On August 31, 2010, the Commonwealth Court of Pennsylvania preliminarily enjoined the Pennsylvania Department of General Services (DGS) from proceeding with its procurement of design/build services for the new Graterford Prison. In American Infrastructure, Inc. v. Commonwealth Department of General Services,1 Commonwealth Court Judge Dante R. Pellegrini held that DGS’s best-value design/build procurement methods violated the Pennsylvania Procurement Code, Act 41 of 2008, and the Pennsylvania Separations Act. He also noted that the preliminary injunction was the latest in a series of setbacks the commonwealth has experienced in attempting to formulate and use "innovative" procurement methods that are intended to allow more rapid completion of particularly urgent public projects, and are also consistent with the commonwealth’s procurement laws.
The Brayman Challenge: Two-Step Best-Value Design/Build Procurement
The first of the setbacks Judge Pellegrini cited was addressed in Brayman Construction Co. v. Commonwealth.2 Brayman was a 2008 challenge to PennDOT’s attempt to procure design/build services urgently needed for replacement of the Six-Mile Creek Bridge on I-90, a bridge that was rated one of the worst and most dangerous in the commonwealth. In that case, PennDOT proposed to select a design/builder via a two-step procurement process outlined in its internal procurement publication, Publication 448 (Innovative Bidding Toolkit). PennDOT had first solicited statements of interest from potential contractors, seeking their qualifications, résumés, and organization charts. Based on this information, PennDOT then narrowed the competitive field, short-listing three of the contractors who responded to the solicitation. PennDOT intended to negotiate stipend agreements with the short-listed contractors, who would then develop design/build proposals. Only the short-listed contractors would be allowed stipends and be permitted to submit technical and price proposals, and the successful proposer would be selected based on whether its overall proposal offered PennDOT the best value, not on a lowest-competitive-price basis.
A disappointed bidder and its CEO sued, as taxpayers, seeking to enjoin PennDOT from awarding the bridge contract on a best-value design/build basis. The petitioners claimed that PennDOT’s procurement methods violated the Commonwealth Procurement Code. PennDOT countered that the Procurement Code permitted public procurement on a design/build basis. It also argued that the code did not prohibit best-value selection, which was thus permitted, and alternatively, that design/build services were professional services, which were exempted from the competitive bidding requirement under 62 Pa. C.S. § 905 of the code.
Judge Pellegrini rejected PennDOT’s arguments. He held that:
- While design/build procurement was permitted, the Procurement Code required that the contract be awarded through sealed competitive bids unless an express exception applied.
- No express exception applied in this case. The professional services exception PennDOT cited did not apply because design/build contracts included construction, and not merely professional architectural and engineering services, and Code Section 103 expressly referred to a design/build contract as a "construction contract."
- The two-step best-value system proposed by PennDOT violates the Procurement Code, which does not authorize short-listing bidders or evaluating proposals based on factors other than those stated in the invitation for bids (and which the judge noted PennDOT representatives appeared unable to articulate clearly, even in the hearings). Rather, the code requires that all qualified bidders be permitted to bid on the same scope of work and that selection be based on the lowest bid price.3
The bottom line in Brayman was that the commonwealth could not legally engage in its proposed two-step best-value procurement for construction, design/build or otherwise. The judge denied an injunction with respect to the Six-Mile Creek Bridge project, because the new bridge was so urgently needed to prevent a potential catastrophe. But PennDOT was expressly forbidden to use the method in other procurements, unless it obtained individual exceptions from the court, based on emergency conditions.
The Hawbaker Challenge: Project Labor Agreements for Major Prison Projects
The next challenge to "innovative" procurement by Judge Pellegrini cited in American Infrastructure was Hawbaker v. Commonwealth Department of General Services.4 In July 2008, the legislature had passed and the governor had signed into law Act 41, which authorized the building of several identified prisons, including a new Graterford Prison to replace the existing overcrowded and obsolescent facility. Act 41 expressly authorized the commonwealth to build the identified prisons on a design/build basis.
DGS, invoking this express authority, issued a request for proposals for design/build services for the new Graterford Prison. DGS’s original solicitation specified that the contract would be awarded to a proposer selected through competitive negotiation, based on the lowest offered price. To overcome organized labor’s objections to Act 41, DGS had agreed to retain a consultant to determine whether a project labor agreement should be required for all prison housing projects valued at more than $15 million. The consultant had concluded that a project labor agreement was advisable for such projects and DGS had therefore included such a requirement in the Graterford solicitation.
