Emerging Legal Issues In State Contracts

Slide 1:Emerging Legal Issues In State Contracts

Joan Sullivan, OSC Director of Contracts John Dalton, OSC Associate Counsel

Slide 2:DISCLAIMER

Slide 3:This Session Is Intended to Cover the Following Topics

Grant Procurements open to For Profits. Revenue and �Barter� contracts. Banding/Substantially Equivalent. Authority to Reject and Rebid. Waiver of mandatory requirements. Advance publication - substantial compliance. Lowest price evaluations for service procurements. Debriefings.

Slide 4:Grant Procurements Open to For-Profits

Historical Perspective Prior to the Procurement Stewardship Act, competition was statutorily required only for commodities, construction, and printing contracts. No statutory requirement for competition for services contracts - but some form of competition administratively required by OSC. Most grant applicants were NFP�s or municipalities. Grants were generally awarded pursuant to a less structured award process.

Slide 5:Grant Procurements Open to For-Profits

1995 Procurement Stewardship Act For first time statutory requirement for competitive process for all procurements, �except where otherwise provided by law.� �Services� must be procured competitively. �Services� does not include �contracts approved in accordance with State Finance Law Article 11-B� (�Prompt Contracting and Interest-Payments for Not-for-Profit Organizations�). Article 11-B covers organizations �incorporated pursuant to or otherwise subject to the not-for-profit corporation law� and charities (i.e., IRC �501[c][3]).

Slide 6:Grant Procurements Open to For-Profits

Developments since 1995 Proliferation of for-profit corporations and municipalities participating in grant programs. State agencies continuing to award grant contracts by a less structured process.

Slide 7:Grant Procurements Open to For-Profits

Issue What requirements apply to grant procurements open to for-profit organizations and/or municipalities?

Slide 8:Grant Procurements Open to For-Profits

Legal Analysis �Services� means the �performance of a task or tasks.� Grants are generally contracts for the provision of services. SFL �163 requires �best value� competitive evaluation for services contract awards. NFP�s are excepted; for-profits and municipalities are not. Therefore, grant awards to for-profits and municipalities are generally covered by PSA.

Slide 9:Grant Procurements Open to For-Profits

Possible Resolutions Short Term If the grant program is governed by a comprehensive statutory award scheme, then that statute may be interpreted as preempting SFL �163, depending on statutory language. Long Term Development of procurement and evaluation methodologies recognizing the unique nature of grant programs.

Slide 10:Grant Procurements Open to For-Profits

Questions

Slide 11:Revenue and �Barter� Contracts

Recent Developments Increasingly, agencies are entering into barter contracts and other contracts that combine elements of traditional revenue contracts and traditional contracts for the procurement of goods or services.

Slide 12:Revenue and �Barter� Contracts

Issue Must the State agency comply with PSA (or other procurement statute) in letting these contracts?

Slide 13:Revenue and �Barter� Contracts

Statutory Framework Procurement Stewardship Act applies to procurements for commodities, services, and technology. Other procurement statutes (e.g., Public Buildings Law, State Printing Law) cover other enumerated types of procurements. BUT no statute specifically addresses the selection of a contractor for revenue contracts.

Slide 14:Revenue and �Barter� Contracts

Legal Analysis Ultimate question is whether the transaction is the �purchase� or �procurement� of goods or services. See Matter of Signacon v. Mulroy, 32 NY 2d 410 (1973). The term �purchase� is not defined in SFL Article 11. In determining whether an arrangement is a purchase/procurement, must examine the total character of the undertaking and determine whether failing to apply procurement laws would frustrate legislative objectives. See Matter of Exley v. Village of Endicott, 51 NY 2d 426 (1980); Citiwide News v. NYCTA, 62 NY 2d 464 (1984); and Matter of Diamond Asphalt Corp. v. Sander, 92 NY 2d 244 (1998) . Therefore, must review on case-by-case basis to determine whether the transaction is fundamentally a transaction for the acquisition of goods or services by the State (with incidental revenue benefits to the State) or fundamentally a revenue contract (which incidentally may result in goods or services flowing to the State).

Slide 15:Revenue and �Barter� Contracts

Practical Application Safest approach: comply with PSA (or other procurement statute). If agency concludes PSA (or other procurement statute) need not be followed, the safest approach is to consult with OSC before procurement activity commences.

Slide 16:Revenue and �Barter� Contracts

Questions

Slide 17:Use of Banding/Substantially Equivalent

Recent Development Occasionally an agency establishes an evaluation methodology whereby proposals are evaluated and final scores are grouped together in predetermined �bands.� The winning proposal is then selected from those in the highest band.

Slide 18:Use of Banding/Substantially Equivalent

Issue To what extent is the �banding� approach appropriate?

Slide 19:Use of Banding/Substantially Equivalent

Statutory Framework PSA requires that commodities be awarded based on lowest price. PSA also requires that services and technology be awarded based on best value. SFL �163(10)(a) states that when �two offers are found to be substantially equivalent, price shall be the basis for determining the award recipient.� SFL �163(7) requires that agencies establish evaluation criteria in advance of the initial receipt of offers.

