Public Owners Beware: Overly-Restrictive Specifications
By David Hill Bashford, Partner, Bradley Arant Boult Cummings LLP (03/01/2012)

Public owners who ignore or fail to recognize overly narrow specifications prepared by their design consultants can violate open and fair competition requirements, and furthermore incur significant liability if the resulting project cannot comply with the anticipated performance requirements. An owner’s design team has legitimate reasons to seek out reputable vendors and products to include in the construction of any public facility. However, if the specified limitations go too far, and especially if limitations on the bidding process may be the result of improper influence on the designer, the public owner can be exposed to unnecessary costs and liability as a result of favoritism shown by the designer to those submitting bids for the work.

The general rule in public bidding is that after fair and open competition, the lowest responsive and responsible bidder will be awarded the work. As recognized by courts around the country, this model of bidding is critical to prevent corruption and ensure fair pricing across a public owner’s various projects as a whole. To this end, most jurisdictions severely limit a public owner’s ability to “sole source” work on public projects by expressly naming which contractors will be allowed to submit bids for the work at issue or which specific equipment/materials must be utilized.

Balanced against absolutely open competition, most jurisdictions allow public owners to use pre-qualification requirements that narrow the field down to only “qualified” bidders, as well as performance specification requirements, to ensure a public owner obtains a quality end product. Overly restrictive specification requirements, however, can effectively create “sole source” situations where only one vendor qualifies and can bid on the work, even though reasonable alternatives exist.

This has at least two serious implications for the public owner. First, overly restrictive specification requirements can restrain open competition in a manner that is not only against public policy, but can further result in corruption and artificially high pricing by a selected vendor. Second, when a contractor is forced to use a particular vendor as a result of overly restrictive specifications, the public owner can become liable if the specified system fails to perform as anticipated. The contractor may incur additional costs in trying to make the defective system compliant (even if unsuccessful).

An initial note for both aspects of this issue is that, in this context, the public owner often acts through its agents, both knowingly and unknowingly. In the traditional project delivery paradigm, the public owner hires an architect or engineer to prepare the design and administer the bidding process. Modern alternatives may change the identity of that agent (construction manager, etc.), but typically the public owner places design responsibility and administration of bidding in the hands of a private party. Regardless of which entity is acting as the agent of a public owner, as long as the owner is a governmental entity and public funds are being utilized to finance the project at issue (whether local, state or federal), the issues discussed below will be relevant and can result in legal exposure for the public owner

Sole Source and Anti-Competitive Bidding

It is unusual for any design documents to affirmatively state either that only a particular vendor’s material or equipment will be accepted. In most jurisdictions, such a patent sole sourcing of a public owner’s project requires additional governmental approval based on statutorily prescribed criteria.

The issue plays out on public projects in a much more subtle fashion. If the design team has a particular contractor or vendor it wants for the project, it will not include expressly exclusionary language, but instead will craft the pre-qualification or specification requirements so narrowly that only one contractor or vendor can comply.

This practice results in a de facto sole source requirement, where even without naming a particular contractor/vendor, a designer can effectively ensure that only one contractor/vendor will be qualified or in compliance to perform the work.

It is important to note that analyzing this issue cannot be done in terms of absolutes. If a designer provides no restrictive criteria, the public owner could end up with wholly unqualified vendors as the lowest responsible and responsive bidders. Also, the public owner (through its designer) has the right to specify criteria for the products and systems it intends to purchase, which is necessary to ensure that the public owner “gets what it paid for.” The issue presented here is much more in the middle, where a designer goes even further to provide narrowly tailored restrictions that may have little or no relationship to whether a particular vendor can satisfy what the owner wants, but instead only act to narrow competition down to the designer’s “favored” provider.

Admittedly, the design team walks a fine line between controlling the bidding process in a manner that provides the public owner with competent contractors and vendors and, on the other hand, restricting fair competition by unnecessarily disqualifying competent contractors or vendors that could bring better pricing and viable alternatives. The designer must act a gatekeeper to ensure competency in the biding process, but without going too far and usurping the public’s right, as well as the public owner’s requirement, to have fair and open competition.

The key point here is that overly narrowing competition, both on a micro (project-specific) and macro (over an entire project portfolio) level, more often than not will result in higher pricing to the public owner without necessarily resulting in a better product. There is some degree of additional cost that is worthwhile to ensure quality contractors and products. Narrowing the field to only those who have worked with the designer on previous projects falls outside of any equitable balance between the public owner’s concerns of quality and price.

