Federal Subcontractor Bid Listing Statute on the Horizon (2011 HR 1778 112 Congress)

A bill has been introduced by New York Democratic Representative Carolyn Maloney, designated the “Construction Quality Assurance Act of 2011,” which would require general contractors to list each subcontractor the bidder plans to use for $100,000 or more of the work on federal competitive bid projects of $1 million or more.

1. Definition of Bid Shopping/Bid Peddling: The Act contains the following definitions:

(a) Bid shopping occurs when the successful prime contract low bidder, after project award, uses the successful subcontract low bids as the beginning point for a post-award auction to the same for other subcontractors to agree to perform the subcontract work at an even lower price, with the savings accruing only to the benefit of the low-bid contractor, not the agency program, the project, or the taxpayers.

(b) Bid peddling occurs when other subcontractors approach the successful prime contractor bidder after award of the prime contract and offer to perform the subcontract work at a lower price than submitted by the subcontractor whose sub-bid price was relied upon by the successful prime contractor again with the ostensible savings accruing to the prime contract low bidder only, not the agency program, the project, or the taxpayers.

2. Purpose of the Bill: The statute’s findings (if executed by Congress) are that:

(a) Listing major subcontractor bids in the prime contractor’s sealed bid by agencies will effectively stem the detrimental and inequitable practices of bid shopping and bid peddling on direct federal construction contracts that are detrimental to taxpayers’ interest in government procurement transparency, sound public contract administration, and successful construction completion.

(b) Agencies will receive better project performance by restoring integrity to the low-bid selection system for prime contractors and major subcontractors, as abusive selection procedures often lead to greater project disputes, claims, changes, product and material substitutions, and in some cases, even contractor defaults – again, all to the detriment of the agency program, the project, and the taxpayers.

(c) Restoring equitable safeguards in the low-bid system will assure that the agency practice will conform to the highest standards adhered to by industry professionals and contractor associations, and will reflect best practices followed by a great many other public procurement systems nationally and internationally.

Many general contractors and subcontractors would question whether bid shopping is as prevalent or pervasive as the statute implies.

3. Listing Requirements

As set forth above, HR 1778 was introduced to assure quality and best value in federal construction procurement by prohibiting the practice known as bid shopping and bid peddling. In any solicitation costing $1 million or more, a bidder must submit as part of its bid the name of each subcontractor that will provide work costing over $100,000. The bidder must also include the location of the subcontractor’s place of business and the nature of the subcontractor’s work.

A bidder may only list one subcontractor for each category of work; however, a bidder may list multiple subcontractors for a category of work if each subcontractor is listed to perform a discrete portion of the work within a category. A bidder may list itself for any portion of the work under the contract if the bidder is fully qualified to perform that portion of the work itself and if the bidder will perform that portion itself. Transfers, assignments, and substitutions listing subcontractors are limited and generally may not be accomplished unless the contracting officer consents to the substitution.

4. Grounds for Substitution

The successful prime contractor may not substitute a listed subcontractor without the consent of the contracting officer and for good cause. After winning the bid, if a prime contractor replaces a listed subcontractor without permission of the contracting officer, the prime contractor may be subject to penalties in an amount equal to or greater than 10% of the amount of the subcontractor’s bid; the difference between the amount of the listed subcontractor’s bid and the replacement subcontractor’s bid; or the difference between the amount of the bid by substituted subcontractor and the dollar value specified by the contractor for the work that the contractor had listed for its own performance.

5. Status of the Legislation

The bill was introduced on May 5, 2011 and has presently been referred to Committee. There are four more steps that the bill must go through before it becomes law: 1) It must be reported by the Committee; 2) the House must vote on the bill; 3) Senate must vote on the bill; and 4) it must be signed by the President. This bill is in its infancy and it is difficult at this point based on the lack of publications to predict what chances the bill has of passing through Congress.

The American Subcontractors Association (ASA) strongly supports the bill, contending that the statute will help bid shopping on federal projects, a practice that sometime results in windfalls for the prime contractors. According to the ASA, bid shopping undermines the competitive bid system and this legislation is an effective tool to deter bid shopping. Passage of the bill will improve the quality and security of federal construction. Based on the experience in Washington, the federal government may be tackling an issue with legislation which will create even more difficulties for the government procurement process, greater than the problems it is seeking to cure.

6. Washington State‘s Poor Experience with a Similar Bid Listing Statute

In the 1990s, Washington experimented with a bid listing statute (RCW 39.30.060 (1993)) which required that prime contractors on public works projects of $100,000 or more list all subcontractors (similar to H.R. 1778). In 1996 the Kent Regional Justice Center project was bid. A huge number of subcontractors that had to be listed (this was a mega-building project). In the hectic last minute bid assembly process, the estimators were overwhelmed. The multiple bids were fraught with inconsistencies and the project was bogged down in a bid protest. Dick v. Metropolitan King County, 83 Wn. App. 566, 922 P.2d 184 (1996). After this disastrous experience, in 1999 RCW 39.30.060 was redrafted, the listing of subcontractors is now limited to electrical, plumbing, and HVAC subcontractors.

It is difficult to envision that the federal government experience, particularly on large building projects which involve the work of many subcontractors, will be any different than experienced in the state of Washington. Further, when the subcontractor listing requirement is combined with the Disadvantaged Business Enterprise (“DBE”) listing requirement, the government will have created a procedural mine field rife with bid protest opportunities. Great for construction lawyers, but devastating for getting projects started. Our local congressional/representatives hopefully will share the problems experienced in this state with similar legislation as well as the compromise resolution reached between subcontractors, general contractors and owners in RCW 39.30.060, as it has evolved today.

Click here to read HR 1778 in its entirety.

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