Public Contracts and Procurement Regulations in California: Introduction

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July 24, 2018
Author: Lorman Education

These materials focus on issues relating to public works bidding, contract award, contract administration and contract close-out. The legal principles discussed in these materials generally apply to all California public works projects. Project administrators and contractors must have a thorough understanding of the bidding laws and processes to ensure compliance with legal requirements. Failure to understand and discharge the responsibilities associated with the bidding and contracting processes will almost inevitably lead to frustrations and delayed project completion with all of its negative legal, political and practical ramifications.


A. Competitive Bidding Requirements

The expenditure of public funds for project construction dictates that public agencies award contracts only after having engaged in an open and fair bidding process. The requirements of competitive bidding are intended to guard against favoritism, fraud or corruption in the award of public contracts. The essential purposes and policies underlying competitive bidding requirements are set forth in Public Contract Code § 100:

"The Legislature finds and declares that placing all public contract law in one code will make that law clearer and easier to find. Further, it is the intent of the Legislature in enacting this code to achieve the following objectives:

(a) To clarify the law with respect to competitive bidding requirements.
(b) To ensure full compliance with competitive bidding statutes as a means of protecting the public from misuse of public funds.
(c) To provide all qualified bidders with a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices.
(d) To eliminate favoritism, fraud and corruption in the awarding of public contracts."

1. Projects Requiring Competitive Bidding

With some exceptions, public works contracts may be awarded only after having engaged in the competitive bidding process. Statutory exceptions to competitive bidding requirements are generally available only if the dollar value of the work involved is relatively small or where the nature of the work is not suited to competitive bidding, such as professional services contracts. Aside from the statutory exceptions, there are other circumstances, recognized by judicial case law, in which competitive bidding may not be required based upon a finding that the competitive bidding process would not serve the underlying purposes of bidding.

The Public Contract Code permits award of contracts without competitive bidding in circumstances involving work of: (i) an emergency nature or (ii) of a limited scope. The standards for the application of these exceptions are narrowly defined by statute. In order to avoid potential disputes pertaining to the propriety of a contract award without competitive bidding, the public agency should make appropriate findings to support the absence of bidding and to limit award of contracts without competitive bidding to the circumstances expressly permitted by statute.

In addition to these sections of the Public Contract Code, there are statutory exemptions permitting the use of day labor or a force account for performing certain work. The principal limitation to the application of the exceptions contained in these sections relate to the scope and dollar value of the work in question.

The Public Contract Code provisions setting forth competitive bidding requirements also set forth other exemptions from competitive bidding. For example, specifically excluded from the competitive bidding requirements are professional services and insurance services. Under Government Code §§4525 et seq., architectural, landscape architectural, engineering, environmental, land surveying and construction project management services may be procured by a public agency without engaging in the bidding process.

Guidelines are to be adopted by the public agency governing the procedures for contracting for these services. The standard for award of such contracts must be based upon the demonstrated competence and qualifications of the individual or firm for the services to be provided and the price of the services must be fair and reasonable to the public agency.

In addition to the statutory exemptions to competitive bidding, there is judicial recognition that competitive bidding does not always serve the underlying purposes of bidding. In these instances, courts have upheld the propriety of a contract awarded without bidding. The court in Graydon v. Pasadena Redevelopment Agency, 104 Ca1.App.3d 631 (1980) held that the contract in that case which had been awarded without competitive bidding should be permitted to stand as it found that competitive bidding would not have implemented the underlying purposes of the competitive bidding requirements. The Graydon court cited, with approval, the general rule that competitive bidding may not be required where the nature of the contract is such that competitive bidding would be unavailing, would not produce an advantage, or the advertisement for competitive bids would be undesirable, impractical or impossible.

Although there is judicial recognition of circumstances where competitive bidding may not be necessary, these principles must be applied only to circumstances which justify dispensing with the bidding process. If the judicially recognized exception to competitive bidding is utilized, it is essential that the agency understand fully the standards enunciated by the courts as to the application and scope of this exception. Once the determination has been made that the nature of the work or project in question qualifies for this exception to competitive bidding, the agency's governing body must thoroughly consider the factors justifying award of the contract without competitive bidding. By so doing, the agency will be assured that all relevant issues to the determination to award a contract without competitive bidding have been appropriately considered and sufficient findings can then be made to support the determination.

2. Publication of Notice Inviting Bids; Opening and Reading of Bids

After the bid documents are prepared, the first affirmative act to comply with the bidding requirements is advertising for solicitation of bids. The notice calling for bids or proposals must be published in a newspaper of general circulation where the agency is located. The notice must identify the work to be performed and the time and place where bid or proposals will be opened. As a practical matter, trade publications, such as the "Green Sheets", are frequently used for publishing the notice calling for bids.

Use of trade publications often results in greater numbers of bidders, but it must be kept in mind that unless the trade publication is deemed a newspaper of general circulation, any such notice is in addition and not in lieu of that required by law.

Defects in the notice calling for bids or in the publication of the notice will require the republication of the notice in conformity with the applicable statutory requirements. Once it is determined that defects exist in the advertisement of the call for bids, prudence dictates re-publication rather than proceeding with the bidding process. If, notwithstanding any defects in advertising the call for bids, the bidding process continues, defects in the notice and publication requirements could become the basis for a disappointed bidder to attack the award of a contract to a competitor. With all of the budgetary and time constraints attendant to every capital project, there is no reason to risk expenditure of time and costs when such defects are known.

Bid proposals responding to a notice calling for bids must be publicly opened and read at the time and place stated in the notice calling for bids. Every effort should be made to open bids at the time stated in the notice calling for bids as the "untimely" opening of bids could reflect negatively on the integrity of the bidding process and potentially lead to bidding disputes. Public Contract Code §4104.5 requires public agencies to return unopened any bids received after the time specified in the Call for Bids. If bids are opened after the time stated in the notice, a contract awarded thereafter would probably withstand judicial scrutiny as long as no bid proposals are accepted after the opening of bids. This result may, however, be different if bids are opened prior to the time stated in the notice. Premature bid opening may prevent some bidders, who would have otherwise timely submitted their bids, from bidding, thus limiting competition. At the very least, early opening of bids provide ammunition for a disappointed bidder to protest the award of a contract by arguing that the very purpose of competitive bidding had been destroyed by the early opening of bids, along with the inference of favoritism or corruption in the process.

