2012 Virginia Payment Bond Changes

Below is a summary of the Virginia payment bond changes that are effective this year prepared by my law partner and fellow VB Construction and Public Contracts Law Department member John Lockard.  The changes resulted from several compromises in the 2011 General Assembly, and the impacts remain to be seen. - neil

VIRGINIA PAYMENT BOND CHANGES 2012

            In 2011, the Virginia legislature increased the minimum contract amounts for which payment bonds are required.  As a result of the changes, no payment bonds are required for state or municipal contracts under $500,000 or for transportation related projects (i.e., VODT projects) under $250,000.  This means that subcontractors and vendors on projects under those threshold amounts may have no lien or bond rights to secure payment for the labor or materials provided to the projects.  This year the legislature increased the minimum threshold on VDOT projects to $350,000.

            Additionally, the General Assembly required that any general contractor for certain projects under the threshold amounts must be “pre-qualified.” This requirement likely arose as a means to provide some assurance for payment and to test the ability of general contractors to perform the contract.  “Pre-qualification” is required for any non-transportation project between $100,000 and $500,000 and for transportation projects between $250,000 and $350,000 (if no payment or performance bonds were otherwise required).  The statute did not specify the requirements for pre-qualification.   Despite this requirement, there is no guarantee that a “pre-qualified” general contractor will be able to pay for the labor and materials supplied for these contracts.

            Public entities are not prohibited from requiring payment bonds for projects under the threshold amounts, but prudent subcontractors and suppliers should assume that they have no security for labor and materials provided for contracts under $500,000 with state public entities or for VDOT contracts under $350,000.  At the beginning of the project, subcontractors and suppliers on these projects should ask if a payment bond was provided.  If not, subcontractors and suppliers should carefully monitor their accounts receivables and take prompt action to pursue their claims if the general contractor does not make payments in a timely manner.  Generally, the aggressive creditors are more likely to be paid.  If you have questions regarding this article or your options to collect amounts due on construction projects, we recommend that you contact an attorney experienced in pursuing construction claims.

Joint Check / Joint Payment Agreements

Increasingly, suppliers are requesting joint check or joint payment agreements from subcontractors and prime contractors. From the suppliers' viewpoint, they make a lot of sense because they give some assurance that payments will go directly to the supplier, even if only by a joint check. The problem, however, for higher tier subcontractors or prime contractors is that it creates a direct contractual relationship with a supplier where one would not otherwise exist. This then lead to potential liability that would not otherwise exist. While needs may dictate the use of a joint check or joint payment agreement, higher tier subcontractors / prime contractors will minimally want to incorporate terms that provide reasonable protections, including limitations of liabilities, the incorporation of lower tier contracts, including payment offset rights, and similar risk allocation provisions. One of the biggest risks to avoid is having an obligation to pay the supplier, even if there is not an obligation to pay the lower tiers, and in capping liability.  More discussions of these issues to follow.

AMEC Civil: The case that keeps on giving

AMEC Civil, LLC's contract with VDOT regarding a Route 58 project has been in ongoing litigation for many years. AMEC recovered a significant damages award from the Circuit Court, only to have much of it reversed on appeal.  Since the original judgment, the case has been going back and forth between the Virginia Court of Appeals, the Virginia Supreme Court, the Norfolk Circuit Court, and now most recently back to the Virginia Court of Appeal, which in an unpublished opinion reversed additional damages findings of the Norfolk Circuit Court, and remanded aspects of the decision back to the lower court for additional factual findings, and recalculations based on those findings ("AMEC CA2"). While the case seems destined for additional appeals, the current decision offers various insights regarding damage claims for VDOT projects. This blog will explore those in a series of posts, starting with the question of "what are actual costs?"

