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Ratwik, Roszak & Maloney, P.A.

300 U.S. Trust Building

730 Second Avenue South

Minneapolis, Minnesota55402

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(612) 339-0060

Fax (612) 339-0038

CONTRACTING AND BID LAW BASICS

Joseph J. Langel

2013 MASBO Institute

February 28, 2013

I.WHAT IS A CONTRACT?

Contracts, as defined by statute, are the subject of the “bid law.” The initial question then, is what is a contract?

  1. Fundamentally, a contract is a promise made in exchange for something of value, whether it is money or something else, such as a promise to do, or not do, something of value to, or for, the other person.
  1. The elements of a contract are:

⇨An offer

⇨Acceptance

⇨Consideration (money/value)

  • Note: gifts are not included.

II.WHAT TYPES OF CONTRACTS MUST BE SUPPORTED BY ADVERTISED BIDS?

A.Statutory Authority

School Districts are granted the power to contract by statute. The statutes dictate whether a school district must adhere to the statutory bidding requirements.

B.School District Contracting Law – Minn. Stat. § 123B.52, subd. 1

“A contract for work or labor, or for the purchase of furniture, fixtures, or other property, except books registered under the copyright laws, or for the construction or repair of school houses, the estimated cost or value of which shall exceed that specified in section 471.345, subdivision 3, must not be made by the school board without first advertising for bids or proposals by two weeks’ published notice in the official newspaper. This notice must state the time and place of receiving bids and contain a brief description of the subject matter.”

C.Municipal Contracting Law – Minn. Stat. 471.345, subd. 2

Contracts are agreements “for the sale or purchase of supplies, materials, equipment or the rental thereof, or the construction, alteration, repair or maintenance of real or personal property.”

D.Examples of Contracts Subject to Bidding Requirements

• New construction of facilities, including buildings, parking lots, athletic fields, etc.

• Repair of facilities (although most repair work will not be significant enough to fall within the dollar limitations, discussed below).

• Purchases of equipment, including computers, paper supplies, furniture, etc.

⇨Note: Just because the type of contract falls within the statutes does not mean bidding is required. The estimated value of the contract must also fall within the statute.

III.WHAT VALUE OF CONTRACT MUST BE SUPPORTED BY ADVERTISED BIDS?

A.Contracts Over $100,000

Any contract falling within the statutory definition, and not otherwise excepted from the law, which has a value in excess of $100,000, may only be entered into after advertising for sealed bids or by utilizing the best value alternative.

B.Contracts Exceeding $25,000, up to $100,000

If the amount of the contract is estimated to exceed $25,000 but not $100,000, then the school district may choose to seek sealed bids, obtain quotations, or utilize the best value alternative.

C.Contracts Less Than $25,000

Contracts with a value of less than $25,000 may be entered into without seeking bids or quotes. The school district may directly contact any supplier of goods they wish and negotiate a contract. In the alternative, school districts may seek quotes and then negotiate with those who respond. Any quotes received must be kept on file for one year. The best value alternative may also be utilized.

D.Splitting Contracts to Avoid the Bid Law

As a general rule, a project that would normally be handled under a single contract cannot be split and dealt with piecemeal so as to reduce the amount of the contracts for the purpose of avoiding the bid law. The purpose of the bid law is to safeguard taxpayer funds by ensuring that the lowest price possible is paid, and to avoid corruption and favoritism. Splitting contracts would be viewed by the courts as being contrary to those purposes.

This does not mean that several contracts can never be used in situations where one contract would otherwise suffice. Whether the use of several, smaller contracts instead of one larger one is appropriate depends upon the facts.

Example 1:A district wants to build a storage building. The total cost is estimated to exceed $100,000. The district could hire one construction company to do all the work, in which case bidding is required. Or, the district could hire individual trades, buy all materials directly and act as the construction manager, in which case bidding is required only for those portions of the work that will, by themselves, exceed $100,000. Either method is legally acceptable.

Example 2:The school board approves a plan to wire an older school building for a computer network. The cost of the project will exceed $100,000. Splitting this work into several contracts, such as by dividing up the school into several areas and having one contract for each area, would likely not past muster in the event of a court challenge. This is particularly true if the same company is hired to do every area and all work is done at one time or even sequentially. The project is to wire the school, and it makes little practical sense to divide it up. One contract should be used, even if it requires bidding.

