R. FAIRCHILD CONSTRUCTION ) COMPANY, LTD., )
vs. ) CASE NO. 90-3122BID
Respondent. )
On June 8, 1990, a formal administrative hearing was held in this case in Tallahassee, Florida, before J. Lawrence Johnston, Hearing Officer, Division of Administrative Hearings.
For Petitioner: W. Crit Smith, Esquire
Smith and Thompson, P.A. 1530 Metropolitan Boulevard
John H. Beck, Esquire 1026 Park Avenue East
For Respondent: Paul J. Martin, Esquire
Susan P. Stephens, Esquire Department of Transportation 605 Suwannee Street, MS 58
The issue in this case is whether the Respondent, the Department of Transportation (DOT), should award State Project No. 46090-3511 to the Hardaway Company, notwithstanding the bid protest filed by the Petitioner, W. R. Fairchild Construction Company, Ltd. (Fairchild), alleging that the Hardaway Company's was unbalanced, irregular and unresponsive and that the DOT did not properly exercise its discretion in evaluating the bids.
On May 24, 1990, the Petitioner, Fairchild, filed a bid protest in response to the notice of intent of the Respondent, the DOT, to award State Project No.
46090-3511 to the Hardaway Company. State Project No. 46090-3511 (the project) is for construction of the West Bay Bridge on State Road 79 in Bay County, Florida. The bid protest alleged that the Hardaway Company's bid was unbalanced, irregular and unresponsive and that the project either should be awarded to Fairchild or should be rebid.
Ten other contractors bid on the project, all of whom were given notice of this proceeding and the final hearing scheduled for June 8, 1990, but none of the other bidders intervened in this proceeding.
At final hearing, Fairchild added as a ground for its bid protest that the DOT did not properly exercise its discretion in awarding the project to the Hardaway Company by failing to submit the bids to the Technical Review Committee for review and recommendation as to the responsiveness and regularity of the Hardaway Company bid.
At the final hearing on June 8, 1990, both parties presented the testimony of witnesses. Four joint exhibits, two Petitioner's exhibits and one Respondent's exhibit were received in evidence. At the conclusion of the hearing, the parties ordered the preparation of a transcript of the final hearing, and the DOT required the filing of proposed recommended orders within ten days so that the Recommended Order would be due withing 30 days of the filing of the transcript. The transcript was filed on July 3, 1990, making the Recommended Order due by August 2, 1990.
Explicit rulings on the proposed findings of fact contained in the parties' proposed recommended orders may be found in the attached Appendix to Recommended Order, Case No. 90-3122BID.
State Project No. 46090-3511 (the project) is for construction of the West Bay Bridge on State Road 79 in Bay County, Florida. Competitive bids on the project were solicited in February, 1990. The bid letting on the project was held in March, 1990. The Petitioner, Fairchild, the Hardaway Company and ten other contractors bid on the project. The Hardaway Company submitted the lowest bid on the project in the amount of $9,487,258.17. Fairchild submitted the next lowest bid in the amount of $9,835,279.34.
Divergent Unit Prices and Imbalances.
The part of the Hardaway Company's bid relating to construction of the foundation for the approaches to the bridge (the "structural bid") is obviously below reasonable cost in several respects. The contract specifications require the use of sand fill, shell fill, reinforcement grid (biaxial type 2), and Class III (seal) concrete. The Hardaway Company's unit prices for these items were, respectively, one dollar per cubic yard for the sand fill, fifty cents per cubic yard for the shell fill, twenty-five cents per square yard for the reinforcement grid, and ten cents per cubic yard for the Class III seal concrete. As a result, the Hardaway Company's bid for these items is obviously significantly below reasonable cost and approximately $95,500 below what Fairchild bid for the same portion of the contract.
In contrast to the sand fill, shell fill, reinforcement grid and Class III concrete, the Hardaway Company's bid on some of the other parts of the structural bid were relatively high. The reinforcing steel for the substructure (Item 415-1-5) was bid at approximately twice reasonable cost (80 a pound versus, e.g., 42 in Fairchild's bid), resulting in $609,936.80 attributable to that part of the bid versus, e.g., $320,216.82 for Fairchild. The statistical average (the DOT's so-called "average 2") for the other serious bidders under this item also was 42 a pound.
