A story in the Philadelphia Daily News about the disbanding of the Old City Civic Association because of mounting legal fees underscores the problems with this paradox.  According to the story, the well known – or infamous – Old City Civic Association has voted to disband because of mounting legal fees from suits brought by developers who drew the ire of the OCCA.   Supporters of the OCCA fear that “deep pocketed” developers will now run rough shot of their neighborhood.  Opponents of the OCCA are no doubt cheering the news of the demise of their meddlesome foe.

According to the story, civic groups are asking for legislative action granting them immunity from lawsuits for their actions.    The problem with this “solution” is that civic associations and their leaders are not accountable to anyone.   At least with elected officials the public can hold them accountable at the ballot box and their are actions in office are regulated by constitutional controls and ethics rules.   Furthermore, judicial review of their legislative actions is available.  Not so with civic groups, who are both un-elected and who have no real constitutional or legislative authority. Therefore, if they are immune from lawsuits what can the frustrated public or a wronged developer do?    This is especially true when, unfortunately as is often the case, the association becomes a vehicle for the personal agendas of their board members.

What should be happening is the power granted to civic associations should be regulated and codified.  By doing this, the community can be assured that its voice is maintained and developers can be assured of the integrity and fairness of the group.

]]> http://www.supplementalconditions.com/2013/05/do-civic-associations-need-to-be-contained-or-protected/feed/ 0 http://www.supplementalconditions.com/2013/05/philly-flags-firms-for-flaunting-dbe-rules/ http://www.supplementalconditions.com/2013/05/philly-flags-firms-for-flaunting-dbe-rules/#comments Tue, 07 May 2013 12:15:09 +0000 Wally Zimolong http://www.supplementalconditions.com/?p=1001 Continue Reading]]> The City of Philadelphia flagged eleven (yes this one goes to eleven) prime contractors for flaunting the City of Philadelphia’s DBE rules according to the City of Philadelphia Office of Inspector General.  According to the news release, the chief offender, William H. Betz, Inc., may have gotten off easy.  According to the OIG, Betz facilitated contracts between JHS & Sons Supply Company and ten prime contractors whereby:

providing JHS’ minority business certification and the supplies necessary to complete the job. As a result, Betz received more than $640,000 worth of business that was intended for legitimate minority-owned companies. JHS received at least $70,000 for acting as a pass-through.

As a result of a settlement agreement with the City, Betz agreed to repay the City $128,000 and is ineligible for City contracts for two years.  Why is this getting off easy?  Because the arrangement alleged by the OIG could have easily led to federal prosecution of Betz officials involved with the scheme.  For you to be indicted for DBE fraud, there is no requirement the project be owned by the federal government or be funded by it.  There is no actual crime known as “DBE fraud” and DBE regulations to not prescribe criminal penalties for violation of DBE rules.  Rather, DBE fraud almost invariable involves the federal crimes of mail fraud and wire fraud, which are the crimes that DBE fraudsters are prosecuted for.

Almost all government contracts contain a termination for convenience clause that allows the government to terminate a contract without liability for breach of contract.  Such clauses owe their roots to military procurement contracts as a way for the government to avoid liability once a war ended. Under federal regulations, you may not recover anticipatory or consequential damages following a termination for convenience.  However, you are entitled to compensation for the work you performed at the time of termination and potential other costs delineated in your contract.

Yet, there are three exceptions to this general rule:  (1) when the government terminates the contract in bad faith; (2) the government abuses its discretion in its decision to terminate the contract; or (3) when the government enters into a contract knowing it will terminate it before it is completed.

Unfortunately, you burden of proving “bad faith” is a high. To establish a breach based on bad faith in this context, you must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.   The clear and convincing standard is stricter than the preponderance of evidence standard that is normally applied in civil cases.  In determining whether the government clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.

Termination for convenience clauses are just another factor you need to deal with in performing public work.  As is usually the case, yes the government can do that.

In recent years, federal prosecutors have raised the stakes for contractors that lose focus on a construction project.  One area where you can easily lose focus is in complying with the multiple federal laws that apply to the project.  Under the False Claims Act, contractors — and their executives — can be prosecuted for failing to assure that their subcontractors are following certain those laws.

