B-161493, JULY 7, 1967, 47 COMP. GEN. 4

B-161493: Jul 7, 1967

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- NONRESPONSIVE TO THE INVITATION BECAUSE OF SUBSTITUTING THE LESS COSTLY AND LESS PROTECTIVE COMBINATION OF BUILDER'S RISK INSURANCE FOR THE COST OF MATERIALS AND A CONTRACTOR'S BOND FOR REMAINING COSTS IN LIEU OF A CONSTRUCTION BOND TO COVER THE ENTIRE CONTRACT PRICE WAS INCONSISTENT WITH ADVERTISED BIDDING PRINCIPLES AND ADVERSELY AFFECTS FREE COMPETITION. NOTWITHSTANDING WAIVER OF THE REQUIRED BOND WAS CONSIDERED "IN THE BEST INTERESTS OF THE BORROWER. WILL NOT BE DISTURBED. IF THE LESS COSTLY FORM OF PROTECTION IS ADEQUATE. NECA CONTENDS THE AWARD IS IMPROPER BECAUSE THE SUCCESSFUL BID. WAS NOT RESPONSIVE TO THE INVITATION'S CONSTRUCTION BOND REQUIREMENTS. THE COOPERATIVE WAS AUTHORIZED TO BORROW SUFFICIENT REA FUNDS TO ENABLE IT TO CONSTRUCT THE HILLMAN-POSEN TRANSMISSION LINE.

B-161493, JULY 7, 1967, 47 COMP. GEN. 4

BONDS - PERFORMANCE - ALTERNATIVE PROTECTION THE AWARD OF A CONSTRUCTION CONTRACT TO A COOPERATIVE--- THE LOW BIDDER UTILIZING FUNDS BORROWED FROM THE RURAL ELECTRIFICATION ADMINISTRATION (REA/--- NONRESPONSIVE TO THE INVITATION BECAUSE OF SUBSTITUTING THE LESS COSTLY AND LESS PROTECTIVE COMBINATION OF BUILDER'S RISK INSURANCE FOR THE COST OF MATERIALS AND A CONTRACTOR'S BOND FOR REMAINING COSTS IN LIEU OF A CONSTRUCTION BOND TO COVER THE ENTIRE CONTRACT PRICE WAS INCONSISTENT WITH ADVERTISED BIDDING PRINCIPLES AND ADVERSELY AFFECTS FREE COMPETITION, NOTWITHSTANDING WAIVER OF THE REQUIRED BOND WAS CONSIDERED "IN THE BEST INTERESTS OF THE BORROWER," AND AIDED IN THE PROMOTION OF THE PROJECT. ALTHOUGH THE AWARD MADE IN GOOD FAITH AND NOT CONTRARY TO 7 U.S.C. 904, GRANTING BROAD DISCRETION TO THE REA ADMINISTRATOR, WILL NOT BE DISTURBED, IF THE LESS COSTLY FORM OF PROTECTION IS ADEQUATE, FUTURE INVITATIONS SHOULD PROVIDE FOR THE ALTERNATIVE PROTECTION IN LIEU OF A PERFORMANCE BOND.

TO THE ADMINISTRATOR, RURAL ELECTRIFICATION ADMINISTRATION, JULY 7, 1967:

WE REFER TO A LETTER DATED MAY 12, 1967, FROM THE NATIONAL ELECTRICAL CONTRACTORS ASSOCIATION, INCORPORATED (NECA), PROTESTING THE AWARD OF A CONTRACT TO MICHIGAN ELECTRIC OF RAVENNA, MICHIGAN, TO CONSTRUCT 22 MILES OF 69 KV TRANSMISSION LINE, KNOWN AS THE HILLMAN POSEN LINE, BY THE NORTHERN MICHIGAN COOPERATIVE, INC. (COOPERATIVE), UTILIZING FUNDS BORROWED FROM THE RURAL ELECTRIFICATION ADMINISTRATION (REA). NECA CONTENDS THE AWARD IS IMPROPER BECAUSE THE SUCCESSFUL BID, WHILE LOW, WAS NOT RESPONSIVE TO THE INVITATION'S CONSTRUCTION BOND REQUIREMENTS.