The Hardaway Company also bid obviously in excess of reasonable cost for the lump sum item of mobilization for pile installation--$600,000 versus
$125,000 in Fairchild's bid and less in the bids of several of the others bidders. (The statistical average for the other serious bidders under this item was $225,000.) But the Hardaway Company bid only $60,000 for the lump sum item for removal of existing structures (versus $160,000 in Fairchild's bid) and only
$30,000 for the lump sum item for removal and disposal of fender system (versus
$110,000 in Fairchild's bid). The portion of the Hardaway Company's bid attributable to mobilization for the roadway work is significantly less than the Fairchild bid under this item ($200,000 versus $375,000) and partially counterbalances the excess in the part of the Hardaway bid for mobilization for the pile installation.
The portion of the Hardaway Company's bid attributable to clearing and grubbing also was high, at $20,000 an acre versus a statistical average of
$4,200 an acre for the other serious bidders, resulting in $216,000 for the Hardaway Company bid versus, e.g., $32,400 for the Fairchild bid and the $45,360 statistical average.
DOT Review Procedures.
Section 2-6 of the DOT's Standard Specifications applicable to the project provides:
2-6 Rejection of Irregular Proposals.
A proposal will be subject to being considered irregular and may be rejected if it shows omissions, alterations of form, additions not called for, conditioinal or unauthorized alternate bids, or irregularities of any kind; also if the unit prices are obviously unbalanced, either in excess of or below the reasonable cost analysis values.
The DOT is in the process of formulating a policy on the use of the Technical Review Committee in the bidding process. A proposed procedure has been developed, which has not yet been made final and has not yet been signed by the Secretary of the DOT, under which the Technical Review Committee would review the low bid on each contract, among other things not applicable to this case, for "any significant irregularities in unit bid prices" and for "unbalanced bidding."
The DOT has not yet defined "any significant irregularities in unit bid prices" or "unbalanced bidding" for purposes of defining the event that triggers review by the Technical Review Committee. The DOT Director of the Office of Construction, Robert Buser, is of the opinion that the unit prices the Hardaway Company bid for the sand fill, the shell fill, the reinforcement grid and the Class III seal concrete are "significant irregularities in unit bid prices." On the other hand, the DOT's Preliminary Estimates Engineer, Robert Griner, who,
unlike Buser, is a member of both the Technical Review Committee and its Preliminary Technical Subcommittee, and is of the opinion that the Hardaway bid for the sand fill, the shell fill, the reinforcement grid and the Class III (seal) concrete are "mathematical imbalances," not "significant irregularities in unit bid prices," which he would define as bids that omit a unit price, whose numerical values do not match words used to express the values, or that are not signed.
Under Griner's approach, which was followed in this case, the Preliminary Technical Subcommittee looks at "mathematical imbalances" to see if they are "material imbalances." If the Preliminary Technical Subcommittee decides that it is not a "material imbalance," it simply reports this finding at the outset of the meeting of the Technical Review Committee, which accepts the finding and does not itself consider the matter any further. Only if the Preliminary Technical Subcommittee reports a "material imbalance" does the Technical Review Committee further consider the question.
Front-end Bidding.
Under the DOT contract for the project, like other items in the specifications, mobilization and land clearing and grubbing are paid in installments as the work proceeds. But, unlike the other items, all of the portion of the contract attributable to mobilization and land clearing and grubbing is paid by the time the entire project is half completed. Similarly, a contractor is paid for reinforcement steel (substructure) when it is delivered to the site. As a result, by shifting dollars in a bid to these "front-end," lump sum items, a contractor can manipulate the bid process and contract to reasonably insure himself of early payment of these inflated items regardless what may happen to the project later.
