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Public Works Contracts: Prequalification Procedures And Irresponsible Bidders

By DANIEL E. FAJERSTEIN and STEWART H. DIAMOND
Ancel, Glink, Diamond, Cope & Bush, P.C., Chicago, Illinois

QUESTIONS PRESENTED:

1. Whether municipalities may exclude irresponsible contractors from bidding on public works contracts by utilizing prequalification procedures.

2. Whether municipalities not utilizing prequalification procedures may select a bidder for a public works contract other than the low bidder due to a determination that the low bidder is irresponsible.

BRIEF ANSWERS:

Considering the importance and frequency of bids for public works, it is amazing how few statutes and cases address this issue. Problems relating to bidding and qualifications of bidders are generally resolved through settlements and short of appellate court litigation. The law which does exist on this subject favors the power of municipalities to defend themselves against unqualified bidders and to use innovative techniques to assure that only qualified contractors are allowed to bid. This article will answer the two questions set out above and suggest a form ordinance for the prequalification of bidders.

By utilizing prequalification procedures, municipalities may exclude contractors from bidding upon public works contracts. Prequalification of bids ensures that only contractors who have the ability to perform the work will bid on the contract. However, the principles underlying the rationale for competitive bidding require that all contractors possessing the potential to complete advertised public works projects must be able to submit bids in a manner that does not stifle competition. Therefore, should a municipality opt for a prequalification process, prequalification requirements must be uniformly applied to all applicants for prequalification. Using criteria established by state agencies, a municipal prequalification ordinance can be adopted. Finally, even municipalities that do not utilize a prequalification process are never obligated to select the services of an irresponsible or unqualified bidder.

DISCUSSION
I. Prequalification of Bidders

There are no Illinois cases addressing the issue of whether a municipality can engage in pre-bid exclusion of a contractor wishing to bid upon a public works contract. However, certain State of Illinois agencies utilize statutorily authorized prequalification procedures. The Illinois Purchasing Act, Ill.Rev.Stat. (1989), ch. 127, at §132.6 provides in pertinent part:

The rules and regulations required by ... this Act may provide that prospective bidders be prequalified to determine their responsibility, ...

State agencies that engage in prequalification of bids include the Illinois Department of Transportation (IDOT), Department of Central Management Services and the Capital Development Board. For instance, IDOT requires all prospective bidders to submit a completed document entitled "Contractor's Statement of Experience and Financial Condition," in addition to other specified documents. All submitted documents are reviewed by the prequalification engineer. The engineer factors together the applicant's performance factor, experience factor, (this category rates working capital) and equipment factor. After determining the product of these factors, the engineer gives the contractor a work rating (WR). The WR is the dollar value up to which the contract may bid upon and is rounded off to the thousandth dollar. Thus, a contractor with a WR of $23,334,000 may bid on any advertised product for that amount or less. If the contractor disagrees with the State Engineer of Construction's WR determination, the contractor may request reconsideration by notifying the Engineer of Construction in writing. Within thirty days after the request for reconsideration, the Director of the Division of Highways must notify the contractor of his determination.

The State's prequalification Engineer utilizes objective criteria to determine a contractor's WR. These criteria would greatly assist the state if a contractor objected to its rating. A contractor who submits and fulfills the prequalification documents and requirements must be granted a certificate of eligibility. See,

September 1992 / Illinois Municipal Review / Page 17


August H. Skoglund Co. v. Ill. Dept. of Transp., 67 Ill.App.3d 276, 384 N.E.2d 849, (1st Dist. 1978).

The IDOT prequalification manual provides that prequalification can be denied for the following reasons:

1. A contractor submits a false statement.
2. A contractor fails to comply with the prequalification rules.
3. The contractor fails to complete each applicable item and schedule set forth in the prequalification forms.