A False Claims Act violation occurs when a person “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.”  Importantly, unlike common law fraud, the government need not show that you intended to defraud the government when you submitted your claim.  The false certification need not be an expressly false statement for there to be a False Claims Act violation.  Under the implied certification theory of liability you can be liable for violating the “continuing duty to comply with the regulations on which payment is conditioned.”

The case U.S. ex rel. Wall v.Circle C Construction, LLC, is a good example of what can happen when you fail to make sure that your subcontractors are following federal regulations before submitting an application for payment.  The defendant, Circle C Construction, had a contract with the Army to perform work on buildings at Fort Campbell in Tennessee.  Prosecutors claimed that Circle C violated the False Claims Act by submitting applications for payment falsely claiming that all of its subcontractors paid prevailing wages under the Davis Bacon Act.

As is typically the case, Circle C’s contract with the Army required Circle C and its subcontractors to pay prevailing wages, to submit certified payroll showing the payment of prevailing wages, to insure its subcontractors complied with the Davis Bacon Act, and to assure that the certified payroll submitted to the Army was accurate and complete.

Circle C, however, neglected to submit certified payroll for its electrical subcontractor, Phase Tech.  The reason for the failure to submit accurate certified payroll for Phase Tech was not because of some scheme to defraud the government by Circle C, rather, it was Circle’s C sloppiness in determining who was working on the project.  In other words, it was not intentional. However, intent was not required because the court applied the implied certification theory of liability and found against Circle C and awarded the government over $500,000 in damages, which it then trebled (tripled) under the False Claims Act, for a total damage award in excess of $1.5 million.

The Circle C case is just one example of easily you can run afoul of the False Claims Act by failing to be diligent that you and your subcontractors are following the federal laws and regulations regarding your project.  Other examples where contractors have run into similar False Claims Act issues are when it fails to assure that federal DBE rules are being complied with on a project.   You should be particularly concerned about the False Claims Act because False Claims Act prosecutions have nearly doubled over the last few years and there have become “en vogue” for federal prosecutors.

For more than two decades it has been true that subcontracting goals – Disadvantaged Business Enterprise goals on federal work and Minority and Women Owned Business Enterprise goals on state and local contracts – must be supported by a disparity study. More than 300 of these studies have been completed around the country to support various DBE and MWBE programs.  Without a viable disparity study, DBE programs are subject to constitutional challenge.  However, just how credible are the disparity studies that state and local government rely upon?

Take for example the Austin, Texas based economic consulting firm, NERA, who finds itself is serious trouble for the disparity studies it produced.  NERA produced dozens of the disparity studies for state and local agencies such as SEPTA, the City of Baltimore, New York State, Hawaii DOT, and the City of Cleveland.

Cleveland awarded NERA a $758,000 no bid contract to complete a disparity study intended to support the city’s MWBE program. It turns out that large chunks of the study were cut and pasted from other NERA studies.In fact, the 36 page legal section of NERA’s Cleveland study is a word for word copy of the legal section done for the Missouri DOT. NERA did not conduct new surveys for Cleveland, instead relying on survey answers for a study done on behalf of the Northeast Ohio Regional Sewer District. One sentence in the Cleveland study referred to the “Houston market area” when the study meant to be discussing Cleveland.

The Cleveland Plain Dealer has run a series of articles on the NERA study. The president of the local Black Contractors Association announced, “Fraud has been perpetrated here.” The Plain Dealer dismissed the study as “slickly repackaged recycling.”

The heart of all disparity studies is the determination of availability – what percentage of contractors who are qualified, willing and able to complete public work are MWBEs or  DBEs? NERA disparity studies apply a headcount approach to availability. All construction firms, regardless of size, are considered the same. The reality that only big construction firms can complete the biggest construction contracts is ignored.

The NERA disparity study for Cleveland concluded that there was sufficient evidence of discrimination to justify continuation of the city’s MWBE program. The City Council agreed. Two lessons are to be learned here.

The first is that a disparity study cut and pasted together is not, or at least should not be, evidence of discrimination justifying preferences in public construction contracts. The law and a sense of fairness require that if there are to be preferences in local contracting, evidence of discrimination in local contracting is needed. Evidence from other parts of the country should not suffice.