THE RURAL ELECTRIFICATION ACT OF 1938, AS AMENDED, 7 U.S.C. 904, PERMITS THE REA TO MAKE LOANS TO SPECIFIED ORGANIZATIONS FOR RURAL ELECTRIFICATION "ON SUCH TERMS AND CONDITIONS RELATING TO THE EXPENDITURE OF THE MONEYS LOANED AND THE SECURITY THEREFOR AS THE ADMINISTRATOR MAY DETERMINE.' PURSUANT TO THIS LAW, THE COOPERATIVE WAS AUTHORIZED TO BORROW SUFFICIENT REA FUNDS TO ENABLE IT TO CONSTRUCT THE HILLMAN-POSEN TRANSMISSION LINE.

IN ACCORDANCE WITH THE PROCEDURES SET OUT IN REA BULLETIN 40-6 OF NOVEMBER 27, 1959, THE COOPERATIVE OBTAINED THE SERVICES OF AN ENGINEERING FIRM, DAVERMAN ASSOCIATES, INCORPORATED, OF GRAND RAPIDS, MICHIGAN (DAVERMAN), TO OVERSEE THE PLANNING AND CONSTRUCTION OF THE TRANSMISSION LINE. DAVERMAN ISSUED INVITATIONS TO 35 POTENTIAL BIDDERS, AND RECEIVED 4 RESPONSES AS OF BID OPENING, MARCH 21, 1967.

THE LOW BID OF $197,416.50 FROM MICHIGAN ELECTRIC WAS CONDITIONED BY AN ACCOMPANYING LETTER DATED MARCH 21, 1967, REQUESTING THAT, IF ITS BID WAS ACCEPTED, THE REQUIREMENT FOR A CONSTRUCTION BOND IN THE AMOUNT OF THE CONTRACT PRICE BE WAIVED IN LIEU OF A COMBINATION OF BUILDER'S RISK INSURANCE FOR THE COST OF MATERIALS AND A CONTRACTOR'S BOND FOR THE REMAINING COSTS. BY ITS LETTER OF APRIL 10, 1967, DAVERMAN RECOMMENDED AWARD BE MADE TO MICHIGAN ELECTRIC NOTWITHSTANDING THE OBVIOUS BID DISCREPANCY, POINTING OUT THAT THE COOPERATIVE WAS TO FURNISH ALL OF THE MATERIALS UNDER THE CONTRACT, AND THAT THE SAVINGS OF NEARLY $10,000 ON THIS BID, WHILE NOT A GREAT DIFFERENTIAL WHEN COMPARED TO THE OVERALL BID PRICE OF NEARLY $200,000, WAS NEVERTHELESS A SUBSTANTIAL SAVINGS IN RELATION TO THE APPROXIMATELY $80,000 LABOR COSTS, THE PRIMARY ELEMENT TO BE FURNISHED BY THE CONTRACTOR.

ON APRIL 19, 1967, THE COOPERATIVE'S BOARD OF DIRECTORS VOTED TO ACCEPT THE RECOMMENDATION OF DAVERMAN; THE MATTER WAS THEN FORWARDED TO REA FOR ITS CONSIDERATION PURSUANT TO PARAGRAPH II D 3 A OF REA BULLETIN 40-6; AND AWARD TO MICHIGAN ELECTRIC WAS APPROVED BY THE ADMINISTRATOR ON MAY 17, 1967.

PARAGRAPHS 12 AND 13 OF FORM 6606, REVISION 2/14/67, NOTICE AND INSTRUCTIONS TO BIDDERS, INCLUDED WITH THE INVITATION PACKAGE SENT TO BIDDERS, UNCONDITIONALLY REQUIRED THE SUCCESSFUL BIDDER, WITHIN 10 DAYS AFTER WRITTEN NOTICE OF AWARD, TO FURNISH A CONTRACTOR'S BOND "IN A PENAL SUM NOT LESS THAN THE CONTRACT PRICE.'