Effective January 1, 2003, the Legislature enacted Section 1601 of the Public Contract Code which permits public agencies to adopt methods and procedures to receive bids on public works or other contracts over the Internet, but only if no bid can be opened before the bid deadline and all bids can be verified as authentic.

3. The Bid Documents

Although certain portions of the bid documents for any capital improvement project subject to competitive bidding are prescribed by law, many bidding issues are not precisely addressed by statute. Public agencies must be sensitive to the issues affecting the bidding process or which may lead to bidding disputes and to effectively provide for these considerations in the bid documents. The use of standard forms of bid documents is convenient, but it must be kept in mind that special or unique circumstances of the project require that any standard form of bid documents be reviewed prior to issuance of the same to ensure that the documents are suitable for the project. The different documents typically found on a public works project are described in the following sections.

a. Instructions for Bidders

Although there is no legal requirement that bid documents include Instructions for Bidders ("IFB"), as a practical matter, the IFB is critical to the bidding process. By the terms of the IFB, the public agency is able to establish the "rules of the game" for the bidding process and for award of the contract. In the IFB, the public agency can consider and provide for the handling of many of the typical issues arising in competitive bidding.

While there is no prescribed form or content of the IFB, there are many common issues typically addressed in the document. These common issues allow for the development of a standard form of IFB which can be modified as necessary for application to a particular project. Many of the issues addressed in these materials, i.e., bid security, conformity with the bid requirements, and bid protests can and should be provided for in the IFB.

Although beyond the scope of these materials, the bid documents must by definition include the project plans and specifications. Insofar as the plans and specifications provide a principal basis for measuring the contractor's performance, great care must be taken in the planning and design phase of the project to ensure that the plans and specifications are complete and accurate. Too often, performance disputes arise between the contractor and the owner which relate to the adequacy and sufficiency of the plans and specifications. By appropriate sensitivity and oversight in the planning and design phases of the project, the public agency owner can take affirmative steps to minimize or altogether prevent such disputes.

Finally, as a practical matter, the bid documents must be designed to provide the public agency owner with sufficient information regarding the bidder and potential contractor. As discussed below, one of the more significant determinations a public agency must make at bid time is the responsibility of the bidders. Many public agencies are authorized by law to utilize a qualification process for determining the type or scope of projects for upon which a bidder may submit an offer. Regardless, an agency must have sufficient information regarding the financial and other capabilities of the bidders in order to make this determination on a knowing and intelligent basis.

b. Provisions Required by Law

i. Prevailing Wages

As a general matter, workers providing labor to construction of a public improvement must be paid the prevailing wage for the trade or craft of that worker. The public works prevailing wage rate requirements are set forth in Labor Code §§ 1720 et seq. Although the primary obligation for the payment of prevailing wages rests with the contractor during performance of the project, there are public agency obligations with regard to prevailing wages which must be discharged in the bidding phase of the project.

In the bidding phase, the primary obligations of the public agency are twofold: (1) to ascertain, from the Director of Industrial Relations, the classifications of workers necessary for the project and the applicable wage rates for those classifications; and (2) to provide bidders with notice of the prevailing wage rate requirements for the project in the bid documents. The obligation for ascertaining classifications and rates is set forth in Labor Code §1773: "[t]he body awarding any contract for public work, or otherwise undertaking any public work, shall obtain the general prevailing rate of per diem wages. . . for each craft, classification or type of workman needed to execute the contract from the Director of Industrial Relations." Section 1773.2 of the Labor Code mandates the specification in the call for bids, the bid documents and the project contract documents of "what the general rate or per diem wages is for each craft, classification, or type of worker needed to execute the contract." As an alternative to the specific identification of classifications and wage rates in the bid documents, the bid documents can refer the bidder to copies of the rates which are on file in the principal office of the agency. Labor Code § 1773.2 provides as follows:

"The body awarding any contract for public work, or otherwise undertaking any public work, shall specify in the call for bids for the contract, and in the bid specifications and in the contract itself, what the general rate of per diem wages is for each craft, classification, or type of worker needed to execute the contract. In lieu of specifying the rate of wages in the call for bids, and in the bid specifications and in the contract itself, the awarding body may, in the call for bids, bid specifications, and contract, include a statement that copies of the prevailing rate of per diem wages are on file at its principal office, which shall be made available to any interested party on request. The awarding body shall also cause a copy of the determination of the director of the prevailing rate of per diem wages to be posted at each job site."

ii. Subcontractor Listing Law

A portion of the Public Contract Code, at Sections 4100-4114, is devoted to addressing issues related to the listing of subcontractors. These sections of the Public Contract Code are designated as the "Subletting and Subcontracting Fair Practices Act" or more commonly referred to as the "Subcontractor Listing Law." The provisions of the Subcontractor Listing Law affect the rights and obligations of public agencies during the bidding process as well as during performance of the contract.

A primary focus of the bidder engaged in competitive bidding is the ability to propose the lowest price. Except for extraordinary circumstances, it is not likely that the bidder will perform all of the work of the contract. Bids must be necessarily be taken by the bidder from subcontractors to perform portions of the work. In a simplified fashion, the prime bidder adds the amounts for its portion of the work and all of the sub-bids for the other portions of the work to arrive at the bid proposal price for the entirety of the Project. Assuming that the prime bidder submits the low bid proposal, the prime bidder may then attempt to increase the profit margin by "shopping" the sub-bids. Since the bid proposal amount to the public agency is not subject to adjustment, every dollar "squeezed" by the prime bidder in shopping the sub-bids results in pure profit to the prime bidder.

The potential evils attendant to bid shopping are addressed in the Subcontractor Listing Law. In fact, the Subcontractor Listing Law includes specific legislative findings of the evils of bid shopping. The Subcontractor Listing Law is intended to prevent the abuses of bid shopping. Public Contract Code §4101 provides: "[t]he Legislature finds that the practices of bid shopping and bid peddling in connection with the construction, alteration, and repair of public improvements often result in poor quality of material and workmanship to the detriment of the public, deprive the public of the full benefits of fair competition among prime contractors and subcontractors, and lead to insolvencies, loss of wages to employees, and other evils."