Illinois Department of Transportation Manual, p. 7, (1988). Nevertheless, IDOT reserves the right not to issue bidding proposal forms and plans to prequalified contractors for the following reasons:

1. Lack of competency and adequate machinery, plant and other equipment, as revealed by the financial statement and experience questionnaires.
2. Uncompleted work which, in the judgment of the Department, might hinder or prevent the prompt completion of additional work if awarded.
3. Failure to pay, or satisfactorily settle, all bills due for labor and material on former contracts in force at the time of issuance of proposal forms.
4. Failure to comply with any prequalification regulations of the Department.
5. Default under previous contracts.
6. Unsatisfactory performance record as shown by past work for the Department, judged from the standpoint of workmanship and progress.
7. When the Contractor is suspended from eligibility to bid at a public letting where the contract is awarded by, or requires approval of the Department.
8. When the bidder has not obtained a Department of Human Rights number or provided evidence of application for the number.
9. When any agent, servant or employee of the prospective bidder currently serves as a member, employee or agent of a governmental body that is financially involved in the proposed work.
10. When any agent, servant or employee of the prospective bidder has participated in the preparation of plans or specifications for the proposed work.

Illinois Department of Transportation Prequalification Manual, supra, at p. 12. Therefore, according to the terms of IDOT's Prequalification Manual, the Department maintains discretion to determine the consistency and continuity of a bidder's responsibility. If IDOT determines that a prequalified low bidder does not maintain the requisite responsibility to complete a project, the low bid will be rejected.

The above-listed terms conform with Illinois case law which holds that public entities maintain broad discretion to determine the responsibility of bidders for public contracts. Johnson v. Sanitary District, 163 Ill. 284 (1896); Leonard v. Garland, 190 Ill.App. 216 (2nd Dist. 1914); Leo Michuda & Son Co. v. Metropolitan Sanitary District of Greater Chicago, 97 Ill.App.3d 340, 422 N.E.2d 1078 (1st Dist. 1981). Indeed, IDOT's advertisements for bids include the statement:

AWARD CRITERIA AND REJECTION OF BIDS. This contract will be awarded to the lowest responsive and responsible bidder considering conformity with the terms and conditions established by the Department in the proposal and contract documents. The issuance of plans and proposal forms for bidding based upon a prequalification rating shall not be the sole determinant of responsibility. The Department reserves the right to determine responsibility at the time of award, to reject any or all proposals, to readvertise the proposed improvement, and to waive technicalities.

As already mentioned, there are no Illinois cases addressing the issue of whether a municipality may adopt a prequalification procedure for bidders on public works projects. However, a strong argument can be made that municipalities may require prequalification. The Municipal Code at Ill.Rev.Stat. (1989), at ch. 24, §8-9-1 provides in pertinent part:

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In municipalities of less than 500,000 ... any work or other public improvement which is not to be paid for in whole or in part by special assessment or special taxation, when the expense thereof will exceed $10,000, shall be constructed either (1) by a contract let to the lowest responsible bidder after advertising for bids, in the manner prescribed by ordinance, except that any such contract may be entered into by the proper officers without advertising for bids, if authorized by a vote of two-thirds of all the aldermen or trustees then holding office; ... [Emphasis added.]

A careful reading of this section provides authority for a municipality which elects to adopt the bidding process by ordinance. Further, this reading of the statute is apparently consistent with legislative intent due to the fact that this statutory provision also provides that upon a vote of two-thirds of the trustees or aldermen, the municipality may forego the competitive bidding process altogether.

Two jurisdictions outside of Illinois provide case law support for a municipal prequalification procedure. In Flaherty v. Allegheny Contracting Industries, Inc., 6 Pa. Commw. 164, 293 A.2d 639 (1972), the mayor and the director of public works excluded a prospective bidder from bidding. The court held that absent a municipal ordinance which provided for prequalification of bids, the mayor and director of public works exceeded their authority. However, the court noted that Pennsylvania law at 53 P.S. §23308.1 provides:

Every contract relating to city affairs shall be authorized by general or specific ordinance of council and shall be let in the manner prescribed by council.