REA BULLETIN 40-6, WHICH IN PARAGRAPH II F SETS OUT REA POLICY IN REGARD TO BORROWER'S USE OF CONSTRUCTION FUNDS, PROVIDES:

"* * * WHERE COMPETITIVE BIDS ARE TAKEN, THE CONTRACT MUST BE AWARDED TO THE LOWEST RESPONSIBLE BIDDER ON THE BASIS OF THE LOWEST BID UNLESS ALL BIDS ARE REJECTED OR UNLESS THE BORROWER CAN SHOW THAT THE AWARD OF THE CONTRACT ON THE BASIS OF OTHER THAN THE LOW BID IS IN ITS BEST INTEREST.'

PARAGRAPH IV F OF THE SAME BULLETIN, IMPLEMENTING THAT POLICY, DIRECTS BORROWERS TO REVIEW BIDS FOR IRREGULARITIES, ERRORS, AND EXCEPTIONS, AND, IN THE EVENT OF MAJOR IRREGULARITIES OR ERRORS, REQUIRES THE REJECTION OF THE BID. THE POLICY REQUIREMENTS REGARDING INSURANCE AND BONDING SET OUT IN REA BULLETIN 40-2 OF AUGUST 16, 1962, PARAGRAPH IV A, ALSO OBLIGE CONTRACTORS UNDER REA FUNDED PROJECTS COSTING OVER $10,000 TO FURNISH BOND IN A PENAL SUM NOT LESS THAN THE CONTRACT PRICE.

THE COMBINATION OF BUILDER'S RISK INSURANCE AND A CONTRACTOR'S BOND FURNISHED BY MICHIGAN ELECTRIC PROVIDES A LESSER DEGREE OF PROTECTION THAN WOULD HAVE BEEN PROVIDED UNDER A CONTRACTOR'S BOND FOR THE FULL AMOUNT OF THE CONTRACT. RISK INSURANCE, BY ITS NATURE, IS LIMITED TO PARTICULAR RISKS, SUCH AS THE COST OF MATERIALS DESTROYED, WHILE UNDER A CONTRACTOR'S BOND A SURETY ASSUMES THE OBLIGATION OF COMPLETING THE PROJECT WITHOUT REGARD TO SUCH FACTORS AS THE COST OF THE MATERIALS INVOLVED. FURTHERMORE, BUILDER'S RISK INSURANCE, UNLIKE THE CONTRACTOR'S BOND, CONTAINS A NUMBER OF EXPRESS EXCLUSIONS RELIEVING THE INSURER FROM EVEN THE LIMITED LIABILITY OF THE COST OF MATERIALS. THESE EXCLUSIONS INCLUDE A NUMBER WHICH ARE OF POSSIBLE APPLICATION HERE, SUCH AS "LOSS, DAMAGE OR EXPENSE TO ELECTRICAL APPLIANCES OF ANY KIND, INCLUDING WIRING, ARISING FROM ELECTRICAL INJURY OR DISTURBANCE FROM ARTIFICIAL CAUSES, * * *.' "LOSS, DAMAGE OR EXPENSE CAUSED BY OR RESULTING FROM MISAPPROPRIATION, SECRETION, CONVERSION, INFIDELITY OR ANY DISHONEST ACT * * *" AND "LOSS OR DAMAGE OCCASIONED BY FLOOD, HOWEVER CAUSED * * *.'

IT IS APPARENT THAT THE ALTERNATE FORMS OF PROTECTION ARE NOT EQUIVALENTS, AND THAT, THEREFORE, MICHIGAN ELECTRIC'S BID CONTAINED A MAJOR IRREGULARITY. IN LIGHT OF THE TERMS OF THE INVITATION REQUIREMENTS AND THE REGULATIONS ISSUED BY REA, THIS MAJOR IRREGULARITY RENDERED NORTHERN MICHIGAN'S BID NONRESPONSIVE. HOWEVER, REA WAIVED THE BOND REQUIREMENT, HOLDING THAT AWARD TO MICHIGAN ELECTRIC WAS PERMISSIBLE AS BEING IN THE BEST INTERESTS OF THE COOPERATIVE.