Example 3:A district wishes to enter into a two-year vending agreement with Coca-Cola or Pepsi, with the district buying the product and keeping profits from sales on district property. The value of the contract is expected to exceed $100,000. Bidding is required.

  • Note: many pop vending contracts do not require bidding because nothing is being purchased. It may be more appropriately characterized as a lease or licensing arrangement.

Example 4:A district is building a new middle school, and part of the overall project includes construction of a new baseball field. The overall project easily exceeds $100,000, but the ball field, by itself, does not. The district could separate the ball field from the rest of the project and forego bidding on that portion, because construction of a ball field is distinct from the construction of a new building.

IV.PROCEDURES FOR WHEN BIDDING IS NOT REQUIRED

A.Quotations

As indicated above, quotations may be used when the value of the contract is less than $100,000.

Quotes are similar to bids in that they are usually solicited through advertisements, the district issues specifications so that everyone who submits quotes will do so with the same information in hand, and the quotes are due on a certain date and at a certain time. Quotes, like bids, are open to the public once opened. The primary difference between quotes and bids is that, once all quotes are submitted, they are then negotiable. The school district need not accept the lowest quote, but rather may haggle over the terms of the proposed contract, and may try to pit one quoting party against another.

It is very important that the district clearly indicate that it is seeking quotations, not bids, during the entire process. The words “bid,” “bidding” and “bidder” should be carefully avoided, otherwise the person submitting the lowest quote may try to argue that it was in fact a bidding process and that he must be awarded the contract. A notice similar to the following is recommended in the advertisement and specifications: “The district is seeking quotations, not bids, and said quotations will be subject to further negotiation once all quotes are submitted and opened. The district reserves the right to negotiate the quotations, and to award the contract to someone other than the one with the lowest quotation.”

B.Emergency Situations

If school district buildings are destroyed or damaged, and “the public interest would suffer by [the] delay” created by bidding, the contracts for repairs may be made without advertising for bids. Minn. Stat. § 123B.52, subd. 1. This is the only “emergency exception” contained in the bid law pertaining to school districts. Contracting without advertising for bids, in situations where it would normally be required, may result in a void contract.

C.Contracts That May be Let in the Open Market

  1. Contracts under $25,000

Some points to remember while negotiating contracts:

-It is incumbent upon districts to spend public funds in the most efficient manner possible, even if the bid law does not apply.

-Unlike bidding, negotiating allows the district to weigh non-monetary factors. Make use of that ability to improve the quality of the product or service being provided.

-Direct negotiation is the easiest method because of the lack of procedure, but in situations where there is a possibility of claims of favoritism or unfairness, consider seeking quotes or bids to make the process more objective from the public’s standpoint.

2.Perishable Food Items

Contracts for the purchase of perishable food items, except for milk for school lunches and vocational training programs, in any amount may be made by direct negotiation by obtaining two or more written quotations for the purchase or sale, when possible, without advertising for bids or otherwise complying with the bid law requirements. Minn. Stat. § 123B.52, subd. 1.

3.Transportation and Fuel

A contract for the transportation of school children, or a contract for the purchase of petroleum heating fuel or fuel for vehicles may be made by direct negotiation, by obtaining two or more written quotations for the service when possible, or upon sealed bids. Minn. Stat. § 123B.52, subd. 3.

4.Employment Contracts

Regardless of how much a district intends to pay an employee, the employment contract is not subject to the bid law. Each employee is considered to be unique, with characteristics that cannot be readily put forth in uniform bid specifications.

5.Professional Services

Services provided by professionals are also considered to be unique and not subject to the bid law, even though they are not employees of the district and the contract may exceed $100,000. This group includes:

• Architects

• Engineers

• Construction Managers

• Attorneys

Note that the people in these groups typically provide services, not things. Construction managers, for instance, are heavily involved in the construction of new facilities, but they do not actually provide the materials or the labor to install the materials. Instead, they are providing professional construction coordination services, and thus are exempt from the bid law.

⇨Note: Occasionally a construction manager will offer to both manage the project and perform work as a contractor. Those roles must be dealt with as two separate contracts, with the latter possibly subject to the bid law.