The initial obligation of compliance with the Subcontractor Listing Law is upon the public agency. Under Public Contract Code §4104, every public agency must require, in the specifications or the general conditions for the project, that the prime bidder set forth all subcontractors to be engaged on the project. Typically, this is accomplished by the inclusion, in the bid documents for the project, of a Subcontractors List which must be completed by the prime bidder. The information required in the Subcontractor List is prescribed by the Public Contract Code §4104. Under Section 4104, the information required to be included in Subcontractors' List is twofold; the name and business location of each subcontractor and the portion of the work of the project to be performed by the listed subcontractor. The agency may allow the bidder up to 24 hours after bid opening to supply additional information concerning listed subcontractors. Not all subcontractors on the project must be identified in the Subcontractors List. Under Section 4104, the dollar value of the work to be performed by the subcontractor triggers the listing requirement; subcontractors performing more than one-half of one percent (.5%) of the total value of the prime bidder's bid amount must be identified on the Subcontractor List.

Two specific bidding circumstances are addressed in the Subcontractor Listing Law regarding the absence of any listed subcontractor for a portion of the work or the listing of more than one subcontractor for the same portion of the work. Public Contract Code §4106 provides for the same result under either of these circumstances. The prime bidder is, by operation of law, deemed to have represented itself as being duly qualified to perform that portion of the work and to have represented that it will perform that portion of the work. To prevent any attempt to evade the result of the failure to list a subcontractor or the listing of multiple subcontractors, Section 4106 expressly prohibits the subcontracting of these portions of the work after award of the contract.

Once a subcontractor is listed, unless the bid proposal is withdrawn, there are limited circumstances under which a listed subcontractor may be "de-listed." The public agency must be a participant to any delisting of subcontractors and must follow the process prescribed by law. If the prime bidder asserts that a subcontractor was listed by clerical inadvertence, the bidder must, within two working days after bid opening, notify the public agency in writing of the claimed clerical error. The bidder is also required to copy the subcontractor listed in error and the intended subcontractor with the notice to the public agency.

The subcontractor inadvertently listed is afforded six working days from bid opening to submit written objections to the proposed substitution to the public agency and the prime bidder. The failure of the erroneously listed subcontractor to timely submit written objections is deemed by law to be prima facie evidence of that subcontractor's agreement that the listing was erroneous. Where competing affidavits are submitted timely by the prime bidder and the erroneously listed subcontractor, the public agency is under an affirmative legal obligation to conduct an investigation. In addition, the public agency must conduct a public hearing to determine the validity of the competing claims. The determination made by the public agency following the public hearing must be supported by admissible and competent evidence. After the public hearing, the public agency must consent to the substitution of the intended subcontractor for the erroneously listed subcontractor unless there are compelling reasons to the contrary. (Public Contract Code §4107.5)

iii. Securities in Lieu of Retention

The Public Contract Code permits contractors limited options with respect to the public agency's withholding of retention during project performance. In the absence of the contractor's exercise of the rights under Public Contract Code §22300, under the typical contract, a portion of each progress payment is withheld and retained by the owner as security for the contractor's performance under the contract.

Retention withheld by the owner, however, often causes cash flow difficulties for the contractor. To alleviate the burden of retention on the contractor and to provide public agency owners with the protection of retention, Public Contract Code §22300 affords the contractor the opportunity to substitute securities in lieu of retention withholdings or to direct the retention withholdings to be deposited with an escrow agent and invested for the benefit of the contractor. These alternative procedures are supported by the public policy consideration of the need to "encourage full participation by contractors in public contract procedures" (Public Contract Code §22300). By its express terms, Public Contract Code §22300 requires that the bid documents include provisions permitting the contractor's election of either the securities or escrow alternative to retention withholdings. The failure to include these alternative provisions in the bid documents and the contract documents has severe consequences to the public agency owner. Under Public Contract Code §22300(c), the "[f]ailure to include these provisions in bid and contract documents shall void any provision for performance retentions in a public agency contract."

At the request and expense of the contractor, securities with a value equal to the amount to be withheld as retention under the contract may be deposited with the public agency or with a bank, as escrow agent. The securities deposited may be certificates of deposit, standby letters of credit, securities under Government Code §16430, or as may be mutually agreed upon between the contractor and the public agency. If the escrow alternative is elected by the contractor, retention withholdings may be deposited with an escrow agent who at the request of the contractor may invest the retention deposits, with interest earned on the investment earmarked for the contractor. Interest earned on retention deposited with an escrow agent may be withdrawn by the contractor at any time without notice to, or the consent of, the owner.

Public Contract Code §22300(e) prescribes the form and content of an escrow agreement for security deposits. By the express terms of Section 22300(e), unless the escrow agreement utilized is "substantially similar" to that prescribed, the agreement is null, void and unenforceable.

IV. Contractor’s License Classification

Public agencies are required by law to specify the classification of Contractor's License which the successful bidder must hold at the time of award of the contract. This obligation is set forth in the License Law and the Public Contract Code (Business & Professions Code §7059(b) and Public Contract Code §3300(a)). Public Contract Code §3300(a) provides: "Any public entity...shall specify the classification of the contractor's license which a contractor shall possess at the time a contract is awarded. The specification shall be included in any plans prepared for a public project and in any notice inviting bids required pursuant to this code." Business and Professions Code §7059(b) provides: "[i]n public works contracts, as defined in Section 1101 of the Public Contract Code, the awarding authority shall determine the license classification necessary to bid and perform the project."