YOUR LETTER OF MAY 26, 1967, ASSERTS THAT THE NECESSARY AUTHORITY TO MAKE AWARD UNDER THESE CIRCUMSTANCES IS CONTAINED IN THE BORROWER'S LOAN AGREEMENT WITH REA, ARTICLE III, SECTION 3, WHICH PERMITS AWARD TO OTHER THAN THE LOWEST RESPONSIBLE BIDDER "UPON A SHOWING THAT THE AWARD OF A CONTRACT TO SUCH BIDDER IS IN THE BEST INTERESTS OF THE BORROWER.' SIMILAR LANGUAGE PERMITTING AWARD ON A BASIS OTHER THAN THE LOW BID WHEN FOUND TO BE IN THE BORROWER'S BEST INTERESTS IS CONTAINED IN REA BULLETIN 40-6, PARAGRAPH II F, QUOTED ABOVE.

THE RECORD SHOWS THAT MICHIGAN ELECTRIC, A RECENTLY ORGANIZED FIRM, COULD NOT SATISFY THE STANDARDS OF THE BONDING INDUSTRY, AND THEREFORE, COULD NOT OBTAIN A BOND FOR THE FACE AMOUNT OF THE CONTRACT. HOWEVER, BECAUSE THE BUILDING MATERIALS ARE TO BE SUPPLIED BY THE COOPERATIVE, MATERIALMEN WILL BE PAID IN ANY EVENT, AND THE NEED FOR A CONSTRUCTION BOND IN THE FULL AMOUNT OF THE CONTRACT IS LESSENED. THE REA IS OF THE OPINION THE ALTERNATIVE PROTECTION FURNISHED HERE, BUILDER'S RISK INSURANCE TO PROTECT THE MATERIALS WHILE UNDER THE CONTRACTOR'S CONTROL AND A CONTRACTOR'S BOND FOR THE REMAINING COSTS, SHOULD PROVIDE ADEQUATE PROTECTION AGAINST ALL REASONABLY FORESEEABLE RISKS UNDER THE CONTRACT.

WE ARE FURTHER INFORMED THAT OVER THE PAST FEW YEARS IN THE NORTHERN MICHIGAN AREA, THE ELECTRIC COOPERATIVES HAVE BEEN UNABLE TO SECURE ADEQUATE COMPETITION FOR CONSTRUCTION OF TRANSMISSION LINES AND RELATED FACILITIES, WITH THE RESULT THAT CONSTRUCTION COSTS ARE GENERALLY RUNNING MUCH HIGHER THAN REA BUDGET ESTIMATES. IT IS THEREFORE THE OPINION OF THE REA THAT A NEW CONSTRUCTION FIRM LOCATED IN THE AREA WILL ULTIMATELY BE OF GREAT BENEFIT IN STIMULATING ADEQUATE FUTURE COMPETITION IN NORTHERN MICHIGAN. ALSO INFLUENCING REA APPROVAL OF THIS AWARD IS THE SUBSTANTIAL RESULTANT SAVING TO THE BORROWING COOPERATIVE. THIS SAVING IS MANY TIMES THE POSSIBLE DIFFERENCE OF THE COST OF THE COMPLETE BOND COVERAGE REQUIRED BY THE INVITATION AND THE LESSER COST OF THE COMBINATION OF A BOND AND BUILDER'S RISK INSURANCE FURNISHED BY MICHIGAN ELECTRIC. FINALLY, AWARD UNDER THE PRESENT INVITATION WAS DEEMED PREFERABLE TO CANCELLATION AND REISSUANCE OF THE INVITATION BECAUSE OF THE URGENCY OF THE PROJECT AND THE NEED TO SCHEDULE THE CONSTRUCTION WORK DURING THE SUMMER MONTHS.

REA CONCLUDED THAT THESE WERE COMPELLING REASONS FOR EXERCISING ITS RESERVED POWER TO MAKE AN AWARD BASED UPON ITS DETERMINATION OF WHAT IS "IN THE BEST INTERESTS OF THE BORROWER" AND SO A WAIVER WAS GRANTED, THEREBY PERMITTING AWARD TO MICHIGAN ELECTRIC.