6.Real Estate Purchase or Lease

Under Minnesota Statutes section 123B.51, school districts have authority to purchase, sell or lease real estate. Because real estate is inherently unique, it is not subject to the bid law regardless of its value. The only constraint is that school districts are generally obligated to obtain the most fiscally responsible price that is possible.

⇨Note: There is no prescribed procedure for buying or selling land. The process is up to the district.

7.Energy Efficiency Contracts

These are contracts “for the evaluation and recommendations of energy conservation measures, and for one or more energy conservation measures.” The cost of the energy conservation measures must be recouped by the energy savings during a 15-year (or shorter) period. Minn. Stat. § 123B.65. As long as the contract contains a written guarantee that savings will meet or exceed the costs, the contract is not subject to bidding requirements.

These contracts have several procedural requirements that must be met in lieu of the bid law requirements.

Note that these contracts cannot be used to “hide” non-energy related repairs or improvements, or to avoid the bid law.

8.Insurance Other Than Group Insurance

Group insurance contracts (for more than 25 employees) are subject to RFP requirements as opposed to formal bidding. Minn. Stat. § 471.6161. Other insurance contracts for public employees are exempt from the RFP requirements. Minn. Stat. § 43A.316, subd. 10.

9.Purchases Under a Joint Powers Agreement

Minn. Stat. § 471.59 permits districts to enter into joint powers agreements with other political subdivisions (city, town, county) or the State or the federal government. By virtue of such agreements, a district may obtain materials that were subjected to a bidding process by the other entity. The key is that someone went through a bona-fide bidding process.

It is incumbent upon the school district to ensure that the acquisition process utilized by the municipality was undertaken properly. Also, the joint powers agreement must be formalized between the parties in order for the arrangement to be legitimate.

There is an exception, however, if a district buys computer hardware and software off of a State contract. In that case, the contract need only be negotiated, not bid. Note that this exception only applies to State contracts, and only to computer hardware and software. The University of Minnesota is not the “State” for this purpose.

10.Cooperative Purchasing – Minn. Stat. § 471.345, subd. 15

A school district may contract for the purchase of supplies, materials, or equipment by utilizing contracts that are available through the state’s cooperative purchasing venture. For a contract estimated to exceed $25,000, a school district must consider the availability, price and quality of supplies, materials, or equipment available through the state’s cooperative purchasing venture before purchasing through another source.

If a school district does not utilize the state’s cooperative purchasing venture, a school district may contract for the purchase of supplies, materials, or equipment without regard to the competitive bidding requirements of Minn. Stat. § 471.345 if the purchase is through a national municipal association’s purchasing alliance or cooperative created by a joint powers agreement that purchases items from more than one source on the basis of competitive bids or competitive quotations.

D.Bidding When You do not Have to Bid

The cardinal rule is simply this: once the bid process is initiated, it must be followed. This is true regardless of whether it was required in the first place. A school district cannot reverse course once bidding is started, even if the bid process was started by mistake.

V.ACCEPTING AND AWARDING BIDS

The lowest responsible bid should be approved by the school board. If this bid is not the lowest bid, the reason for not selecting the lowest bid should be explained in the board’s resolution so that a record is made in the event of a bid contest.

A.When Does a Bid “Materially Vary” From the Specifications?