It is important to note that the obligation imposed on the public agency is limited to a determination of the necessary classification of contractor's license for a contractor directly contracting with the public agency, it does not extend to the listed subcontractors. So long as the required classification of the prime contractor is determined, there is no additional requirement imposed on the public agency to determine necessary classes of the specialty contractors to the prime contractor necessary to complete the work of the contract. Finally, even though Public Contract Code §3300(a) imposes this express obligation upon a public agency, the failure of a public agency to comply with the requirements of this section does not afford an unsuccessful bidder a right to seek damages for not being awarded the contract solely on the basis of the public agency's failure to comply with Section 3300(a).

v. Builders Risk Insurance and Seismic Coverage

Public Contract Code §7105 sets forth potentially severe limitations to compelling a contractor to replace, repair or rebuild work in progress damaged during project construction as a result of an "act of God." The limitations imposed by Section 7105 must be considered by every public agency for every project.

The term "act of God" has an extremely narrow definition under Section 7105: "earthquakes in excess of a magnitude 3.5 on the Richter Scale and tidal waves." If either of these acts of God occur, the public agency cannot compel the contractor to replace, repair or rebuild damage to work in progress for greater than five percent (5%) of the value of the contract, unless the public agency requires the contractor to obtain insurance indemnifying the public agency from damage to the project caused by an act of God. If seismic coverage will be required, the public agency must, in the request for bids, set forth the amount of  work to be covered by this insurance coverage. Public Contract Code §7105(a) and (b) provides:

"(a) Construction contracts of public agencies shall not require the contractor to be responsible for the cost of repairing or restoring damage to the work, which damage is determined to have been proximately caused by an act of God, in excess of 5 percent of the contracted amount, provided, that the work damaged is built in accordance with accepted and applicable building standards and the plans and specifications of the awarding authority. However, contracts may include provisions for terminating the contract. The requirements of this section shall not be mandatory as to construction contracts financed by revenue bonds. This section shall not prohibit a public agency from requiring that a contractor obtain insurance to indemnify the public agency for any damage to the work caused by an act of God if the insurance premium is a separate bid item. If insurance is required, requests for bids issued by public agencies shall set forth the amount of the work to be covered and the contract resulting from the requests for bids shall require that the contractor furnish evidence of satisfactory insurance coverage to the public agency prior to execution of the contract.

(b) For the purposes of this section:

(1) "Public agency" shall include the state, the Regents of the University of California, a city, county, district, public authority, public agency, municipal utility, and any other political subdivision or public corporation of the state.

(2) "Acts of God" shall include only the following occurrences or conditions and effects: earthquakes in excess of a magnitude of 3.5 on the Richter Scale and tidal waves."

With the distinct likelihood of seismic activity greater than 3.5 on the Richter Scale and the possibility of damage to work in progress on an on-going project, the issue of seismic coverages cannot be overlooked. For every project, the public agency's project administrators must consider whether or not to require that the contractor provide for seismic coverage. Essentially, the decision on this issue is an exercise of judgment requiring the evaluation of the additional costs of seismic coverage and the likelihood of damage or destruction to work in progress by seismic activity.

vi. Design Services Contracts; Disclosure of Indemnification Provision

Public agencies are under an affirmative statutory obligation to disclose to its potential design professionals the specific nature and scope of indemnification provisions in the proposed contract which would require the design professional to indemnify the public agency whether or not damage to the public agency is caused by the design professional. These obligations are codified in Public Contract Code §20103.6 which provides:

"(a) (1) Any local agency subject to this chapter shall, in the procurement of architectural design services requiring an expenditure in excess of ten thousand dollars ($10,000), include in any request for proposals for those services or invitations to bid from a prequalified list for a specific project a disclosure of any contract provision that would require the contracting architect to indemnify and hold harmless the local agency against any and all liability, whether or not caused by the activity of the contracting architect.

(2) The disclosure statement shall be prominently set forth in boldtype.

(b) In the event a local agency fails to comply with paragraph (1) of subdivision (a), that local agency shall (1) be precluded from requiring the selected architect to agree to any contract provision requiring the selected architect to indemnify or hold harmless the local agency against any and all liability not caused by the activity of the selected architect, (2) cease discussions with the selected architect and reopen the request for
proposals or invitations to bid from a qualification list, or (3) mutually agree to an indemnity clause acceptable to both parties.

The types of design professional indemnification provisions subject to Section 20103.6 are limited to those which "require the contracting architect to indemnify and hold harmless the local agency against any and all liability, whether or not caused by the activity of the contracting architect." Accordingly the terms of the proposed contract must be initially reviewed to ascertain whether indemnification provisions therein fall within the purview of Section 20103.6. If the scope of indemnification requires disclosure, the disclosure must be "prominently set forth in bold type."

If the indemnification provisions of the proposed contract are subject to the Section 20106.3 disclosure requirements, the public agency must then consider the statutory options available for failing to make the required disclosure. Three alternates are provided in Section 20106.3: (a) be precluded from requiring the architect to be subject to the indemnification provision; (b) cease discussions and reopen the selection process; or (c) negotiate a mutually acceptable indemnification provision with the architect.

c. Limitation on Sole Source Specification

As part of the policy of encouraging competition, public agencies are generally prohibited from the inclusion of provisions in the bid documents which limit competition in the bidding process or which call for a sole source of materials or products. These prohibitions are set forth in Public Contract Code §3400. The essence of this prohibition is consistent with the underlying purpose of public competitive bidding as it is designed to prevent favoritism in the award of public contracts.

Assuming compliance with applicable bidding requirements, this obligation should be discharged by the public agency in the ordinary course of the bidding process. The prohibition on bidding provisions limiting competition are set forth generally in Section 3400(a) as follows: "No agency... nor any public officer or person charged with the letting of contracts for the construction, alteration, or repair of public works shall draft or cause to be drafted specifications for bids. . . in a manner that limits the bidding, directly or indirectly, to any one specific concern."

Aside from the bidding process, Public Contract Code §3400 also addresses the limitations upon requiring the contractor furnish a "sole source" of materials or products. With limited exception, public agencies are prohibited from "calling for a designated material, product, thing or service by specific brand or trade name unless the specifications lists at least two brands or trade names of comparable quality or utility and is followed by the words' or equal' so that bidders may furnish any equal material, product, thing, or service." The exceptions to this general requirement are set forth in Section 3400. The three statutorily recognized exceptions are: (1) the designation of a particular material or product is necessary to match others in use; (2) a unique or novel product application is required to be used in the public interest; or (3) where the designated product or material is in the nature of a field test or experiment to determine suitability of the product for future use. If the last exception is utilized to justify the sole source designation, there must be a finding by resolution of the governing body authorizing inclusion of a sole source for such field test or experimental purposes. The governing body's finding and resolution in this regard must be included in the specifications for the project.