Thus, the court held that pursuant to the statute, the city was authorized to pass an ordinance setting forth prequalification procedures. Notably, both the Pennsylvania statute and the Illinois Municipal Code at §8-9-1 provide that the bidding process for certain public contracts shall be determined by ordinance. See also, Corcoran v. City of Philadelphia, 363 Pa. 606, 70 A.2d 621 (1950) and Harris v. City of Philadelphia, 299 Pa. 473, 149 A. 722 (1930).

In a Florida case, City of Opa-Locka v. Trustees of the Plumbing Industry Promotion Fund, 193 So.2d 29 (1966), the court upheld a Dade County ordinance requiring that bidders for a public works contract must be prequalified. The Opa-Locka court held that absent statutory preemption, prequalification of bidders was permitted so long as the requirements did not promote favoritism or unduly limit the number of bidders. See also, J. Weinstein Building Corp. v. Scoville, 254 N.Y.S. 384 (1931) (providing that "[i]f the principle of prequalification of bidders is a good one, and should be adopted by municipalities generally, provision for it should be made in the statute law, or, where not prevented by statute, in the ordinances of municipalities.") Although Illinois non-home rule entities are subject to more rigorous standards regarding their governmental powers, the general theory of prequalification by local law seems to be sustained in a number of states. The appendix to this article provides a sample form ordinance mandating a prequalification procedure

Since the Municipal Code provides that municipalities may mandate bidding procedures as prescribed by ordinance, Illinois municipalities should be able, without further statutory authority, to engage in a prequalification process. However, it is imperative that all bidders are accorded equal treatment. Once a prequalification process is mandated, the corporate authorities should provide adequate notice to prospective bidders of the new requirements and may not selectively waive prequalification requirements for specific bidders. Finally, due to the fact that Illinois case law grants municipalities broad discretion to reject the bids of irresponsible contractors subsequent to submission of bids, and because of the economic costs of developing and operating a qualitative prequalification procedure, the corporate authorities should carefully weigh the costs and benefits of adopting prequalification procedures.

II. Bidding Documents and Specifications

In order to ensure that only qualified bidders are considered for a contract award, municipalities may require bidders to submit relevant and highly specific information in the bidding documents. Nevertheless, the bidding documents should not restrict competition. In Dement v. Rokker, 126 Ill. 174 (1888), the Illinois Supreme Court held that all bidders must be permitted

September 1992 / Illinois Municipal Review / Page 19


to bid for a public works contract. In Dement, bidders upon a series of state contracts formed a partnership for the purpose of limiting bidding and attaining a higher contract award. The Court held that the Commissioners of State Contracts were correct in rejecting bids from partnership members, and held:

Letting by contract, to the "lowest responsible bidder" necessarily implies equal opportunity to and freedom in all whose interests or inclination might thus impel them to compete at the bidding. No one may be compelled to bid at such a letting, but there must be entire fairness and freedom in competition; and no one can, ... claim to be the lowest bidder, where others, who otherwise would have bid, are, by an arbitrary arrangement to prevent competition, kept from bidding.... [T]here shall be a public letting in which there is entire freedom of competition, ...

Id., at 196. Notably, the collusive activities of the Dement bidders are now punishable as a Class 3 Felony under the Criminal Code, Ill.Rev.Stat. (1989), ch. 38, §33E-3.

In addition to Illinois law as developed by Dement, McQuillin's municipal law treatise defines the general common law parameters regarding bidding rules:

The request for bids must not unduly restrict competition. The dictates of public policy require that all responsible bidders shall have the opportunity to compete, and accordingly, devices or unreasonable actions by authorities which are designed or tend to limit the list of qualified bidders are presumed to be injurious to the taxpayers and are illegal. All parties having the ability to perform the advertised contract should be allowed to compete freely without any unreasonable restrictions. Every element which enters into the competitive scheme should be required equally for all and should not be left to the volition of the individual aspirant to follow or disregard, and thus to estimate his or her bid on a basis different from that afforded to the other contenders, a common standard by which all bidders are to be measured being implied by the bidding law.