  1. Bids must substantially and materially conform to specifications, or they will be rejected as nonresponsive.
  1. The statutes do not define the term “materially varies.” Generally, courts have found that a variance is material when the “variance gives a bidder a substantial advantage or benefit not enjoyed by other bidders.” Coller v. City of St. Paul, 223 Minn. 376, 26 N.W.2d 835 (Minn. 1947).
  1. There may be no material variation on matters involving the substance of a competitive bid, such as price, quality, quantity or manner of performance. Foley Bros. Inc., 123 N.W.2d 387 (Minn. 1963).
  2. Examples of material variances:
  1. Inability to meet scheduled deadlines.
  1. Submission of one bid when separate bids (for general construction, heating and ventilating, plumbing and sewage system, and electric wiring) were requested in the advertisement is a material variance. Op. Atty. Gen. 707A4, June 4, 1947. The bidder who combined the bids enjoyed a substantial advantage over other bidders who were required to bid each item separately.
  1. When specifications stated that failure to submit information concerning commitment to enter into subcontracts with minority and women-owned businesses would render the bid nonresponsive, a failure to specify women-owned businesses with which bidder would use best efforts to enter into subcontract, rendered bid materially nonresponsive. Carl Bolander & Sons Co. v. City of Minneapolis, 451 N.W.2d 204 (Minn. 1990).
  1. A bid containing an escalator clause where one was not requested in specifications is unresponsive. Op. Atty. Gen. 707-B-7, Nov. 14, 1947.
  1. A bid that specified an installation process for parking meters which was radically different than the one contained in the specifications, and gave the bidder a $2 advantage per parking meter, should be rejected. Coller, 223 Minn. 376, 26 N.W.2d 835 (Minn. 1947).
  1. A variance is de minimus and may be waived if “the public rights are not thereby prejudiced.” Byrd v. Independent School District No. 194, 495 N.W.2d 226 (Minn. App. 1993). Courts have stated that the public should not be denied the benefit of the lowest bidder for every minor defect that does not affect the substance of the bid.
  1. Bid instructions should include the following standard language: “The School District reserves the right to wave any informal irregularities in the bids.”
  1. A variance is not de minimus when it affects the price, quality, quantity, or manner of performance. These factors cannot be waived as irregularities.
  1. Examples of non-material or de minimus variances:
  1. The submission of a certificate of noncollusion rather than an affidavit of noncollusion is not a material variance from the specifications. Foley Bros. Inc., 123 N.W.2d 387 (Minn. 1963).
  1. The delivery of a bid several minutes after the deadline set by the specifications when no bids had been opened, will not justify a rejection of the bid. Nielsen v. City of St. Paul, 88 N.W.2d 853 (Minn. 1958).
  1. The apparent low bidder proposed the use of unspecified equipment when the bid had called for the use of a particular brand of equipment. The court found this variance to be deminimus because the use of unspecified equipment only allowed the bidder to reduce its bid by $18,200 and the bidder was the low bid by nearly $330,000. Madsen-Johnson Corp. v. City of Becker, 1996 WL 106192 (Minn. App. 1996).
  1. If bid specification calls for alternative bids, a bid which contains a material variance on an alternative that is not made part of a contract will not require rejection of the bid. Griswald v. RamseyCounty, 65 N.W.2d 647 (Minn. 1954).

B.Mistakes in Bid

  1. Generally, where a bidder makes an honest mistake or calculation error in formulating a bid and the contracts have not yet been awarded, a municipality should allow the bidder to withdraw their bid.
  1. When the contracts have already been awarded, the municipality may still release the bidder by mutually agreeing to abandon the contract.
  1. When a mistake has been made which complicates the bidding process, a municipality may reject all bids and re-advertise. Another option is to reject the mistaken bid and accept the next lowest responsible bidder.
  1. Changes to Bids Following Opening
  1. Once bids are submitted and opened, they cannot be altered, withdrawn, or revoked, in the absence of mistake or fraud.
  1. Municipalities “must determine responsiveness at the time of the opening of the bid.” Bolander, 451 N.W.2d 204 (Minn. 1990).
  1. At the bid opening, if a bid does not comply with the specifications, the bidder may not be allowed to modify bid to conform to the specifications. Coller, 223 Minn. 376, 26 N.W.2d 835 (Minn. 1947).
  1. Examples:
  1. Where the price term of a bid is ambiguous due to (+) and
    (-) signs, bidder may not clarify the price term after bids were opened. Lovering-Johnson, Inc. v. City of Prior Lake, 558 N.W.2d 499 (Minn. App. 1997). To do so would be to allow the bidder an unfair advantage of using information gained during the bid opening to submit a bid and ensure the bidder the lowest bid price.
  1. A bidder may not change a bid from eight-ply snow tires to ten-ply tires on a snow plow as required by specifics after bids were open. Op. Atty. Gen. 707-A-7, Aug. 10, 1949.
  1. If the bidder requests withdrawal of bid due to error in submitting bid, bid may be withdrawn before accepted. However, bidder may not change bid and resubmit.

⇨In Rochon Corp. v. City of St. Paul, the bidder discovered a major typo when the bids were opened. A subcontract for $688,000 was written as $68,800. The bidder sought to withdraw the bid. The city, however, offered to have the bidder correct its error, which still left it as the low bidder. The bidder agreed and was awarded the contract. The Court of Appeals held that the post-bid modification was a material change in the bid and unlawful, and the contract was deemed void.