Slide 20:Use of Banding/Substantially Equivalent

Legal Analysis An award of a service contract must be made to the responsive and responsible offeror providing �best value.� The offeror receiving the highest combined score for its technical and financial proposals is, by definition, the �best value� offeror, except where one or more other proposals are �substantially equivalent.� A band of top-rated proposals can only be created where it is reasonable to determine that all proposals in that band are �substantially equivalent.� The range of substantial equivalence is an evaluation criterion that must be established in advance of receipt of initial proposals. Once a range of substantial equivalence is established, the award must be made to the offeror providing the lowest price.

Slide 21:Use of Banding/Substantially Equivalent

Questions

Slide 22:Authority to Reject and Rebid

Recent development Agencies have proposed that procurements be terminated through the rejection of all bids where the sole basis for the agency�s proposed action was: A desire by the agency to avoid the necessity of a responsibility determination with respect to an apparent winning offeror. A desire by the agency to avoid a threatened bid protest which, on its face, was spurious.

Slide 23:Authority to Reject and Rebid

Issue What are the restrictions, if any, on an agency�s authority to reject and rebid?

Slide 24:Authority to Reject and Rebid

Statutory and Common Law Framework SFL �163(9)(d) allows for all offers to be rejected. Case law requires that there must be a rational basis supporting a determination to reject all offers. Matter of Conduit & Foundation Corp v Metropolitan Transportation Authority, 66 NY2d 144 (1985); Matter of LaCorte Electrical Construction v NYS Dep�t of Social Services, 243 AD2d 1029 (3d Dep�t, 1997).

Slide 25:Authority to Reject and Rebid

Legal Analysis Agencies have wide discretion to reject and rebid where they determine that such action is in the best interest of the State. To justify its determination, an agency need only show a rational basis. A desire to avoid a responsibility determination, by itself, cannot be considered a rational basis. The threat of a spurious bid protest, by itself, cannot be considered a rational basis.

Slide 26:Authority to Reject and Rebid

Questions

Slide 27:Waiver of Mandatory Requirements

Recent Developments Increasingly, we are seeing procurements where agencies impose numerous, and, in many cases, apparently inconsequential, specification requirements which are denominated as �mandatory requirements.� In some cases, after proposals are opened, agencies realize that such �mandatory requirements� would eliminate all bidders or significantly reduce the competitive field. In these cases, the agencies, rather than rebid, desire to waive these unmet �mandatory requirements.�

Slide 28:Waiver of Mandatory Requirements

Issue In these circumstances, to what extent may an agency waive such �mandatory requirements�?

Slide 29:Waiver of Mandatory Requirements

Statutory and Common Law Framework SFL �163(9)(b) provides that a solicitation must prescribe the minimum specifications or requirements that must be met in order to be considered responsive. SFL �163(2)(b) requires �a clear statement of product specifications, requirements or work to be performed� and that procurement process promote fairness. An agency may reject any bid that fails to comply with the literal specification requirements, but may waive a deviation which is minor or non-substantial � that is, it is not material. See LeCesse Bros. v. Town Board of the Town of Williamson, 62 AD2d 28 (4th Dep�t, 19780 aff�d, 46 NY 2d 960 (1979). An agency must reject a bid which contains a material variance or omission from the bid specifications. See Progressive Dietary Consultants v. Wyoming County, 90 AD2d, 214 (4th Dep�t, 1982). A variance is material or substantial when it would impair the interests of the procuring agency, place the successful bidder in a position of unfair economic advantage, or place other bidders or potential bidders at a competitive disadvantage. Cataract Disposal, Inc. v. Town of Newfane, 53 N.Y.2d 266, 440 N.Y.S.2d 913 (1981); Fischbach & Moore v NYC Transit Authority, 79 A.D.2d 14, 435 N.Y.S. 2d 984 (2nd Dept. 1981); Application of Glen Truck Sales & Service, Inc. v. Sirigano, 31 Misc.2d 1027, 220 N.Y.S.2d 939 (1961). �

Slide 30:Waiver of Mandatory Requirements

Legal Analysis Agencies can only waive these �mandatory requirements� if they are not material. To do so agency must document that change does not disadvantage any bidder or potential bidder. Where agency has denominated a requirement as mandatory, the fair process required by the PSA requires that bidders and potential bidders be entitled to rely upon agency characterization of requirement as mandatory. As a result, a �mandatory requirement� will be presumed material and therefore not waivable except where agency can document that inclusion of the mandatory requirement did not cause any qualified potential bidder to refrain from submitting a proposal, and did not otherwise disadvantage any bidder or potential bidder.

Slide 31:Waiver of Mandatory Requirements

Practical Advice Review specifications for the terms �must� �shall� and �mandatory� Make sure you really mean it!!! Understand the ramifications of vendors not meeting the requirements.