This question was one of the main focuses of AMEC CA2 because the VDOT specification in question expressly provides that only "actual costs" will be considered for adjustments. This was a key issue in the case because the lower court had measured damages, in part, by averaging estimated costs using varied means testified to at trial. In the earlier appeal, the Virginia Supreme Court had held that "actual costs" was a term of art, and included direct costs, like materials and wages, and indirect costs, like overhead, but did not include profit. Apply this, the Court of Appeals concluded that, other than the Blue Book, which the Virginia Supreme Court had expressly approved for calculating actual costs for the use of owned equipment, estimates were not a permissible means of establishing actual costs, and that averaging of monthly costs would not reflect actual costs, which must be proven by actual cost records, absent expert testimony otherwise.

This decision makes clear the obligation for keeping accurate records of actual costs for force account work.  More to follow in discussion about the continuing AMEC CA2 ramifications.

"Best Value" Procurement? - Not for Virginia Public Sealed Bidding

With increasing regularity, various procuring agencies had been swimming in the "best value" pool for their procurements. Following the well established federal procurement practice, their solicitations included language along the lines that the procuring agency reserved the right to select "the most advantageous offer" considering such factors as experience, schedule and/or price. Such was the case for a Spotsylvania School Board procurement for janitorial services, respecting which the School Board did not make award to the lowest bidder, but instead made award to the bidder it deemed the most advantageous overall. The low bidder protested, and its protest basis was recently sustained by the Virginia Supreme Court in Professional Building Maintenance Corp. v. School Board of the County of Spotsylvania, in the court's April 20, 2012 decision.

In doing so the court noted that Virginia's public procurement act required award to the lowest responsive and responsible bidder for competitive sealed bidding. While the act does allow for competitive negotiation for certain procurements, the court noted this procurement did not qualify. The court rejected the School Board's contention that best value concepts could be utilized for competitive bids, noting that while the act does permit public bodies to "consider best value concepts when procuring goods and nonprofessional services" in Code Section 2.2-4300, the act does not provide a method of procurement in lieu of competitive sealed bidding. Therefore the court concluded that to accept the School Board's argument it would need to add language to the competitive sealed bidding code provisions as an alternative to the lowest responsive and responsible bidder, which the court concluded it was not allowed to do under prior case precedent.

The court noted other concerns with the School Board's procurement too, including whether the School Board actually followed the stated terms and conditions of the invitation in process or actual evaluation; all of which resulted in the appeal being allowed to proceed to trial. There are not many procurement cases decided by the Virginia Supreme Court, and this decision is insightful on many fronts to both those soliciting and those responding to Virginia procurements. Interestingly, the court did not address any potential tie-in between "best value" and "responsibility" and whether that becomes the next battleground on this issue, or whether public bodies abandon "best value" evaluations for competitive bids remains to be seen.

Virginia Bid Protests: A quick overview

So you lost an award relating to a Virginia public procurement, and want to protest. What are the basic requirements? They are actually fairly simple, but do require prompt action. A protest must be filed with the awarding authority within ten (10) days of the award or the decision to award, whichever is earlier. There is a potential additional ten (10) day time clock if procurement related documents have been requested under the procurement code (Section 2.2-4303), if the basis or an additional basis of protest is based on that document production. The written protest must include the basis for the protest and the relief sought. The procuring agency's response is due within ten (10) days, and the protestor then has ten (10) days from receipt to appeal, or the procuring agency's decision is final. We'll look at protest bases and potential relief in other blogs.

Mechanic's Lien / Payment Bond Reforms Pending in NC

Since many Virginia contractors also perform work in North Carolina, I thought those that do might be interested in pending reforms to NC's mechanic's lien and payment bond statute that were filed today in the state's General Assembly. Some of these changes are very substantial. A link to the NC General Assembly web page with the proposed legislative changes follows: S864, Mechanics Liens/Payment Bond Reforms.

COFC Bid Protect Authority: DOD proposal to make force protestor forum choice

The DOD is requesting Congress to amend COFC bid protest jurisdiction to adopt the same timelines as are applicable to a GAO bid protest.  The result is that protestors would then have to choose forums initially. There are certainly pros and cons to this approach, but it is regardless an important develop those with potential interests should follow, and as deemed appropriate enter into the political fray. The DOD proposal can be found at the following link:
http://www.dod.mil/dodgc/olc/docs/25April2012Proposals.pdf