Failure of Prime Contractor to Comply With "Percentage of Work" Requirements Entitles Government to Damages

In a case of first impression, the United States Civilian Board of Contract Appeals upheld a contracting officer’s final decision assessing damages against a prime contractor that failed to comply with the requirement to perform at least 50% of the on-site work. On a contract awarded by the Federal Highway Administration ("FHWA"), prime contractor, Singleton Enterprises ("Singleton") subcontracted the vast majority of its work to Talley Construction ("Talley"). Singleton’s only employees on-site were supervisors, which Singleton apparently borrowed from Talley but paid directly. It was unclear whether Singleton had paid for equipment used on the site, but the CBCA determined that whether or not Singleton had paid for equipment costs, it still performed substantially less than 50% of the value of on-site work.

The FHWA decided that if Singleton did not perform the on-site work, it was not entitled to the benefit of the unit prices it charged for that work. Talley was essentially acting as prime contractor so the FHWA decided it should only pay Singleton what Singleton was paying Talley. To calculate its damages, once the final quantities were determined, the FHWA multiplied Talley’s unit price to Singleton for the work, which was less than Singleton’s unit price to the FHWA for the work. Singleton had already been paid more than the FHWA would have paid based on Talley’s pricing. The appeal upheld not only the FHWA’s decision that it was entitled to recoup its "overpayment" damages from Singleton for not meeting the percentage of work requirement but also the reasonableness of the FHWA’s method of calculating its damages for that breach.

The decision notes that it has no precedential value. However, in similar circumstances, contractors should expect both the Department of Transportation and the Civilian Board of Contract Appeals to act as they did here. See Singleton Enterprises v. Department of Transportation, CBCA No. 2716, June 14, 2012.

Listing of Subcontractors with a Bid--should it be grounds for rejecting a low bid from a responsible bidder?

Where in the Mississippi Procurement Statutes does it require subcontractors to be listed with a bid?  The correct answer is NO WHERE!!  So why use it to decide whether to award the contract to a prime contractor who is the low bidder with a valid certificate of responsibility from the Mississippi State Board of Contractors?

Rule 12 of the Mississippi State Board of Contractor’s Rules and Regulations states:

… the Prime Contractor on or before the date of being awarded the prime Contract, shall submit to the awarding agency a list of all subcontracts, exceeding Fifty Thousand Dollars ($50,000.00) with respect to public projects…

(Emphasis added.)

The Department of Finance and Administration’s Procurement Manual provides as follows concerning the requirement for the listing of subcontractors:

600.55

SUBCONTRACTOR’S LIST

The Contractor will submit to the Bureau a list of all Subcontractors to be used on the Project within seven (7) days after written notice of contract award. Any Subcontractor listed must be acceptable to the Bureau. [Miss Code 1972, Annotated, Sections 31-3-1 through 31-3-23.]

(Emphasis added.)

And, when the City of Vicksburg questioned whether it could award the contract to the apparent low bidder that had not listed its subcontractors as required on the Bid Form, the Attorney General opined as follows:

In response to your first inquiry, previous opinions have stated that a waiver of an irregularity in a bid received would not be improper in cases where (1) the irregularity does not destroy the competitive character of the bid by affecting the amount of the bid thereby giving the bidder an advantage or benefit over other bidders and (2) the irregularity does not involve noncompliance with a statutory or regulatory requirement. See MS AG Op., Dees (June 7, 1995) and MS Ag Op., Kilpatrick, December 19, 1997). See also Parker Construction Company v. Board of Aldermen of the City of Natchez, 721 So.2d 671 (Miss. App. 1998). In your first inquiry, the irregularity was the failure to list the names of subcontractors on the bid form. We have previously opined that there is no statutory or regulatory requirement that a contractor submit a list of subcontractors upon the submission of his or her bid.  MS AG Op., Dees (June 7, 1995).  In fact, as you have stated, the Rules and Regulations of the State Board of Contractors, Rule 12, specifies that "the Prime Contractor, on or before the date of being awarded the prime contract, shall submit to the awarding agency a list of all sub-contracts, exceeding Fifty Thousand Dollars ($50,000.00) with respect to public projects…" It is the responsibility of the awarding authority, however, to make a final determination whether an irregularity in a bid may be waived.

(Emphasis added). Mississippi Attorney General Opinion, dated September 22, 2000, addressed to Nancy D. Thomas. See also, Mississippi Attorney General Opinion, date June 7, 1995, addressed to A.J. "Buddy" Dees, Jr. (public agency permitted to award contract where prime contractor’s bid document listed subcontractor did not have a certificate of responsibility but prime contractor substituted licensed subcontractor prior to award).

Nonetheless, the design professionals for most public projects require the listing of subcontractors. Then, when a prime contractor fails to list its subcontractors or makes an error in listing its subcontractor, the design professional and/or public agency decide whether to reject the bid or waive the "irregularity". What are the criteria for deciding which of the two options will be exercised? You tell me.

If the public agency requires the listing of subcontractors it should state in the Instructions to Bidders that the bid will be rejected if subcontractors are not listed properly. It is just that simple. In addition, public agencies should change their rules and regulations to state listing of subcontractors must be submitted with the bid to be considered for award. This would mean that everyone would know the rules for listing of subcontractors. Will this happen? It is doubtful. It appears design professionals and public agencies prefer the flexibility afforded by such an ambiguity in the bidding process rather than the objectivity associated with clear Instructions to Bidders.

CAN I RELY ON MY SUBCONTRACTOR'S CERTIFICATE OF INSURANCE?

Every contractor generally requires proof of insurance from its subcontractors, especially with respect to worker’s compensation insurance. In satisfaction of this contractual requirement, subcontractors commonly provide a certificate of insurance to the prime contractor. Is the certificate of insurance sufficient? It may not be.

Many certificates of insurance contain a disclaimer that the certificate is for informational purposes only and does not extend the policy. The disclaimer is a warning that you must look at the policy itself for specific coverage.

In Complete Roofing Services, et al. v. Doherty Duggan & Rouse Insurors, 5th Circuit Court of Appeals (5th Cir. 2009), a certificate of insurance was issued to a general contractor, but the worker’s compensation coverage denoted in the certificate was limited to occurrences only in Georgia. The subcontractor’s employee was injured in Mississippi. The court determined that the "Georgia only" policy did not provide coverage for the injured employee. As a result, the general contractor’s worker’s compensation was required to cover the claim. In this case, it was a catastrophic claim costing the worker’s compensation carrier over $1,000,000.

The best business "policy" is to always obtain and read the actual insurance policy itself. In reviewing the policy, take into consideration the circumstances related to each particular project. For example, consider the following factors: Is the subcontractor from another state? If so, are the subcontractor’s employees from another state or local? Is the subcontractor’s insurance policy state specific? If so, does it cover the state where the project is located? Will any leased employees be used for the project? If so, does the insurance policy cover leased employees or is other insurance required? Are there any warnings or disclaimers in the policy? If so, take heed and consider whether other additional insurance is necessary.

Although the Complete Roofing Services case dealt with a contractor/subcontractor relationship, these basic rules apply to any situation where one party contractually requires insurance from another party. The bottom line is this: get the full policy and read it. This applies to your own insurance policy as well!

(D. Drew Malone is a member of Robinson, Biggs, Ingram, Solop & Farris, PLLC who practices in the area of insurance defense. Drew personally handled this case and contributed to drafting this blog.)