Expert Commentary

Public Agency Exempted Project from Competitive Bidding

Kent Holland explains how a recent court decision may offer useful instruction for design-builders interested in proposing innovative projects that might not be possible under traditional public procurement methods.


Design Liability
February 2002

When the Tri-County Metropolitan Transportation District in Portland ("Tri-Met") decided to exempt from competition the contract to construct a light-rail extension to the airport, the Associated Builders and Contractors (ABC) filed suit, challenging Tri-Met's decision. The trial court granted summary judgment in favor of Tri-Met, finding that Tri-Met's decision to forego competition was supported by findings that were based on substantial evidence satisfying the statutory requirements for waiving the competitive bidding requirements.

This decision was affirmed on appeal, with the appellate court providing a detailed explanation of the statutory scheme and basis for upholding the Tri-Met decision. The decision may offer useful instruction for other jurisdictions and design-builders interested in proposing innovative projects that might not otherwise be possible under traditional public procurement methods.

Oregon Law

Under Oregon law, public contracts must ordinarily be awarded on the basis of competitive bids. Section 279.015 of the Oregon Statute authorizes public agencies to exempt contracts from competitive bidding if local contract review boards make findings that certain conditions have been met. In this case, Bechtel Infrastructure Corporation proposed that Tri-Met and two other agencies form a partnership to construct a rail extension to the airport. Bechtel agreed to take responsibility for the design and construction and also to provide project funding in exchange for a fee plus real estate development rights along one segment of the line. Tri-Met evaluated the proposed contract and determined that it met the statutory standard for an exemption. The findings were submitted to a contract review board ("Board") for review and approval, and the Board approved the decision.

In arguing against the exemption, the ABC submitted evidence that Bechtel intended to perform the contract under a national agreement with unions, with the result that nonunion subcontractors would be effectively prevented from competing for work on the project. In response, Tri-Met stated that it was not its policy to dictate terms of the labor relationship between a general contractor and its subcontractors. In addition, it set forth findings that the project could only be built via the means proposed by Bechtel.

Under the statute, a contract could only be exempted from competitive bidding requirements if the public agency finds:

  1. It is unlikely that such exemption will encourage favoritism in the awarding of public contracts or substantially diminish competition for public contracts; and
  2. The awarding of public contracts pursuant to the exemption will result in substantial cost savings to the public contracting agency. In making such finding, the director or board may consider the type, cost, amount of the contract, number of persons available to bid and such other factors as may be deemed appropriate.

The Appellate Court's Ruling

On appeal, the ABC offered three arguments against the Board's decision to approve the exemption. It argued that even if an agency may exempt a contract from competitive procurement, it must nevertheless assure that some other form of competitive procurement occurs. Second, it argued that before exempting a contract, the agency must consider the effect it would have on subcontractors that want to work on the project. Finally, it argued that there were insufficient findings of fact to support the decision. In rejecting each of these arguments, the court's holding clarifies the Oregon law and could provide guidance for design-build projects in other jurisdictions as well.

With regard to using some alternative method of assuring competition, the court held that the statute did not require this. It only required the use of alternative contracting methods "when appropriate" in the opinion of the Board. Since the Board in this case determined that the only way to award this contract was by sole source to Bechtel because "the Board findings make clear that no one else could have done the job," the court was satisfied that the Board did not err by declining to direct an alternative contracting method that would have included some form of competition.

Concerning the ABC's argument that the Board should have considered how Bechtel's participation in the national labor agreement would effectively preclude nonunion subcontractors from competing for work on the project and reduce competition among subcontractors, the court held that the subcontracts were not considered "public contracts" under the statute, and that "the Board did not need to consider the effect that awarding the contract to Bechtel would have on competition among subcontractors…."

In rejecting the ABC's argument that the Board's findings were not presented in sufficient detail and form, the court held that no particular form of decision is necessary, and that the findings themselves were more than adequate to support the decision.

The Contract Review Board Findings

Specific Board findings included the following:

  1. The terms and conditions of the design/build contract will be the result of arm's-length contract negotiations between Tri-Met and Bechtel, and will be reviewed and approved by the Tri-Met Board, thus discouraging any favoritism in the awarding of the contract.
  2. Under the unique circumstances presented, it is unlikely that an exemption authorizing Tri-Met to negotiate a design/build contract with Bechtel for the Airport Max Project will encourage favoritism in the awarding of public contracts or substantially diminish competition for public contracts.
  3. This negotiated contract will have no negative impact on the contracting or subcontracting market in the Portland area. A sufficient number of qualified firms are available to ensure adequate competition and any subcontracted work will be competitively bid. This is a unique opportunity to enhance the local economy because it is unlikely the Project would be built in the near future without this public-private cooperation.
  4. Although the contract with Bechtel will be awarded without direct competition, a substantial part of the construction work will be performed by subcontractors who will be selected through a competitive process. Because of the magnitude of the private investment required and private economic risks associated with the project, the project is unique and it is highly unlikely that this procurement will have any effect or substantially diminish competition for future public contracts.

Based on its review of the record, the court concluded that substantial evidence supported the Board's findings. The decisions of the Board and trial court were, therefore, affirmed.

Conclusion

This decision should be encouraging to public agencies that may be looking at the potential for using public-private partnerships to obtain necessary private financing for projects directly benefiting the public. Design-build contracting scenarios that include private investment, and even ownership interests, by the design-builder may offer public agencies the opportunity to construct projects that, as in this case, otherwise would be unlikely to "be built in the near future without this public-private cooperation."

In the current economy, such project financing scenarios that include the design-builder's participation may become increasingly significant. It is important, therefore, that this decision recognized this as a legitimate consideration of Tri-Met.

Another aspect of this decision that might have significance beyond the specific facts of this case is the conclusion that "the fact that the public agency supplies funds to general contractors, who use them to pay subcontractors, is not sufficient to convert subcontracts between private parties into public contracts." This seems to have the potential to give greater leeway and flexibility to the general contractor in how it goes about awarding and administering subcontracts.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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