McQuillin, Municipal Corporations, (3d ed.) §29.44.

However, municipalities may protect themselves from irresponsible, incompetent or inexperienced bidders through the prudent use of bidding documents. For instance, municipalities may require that bidders provide evidence substantiating previous successful completion of similar public works contracts. Heninger v. Akron, 64 Ohio L.Abs. 417, 112 N.E.2d 77 (1951). Correspondingly, municipalities may require contractors to provide documentation evidencing two years of experience with the type of project bid upon. Corcoran v. Philadelphia, 363 Pa. 606, 70 A.2d 621 (1950). Further, municipalities may require that bidders supply samples of materials the contractor proposes to use for the project. Chicago v. Singer, 202 Ill. 75, 66 N.E. 874 (1903).

III. Contractors' Right to Sue

Generally, only victorious bidders possess a constitutionally protected property right to public works contracts. Therefore, a contractor who is rejected after submitting the lowest bid does not have a right to a due process hearing before the corporate authorities or standing for a federal civil rights action. However, Illinois law provides that a rejected low bid contractor maintains a limited property interest affording procedural due process protection when there is, "(1) a regulated bidding procedure; (2) material compliance with the procedure by the unsuccessful bidder; and (3) material and significant non-compliance with the procedure by the successful bidder." Northwest Disposal Co. v. Village of Fox Lake, 119 Ill.App.3d 546, 75 Ill.Dec. 8, 456 N.E.2d 691, 695 (2d Dist. 1983), citing Kendrick v. City Council of Augusta, 516 F.Supp. 1134, 1139 (S.D.Ga. 1981). Nonetheless, municipalities maintain broad discretion to determine the "lowest responsible bidder." Northwest Disposal, supra, at 456 N.E.2d 695.

Finally, any contractor who cannot adequately and satisfactorily complete the necessary bidding documents may be properly excluded from further consideration regardless of whether he or she submitted the lowest bid. Importantly, this exclusion must occur after all persons or companies receive an equal opportunity to submit bids or prequalification documents.

IV. Rejecting Irresponsible Ridders

As a general principle of municipal law, municipalities may exercise their discretionary powers to reject low bids if the corporate authorities deem that the low bidder is irresponsible or otherwise unfit. Illinois courts abide by this principle. In People v. Kent, 160 Ill. 655

Page 20 / Illinois Municipal Review / September 1992


(1896), an old case but one that would likely be followed today, the Illinois Supreme Court held that the City of Chicago public works commissioner properly exercised his discretion in refusing to award the contract to the lowest bidder. The commissioner reviewed the contractor's previous work experience and learned that the contractor's previous work was "both poor and unsatisfactory." The court held:

[T]he term "responsible" should not receive a construction so narrow and limited. In one sense the term is synonymous with "accountable," and means answerable, legally or morally, for the discharge of a duty, trust, debt, service or other obligation. ... In that sense "responsible" means to be able to answer or respond in accordance with what is expected to demanded, and to discharge a claim or duty.
Id., at 661.

Under the holding in Kent, courts may interfere with the corporate authorities' discretion to reject a bid only if there is evidence that the corporate authorities acted fraudulently or with an improper motive. The principle that municipalities may reject an irresponsible contractor's low bid was further developed in Panozzo v. City of Rockford, 306 Ill.App. 443, 28 N.E.2d 748 (2nd Dist. 1940). In Panozzo, the plaintiff was the rejected low bidder for a waste disposal contract. The city council determined that the plaintiff was not capable and did not have the requisite experience to perform the contract. The court reasoned that:

the phrase "lowest secure bid" ... does not mean the lowest bidder financially only. It means more than that. It means that the bidder is, by experience and otherwise, capable of doing the work in a satisfactory manner.

Id., at 196. In making such a decision, the corporate authorities should carefully research the specific facts and documents and not simply act upon information procured from a few phone calls by the director of public works. The existence of lawsuits, mechanics liens, penalty payments, late completions and other actual evidence of prior poor performance are important and should be known before the time of rejection, rather than in preparation for defending a lawsuit.

