The first section of the article will discuss the law for prime contractors and subcontractors on public works projects for the State of California and lesser public entities. The second section will discuss the bidding laws for private works.
A. Public Works Projects
1. Prime Contractors
Bid documents usually require that the bid shall remain open to acceptance for a specific period (e.g. 60 days). On most public works projects a bid bond is required. On public works projects, the bid bond is intended to act as security that the contractor will enter into a contract if the bid is accepted. Consequently, if an error is made in the bid, the contractor will want to avoid the forfeiture of the bid bond. California Public Contract Code section 5103 sets forth the grounds for relief from a prime contractor’s bid error and thus the forfeiture of the bid bond.
Specifically, the bidder must establish that: “(a) A mistake was made; (b) He or she gave the public entity written notice within five days after the opening of the bids of the mistake, specifying in the notice in detail how the mistake occurred; (c) The mistake made the bid materially different than he or she intended it to be; and (d) The mistake was made in filling out the bid and not due to error in judgment or to carelessness in inspecting the site of the work, or in reading the plans or specifications.” The cases interpreting this section emphasize the necessity of providing a timely five-day written notice that includes sufficient facts for the public entity to determine that the error was material and not an error in judgment. Permitted errors can include, but are not limited to: (1) failing to include a subcontractor’s price in the bid; (2) failing to carry over numbers from one bid sheet to the next; and (3) combined clerical and judgmental errors.
As most contractors are aware, subcontractors typically wait to the last hour before submitting their bids to avoid bid shopping by the prime contractor. Under the California Subletting and Subcontracting Fair Practices Act, which is codified at Public Contract Code section 4100 et seq., the bidder is required to set forth the name of each subcontractor who will perform work or labor or render services to the prime contractor in an amount in excess of one-half of one percent of the prime contractor’s total bid. With a few limited exceptions set forth in the Act, the listed subcontractor must then be awarded the subcontract.
If the prime contractor relies on the subcontractor’s bid, he or she will list that subcontractor in compliance with the subcontractor listing laws. Thus, the courts have held that when the prime contractor’s bid is accepted by the public entity and the listed subcontractor refuses to enter into a subcontract, the prime contractor can recover the difference between that bid and the cost to perform the work from the recalcitrant subcontractor. The courts relied on a concept called promissory estoppel. (See Drinnan v Star Paving (1958) 51 Cal 2nd 409)
However, there are potential defenses to the promissory estoppel doctrine. The possible defenses may include: (1) the bid was materially different than the other bids for the same work; (2) the bid reserved the right to refuse to enter into a contract; (3) there was an material delay in accepting the bid; (4) the subcontract includes provisions that are fundamentally different than the typical subcontract used in the industry; and (5) the prime contractor had an opportunity to withdraw the bid, under the aforementioned code sections, but failed to do so. Since these defenses are dependent on the facts surrounding the bid, there is no guarantee that they will succeed. Nonetheless, if an error is made, the subcontractor should immediately notify the prime contractor.
B. Private Works
Typically, the bid documents (e.g. Instructions to Bidders) allow the owner to accept or reject any bid, including the low bid. It is possible that the language in certain bid documents could be construed to obligate the owner to enter into a contract with the lowest bidder.
Generally, until a bid is accepted, the contractor has a right to withdraw or revoke the bid prior to its acceptance by the owner. If the bidder intends to withdraw the bid it is wise to do so in the same manner the bid was submitted.
If, however, the owner has paid for and is given an option to enter into a contract for a specific period and for the amount bid, the bidder would be barred from unilaterally withdrawing its bid for the stated period. Also, if bidder’s signed bid documents require that the bid remain open for acceptance by the owner for a specific period and also require the bidder to post a bid bond, the bidder’s bid bond may be forfeited if the bidder attempts to prematurely withdraw its bid. Nonetheless, the contractor should be allowed to withdraw the bid if (a): there is clear error on the face of the bid, (b) there is a material bid between the low contractor’s bid and the next lowest bidder; or (c) there is an equitable basis for disregarding the bid.
The California Commercial Code, which has been held applicable to certain construction contracts, may also prevent the revocation of a “firm offer” to buy or sell goods that is to remain open for acceptance for a specific period. Typically, such offers involve a purchase order for the sale of materials rather than a construction contract for the installation of those materials. In the event that there is a dispute as to right to revoke a bid that is to remain open for a fixed time it would behoove the contractor to discuss it legal options with a qualified attorney.