Several chapters of the Associated Builders and Contractors, an association of merit-shop contractors, and a number of contractors and affiliated individuals sought to enjoin the procurement, asserting that requiring a project labor agreement unfairly and improperly deprived merit-shop contractors of their competitive advantage, by forcing them to use only labor obtained from union hiring halls. The petitioners added that DGS had not fulfilled its Separations Act5 duties by delegating to the design/builder the duty to award separate subcontracts for the project.
Judge Pellegrini held that:
- DGS could validly include a requirement for a project labor agreement in the solicitation, which was especially appropriate in time-critical projects that could not tolerate labor disputes and associated delays
- merit-based contractors were not unduly prejudiced, as they could still bid for the contract, and
- Act 41 had altered DGS’s Separations Act duties, and allowed DGS to delegate compliance with the Separations Act to the design/builder.
For these reasons, and because the overcrowding at the existing Graterford Prison required immediate action, Judge Pellegrini denied the request for an injunction.
The American Infrastructure Challenge: Best-Value Procurement and Compliance with the Separations Act on Urgent Design/Build Prison Projects
The procurement for the new Graterford Prison was thus permitted to proceed but then encountered a practical obstacle. DGS proved unable to negotiate with the apparent low bidder an acceptable price that was within the maximum budget limitation for the project. All bids were therefore rejected and DGS began its procurement anew.
In the re-procurement, DGS adhered to its design/build approach, but changed the method of selecting the design/builder. Rather than using the more traditional approach of selecting the lowest-priced proposal, DGS specified a two-step approach. In step one, proposers would submit technical proposals for the prison. DGS would then rate the proposals, based on formulas described in its published design/build procurement guidelines,6 short-list the three proposers with the highest scores, and revise the statement of work to incorporate any technical innovations accepted as a result of DGS’s review of the technical proposals. The short-listed proposers (and only those proposers) would then be permitted to proceed to step two, in which cost proposals and disadvantaged business plans would be submitted. The contract would be awarded to the proposer with the highest point total, taking into account the scores for all three portions of the proposal – technical approach, cost, and disadvantaged business plan. In short, final selection was to be on a best-value basis.
After the short list for the project was released, objectors filed another complaint with the Commonwealth Court. The petitioners were a number of chapters of the Associated Builders and Contractors, and a number of construction companies and affiliated individuals, many of whom were also petitioners in the Hawbaker case.
In the American Infrastructure complaint, the petitioners again argued that a two-step procurement with short-listing violated the Procurement Code. They also argued that the procurement violated Act 41 and the Separations Act. Act 41 required that DGS include in its design/build contracts a requirement that the design/builder comply with the Separations Act. The Separations Act, in turn, required that all public projects valued at more than $4,000 be based on separate specifications for plumbing, ventilation, heating, and electrical work, that separate contracts be procured for each of those trades, and that the contracts be awarded through competitive bidding.
The DGS procurement, however, did not require that design/build proposers list proposed subcontractors in their proposals, and in fact specified that they would not enter into binding commitments with subcontractors before submission of the technical proposals. The procurement, moreover, did not require that the design/builder award subcontracts based on competitive bidding. In short, the successful design/builder was free to choose whatever subcontractors it wanted, which, as DGS apparently contemplated, would allow post-award bid shopping, with potentially lower prices for the HVAC and electrical work. The Separations Act, the petitioners argued, was intended specifically to prevent such a practice.
This time, Judge Pellegrini granted the petitioners a preliminary injunction. In doing so, he held that:
- under Section 512 of the Procurement Code, DGS cannot short-list bidders for construction contracts, for the reasons stated in Brayman
- this conclusion was not altered by the recent precedential decision in Language Line Services. Inc. v. Commonwealth Department of General Services,7 which was distinguishable because it involved only a contract for professional services, no claim was ever asserted challenging the short-listing procedure, and the contract was subject to negotiation, not award based on proposals only
- DGS’s only justification for failing to require the design/builder to abide by the Separations Act was that doing so was impracticable in a design/build procurement, because the design would not be completed at the time of the technical proposals and the "low" bids would be illusory and subject to change as the design was completed. But, the judge concluded, none of this changed the fact that the Act required the design/builder to comply with the Separations Act (and so, apparently, DGS needed to address its arguments to the legislature and not the court).
The judge noted that, because the Supreme Court had the Brayman appeal pending before it, he would not have issued an injunction based solely on the basis that DGS’s two-step short-listing violated Section 512 of the Procurement Code. But his conclusion that Section 512 had been violated, together with DGS’s "intentional" and clear violation of Act 41 and the Separations Act, did justify an injunction, despite the urgent need for the new prison.