Additional Illinois cases holding that municipalities may reject irresponsible bidders stating this rule include Dement v. Rokker, supra, ("a lower bid might, undoubtedly, be rejected by the commissioners for the reason that the bidder is not responsible.") People v. Omen, 290 Ill. 59, 67 (1919) ("The term 'responsible' includes the ability to respond by the discharge of the contractor's obligation in accordance with what may be expected or demanded under the terms of the contract"); Northwest Disposal Co. v. Village of Fox Lake, supra, (the corporate authorities have "the discretion to determine who is the 'lowest responsible bidder' and it need not be the lowest bidder in terms of contract price"); and Armstrong v. Crystal Lake Park Dist., 139 Ill.App.3d 991, 93 Ill.Dec. 823, 487 N.E.2d 648, 652 (2nd Dist. 1985) ("The fact that a contractor submits the lowest bid will not automatically require that a contract be granted to that contractor").

In jurisdictions outside of Illinois, courts have discussed additional reasons justifying a municipality's decision to reject an irresponsible low bidder. Justifiable reasons for the municipality's rejection of irresponsible low bidders include previous unsatisfactory work experience with that contractor (Callanan Industries, Inc. v. Schenectady, 116 A.D.2d 883, 498 N.Y.S.2d 490 (1986)); previous illegal practices perpetrated by the bidding company's officers (Williams v. City of Topeka, 85 Kan. 857, 118 P. 854 (1911)); and general untrustworthiness (City of Inglewood v. Superior Court, 103 Cal.Rptr. 689, 500 P.2d 601 (1972)). See also, Rollings Construction, Inc. v. Tulsa Metropolitan Water Authority, 745 P.2d 1176 (Okla. 1987); Arc Plumbing v. Board of Responsibility, 135 Misc.2d 413, 515 N.Y.S.2d 685 (Sup. 1987).

CONCLUSION

Municipalities may mandate a prequalification procedure for public works contracts. However, the corporate authorities should carefully consider the economic costs of implementing a prequalification procedure. Regardless of whether the municipality adopts a prequalification procedure, all potential bidders must be accorded equal treatment. Municipalities may require bidders to complete detailed and thorough bidding documents in order that the corporate authorities may determine the experience, competence and responsibility of the various bidders. Bidders who cannot satisfactorily complete the bidding documents may be properly excluded from further consideration. Finally, the corporate authorities may reject the low bidder after a good faith determination that the low bidder is

September 1992 / Illinois Municipal Review / Page 21


irresponsible, incompetent or without sufficient experience.

APPENDIX

ORDINANCE NO. _____

AN ORDINANCE AUTHORIZING THE MAYOR TO REQUIRE THE PREQUALIFICATION OF BIDDERS FOR SPECIFIC CONTRACTS

WHEREAS, the municipality, by the affirmative vote of at least two-thirds of its Aldermen (or Trustees), may approve certain contracts without competitive bids; and

WHEREAS, state statutes only require competitive bidding for certain contracts; and

WHEREAS, the municipality finds that the prequalification of bidders for certain contracts to be selected by the Mayor is the most efficient and beneficial method for allowing a choice to be made from bidders who are responsible and qualified; and

WHEREAS, Illinois Revised Statutes, Chapter 24, Paragraph 8-9-1 empowers a municipality to prescribe bidding procedures; and

WHEREAS, a provision requiring the prequalification of bidders would be in the best interests of the citizens of the municipality;

NOW THEREFORE, BE IT ORDAINED BY THE __________of__________,__________ COUNTY, ILLINOIS, as follows:

SECTION 1: That the Mayor may require that bidders for certain projects or a class of projects prequalify themselves, and that only bidders so prequalified shall be permitted to submit bids. In determining the contracts on which prequalification shall be required, the Mayor shall consider some of the following standards:

(1) the importance of the contract to the municipality;
(2) the harm which could be done to the municipality through an improper or untimely performance;
(3) the number of contractors without adequate qualification who could be expected to bid;
(4) the existence of objective criteria which could be set out in a prequalification questionnaire.