Finally, Section 3400(a) requires the agency to provide some period of time either prior to or after, or prior to and after, the award of the contract for submission of data substantiating a request for substitution of an "or equal" item. If no period of time is specified, such data may be submitted any time within 35 days after award of the contract.

d. `Alternate Bid Items: Local Agencies

Oftentimes, the use of bid "alternates" is necessary to meet budgetary restraints imposed on an agency for a particular project. Through this mechanism, bidders submit a proposal for a "base" bid amount together with prices for discrete "alternate" work items. Both the California courts and legislature are concerned that the selection of alternates in determining the winning bidder after the bidders' identities are known permits agencies to manipulate the award of the contract, thereby creating at least an appearance of favoritism. In response to this concern, the California legislature enacted Public Contract Code §20103.8 which provides as follows:

"A local agency may require a bid for a public works contract to include prices for items that may be added to, or deducted from, the scope of work in the contract for which the bid is being submitted. Whenever additive or deductive items are included in a bid, the bid solicitation shall specify which one of the following methods will be used to determine the lowest bid. In the absence of such a specification, only the method provided by subdivision (a) will be used:

(a) The lowest bid shall be the lowest bid price on the base contract without consideration of the prices on the additive or deductive items.

(b) The lowest bid shall be the lowest total of the bid prices on the base contract and those additive or deductive items that were specifically identified in the bid solicitation as being used for the purpose of determining the lowest bid price.

(c) The lowest bid shall be the lowest total of the bid prices on the base contract and those additive or deductive items that when taken in order from a specifically identified list of those items in the solicitation, and added to, or subtracted from, the base contract, are less than, or equal to, a funding amount publicly disclosed by the local agency before the first bid is opened.

(d) The lowest bid shall be determined in a manner that prevents any information that would identify any of the bidders or proposed subcontractors or suppliers from being revealed to the public entity before the ranking of all bidders from lowest to highest has been determined.

A responsible bidder who submitted the lowest bid as determined by this section shall be awarded the contract, if it is awarded. This section does not preclude the local agency from adding to or deducting from the contract any of the additive or deductive items after the lowest responsible bidder has been determined.

(e) Nothing in this section shall preclude the prequalification of subcontractors. "

B. Review of Bid Proposals

Generally speaking, a public agency is generally required to award the contract to the lowest responsive and responsible bidder or else to reject all bids. This section discusses the separate concepts of bidder responsibility and bid responsiveness as they relate to the public agency's review of bid proposals and award of contract.

1. Bidder Responsibility

The term "lowest responsible bidder" has been construed to mean the lowest bidder whose offer best responds in quality, fitness and capacity to the particular requirement of the proposed work. West v. City of Oakland (1916) 30 Cal.App. 556. Effective January 1,2000, the legislature enacted Public Contract Code § 1103 which defines "responsible bidder" as "a bidder who has demonstrated the attribute of trustworthiness, as well as quality, fitness, capacity, and experience to satisfactorily perform the public works contract." The legislature specifically found and declared this new section to be declaratory of existing law.

The term "responsible" in the context of public works bidding is not employed to denote a bidder who is generally trustworthy, but also refers to the bidder's ability to perform in accordance with the requirements of the bid solicitation. City of Inglewood-Los Angeles County Civic Center Authority v. Superior Court (1972) 7 Ca1.3d 861. In evaluating the responsibility of a bidder, the public agency will take into account numerous factors, including, for example, the financial capabilities of the bidder, the bidder's experience and familiarity with the type of work of the project, the bidder's work on previous projects, and the bidder's resources and facilities.

Although an awarding authority is afforded considerable discretion in making determinations regarding a bidder's responsibility, considerable care must be taken in arriving at such decisions. Particularly if there is a finding that a bidder is not responsible, it is incumbent on the public agency to afford that bidder sufficient due process to demonstrate is responsibility. The courts, however, in most instances, will not disturb or overturn a finding of non-responsibility unless the aggrieved bidder can show that the awarding authority abused its discretion in making such a determination. This point is illustrated in Raymond v. Fresno City Unified School District (1954) 123 Cal.App.2d 626, in which the public agency rejected the apparent low bid based upon the low bidder's poor construction of another school building. The court rejected the low bidder's suit for declaratory relief and held in favor of the public entity, stating: "there are many occasions and experiences of municipal government when the quality of the thing to be supplied in the course of the public service depends upon conditions which differentiate bidders, and require. . . sound discretion on the part of city officials in determining whether the wares or device which each individual bidder offers in the form of his own exclusive design are such as will meet the particular requirements of the intended work." Id. at p. 629.

The "responsibility" of each individual bidder must be evaluated independently. That is, in determining the "lowest responsible bidder," there is no basis for the awarding authority to apply a concept of relative superiority of the bidders' responsibility. If the awarding agency makes a finding that the low bidder is responsible, the contract cannot be awarded to another bidder on the basis of that other bidder's superior responsibility. Essentially, once a finding is made of the bidders' responsibility, all such bidders are deemed equally responsible.

This principle is extensively discussed by the Court in City of Inglewood-Los Angeles County Civic Center Authority, supra. In that case, the public agency awarded a contract to the non-low bidder. In doing so, the public agency applied a "relative superiority" concept, upon the architect's recommendation that while the low bidder was considered capable, the qualifications of the non-low bidder were considered to be so superior as to justify its selection as the lowest responsible bidder. The Court held that to permit a public agency to reject the bid of the lowest responsible bidder and to award the contract to a "more" responsible bidder operates to frustrate the very purposes of the competitive bidding process and could promote favoritism in the award of public contracts.If the apparent low bidder is deemed to be nonresponsible, the public agency must afford the bidder appropriate due process to demonstrate its responsibility. Although the concept of due process is not easily amenable to definition, essential elements of due process include notice and the opportunity to be heard on factual contentions and legal arguments.