The rules that apply to subcontractors bids on public works projects also apply to private works projects. While the Subletting and Subcontracting Fair Practices Act only applies to public works projects, if a prime contractor can establish that the subcontractor knew that the prime contractor would rely on the bid the subcontractor will be estopped from withdrawing the bid. The same defenses available to subcontractors on public works projects are also available on private works bidding disputes.
It should be noted that if the prime contractor promises to award the bid to the lowest bidder, a subcontractor maybe able to recover damages if the prime contractor awards the subcontract to the next lowest bidder. On private projects, which are publically funded, it is not uncommon for the owner to include a requirement that the subcontractors be listed on the bid. Under such circumstances a viable argument could be made that the prime contractor is estopped from entering into a subcontract with an unlisted subcontractor.
If a general contractor has submitted a bid that contains an error, it should review the statutory requirements for withdrawing the bid with care. The contractor should also review the bid documents to determine what requirements exist, if any, for revoking a bid. On a private works project, if a general contractor desires to withdraw its bid prior to acceptance it should immediately given such a written notice to the owner. If an error is discovered after the bid is accepted, the contractor should immediately advise the owner of the error and then seek competent legal counsel to discuss a further strategy for minimizing any damage. A subcontractor, on either a public or private works project, should immediately notify the general contractor, in writing, of the nature of the material error and request that the general allow the bid to be withdrawn. Under all circumstances, if the potential exposure for damages for improperly withdrawing a bid is significant, a contractor should seek the advice of legal counsel. Such timely legal advice may avert a financial disaster for a contractor.
This article, ©1999, was written by William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for 20 years. Mr. Last also holds a California A & B contractors license. He can be contacted at 650-425-4679. This bulletin is published periodically to provide general information about current legal issues. If you have a specific legal question or need legal advice, you should contact an attorney.
The Requirements For Listing Subcontractors
on California Public Works Bids
If you are a subcontractor or a general contractor who bids on California public works projects you are, in all likelihood, aware of the existence of the subcontractor fair listing laws. However, you may not be aware of all the nuances of the law. This article will review the subcontractor fair listing law.
1. WHAT ARE SUBCONTRACTOR FAIR LISTING LAWS?
Prior to the establishment of subcontractor fair listing laws, it was common for successful general contractor bidders to bid-shop or bid-peddle the subcontractors bid. The legislature determined, however, that such practices were not in the best interest of the public and thus established the fair listing laws which are referred to as the “Subletting and Subcontracting Fair Practices Act” (hereafter “the Act”). Generally, the Act requires the subcontractors to be listed on all state and local contracts and allow substitutions under very limited circumstances.
2. WHEN MUST A CONTRACTOR LIST ITS SUB-CONTRACTORS?
Under most circumstances, subcontractors must be listed in the bid. Public Contracts Code §14104 states that public project specifications or general bidding conditions must require persons making bids to set forth the names and locations of subcontractors which will perform work in excess of one-half of one percent of the total bid (or, in the case of streets, highways, or bridges, work in excess of one-half of one percent of the total bid or $10,000.00, whichever is greater). The bidding contractor must also set forth the portion of the work which will be done by each subcontractor. The prime contractor may list only one subcontractor for each portion as is defined in his or her bid.
3. WHEN CAN A CONTRACTOR SUBSTITUTE A LISTED SUBCONTRACTOR?
Generally, once a subcontractor is listed the general contractor may not substitute another subcontractor for the same work. California Public Contracts Code §4107 provides that no prime contractor whose bid is accepted may substitute another subcontractor in place of the subcontractor listed in the original bid. However, there are exceptions, the awarding authority may, except as otherwise provided, consent to the substitution of another person as a subcontractor in any of the following situations:
(1) When the subcontractor listed in the bid, after having had a reasonable opportunity to do so, fails or refuses to execute a written contract, when that written contract, based upon the general terms, conditions, plans and specifications for the project involved or the terms of that subcontractor’s written bid, is presented to the subcontractor by the prime contractor.
(2) When the listed subcontractor becomes bankrupt or insolvent.
(3) When the listed subcontractor fails or refuses to perform his or her subcontract.
(4) When the listed subcontractor fails or refuses to meet the bond requirements of the prime contractor (provided such bond requirements are included in the prime contractor’s bid solicitation materials);
(5) When the prime contractor demonstrates to the awarding authority that the name of the subcontractor was listed as the result of an inadvertent clerical error.