It is worth noting that recent publicized investigations in at least two states may result in charges against public employees and/or agents of public owners for providing unfair advantage to “friendly” contractors or vendors for reasons that were not necessary or even intended to ensure a better end product. Whether because he or she is receiving free tickets to events from a particular contractor, or because a good friend is the president of a particular supplier, the individuals determining the design and pre-qualification criteria that dictate who can bid for public work (whether public employees or agents of public owners, e.g., the design team) can face significant liability, and even potential criminal charges, for improperly narrowing the competitive field based on stated or unstated criteria that do not promote fair and reasonable competition.

Owner Liability for Defective Specification

Pursuant to the so-called Spearin doctrine, which is almost uniformly adopted in some form throughout all U.S. jurisdictions, an owner impliedly warrants the adequacy of plans and specifications furnished by the owner or its agent (e.g. designer or engineer) to a contractor. Said differently, if the owner (or more typically the owner through its design agent) provides plans and specifications that turn out to be inaccurate or defective, and the contractor followed such provisions in performing its work, the contractor is not liable for any defects in the final product arising out of such inaccuracy or defect in the specifications. In addition, if such provisions turn out to be inaccurate or defective, the owner is liable for any additional costs and/or time incurred by the contractor in trying to cure the defect and achieve compliance.

This is a significant source of potential liability that should make public owners pay close attention to the criteria and restrictions provided in specifications by their design teams. As an illustration, assume that an owner wants an electronic monitoring system that can provide a guard’s location anywhere inside the prison to within three feet. It may make sense for the designer to include pre-qualification requirements that the contractor have performed similar installation work in the past and that the equipment satisfy certain performance criteria. If the contractor then selects a vendor (or combination of vendors) to provide the materials and the system fails to perform as anticipated, the liability for such failure is most likely on the contractor.

However, if the designer goes a step further and specifies particular components that as a whole only one vendor can possibly supply, and if the system fails to perform as anticipated, the contractor will have a strong argument that the public owner is liable for the resulting cost and time impacts due to a defective specification. By narrowing the specification in such a manner, a designer can expose an unwitting public owner to significant additional and unnecessary liability in the event the specified component or system cannot comply with performance criteria.

Even when specifications provide for the use of alternative (i.e. “or equal”) products or methods of performance, a contractor has the right to assume that the specific products or methods listed in the contract documents will be adequate and achieve the desired result in accordance with the Spearin doctrine. Said differently, courts have found that merely inserting an “or equal” clause into an otherwise “sole source” specification will not relieve an owner from its warranty that the specified materials or methodology will produce a compliant end product. This is even more true where the designer refuses to accept any proposed “or equals” or, alternatively, where the design is so restrictive that in reality there is no “or equal” available.

In addition, courts further have found that merely inserting performance criteria will not necessarily shift the risk of compliance back to the contractor. If the specification is written (or interpreted by the design team) so that the contractor does not have discretion to choose from among more than one option for a component or system, the fact that the specification also purports to require that contractor satisfy certain performance criteria will not relieve the public owner from liability under the Spearin doctrine. If the required component or system fails to satisfy the performance criteria, assuming the failure is not because of the contractor’s improper installation, the contractor will still be able to seek recovery from the public owner based on breach of the warranty that the required component or system could be compliant.

Conclusion

In recent years, it appears that certain contractors, as well as lower-tier vendors, have (through marketing and other means) made significant inroads with design firms in getting their names, equipment or materials written into public construction (and renovation) specifications in a manner that effectively results in a “sole source” situation.

Where this occurs, not only can the public employees and design team (as agents of the public owner) be exposed to liability and charges (both civil and criminal), the public owner also can inadvertently take on significant additional costs and liability in the form of inflated project costs resulting from lack of competition and/or exposure to liability if the specified system fails to perform as anticipated. Public owners are well-advised to play an active role in reviewing and understanding restrictions inserted into their project documents by their design team.

Preserving open and fair competition is not only at the heart of controlling costs over a public owner’s portfolio of projects, but is further critical to protecting the public owner from unnecessary liability for competitive limitations that may have little or no bearing on whether the public owner gets what it wanted in the final product.

David Hill Bashford is a partner in the Charlotte, N.C., office of Bradley Arant Boult Cummings LLP.

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