SECTION 2: That in order to become prequalified, contractors must complete a set of prequalification materials to be prepared and distributed by the municipality. Where the Mayor determines that prequalification shall be desirable for contract or a class of contracts, he shall publish a notice at least twice over a period of fourteen days in a newspaper published in the municipality announcing that prequalified persons or firms are being sought for a contract or a class of contracts, the place where information on prequalification may be sought, and the time within and place where applications for prequalification will be received. Any list of prequalified contractors shall be posted, and such list shall be in force for a period of three years unless the Mayor shall sooner seek information from contractors to develop a new list.

SECTION 3: That prequalification may be denied for the following reasons:

1. A contractor submits a false statement in the prequalification materials.
2. A contractor fails to comply with the prequalification rules.
3. A contractor fails to complete each applicable item of the prequalification materials.
4. Lack of competency, experience, facilities or personnel are revealed by the prequalification materials.
5. Uncompleted work which might hinder or prevent the prompt completion of additional work if awarded.
6. Failure to pay, or satisfactorily settle, all bills due for labor and material on former contracts.
7. Failure to comply with any prequalification regulations of the municipality.
8. Default under previous contracts.

Page 22 / Illinois Municipal Review / September 1992


9. Unsatisfactory performance record as shown by past work judged from the standpoint of workmanship and progress.
10. The submission of misleading information on previous bid proposals.

SECTION 4: The municipality shall post the list of prequalified contractors no less than ____ days before letting a contract pursuant to this ordinance.

SECTION 5: That the municipality reserves the right to waive technicalities.

SECTION 6: That the municipality reserves the right to select the contractor it deems the lowest responsible bidder at the time the contract is awarded.

SECTION 7: That the municipality reserves the right to reject any and all bids.

SECTION 8: That this Ordinance shall be in full force and effect from and after its passage, approval and publication in pamphlet form as provided by law.

[OPTIONAL SECTION 5: (If this section is used, renumber Sections 5 - 8 as 6 - 9.) The municipality shall, upon denying a contractor prequalification, notify the contractor in writing within 48 hours of the reason(s) for denial. Within 48 hours of receiving such notice, the contractor may request a hearing before the _________ by stating in writing his or her objection to the municipality's denial. A contractor's failure to request a hearing within said time period constitutes a waiver of his or her right to a hearing. After a hearing is requested, the municipality shall schedule a hearing for a date no less than 24 hours and within 96 hours of receiving the contractor's request and written objection. At the hearing, the contractor shall be permitted to present support for his or her objection. The contractor shall be notified of the municipality's final decision within 48 hours after the hearing, unless he or she consents to a longer notification period.]

PASSED this ___ day of __________, 19__.
AYES:
NAYS:
ABSENT:
APPROVED this ___ day of __________, 19__.

____________
Mayor

ATTEST:

____________
Clerk


All-America City NATIONAL
CIVIC
LEAGUE
1992 All-America Cities


Rockford, Illinois (Pop. 139,426)

Facing an affordable housing pinch, lack of broad-based interest in the arts, and the rapid exhaustion of its landfill, the Rockford community took definitive steps to enhance its quality of life and its long-term ecological viability. Utilizing a $500,000 grant, the Rockford Area Affordable Housing Coalition consisting of over 40 private, public and nonprofit organizations was formed to raise funds and coordinate the rehabilitation and construction of multi-family dwellings. Proving that "the arts are for everyone," community leaders through the collaboration of six local cultural organizations converted a 120,000 square-foot former retail store into the $6.2 million Riverfront Museum, featuring high access and events honoring the community's diverse cultures. With the prospect of closing its landfill within two years looming ominously, Rockford instituted the "Rockford Recycles" program which, since its initiation in 1989, has reduced landfilling by 40 percent with more than two-thirds of Rockford's citizens complying.

September 1992 / Illinois Municipal Review / Page 23


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