In analyzing these front-end, lump sum items, Griner treated them (along with the unreasonably low bids on the sand fill, shell fill, reinforcement grids and C III seal concrete) as "mathematical imbalances." Following the guidance of a Federal Highway Administration (FHWA) memorandum, dated May 16, 1988, on the subject of "Bid Analysis and Unbalanced Bids," Griner analyzed the Hardaway bid to be sure it would not be susceptible to cost overruns (it was not) and to be sure the quantities were correctly estimated (they were). He also analyzed the additional cost to the DOT of paying the Hardaway Company early (by the half way point of the project) for the inflated front-end items to determine whether the "mathematical" imbalance was "material," i.e., whether "the mathematically imbalanced bid will result in the lowest ultimate cost to the Government." Based on a twelve percent interest rate, Griner calculated that the inflated front-end items would cost the DOT approximately an additional $98,000, 1/ still much less than the difference between the low Hardaway bid and any other bid. Based on this calculation, Griner concluded that the "mathematical imbalance" in the Hardaway bid was not a "material imbalance" and did not require the award of the bid to Fairchild or one of the other bidders.
Griner overlooked and did not apply another portion of the method of analysis in the FHWA memorandum on "Bid Analysis and Unbalanced Bids" that states:
There are numerous reasons why a bidder may want to unbalance his/her bid on a contract. One reason is to get more money at the beginning of the project. The bidder does this by overpricing the work done early in
the project. This is called "front loading" the contract. The leading case in the "front loading" area is Matter of: Riverport Industries, 64 Comp. Gen. 441 (1985). Here the Comptroller General held that if the bid is front loaded, regardless if it is the lowest bid, it "should be viewed as materially unbalanced since acceptance of the bid would result in the same evils as an advance payment. An advance payment is prohibited by law." The "front loading" may also be materially unbalanced due to the cost
of money that must be paid out early versus over the normal construction fo the project.
Under the Hardaway Company bid, the pile mobilization, the land clearing and grubbing, and the reinforcement steel (substructure) parts of the bid are "front-ended." 2/ Under the method of analysis suggested by the FHWA memorandum, the Hardaway Company would be paid approximately $428,000 in "advance payments" under these two items if it is awarded the contract. Approximately $375,000 in pile mobilization, $183,600 in land clearing and grubbing, and $289,700 in the reinforcement steel were shifted to these front- end items from the unbalanced sand fill, shell fill, reinforcement grid, and Class III (seal) concrete items. These dollars The shifted dollars are estimated by taking the difference between the statistical average for these items and the Hardaway bid on them. Since roiughly half of the shifted dollars would be paid earlier than they would be paid if they were bid under the sand fill, shell fill, reinforcement grid and Class III (seal) concrete items, the amount of "advance payment," under the FHWA analysis would be approximately
$428,000.
Griner did not explain why he only followed part, but not all, of the method of analysis suggested by the FHWA memorandum, other than to say he overlooked it. But he also testified that it is common practice for contractors to submit mathematically unbalanced bids, and the DOT always analyzes them the way he did in this case. Indeed, in the March, 1990, bid letting, Griner found "mathematical imbalances" in 21 of the 29 low bids but no "material imbalances."
The Fairchild bid also contains "mathematical imbalances." It also "front-ends" several items. The total dollar value of the "front-ending" in the Fairchild bid (including roadway mobilization) closely approximates that found in the Hardaway bid and, under the FHWA analysis, would result in approximately the same amount of advance payment.
Under Section 101-2.2 of the DOT's Standard Specifications for this project, contractors are limited to a maximum of ten percent of the total contract for mobilization. The Hardaway Company's total mobilization bid is within the maximum under the specifications.
Notwithstanding the imbalances in the Hardaway bid, and the so-called "advance payments" that would result from the "front-ending" in the Hardaway bid, the Hardaway bid remains the lowest and best bid on the project, and it is the best interest of the DOT and the public to award the contract to the Hardaway Company. Even if the Hardaway Company had bid the sand fill, shell fill, reinforcement grid, and Class III (seal) concrete items exactly as Fairchild did, Hardaway still would be low bidder.
"Value Engineering" and Alleged Alternative or Contingent Bidding.
Inferences reasonably could be drawn from the evidence that the Hardaway Company may intend to propose to the DOT that the approach to the bridge be re-engineered so as to eliminate the need for the sand fill, the shell fill, the reinforcement grid and the C III (seal) concrete. If the DOT accepts such a proposal, the contract between the DOT and the Hardaway Company would have to be modified. If the re-engineered project were to allow the Hardaway Company to do the job for less than its bid price, half (or, if the proposal is innovative or unique, up to 80%) of the savings would be paid to the Hardaway Company under what the DOT calls "value engineering."
