Subcontractor Listing Proves Controversial

According to the old adage, watching sausage being made and watching the legislature in session are two things you don't want to do. That certainly was the case with the "subcontractor listing" bill that passed the 1999 Oregon Legislative Assembly.

Implementation of the law has been equally controversial. Although I discussed bid shopping and the new disclosure statute in an earlier Dirt Law™ column, the continued fallout from this bill deserves further attention.

In summary, ORS 279.027(3) applies to every public improvement project bid with a contract value of more than $75,000. Within four working hours after the bids are due, bidders must disclose any first-tier subcontractor whose subcontract value is $500,000 or more, or whose potential contract value is five percent of the total project bid or $15,000 (whichever is larger). The disclosure must include the name and address of the "subcontractor", its CCB registration number (if required to be registered or licensed), and the amount of the contract.

Once the contract is awarded, the prime contractor may not substitute a different subcontractor for the listed subcontractor unless:

• The listed "subcontractor" fails or refuses to execute a written contract after having had a reasonable opportunity to do so. The written contract must be based upon the general terms, conditions, drawings, and specifications for the public improvement project or the terms of that "subcontractor's" written bid as presented to the "subcontractor" by the prime contractor;
• The listed "subcontractor" fails or refuses to perform the subcontract;
• The listed "subcontractor" fails or refuses to meet bond requirements of the prime contractor that had been identified prior to the bid submittal;
• The prime contractor demonstrates to the public contracting agency that the "subcontractor" was listed as the result of an inadvertent clerical error;
• The prime contractor determines that the work performed by the listed "subcontractor" is substantially unsatisfactory and not in substantial accordance with the drawings and specifications, or that the "subcontractor" is substantially delaying or disrupting the progress of the work; or,
• The listed "subcontractor" becomes bankrupt or insolvent;
• The listed "subcontractor" is required to be licensed or registered by the CCB and does not hold a license or certificate of registration from the CCB;
• The listed "subcontractor" is ineligible to work on a public improvement pursuant to applicable statutory provisions.

This is the substance of the new law governing subcontractor listing. But the legislation affecting public works construction is often just the first step. Public agencies (state agencies, cities, counties, special districts, etc) have the power to make rules interpreting the statutes and providing detailed procedures for implementing the legislative mandates. In this regard, the Attorney General publishes "Model Public Contracting Rules" (OAR Chapter 137, Divisions 30, 35, and 40). Although many public agencies adopt the Model Rules in whole or in part, they are not required to adopt them. They may create their own rules. Whichever rules are adopted, because courts presume they are valid, the rules are important.

The Attorney General has recently issued a new Model Rule (OAR 137-040-0017) dealing with "Disclosure and Substitution of First-Tier Subcontractors". Although comment was requested (as required by statute) and contrary input was received, we understand that no changes were made to the initial form of the rule. The following are key aspects of the Model Rule that are not necessarily required by, or evident from, a plain reading of the statute.

• Bidders must not only disclose traditional subcontractors who meet the criteria, they must also disclose material suppliers;
• In determining which subcontractors and suppliers must be disclosed, the prime contractor bidder must include all alternative bid amounts, exclusive of options that can only be exercised after contract award. If different options can be exercised, then each option must be disclosed — even if the different options would result in the use of different subcontractors or suppliers;
• The disclosure must be made on a form provided by the Agency;
• Bid openings are to be held at least four hours after the bid closing. In other words, bidders are required to submit their bids, and then submit their disclosure form within the next four hours. Only after four hours have passed will bids be opened by the agency, and then the only bids that will be opened are those for which a proper disclosure form has been received.

The new subcontractor disclosure law, and the new Model Rule interpreting that law, create a number of issues. First and foremost, we are now getting reports from clients and others that bid shopping and bid peddling is more rampant than ever. Regardless of whether bids are opened when first submitted to the Agency, it is rare that all of the key players do not know within a few minutes who is low. This leaves the four-hour window as a kind of "open season" for buying out the job by shopping or peddling subcontractor and supplier quotes. Similarly, if subcontractors and suppliers find out who is low, they can start making calls to better their situation. Contractors with the job in hand find themselves in a position to bring great pressure on key subcontractors and suppliers to lower their prices before the four-hour window closes.

Of even more concern is the potential for undermining the entire bidding process. No sanctions exist for the unscrupulous contractor who submits an artificially low bid while planning to make its money back by negotiating with its subs and suppliers in the four hours after closing. The contractor runs no risk here. If the plan does not work and it is unable to "buy out" the job, all it has to do for its bid to be non-responsive is fail to submit the disclosure form. The Agency, which cannot collect on the bid bond for a non-responsive bid, ends up paying more for the project than it would have under the traditional approach to public works bidding. This gives the unscrupulous contractor "two bites at the apple" — the very touchstone of the analysis of what makes a bid responsive.

The Oregon-Columbia Chapter of the Associated General Contractors is collecting information on how the new disclosure law is working so that revisions or repeal may be effectively debated in the 2001 legislature. Whether you are an owner, prime contractor, subcontractor, or material supplier we urge you to supply the AGC or your local trade association information on this new subplot in Oregon public contracting.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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