It appears that the commonwealth is determined to engage in "innovative" project procurement, and that it has invested a great deal of time and effort to develop non-traditional methods of procurement, with a goal of allowing more rapid and efficient project delivery. But the commonwealth has faced strong opposition from a variety of industry groups to the particular innovations it has attempted to date, and has also repeatedly failed to satisfy the Commonwealth Court that those innovations comply with currently applicable procurement laws. As matters now stand, the commonwealth:
- cannot procure design/build or other construction contracts using a two-step procurement that short-lists contractors before technical and price proposals are submitted
- cannot use any method other than sealed competitive bids to procure construction (including design/build construction) unless the project falls within an express statutory exception to such competitive bidding – for this purpose, the statutory exception for professional services does not apply
- cannot rely on Section 513 of the Procurement Code to justify soliciting sealed competitive proposals instead of sealed competitive bids unless the commonwealth shows that the project is non-routine, there are specific, identified reasons that it is impracticable or advantageous to the commonwealth to use traditional sealed competitive bid procurement, and the proposers are clearly alerted to what factors will be used in evaluating their proposals, and
- cannot engage in design/build contracting for those projects specifically identified in Act 41 without expressly requiring that the design/builder competitively bid separate heating, ventilation, plumbing, and electrical subcontracts and award the subcontracts to the responsible bidder offering the lowest responsive price.
Appeals in the Brayman and Hawbaker cases are pending before the Pennsylvania Supreme Court. The commonwealth has stated that it is disappointed with the American Infrastructure decision, but has not announced whether it will appeal the decision or take some other action to allow it to proceed with the Graterford Prison project, and with its broader efforts to engage in "innovative" procurement. Pepper Hamilton will issue future updates on these cases, and on the commonwealth’s further efforts at "innovative" procurement, as additional developments occur.
1 No. 621 M.D. 2010 (Pa. Cmwlth. August 31, 2010) (unreported).
2 No. 527 M.D. 2008 (Pa. Cmwlth. February 17, 2009) (unreported).
3 The order in Brayman was actually stated more broadly than this. It did not merely prohibit the specific two-step approach PennDOT had taken, but enjoined awarding design/build contracts "using the best-value method or any other ‘innovative method’ that does not award the bid based on sealed competitive bids." In American Infrastructure, however, the judge described the Brayman holding as specifically directed at PennDOT’s two-step short-listing process. See American Infrastructure at pp. 9-10. In doing so, the judge distinguished Brayman from Pennsylvania Associated Builders and Contractors, Inc. v. Commonwealth Department of General Services, 932 A.2d 1271 (Pa. 2007), which he described as addressing the different issue of whether construction contracts could be awarded on a "best-value" basis. Associated Builders was yet another case involving challenges to the commonwealth’s "innovative" procurement. The Pennsylvania Supreme Court held that Section 513 of the Procurement Code permitted DGS to award construction contracts using competitive sealed proposals, rather than competitive sealed bids, if awarding those contracts via competitive sealed bids was not practicable or advantageous to the commonwealth. (The Commonwealth Court had held that Section 513 did not apply to construction.) Note, however, that after this Supreme Court win for DGS, the case was remanded for further proceedings. The Commonwealth Court then held that DGS had violated the Procurement Code in awarding a renovation contract at Cheyney University (the particular project in question in the case). As the court explained, DGS had failed to satisfy the requirements of Section 513, because it had neither established why it needed to consider factors other than price in awarding a routine renovation project nor given fair notice to proposers of what particular other factors would be considered in evaluating their proposals. See Pennsylvania Builders and Contractors, Inc. v. Commonwealth Department of General Services, No. 526 M.D. 2005 (Pa. Cmwlth. May 19, 2010).
4 No. 405 C.D. 2009 (unpublished).
5 71 P.S. § 1618. As discussed below, the Separations Act requires that, in all public projects valued at more than $4,000, separate specifications be prepared for the heating, ventilation, plumbing, and electrical work, that separate contracts be awarded for those trades, and that the contracts be awarded to the responsible bidder offering the lowest responsive bid price.
6 See Pennsylvania Department of General Services 2010 Prison Expansion Design/Build Contract Request for Proposal Process Guidelines (v.4 March 4, 2010), available at http://www.education.state.pa.us/portal/server.pt/
7 991 A.2d 383 (Pa. Cmwlth. 2010).
Joyce K. Hackenbrach