Under DOT procedures, "value engineering" proposals are not made or evaluated until after the original contract is signed with the successful bidder. It is not an alternative bid or a contingent bid.
CONCLUSIONS OF LAW
Standard of Review.
The standard of review to be used by a hearing officer in a bid protest proceeding was explained in Capeletti Bros., Inc., v. Dept. of General Services, 432 So. 2d 1359, 1363-1364 (Fla. 1st DCA 1983), it was held:
Capeletti also contends that the hearing officer erred in not imposing upon Bergeron the burden at hearing to prove that DGS' previouly announced intention to reject all bids was arbitrary, capricious and unreasonable.
Capeletti misconceives the purpose of the s. 120.57 hearing. The rejection of the bids never became final agency action. As we have previously held, APA hearing requirements are designed to give affected parties an opportunity to change the agency's mind. Couch Const. Co. v. Department of Transp., 361 So. 2d 172, 176 (Fla. 1st DCA 1978); McDonald v. Department of Banking and Finance, 346 So. 2d 569, 584 (Fla. 1st DCA 1979 [sic]). "Section 120.57 proceedings are intended to formulate final agency action, not to review action taken earlier and preliminarily."
McDonald, supra at 584.
This statement of the standard of review is consistent with other conventional expressions of the normal standard of review in Section 120.57(1) proceedings before DOAH hearing officers.
At the same time, the law has been equally clear that the appellate standard of review of final agency decisions to award a competitive bid requires that the courts defer to the agency's decision, except in limited circumstances, and not substitute its judgment for that of the agency. See generally Liberty County v. Baxter's Asphalt and Concrete, Inc., 421 So. 2d 505, 507 (Fla. 1982); Couch Constr. Co., Inc. v. Dept. of Transp., 361 So. 2d 172, 175 (Fla. 1st DCA 1978); Systems Dev. Corp. v. Dept. of Health, etc., 423 So. 2d 433, 434 (Fla. 1st DCA 1982).
In this case, the DOT has argued, based on the recent decision in Dept. of Transp. v. Groves-Watkins Constructors, 530 So. 2d 912 (Fla. 1988), that the issue for the hearing officer to decide in this case is "whether the agency acted fraudulently, arbitrarily, illegally, or dishonestly." In Groves- Watkins, a case involving an agency's decision to reject all bids, the Court
held, without explaining why an agency's announced intention to reject all bids should be treated differently from any other announced agency intention to take action:
Thus, although the APA provides the procedural mechanism for challenging an agency's decision to award or reject all bids, the scope of the inquiry is limited to whether the purpose of competitive bidding has been subverted. In short, the hearing officer's sole responsibility is to ascertain whether the agency acted fraudulently, arbitrarily, illegally, or dishonestly.
Id, at 914.
It is not clear whether the Court in Groves-Watkins intended that the standard of review it established in that case for an announced agency intention to reject all bids also should apply to an announced agency intention to award a bid, as in this case. If it did, what the Court was saying on the subject might be considered to be dicta that went beyond the precise holding in the case. 3/ But no conclusion of law in this respect need be drawn. Under the facts of this case, it must be concluded that the bid should be awarded to the Hardaway Company regardless how the issue is framed.
DOT Review Procedures.
Fairchild contends that the DOT did not follow its own procedures in that the Technical Review Committee (TRC) did not "review" the Hardaway bid. But the evidence did not prove that there was an agency rule or nonrule policy requiring TRC review in this case. The proposed "procedure" on the subject still is in the process of being formulated and has not been finalized in the
form of agency policy. As stated in Gulf Coast Home Health Services of Florida, Inc., v. Dept of Health, etc., 513 So. 2d 704, 706 (Fla. 1st DCA 1987): "The Florida Administrative Procedure Act (APA) recognizes the inevitability and desirability of refining incipient agency policy through adjudication of individual cases." See also McDonald, supra.