Prior to rejecting an apparent low bidder on the basis of nonresponsibility, the public agency must notify the low bidder of the evidence supporting this finding, and afford the bidder an opportunity to present evidence in rebuttal and to demonstrate that the bidder is qualified to perform the contract. Although the public agency need not conduct a quasi-judicial hearing, due process requires that the public agency at least follow the procedures set forth above before rejecting the apparent low bidder on the basis of nonresponsibility. See City of Inglewood-Los Angeles Civic Center Authority, supra, at p. 871. Even if the bidder is not responsible, failure to afford the bidder its due process rights may operate to invalidate the finding of nonresponsibility and/or the bidding process.

2. Bid Responsiveness

Bid responsiveness, in contrast to bidder responsibility, does not measure the capability of the bidder, but rather whether the bid, as submitted, is in compliance with all of the requirements of the bid documents. To be "responsive," a bid must be in strict and full accordance with the "material" terms of the invitation for bids. Given the relative complexity of capital improvement projects, there will inevitably be some variation between bid proposals and the bid documents. This raises issues of whether a variation is "material" or "immaterial" and whether variations may be waived by the awarding authority.

Any "material" variance in a bid may not be waived by the awarding authority, and bids containing "material" variances must be rejected. This principle insures that all bidders will be treated alike and guards against the possibility for fraud, corruption or favoritism in the bidding selection process. More fundamentally, it ensures that the public agency will be comparing "apples to apples" when reviewing the competing bid proposals. The "material" terms of a bid are (1) those terms which could affect price, quantity, quality or delivery; and (2) those terms which are clearly identified by the invitation for bids and which must be complied with at the risk of bid rejection for nonresponsiveness. The determination of whether a bid proposal fails to comply with material terms the bid documents is by necessity a factual determination based upon whether the variation gives the bidder an unfair advantage relative to other bidders. Menefee v. County of Fresno (1985) 163 Cal.App.3d 1175. Even if there is only a theoretical possibility that a bidder will obtain an unfair advantage, a bid may be rejected as nonresponsive. It need not be shown that the bidder possessed any intention of seeking a competitive advantage. For example, a bid which allows the bidder the chance, after bid opening, to decide whether (and possibly on what terms) it wanted the contract is considered an unfair advantage and will render a bid nonresponsive, even if the bidder never intended to gain or use any advantage. See Konica, supra.

Not all variations, however, will necessarily render a bid nonresponsive. Although full compliance with each provision of the bid documents is always preferable, an immaterial variation may be waived by the public agency. An "immaterial variation" is the failure of a bidder to meet a bid requirement that does not affect the bidder's commitment if it is awarded the contract, either because (1) the requirement is merely procedural and, in the particular case, the meaning of the bid is clear; (2) the requirement is substantive but it is satisfactorily met, although not in the precise manner contemplated by the bidding documents; or (3) the requirement not met is one calling for information that relates not to perform obligation but to independently verifiable facts regarding the bidder's status. In short, an "immaterial variation" will not change the bidder's performance obligations as described in the bid documents and does not provide the bidder an unfair advantage over other bidders. See Konica, supra, at p. 454. The Menefee and Konica cases illustrate the application of these rules to bidding on public works projects. In Menefee, a disappointed bidder challenged a contract award to the apparent low bidder, contending that the bid was nonresponsive because one of the pages of the bid proposal sheet had not been signed. The court permitted the public agency to waive the defect of the unexecuted page and upheld award of the contract to the low bidder. In reaching its decision, a primary consideration of the court was whether the low bidder obtained an unfair advantage over other bidders by failing to sign a page of its bid. If the absence of a signature would allow the low bidder to avoid entering the contract, the court reasoned, then it would have the unfair advantage of deciding whether it wanted the contract after bid opening. The court found, however, that the bidder was bound by the terms of its bid and could not have refused to enter into the contract based on the defect in its bid. Therefore, the public agency was permitted to waive this "immaterial" defect.

In the Konica case, Copy-Line was the apparent low bidder on a contract to provide copying services to the University of California. Konica contended that Copy-Line's bid was nonresponsive because it did not meet the performance requirements set forth in the request for bids. The court found that Copy-Line gained an unfair competitive advantage by deviating from the performance requirements because the deviation allowed it to submit a lower bid than it otherwise could have. Accordingly, the court ordered the contract award to Copy-Line be vacated and the contract to be rebid.

These cases underscore the need for a public agency to thoroughly review bids received in response to the agency's advertisement for bids and highlight the high degree of scrutiny to which the courts subject all areas of the process of bidding and award of public contracts. This heightened scrutiny stems again from the policy behind the public bidding requirements and the concern of preventing abuse in the expenditure of public funds. Accordingly, the public agency must carefully review the responsiveness of bids prior to making its award of a contract.

3. Bonds and Bonding

The preparation of bid documents must necessarily take into account and provide for the posting of bid security at the time of bid submittal as well as the posting of payment and performance bonds by the successful bidder. Discharge of the public agency obligations relating to bonding issues requires an understanding of the nature and legal effect of bonds and the bonding requirements imposed by law. With this background, the public agency can effectively determine the bidder's compliance with legal requirements and the adequacy of the bonds presented by the bidder.

a. Bonds and Suretyship

To be effective in assessing compliance with bonding requirements, a basic understanding of suretyship and bonds is essential. As a general matter, bonds involve a tri-party relationship between a principal, surety and an obligee. The surety acts as a "guarantor" promising to answer for the debt or default of the principal. In essence, suretyship is the pledge of a party (the surety) to another party (the obligee) that a third party (the principal) will fully and faithfully perform an underlying contract between the principal and the obligee. In the event of the default of the principal, the surety is bound to the obligee and to thereafter assume the principal's performance in accordance with the terms of the bond. Typically, there will be a separate agreement between the principal and the surety calling for the principal's indemnification and hold harmless of the surety in the event that the surety is required to act under the bond on behalf of the principal.

It is important to note that the rights and obligations between a principal and a surety under a bond are significantly different than those between an insured and the insurer under a typical policy of insurance.

