless, it is important to note that a pass-through provision or a liquidating agreement is something that must be clearly spelled out in the parties’ contract or by a separate agreement. A general incorporation by reference provision of the owner’s contract in the subcontract usually will be insufficient to establish a valid liquidating agreement. Similarly, a provision in the subcontract that defers the general contractor’s obligation to pay until payment is received from the owner, (i.e., a “pay-when paid” or a “pay-if-paid” clause) also will likely not be deemed to be a valid liquidating agreement. In order to be enforceable, the courts of New York have held that a liquidating agreement must:
- Impose liability upon a party (i.e., general contractor) for a third party’s; (i.e., subcontractor) increased cost, and provide the first party with a lawful basis for legal action against the party at fault (i.e., owner);
- Liquidation of liability in the amount of the first party’s (general contractor) recovery against the party at fault (owner); and
- A provision for the pass-through of that recovery to the third party (i.e., subcontractor).
When to Enter Into a Liquidating Agreement
“Pass-through provisions” which are similar to liquidating agreements can be included in the subcontract at the time the parties enter into their agreement. You may think of a “pass-through provision” as a mini liquidating agreement that typically is not as comprehensive as a stand-alone liquidating agreement.
Liquidating agreements are often entered into separate and apart from the subcontract after a dispute has arisen and there is the absence of a well-defined pass-through provision in the subcontract. Including a pass-through provision in a subcontract and entering into a separate liquidating agreement with a subcontractor at a later point in time both have their pluses and minuses. Having a pass-through provision agreed to early on in the parties’ relationship provides the general contractor with a certain amount of security and leverage with the subcontractor in the event that a dispute arises. Conversely, the general contractor should recognize that it has now undertaken the responsibility to pass through the subcontractor’s claim to the project owner. A subcontractor’s claim that is poorly documented or factually inaccurate may cause the owner to develop a poor opinion of any claim of the general contractor that may be submitted along with the subcontractor’s claim.
These potential pitfalls could be avoided by waiting until a dispute arises before entering into a liquidating agreement. In doing so, the general contractor will likely have a better understanding of the subcontractor’s claim and be able to make a more informed decision about whether to enter into a liquidating agreement. On the other hand, by waiting to enter into a liquidating agreement, the subcontractor’s position may become so entrenched and the parties so adverse that forming a liquidating agreement becomes an impossibility. Experience has demonstrated that a better course of action from a general contractor’s perspective is to have a comprehensive pass through provision in the subcontract that clearly identifies that the subcontractor’s recovery will be limited by whatever recovery the general contractor receives from the owner.
Benefits of a Pass-Through or Liquidating Agreement
One of the chief benefits of entering into a liquidating agreement is that such agreements avoid a subcontractor’s dispute being litigated or arbitrated during the same time that a general contractor may be in a battle with the project owner. The avoidance of having simultaneous suits prevents the circumstance where a general contractor is taking a position with an owner that may negatively impact its position with a subcontractor, or vice versa. By including the subcontractor’s claim with the claim of the general contractor as part of a liquidating agreement, the general contractor is maximizing or preserving the value of its claim, along with the value of the subcontractor’s claim. Another added benefit of a liquidating agreement is that it defers resolution of any disputes with the subcontractor until disputes with the owner are resolved. At the end of the day, a pass-through provision or liquidating agreement is one of the best tools for avoiding inconsistent results and conflicting liability with the subcontractor and the owner.
Central Elements of a Liquidating Agreement
Liquidating agreements, like all other contracts, are subject to negotiations between the parties. In order for a liquidating agreement to adequately protect the interest of the general contractor, it should contain the following elements:
- It should state that the general contractor will pursue the subcontractor’s “reasonable” claims against the owner;
- The general contractor does not verify the subcontractor’s claim;
- The subcontractor will reasonably assist, at its own costs and expense, with its claim;
- The subcontractor will be bound by any determination that is binding upon the general contractor with respect to the subcontractor’s claim; or
- At the very least, the subcontractor will not commence suit or arbitration against the contractor until any dispute with the owner is resolved;
- Any suit or arbitration that the subcontractor is permitted to commence or has commenced will be stayed pending the resolution of the dispute with the owner;
- Any proceeds of any proceedings against the owner will be distributed between the contractor and the subcontractor on a basis that is set forth in the liquidating agreement; and
- The agreement should provide that the general contractor has the sole authority and discretion to settle the subcontractor’s claim.
The importance of having a well written pass-through provision in a subcontract or separate stand-alone liquidating agreement in place with a subcontractor cannot be overstated. While not a total guarantee that such agreement will prevent litigation with a subcontractor, they substantially reduce the likelihood of such disputes taking place.
Peckar & Abramson Has The Most Experienced and Largest Construction & Infrastructure Practice in the United States–With a Worldwide Reach.
The views expressed in these articles are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice
For more information about NASBP’s active role as an endorsing member of ConsensusDocs, visit nasbp.org.
The NASBP membership can save 20% on ConsensusDocs document subscription packages using new promo code!
Because NASBP is an endorsing member of ConsensusDocs, the NASBP membership is entitled to nearly 18% off of their purchase of ConsensusDocs subscription packages from ConsensusDocs at the ConsensusDocs online store when the following discount code is provided when prompted during purchase, Promotion Code: 7VU89T9P.
For more information, visit consensusdocs.org.
For information about the ConsensusDocs bond forms, visit nasbp.org.
NASBP also provides the ConsensusDocs bond forms for download from learn.nasbp.org.
NASBP is an endorsing organization of the ConsensusDocs coalition, an unprecedented effort by 42 industry organizations to identify industry best practices and to incorporate such practices in a new generation of consensus industry standard form documents.