The "procedure" simply states that the TRC will "review" the low bid for, among other things not applicable to this case, "any significant irregularities in unit bid prices" and "unbalanced bidding." In this case, as in numerous similar situations, the Preliminary Technical Subcommittee (PTS) reviewed the Hardaway bid to determine whether the bid was "materially unbalanced" and reported to the TRC its finding that the Hardaway bid was not "materially unbalanced" or otherwise "irregular." Even if the proposed "procedure" constituted agency policy, the DOT's practice would not be an unreasonable application of the "procedure." Contrast Dept. of Corrections v. Provin, 515 So. 2d 302 (Fla. 1st DCA 1987), with Woodley v. Dept. of Health, etc., 505 So. 2d 676 (Fla. 1st DCA 1987), and Boca Raton Artificial Kidney Center, Inc., 493 So. 2d 1055 (Fla. 1st DCA 1986).
The Imbalances and Front-end Bidding.
Section 2-6 of the Standard Specifications for Road and Bridge Construction permits, but does not in every case require, that irregular bids be rejected. "[T]he purpose of competitive bidding is to secure the lowest possible responsible offer and minor irregularities can be waived in effectuating this purpose." Tropabest Foods, Inc., v. Dept. of General Services, 493 So. 2d 50, 52 (Fla. 1st DCA 1986).
In this case, following the guidance of a portion of a Federal Highway Administration (FHWA) memorandum dated May 16, 1988, the DOT, through the PTS and the TRC, conducted an inquiry to determine whether the "mathematical imbalances" in the Hardaway bid amounted to "material imbalances." To do this, the DOT checked for errors in its quantities estimates to be sure that Hardaway's unbalanced bid would not benefit Hardaway, and cost the DOT, over the life of the contract as a result of overruns. The DOT also calculated the amount of interest income the DOT would lose by early payment of inflated front- end items. Even without making a similar analysis of the Fairchild bid and the other bids, the evidence is clear that it will cost the DOT significantly less to build the West Bay Bridge in Bay County if it accepts the Hardaway bid than it would if it were to accept the Fairchild bid (or any of the other bids.)
The evidence did not prove that the Hardaway Company is not a responsible bidder or that it conditioned its bid on building something other than what the bid specifications say it is required to do. The Hardaway bid included a bid on every item required by the specifications. It was not an "alternative bid" and was not a proposal for "value engineering." Even if the Hardaway Company plans to propose a "value engineering" alternative and hopes for DOT approval, it has taken the risk that its proposal will not be approved. And even if such an alternative is proposed and accepted, it cannot be predicted with any certainty that the Hardaway Company would benefit economically from the underbidding of the sand fill, shell fill, reinforcement grid, and Class III (seal) concrete items of the structural bid. Presumably, as part of the DOT's decision whether to accept a "value engineering" proposal, the cost of the
front-end items of the bid would be subject to discussion and negotiation as well.
"[A]lthough a bid containing a material variance is unacceptable, not every deviation from the invitation to bid is material. It is only material if it gives the bidder a substantial advantage over the other bidders and thereby restricts or stifles competition." Tropabest, supra, at 52. The irregularities in the Hardaway bid did not give Hardaway a substantial advantage over the other bidders. Any other bidder could have structured its bid as the Hardaway Company did. Indeed, Fairchild underbid some contingent items in its bid and front- ended the roadway mobilization part of its bid. Front-end bidding is common in Florida.
Like the "procedure" for the operation of the TRC, the FHWA memorandum does not represent, in itself, agency policy. Rather, it is a guide for the DOT to use in determining whether an imbalance is material, and therefore disqualifying. Cf. Gulf Coast Home Health, supra; McDonald, supra. This conclusion is supported by the DOT's practice of being guided by some, but not all, of the FHWA memorandum.
It appears from the evidence in this case that, at least in some jurisdictions, the practice of inflating bids on front-end items results in a so-called "advance payment" that is "illegal." The reason DOT gave in testimony at the hearing for not following this part of the FHWA memorandum was simply that it was overlooked. But neither party has pointed to any Florida law to the effect that it would be illegal for the DOT, with knowledge that Hardaway underbid some required unit items and "front-ended" others, to enter into a contract with the Hardaway Company. Absent such law, there is no reason why the DOT should not be allowed to award to the lowest bidder just because of these