A primary distinguishing feature is the principal's indemnification obligations to the surety. Under a policy of insurance if a claim is made for which coverage is afforded under the policy, the insurer is obligated to defend and indemnify the insured. Absent extraordinary circumstances when the insurer satisfies the claim, there is no right to seek reimbursement from the insured for the amounts incurred to discharge the claim.

With bonds, however, when the surety is compelled to discharge the principal's obligations, the surety is generally entitled to be indemnified by the principal for the costs and expenses incurred by the surety in discharge of the principal's obligations.

b. Bid Security; Bid Bonds

In general, public agencies must require bidders to post bid security in connection with submittal of a bid proposal. Bid security is intended to protect the public agency from damages incurred if the bidder awarded the contract for the project fails or refuses to execute the contract. In this event, the public agency is faced with limited options; award could be made to the next lowest bidder or all bids can be rejected with the project re-bid. While it is virtually impossible when preparing the bid documents to quantify the losses which will be sustained if the apparent low bidder does not execute the contract, considering the options if the apparent low bidder fails or refuses to execute the contract provides some rough guidelines as to an appropriate amount of the bid security.

Aside from specifying the amount of required bid security, in preparing the bidding documents, the project administrator must be sensitive to the types of bid security permitted by law and to have the bidding documents accurately reflect the permissible types of bid security. Typically, bid security is provided by bidders in the form of a bid bond. In addition to a bid bond, public agencies are usually permitted by statute to accept bid security in the form of cash or cashiers/certified check.

For practical reasons, the retention of bid security of all bidders for a period of time after award of the contract is significant. Retention of the bid security during this period ensures that the agency will have the contract executed by the successful bidder, and if not, to be able to seek recourse against the bid security.

c. Payment Bond

Civil Code §3096 defines a payment bond as "a bond with good and sufficient sureties which is conditioned for the payment in full of the claims of all claimants and which also by its terms is made to inure to the benefit of all claimants so as to give such persons a right of action to recover upon such bond. . ." Unlike bid bonds or bid security, the obligee of the payment bond is typically not the public agency; rather, the payment bond benefits those who have provided work, labor, materials or services to the Principal and who are unpaid for the value of the same. The rights of the unpaid claimants under the payment bond are in addition to, and not in lieu of, any other remedy for payment which the claimant may have by operation of law or by contract.

Public agencies are mandated by law to require that the successful bidder, prior to commencement of work, have approved by the public agency and on file with the public agency a payment bond in conformity with requirements established by statute. Civil Code §3247(a) provides that "[e]very original contractor to whom is awarded a contract by a public entity. . . involving an expenditure in excess of twenty-five thousand dollars ($25,000) for any public work shall, before entering upon the performance of the work, file a payment bond with and approved by the officer or public entity by whom the contract was awarded." The public agency must set forth the payment bond requirement in the bid documents.

Aside from simply requiring the posting of a payment bond, the public agency is also required to approve the payment bond. The statutory standards for approval of a payment bond are set forth in Civil Code §3248. The bond must be in a sum not less than 100% of the total amount payable under the contract.

The agency must generally confirm: (1) the amount of the bond; (2) the types of claims subject to the bond; (3) the classes of claimants benefited by the bond and (4) that the bond be in the form of a bond and not a deposit in lieu of a bond.

d. Performance Bond

There is no express legal obligation imposed on public agencies to require a performance bond similar to that found in the Civil Code pertaining to payment bonds. However, certain agencies are mandated by law to require a successful bidder to post a performance bond. For example, California public school districts must require a performance bond for construction of school facilities in the same amount as the required payment bond pursuant to Title 2, Section 1863.20 of the California Code of Regulations.

Notwithstanding the absence of a legal mandate, as a matter of practice and prudence, performance bonds which inure to the benefit of the public agency owner should be required. In the event of the contractor's default in its performance of the project or other obligations of the contract, the public agency owner can, under a typical performance bond, compel the surety to assume and discharge the contractor's performance obligations.

e. Sufficiency of the Bond and the Surety

Merely requiring the bidder to post a bid bond and the successful bidder to post payment and performance bonds may, by itself, be insufficient to ensure that the benefits intended by the bond instrument will accrue. It is essential for the public agency to conduct appropriate due diligence in the bidding and contract award phase to ensure that the bonds submitted conform with the requirements imposed by law and any additional requirements imposed by the bid documents. Effective January 1, 2002, additional requirements concerning all statutory bonds, including bid bonds, payment bonds and stop notice release bonds (discussed below), has been imposed under Code of Civil Procedure §995.3. That statute provides as follows:

"(a) Notwithstanding any other provision of law, any bond required on a public works contract, as defined in Section 1101 of the Public Contract Code, shall be executed by an admitted surety insurer. A public agency approving the bond on a public works contract shall have a duty to verify that the bond is being executed by an admitted surety insurer.

(b) A public agency may fulfill its duty under subdivision (a) by verifying the status of the party executing the bond in one of the following ways: (1) Printing out information from the website of the Department of Insurance confirming the surety is an admitted surety insurer and attaching it to the bond. (2) Obtaining a certificate from the county clerk that confirms the surety is an admitted insurer and attaching it to the bond."

An "admitted surety insurer" is defined in Code of Civil Procedure §995.120 as "a corporate insurer or a reciprocal or interinsurance exchange to which the [California] Insurance Commissioner has issued a certificate of authority to transact surety insurance in [the state of California]. . ." Determination of the sufficiency of the surety is not, however, the end of the investigation. The public agency must be certain that the bond has been properly issued. The issues which must be considered in this regard include the correct identification of the principal and the obligee, the amount of the bond and the authority of the attorney in fact executing the bond on behalf of the surety.