WHILE WE AGREE THAT THE FACTORS STATED SUPPORT YOUR DECISION TO WAIVE THE MAJOR IRREGULARITY IN MICHIGAN ELECTRI'S BID, WE QUESTION WHETHER PROPER CONSIDERATION WAS GIVEN TO THE POSSIBLE ADVERSE EFFECT SUCH A WAIVER MIGHT HAVE UPON FREE COMPETITION. OTHER OFFERORS WHO COMPLIED WITH THE TERMS OF THE INVITATION MIGHT BE DISCOURAGED FROM BIDDING UPON FUTURE PROJECTS IF THEY BELIEVE SOME BIDDERS MAY BE GRANTED WAIVERS OF THE INVITATION REQUIREMENTS. OR, CONCEIVABLY, IN THE BELIEF SUCH BIDS WILL BE CONSIDERED, BIDDERS MIGHT BE LEAD TO REQUEST OTHER VARIATIONS FROM THE CONDITIONS SET OUT IN FUTURE INVITATIONS.

THUS, THE SHORT RANGE BENEFIT TO COMPETITION IN THE IMMEDIATE GEOGRAPHIC AREA COULD WELL BE OFFSET BY THE DETRIMENT SUFFERED AS THE RESULT OF INJECTING AN UNNEEDED ELEMENT OF UNCERTAINTY INTO THE COMPETITIVE BIDDING SYSTEM THROUGH THE GRANTING OF DISCRETIONARY WAIVERS PERMITTING ACCEPTANCE OF NONRESPONSIVE BIDS.

FURTHERMORE, WE CANNOT AGREE THAT THE POWER OF THE REA RESERVED IN THE LOAN AGREEMENT AND THE REGULATIONS TO AUTHORIZE EXCEPTIONS TO THE USUAL COMPETITIVE BIDDING PRACTICE OF ACCEPTING THE LOW BID CAN REASONABLY BE INTERPRETED TO COVER THE ACTION COMPLAINED OF HERE: THE AWARDING OF A CONTRACT TO A NONRESPONSIVE BIDDER. THE LANGUAGE OF PARAGRAPH II F OF BULLETIN 40-6 IN GENERAL REQUIRES AWARD TO THE "LOWEST RESPONSIBLE BIDDER ON THE BASIS OF THE LOWEST BID.' AN EXCEPTION IS PERMITTED, HOWEVER, WHERE IT CAN BE SHOWN THAT AWARD ON THE BASIS OF "OTHER THAN THE LOW BID" IS IN THE BORROWER'S BEST INTEREST. WITHIN THE CONTEXT OF THE PARAGRAPH WE BELIEVE THE QUOTED LANGUAGE MUST IN EACH CASE BE READ WITH THE ADDITION OF THE WORD "RESPONSIVE.' OTHERWISE, IF BIDS ARE TO BE CONSIDERED ONLY WITH RESPECT TO PRICE AND THE BIDDER'S RESPONSIBILITY AND WITHOUT REGARD TO RESPONSIVENESS THERE IS NO BASIS FOR BID COMPARISON AND THE TERM "LOW BID" WOULD HAVE NO SIGNIFICANCE. FURTHERMORE, ANY OTHER INTERPRETATION IS INCONSISTENT WITH THE REQUIREMENT IN PARAGRAPH IV F OF BULLETIN 40-6 THAT BIDS CONTAINING MAJOR IRREGULARITIES BE REJECTED. FOR THESE REASONS, AND ON THE BASIS OF THE LANGUAGE EMPLOYED, WE THINK THE SENTENCE OF PARAGRAPH II F REFERRED TO ABOVE AND PREVIOUSLY QUOTED MUST BE CONSTRUED TO PERMIT AWARD TO A RESPONSIVE AND RESPONSIBLE BIDDER WHOSE BID WAS NOT THE LOWEST RECEIVED. APPROPRIATE EXAMPLES OF THIS WAIVER AUTHORITY MIGHT BE THE REJECTION OF THE LOW BID OF AN UNKNOWN CONTRACTOR TO PERMIT AWARD TO A CONTRACTOR WITH AN ESTABLISHED REPUTATION FOR SKILLED AND TIMELY PERFORMANCE; OR THE REJECTION OF THE BID OF A SEEMINGLY ADEQUATE, EXPERIENCED CONTRACTOR IN FAVOR OF A CONTRACTOR WHOSE HIGH DEGREE OF EXPERTISE MAKES HIM AN ACKNOWLEDGED LEADER IN A PARTICULAR INDUSTRY.