The other lesson is that politicians voting on disparity study-based programs don’t really understand what they are voting on. To be fair, disparity studies are often long (the Cleveland study exceeds 700 pages) and complicated documents. Few decision makers have the time, interest, or expertise to read the studies.

Pipeline construction clearly involves a lot of digging.  Where there is digging, there is the unknown of what lies in and below what is being dug.  To address this risk, pipeline owners will include in their contract a differing site conditions clause.  Generally, these clauses disclaim any warranty or representation as to what you will encounter once you start excavation and shift the risk to the you if what you encounter is different than what the contract (or bid) documents represented you should expect to encounter.  When a differing site conditions clause like this appears in your contract, you cannot recover additional costs because you encountered conditions that you did not expect, like addition or different rock, soil, or (as the case below) existing pipeline crossings.   (This is not typically the case for projects performed for the federal government )

El Paso Field Services v. Mastec North America, involved the construction of an underground gas pipeline.  El Paso’s bid package showed only 280 “foreign crossings” (crossings of other existing pipelines along the proposed pipeline right of way) when there were actually 794.   Mastec sought compensation for the additional costs associated with encountering the 594 additional crossing.  The contract, however, contained several sections that broadly addressed differing site conditions and that shifted the risk entirely to Mastec causing the court to deny Mastec’s claim.

If pipeline construction is a new field for you, be aware of what your contract says about differing site conditions.

]]> http://www.supplementalconditions.com/2013/04/exploding-pipeline-construction-and-differing-site-conditions/feed/ 0 http://www.supplementalconditions.com/2013/03/pa-board-of-claims-has-exclusive-jurisdiction-over-contractor-claims/ http://www.supplementalconditions.com/2013/03/pa-board-of-claims-has-exclusive-jurisdiction-over-contractor-claims/#comments Fri, 29 Mar 2013 12:49:15 +0000 Wally Zimolong http://www.supplementalconditions.com/?p=976 Continue Reading]]> My age makes me part of perhaps the last generation to go to college where computers, the internet, and email were not in widespread use.  Before the internet age, Villanova University, where I went to undergraduate and law school, would notify students of the time and location of final exams by posting several small print pages that you would need to decipher to find the date, time, and location of your final exam.  The date, time, and location of the final exam for every class Villanova offered appeared on these print outs.  You can imagine what they must  have looked like.  I can remember trying to find my class and then following the small print line over to find the date, time, and location when it would be held.

On one occasion, most likely attributable to a few Yuengling’s the night before, I wrote down the wrong place and time for my final exam.   I showed up on at the time and location when I thought the exam should begin only to find the classroom empty and locked.  Luckily, I was able to contact the professor, which required me to actually call or go see him in person — no email, and he agreed to let me take the final exam.  However, I still ended up with a C, in a class when I should have done much better.  The grade was no doubt influenced by my failure to show up at the right place and time.

Moral of the story – don’t be in the wrong place at the wrong time.  This adage applies to bid protest litigation involving the Commonwealth of Pennsylvania as well.   In Scientific Games Intern, Inc. v. Commonwealth of Pennsylvania, the Pennsylvania Supreme Court held that under the Pennsylvania Procurement Code the Commonwealth Court did not have jurisdiction over a successful bidder’s claim for specific performance.

The case involved an award of a bid for a computer system to monitor slot machine’s for the Department of Revenue.  The plaintiff, SGI, was submitted the winning bid and contract negotiations ensued.  Eventually, an agreement on terms was reached and the Office of Chief Counsel transmitted a copy to SGI for execution.  SGI signed the contract and returned it to the Commonwealth.  However, before the Commonwealth could fully execute the contract.  The Commonwealth cancelled the contract under Section 521 of the Procurement Code.  SGI then brought an action against the Commonwealth in Commonwealth Court seeking specific performance of the contract.  The Commonwealth raised preliminary objections challenging the Commonwealth Court’s jurisdiction to hear the dispute, which the Commonwealth Court overruled.  On appeal the Supreme Court overturned the Commonwealth Court and explained:

“The Procurement Code establishes administrative processes to address disputes arising in the procurement setting. On account of the doctrine of sovereign immunity, however, contractors, bidders, and offerors have limited recourse and remedies. Relative to controversies in matters arising from procurement contracts with Commonwealth agencies, the Board of Claims retains exclusive jurisdiction (subject to all jurisdictional prerequisites), which is not to be supplanted by a court of law through an exercise of original jurisdiction.As to challenges to cancellations of solicitations asserted under Section 521 of the Procurement Code, the Legislature did not implement any waiver of sovereign immunity and afforded no remedy to aggrieved bidders and offerors which have not yet entered into an executed contract with a Commonwealth agency. For those attaining the status of contractor—which we find should be deemed to occur at the time a contract is executed by all parties (as that event is also understood for purposes of Section 521)—the remedial procedure is via Section 1712.1, subject to review within the exclusive jurisdiction of the Board of Claims.”

As a result, the plaintiff’s claim was dismissed.  When dealing with a challenge to an action involving the Procurement Code it pays to file your claim at the right place at the right time.

The company agreed to pay $1,150,000 to settle allegations that it violated the False Claims Act by falsely reporting to the Army Corps of Engineers that it hired and mentored a Native American-owned company to work on Fort Bragg and Fort Campbell projects.

As is typical in DBE fraud cases, the Native American firm that Caddell certified as a DBE was merely a “pass through” entity who was performing no commercially useful function.

Perhaps as significant as the fine, is that the charges also led to the indictment of two Caddell Construction executives on federal fraud charges.  This story underscores how serious firms must take participation in government DBE programs.  Fines are bad, jail time is worse.

There are several interesting aspects of this story.  First, there is the issue of standing.  As a threshold matter, the MCA must demonstrate that it has a protected right or interest that the Gaming Commission actions has harmed.  However, the MCA has no “right” to have a certain amount of work set aside to its members.  In fact, strict quotas and set aside are invalid.

Second, if Whiting-Turner already has a contract with the Gaming Commission with W/MBE hiring goals that the Commission accepted, the Commission would be in a tough legal position to demand that Whiting -Turner change those goals.  Whiting-Turner would be on sound legal ground to refuse any change to the W/MBE goals in its contract with the Commission.

Finally, the legal theory that the Minority Contractors Association is positing to challenge the goals is interesting.  The MCA claims that the State must establish hiring goals based upon a disparity study and is apparently relying upon the Maryland District Court’s holding in Associated Util. Contractors of Maryland, Inc. v. Mayor & City Council of Baltimore, 83 F. Supp. 2d 613, 622 (D. Md. 2000).  What’s interesting is that case involved the challenge to MBE program by a — largely — non-minority contractor’s association, who claimed that their non-minority members would be injured by the program.  The holding in that case reaffirmed the long standing proposition that in order to survive constitutional muster courts would apply a strict scrutiny analysis to MBE programs and that in order to survive such scrutiny that state proposing the race based program needs to come forward with compelling evidence of discrimination, i.e. a disparity study.

Here, a challenge to Whiting-Turner’s contract based on this theory could very well blow up in the MCA’s face because a disparity study is used to just the constitutionality of the program.  If the Court comes back and requires a disparity study which shows that the goals should be less than what Whiting Turner proposed, it could trigger a lawsuit by non-minority firms while also decreasing the number of minority firms participating on the project.

The MCA may want to rethink their strategy here.

According to Gordon, among the pro’s of a bid protest are:

Protests introduce a relatively low-cost form of accountability into acquisition systems by providing disgruntled participants a forum for airing their complaints;

They can increase potential bidders’ confidence in the integrity of the procurement process if the GAO is directly responsive to participants’ complaints, leading more players to participate;

Protests can increase the public’s confidence in the integrity of the public procurement process; –The known availability of the protest avenue empowers those in contracting agencies who face pressure to act improperly;

Protest decisions made public provide a high level of transparency into what is happening in the federal procurement system; and

Protests provide guidance.

Contractors considering a GAO bid protest frequently grapple with whether the protest will hurt their chance for future contracts. The conclusion from this study seems to be that this is not a valid concern.  Could this report push even more contractors to protest bids with the GAO?