(6) When the listed subcontractor is not licensed pursuant to the Contractors’ License Law.
(7) When the awarding authority, or its duly authorized officer, determines that the work performed by the listed subcontractor is substantially unsatisfactory and not in substantial accordance with the plans and specifications, or that the subcontractor is substantially delaying or disrupting the progress of the work.
Prior to approval of the prime contractor’s request for the substitution, the awarding authority must give notice in writing to the fisted subcontractor of the prime contractor’s request to substitute and of the reasons for the request, by certified or registered mail to the subcontractor’s last known address. The subcontractor has five working days within which to submit written objections to the substitution to the awarding authority. If the subcontractor objects, the awarding authority must give notice in writing within at least five working days to the listed subcontractor of a hearing by the awarding authority on the prime contractor’s request for substitution.
4. WHAT HAPPENS IF A CONTRACTOR IMPROPERLY SUBSTITUTES A LISTED SUB-CONTRACTOR?
Public Contracts Code §4105 states that listing other contractors who will in turn sublet portions constituting the majority of the prime contract work is a violation of Public Contracts Code §4104 and subjects the prime contractor to penalties set forth the Act. Public Contracts Code §4106 states that if a prime contractor fails to specify a subcontractor when so required, the prime contractor agrees that he or she is fully qualified to perform that portion himself or herself and will in fact perform that portion of the work. The issue that can arise is whether the general contractor has the appropriate license to perform that work. For example, fire sprinkler work can only be performed by a contractor who has such a speciality license. Thus, if a general contractor doesn’t have a fire sprinkler license he must list an appropriately licensed subcontractor. If such a speciality subcontractor is not listed, the bid may be subject to a successful bid protest.
If after the award of a contract, the prime contractor subcontracts, except as otherwise provided for in the Act, any such portion of the work, the prime contractor shall be subject to the penalties. The penalties are set forth in Public Contracts Code §4110 which states: “A prime contractor violating any of the provisions of this chapter violates his or her contract and the awarding authority may exercise the option, in its own discretion, of (1) canceling his or her contract or (2) assessing the prime contractor a penalty in an amount of not more than 10 percent of the amount of the subcontract involved, and this penalty shall be deposited in the fund out of which the prime contract is awarded. In any proceedings under this section the prime contractor shall be entitled to a public hearing and to five days notice of the time and place thereof.” A violation of the Act may also subject a prime contractor to a disciplinary action by Contractor’s State License Board.
The listed subcontractor may also sue the general contractor who substitutes another subcontractor. The listed subcontractor may also file a legal action against the contract-awarding public agency seeking a court order compelling the public agency to enforce the law.
5. WHAT HAPPENS WHEN THERE IS A WITHDRAWAL Of A BID BY A SUB-CONTRACTOR?
If a listed subcontractor refuses to sign a contract, the general contractor can file a promissory estoppel lawsuit against the subcontractor. Such a lawsuit could result in an award of the difference of the subcontractor’s bid and the cost of completing the subcontractor’s scope of work The subcontractor, however, has defenses to such a lawsuit. The defenses include:
(1) The general contractor should not have relied on the bid because it was so low in comparison to the other bidders.
(2) The general contractor shopped the bid and did not rely on it.
(3) The subcontractor refused to sign the contract because the general contractor’s contract contained unfair and unreasonable language.
(4) Once the general contractor learned of the bid it should have withdrawn the bid from the public entity.
A number of bid protests are based on a prime contractor’s failure to comply with the Act. It is easy to overlook the requirements of the Act in the rush to submit a timely bid. If you are a prime contractor bidding on a public works project you should review the requirements of the Act with your estimators. You should be sure that you have listed a subcontractor for any work in excess of one half of one percent if you do not to intend to perform that work. If you intend to perform the work, you should review the licensing requirements for performing that work. You should also review the subcontractor’s bid to determine if there are exceptions or special subcontract terms in the bid. If you list a subcontractor whose bid includes such exceptions or special subcontract terms you may find it difficult to substitute a new subcontractor if listed subcontractor refuses to sign a subcontract that does not include the bid exceptions and/or subcontract terms.
If you are subcontractor whose bid is listed you should familiarize yourself with your obligations to enter into a subcontract if you are the listed subcontractor. You should also submit your bid along with any exceptions and/or contractual language requirements by facsimile prior to the bid opening. Timely written bid exceptions and/or contractual language requirements may be the basis for a limitations on the scope of the work in the subcontract and elimination of unfavorable contract clauses.