HOWEVER, IN ORDER TO QUALIFY FOR CONSIDERATION UNDER THIS DISCRETIONARY POWER TO EITHER REJECT OR ACCEPT THE LOW BID, A BID MUST OFFER THE SERVICES AND SUPPLIES DESCRIBED IN THE INVITATION RATHER THAN A NONCONFORMING ALTERNATIVE SELECTED BY THE BIDDER. TO CONSTRUE THIS DISCRETIONARY FUNCTION OTHERWISE WITHIN THE CONTEXT OF PROCUREMENT BY ADVERTISED BIDDING WOULD RESULT IN A LOGICAL CONTRADICTION, FOR IT WOULD NEGATE A BASIC PREMISE OF COMPETITIVE BIDDING, THE REQUIREMENT THAT ALL BIDDERS BE AFFORDED EQUAL TREATMENT. ONE OF THE PREREQUISITES FOR INSURING EQUAL TREATMENT OF BIDDERS IS THE EVALUATION OF ALL BIDS ON THE BASIS OF IDENTICAL SPECIFICATIONS AND CONDITIONS, WHICH IN TURN REQUIRES THE REJECTION OF BIDS WHICH MATERIALLY DEVIATE FROM THE PREDETERMINED STANDARDS OF EVALUATION.

WE THEREFORE CONCLUDE THAT AWARD OF THIS CONTRACT WAS INCONSISTENT WITH THE PRINCIPLES OF ADVERTISED BIDDING BECAUSE MICHIGAN ELECTRIC'S BID CLEARLY DID NOT SATISFY THE CONTRACTOR'S BOND REQUIREMENTS, AN ESSENTIAL ELEMENT OF THE INVITATION WHICH RENDERED THE BID NONRESPONSIVE. FURTHERMORE, IT IS OUR OPINION THAT REA REGULATIONS PROHIBIT AWARD UNDER SUCH CIRCUMSTANCES.

NEVERTHELESS, THIS AWARD APPEARS TO HAVE BEEN MADE IN GOOD FAITH AND IS NOT CONTRARY TO THE STATUTE GRANTING BROAD DISCRETION TO THE ADMINISTRATOR IN THESE MATTERS. WE ARE ALSO ADVISED THAT THE CONTRACTOR IS PERFORMING WORK UNDER THE CONTRACT. FOR THESE REASONS, WE DO NOT DEEM IT ADVISABLE TO DISTURB THE PRESENT AWARD TO MICHIGAN ELECTRIC.

WE NOTE ALSO THE DETERMINATION OF YOUR OFFICE THAT IN THIS INSTANCE BUILDER'S RISK INSURANCE IS CONSIDERED ADEQUATE PROTECTION FOR THAT PORTION OF THE TOTAL CONTRACT PRICE WHICH REPRESENTS THE COST OF MATERIALS FURNISHED BY THE COOPERATIVE. THIS DETERMINATION SUGGESTS THE POSSIBILITY THAT THIS LESS COSTLY FORM OF PROTECTION, IN COMBINATION WITH A CONTRACTOR'S BOND, MIGHT PROVIDE ADEQUATE PROTECTION FOR COOPERATIVES UNDER SIMILAR FUTURE CONTRACTS. IF SO, WE SUGGEST CONSIDERATION OF PROVIDING IN INVITATIONS THAT SUCH ARRANGEMENT WILL BE REGARDED AS AN ACCEPTABLE ALTERNATIVE TO THE PERFORMANCE BOND REQUIREMENT.