Slide 32:Waiver of Mandatory Requirements

Questions

Slide 33:Advance Publication � Substantial Compliance

Recent Developments In a number of recent procurements, agencies have inadvertently failed to publish in Contract Reporter. But, in these procurements, agency has published notice in other forums, and in some cases provided actual notice to all potential bidders.

Slide 34:Advance Publication � Substantial Compliance

Issue Can OSC approve the contracts in these situations?

Slide 35:Advance Publication � Substantial Compliance

Statutory Framework Economic Development Law � � 142 and 143 generally require agencies to publish notice of contract opportunities - generally in the Contract Reporter. Economic Development Law � 144 provides that Comptroller may grant exemptions under defined circumstances. Economic Development Law � 145 provides that Comptroller may not approve a contract which has not been published or exempted from publication, BUT also provides that Comptroller may also approve where Comptroller determines that there has been �substantial compliance� with sections 142 and 143.

Slide 36:Advance Publication � Substantial Compliance

Legal Analysis Purpose of publication requirements is to provide constructive notice to potential bidders. Actual notice is superior to constructive notice. Therefore, where all potential bidders have received actual notice, there has been substantial compliance. Even where there has not been actual notice, where notice has been published in locations where parties interested in the procurement would be expected to inquire or search, such publication may constitute �substantial compliance�.

Slide 37:Advance Publication � Substantial Compliance

Cautionary note �Substantial Compliance� is a safe harbor � to be used in a storm. Don�t rely on it on sunny days. Always plan on publication in Contract Reporter.

Slide 38:Advance Publication - Substantial Compliance

Questions

Slide 39:Lowest Price Evaluations for Services Procurements

Recent Developments In a number of cases, we are receiving service contract awards which were made solely on the basis of lowest price.

Slide 40:Lowest price Evaluations for Services Procurements

Issue Under what circumstances may an agency award a contract for services on the basis of lowest price alone?

Slide 41:Lowest Price Evaluations for Services Procurements

Statutory and Common Law Framework SFL � 163 (10) requires that contracts for services be awarded on basis of best value. SFL � 163 (1)(j) defines best value as a methodology which �optimizes quality, cost and efficiency, among responsive and responsible offerers.� In Transactive Corporation v. New York State Department of Social Services, 236 AD2d 48, 53 (1997); aff�d on other grnds, 92 NY2d 579 (1998) the court stated that a best value award requires a cost benefit analysis � but did uphold an award which was made on the basis of price since in that case it was satisfied that a cost benefit analysis had occurred.

Slide 42:Lowest Price Evaluations for Services Procurements

Legal Analysis Awards of service contracts must reflect a cost-benefit analysis. Generally a cost-benefit analysis requires an evaluation of both the price and technical merits of the proposals. There are cases where an award ultimately made on the basis of price alone may reflect a cost- benefit analysis -- where qualitative and efficiency requirements have been so fully defined in the specifications that there is little room for technical variances between proposals which will have any value to the procuring agency. For example: where the services are of a routine and non-technical nature such that there is little room for meaningful variations among responsive offerors � such as trash removal; where agency has established detailed technical requirements which leave little if any room for meaningful variations among responsive offerers; where an agency is using a �competitive range� consistent with Transactive.

Slide 43:Lowest Price Evaluations for Services Procurements

Variation May agencies award service contracts using a methodology where price is given little or even no value? OSC believes it is highly doubtful that an award of a service contract where price is given zero value could be regarded as reflecting a best value (cost-benefit) analysis. Where price is given very low value (less than 20%) OSC will look for agency justification. Further, where price is given a very low value agency may find itself �boxed-in� where a very highly scored technical proposal thus becomes the �best value,� but is too expensive. In such a situation, agency will have only 2 choices: Award to highest-ranked/very expensive offeror (agencies should attempt to negotiate price reduction); or Reject and rebid.

Slide 44:Lowest Price Evaluations for Services Procurements

Questions

Slide 45:Debriefings

Recent Developments On occasion, agencies refuse to provide bidders with a debriefing concerning the award. Some agencies refuse to provide any information to a bidder prior to approval of the contract by OSC � in some cases, refusing to even tell the vendor that it has been found non-responsive.

Slide 46:Debriefings

Issues What is an agency�s obligation with respect to debriefings? What information, if any, can an agency disclose to an unsuccessful vendor, and when?

Slide 47:Debriefings

Procurement Guidelines The Procurement Guidelines issued by the NYS Procurement Council provide in Section VII (A)(1) that debriefing should be offered to non-winning bidders � but should be limited to the evaluation results of the bidder being debriefed.

Slide 48:Debriefings

Legal Analysis A bidder must be advised when it is found non-responsive or non-responsible � particularly where the bidder being disqualified would otherwise appear to be the winning bidder. Agencies should debrief �losing� bidders, at least as to their own proposals.

Slide 49:Debriefings

Questions ?