The purpose of the payment bonds required under Civil Code §3247 is to protect unpaid laborers, vendors and subcontractors to the contractor. Unlike private works of improvement where unpaid claimants to the general contractor have the right to assert mechanics' liens against the real property upon which the project is located and to foreclose upon the mechanics' liens, these rights do not exist on a public works project. In addressing issues relating to public works payment bonds, California Courts have uniformly enunciated the purpose of payment bonds as affording a statutory remedy for unpaid claimants due to the absence of lien rights. See California Electric Supply Co. v. United Pacific Life Insurance Co., (1964) 227 Cal.App.2d 138; Powers Regulator Co. v. Seaboard Surety Company of New York, (1962) 204 Cal.App.2d

In the event that the public agency fails to discharge its obligations concerning investigation of the issuance and status of the payment bond, the public agency incurs liability to unpaid claimants for failures of the bond or surety which could have been discovered in the proper execution of the agency's obligations. In Rankin v. City of Murietta (2000) 84 Cal. App. 4th 605, the court held that the City had a mandatory duty to determine the status and financial sufficiency of the surety on a payment bond before approving the bond. Having negligently failed to do so, the City was obligated to pay a subcontractor the unpaid balance owed by the prime contractor.

These issues were also addressed in the case of C.A. Magistretti Co. v. Merced Irrigation District, (1972) 27 Cal.App.3d 270. In Magistretti, the Merced Irrigation District awarded a contract to a general contractor, but did not require the contractor to post a payment bond. The subcontractor, Magistretti, performed work on the project, but was not paid by the contractor for the value of the work provided to the project. In the absence of a payment bond, the subcontractor brought an action against the Merced Irrigation District and the members of the District's Board of Directors, alleging the negligence of these defendants in not requiring the contractor to post a payment bond in conformity with law. The subcontractor sought recovery of damages against these defendants, i.e., the unpaid balance due it for work provided to the project. The Court in Magistretti rejected the subcontractor's claims against the District and its Board members on procedural grounds; the subcontractor had not presented a "Government Code" claim to the District as required by Government Code §§900 et seq. Even though relief to the subcontractor was denied, the Court's opinion in Magistretti clearly indicates that there is potential liability accruing to public agencies and public agency employees for negligently discharging their statutory obligations under Civil Code §3247.

4. Contractor Licensing

Compliance with the obligations imposed upon a public agency to ascertain the license status of prospective contractors requires a general understanding of the purpose, scope and structure of the California Contractors' Licensing Law. The California Contractors' License Law consists of comprehensive regulations and statutory provisions governing the conduct and licensing of contractors.

Although the License Law focuses upon the regulation of contractors, portions of the License Law impose obligations on public agencies to ascertain the licensing status of contractors. Failure to discharge these obligations may expose public agency officers or employees to financial liability in addition to the sometimes severe penalties imposed upon contractors.

As a general matter, the Contractors' License Law is in the nature of consumer protection legislation. A primary function of the License Law is, of course, the establishment of rules and regulations governing or limiting those entitled to offer services to the public as a contractor. Flowing from this function is the protection of the public from the acts of unscrupulous or incompetent contractors. The License Law also establishes guidelines and procedures for the handling and disposition of violations of the License Law and complaints against contractors.

The License Law applies to any "person" undertaking to construct, alter, repair, improve, move, wreck or demolish any building, highway, railroad, excavation or other structure, project, development or improvement. Business & Professions Code §7026. A "person" includes any individual, firm, partnership, corporation, association or other organization. Business & Professions Code §7025. Although the statutory scheme appears at first blush to be so comprehensive as to encompass virtually every activity affecting real property, there are exemptions and nuances contained within the statutory scheme. For example, a gardener performing typical gardening functions is exempt from the licensing requirement. Nevertheless, if that gardener prunes trees of more than fifteen (15) feet in height or performs work on a landscape system may be deemed a contractor and is required to be properly licensed to perform that work. Business & Professions Code §7026.1(c) and 16 California Code of Regulations §832.27. Particularly in light of the obligation imposed on public agencies for ascertaining the contractor's license status, the preceding example illustrates the need for project administrators to understand the scope of the License Law and to make the appropriate determination of the applicable licensing requirements.

The License Law establishes three categories of contractors: Class A (general engineering contractor); Class B (general building contractor); and Class C (specialty contractor). Class A Contractors (general engineering contractors) are those whose principal contracting business is in connection with fixed works requiring specialized engineering knowledge and skill, including irrigation, drainage, water power and supply, flood control, streets and roads, sewers and sewage disposal systems, parks, playgrounds and other recreational facilities, and land leveling, earthmoving, excavating, grading, trenching, paving and surfacing work in connection with the fixed works. Business & Professions Code §7056. Class B Contractors (general contractors) are those whose principal contracting business is in connection with any structure built for the support, shelter and enclosure of persons, animals or movable property of any kind which requires the use of two or more unrelated building trades or crafts or the supervision of the construction of such structure. Business & Professions Code §7057. Class C Contractors (specialty contractors) are engaged in the performance of construction work requiring special skill. Business & Professions Code §7058. The Contractors' License issued to a specialty contractor indicates the type of work the licensee may undertake by the number designation after the "C" designation; for example masonry contractors must hold a C-29 license, a plumbing contractor must hold a C-36 license and an electrical contractor must hold a C-10 license. The classifications of specialty contractors and the scope of work permitted under such classification are established at 16 California Code of Regulations, §§832.02-832.61.

The License Law is violated if a contractor licensed in a particular class undertakes to perform work outside of that classification. Business & Professions Code §7059 (a); 16 California Code of Regulations, §830(b). It is a violation of the License Law if a general building contractor enters into a prime contract unless the work requires two or more unrelated trades or the contractor holds the required specialty licenses for all trades.

Although simple in concept, the practical application of this rule illustrates some of the nuances, particularly in connection with the work of specialty contractors. For example, there is the concept of "incidental and supplemental" work to the primary work of the contractor. Specialty contractors may, without violating the License Law, perform the work of a contract requiring the use of two or more trades for which the contractor is not licensed if the work in these other trades is incidental and supplemental to the trade in which the specialty contractor is licensed. Business & Professions Code §7059(a).

The need to understand the licensing structure is more than academic. In the context of a public works project, as discussed below, the public agency must determine, and specify in the bid documents, the classification of contractors' license necessary to complete the work of the project. An understanding of the classification structure and the scope of work permitted for each license classification permits the agency to make the appropriate and correct determination of the necessary license classification. For example, a public works contract may be awarded to a specialty contractor, as a prime contractor to the public agency, if the trade of the designated class constitutes more than a majority of the work of the project.

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