A Gamble For Hawaiian Contractors: Hawaii Raises The Stakes For Contractors Betting On State Bid Protest Appeals

McCarter & English Blog: Government Contracts & Export Controls

The cards are on the table, and the Hawaiian state legislature has dealt its state contractors a risky hand. A new bill, SB 1329, is set to eliminate the monetary cap on the bond required to challenge a procurement officer’s final decision on a bid protest. If the bill is signed into law, protestors could benefit from a quicker protest response time that would mandate a decision within 75 days (absent an extension). The rub is that if the protestor wishes to appeal that quicker decision, it would be required to stake a bond of 1 percent of the total contract value of the project. If that appeal then proves fruitless, the Hawaiian “house” wins and collects that 1 percent stake. Beyond serving as a wager Hawaiian contractors need to consider, ultimately the higher stakes will likely serve as a barrier to entry for many small businesses feeling wronged by state procurement decisions.

While different from the federal procurement process with which most government contractors are familiar, the Hawaiian protest process does share some similarities. For example, in Hawaii, protests must be submitted within a designated time (five days of knowing of the facts giving rise to the protest), and the contract is stayed until the protest is decided. Haw. Rev. Stat. Ann. § 103D-701. Dissimilar to federal procurements, however, and more akin to a federal agency protest, the initial bid protest must be submitted to the chief procurement officer for the procuring state entity, not to an independent body such as the Government Accountability Office. Haw. Rev. Stat. Ann. §§ 103D-701(a); 103D-203(a).

An appeal of that ultimate bid protest decision, however, is where the Hawaiian process differs most from its federal corollary. If a protestor is unsuccessful in its protest, it can take that appeal to the Hawaii Office of Administrative Hearing, but if it does so, the protest must be accompanied by an appeal bond. Therein lies the gamble. If the appeal is unsuccessful, the bond will be forfeit. Under the current law, the bond amount is structured as follows:

  • If the contract value is estimated to be less than $1 million and the protest amount is greater than $10,000, then the appellant must pay a bond in the amount of:
    • $1,000 if the contract value is estimated to be less than $500,000 or
    • $2,000 if the contract value is estimated to be more than $500,000 but less than $1 million.
  • If the contract value is estimated to be more than $1 million and the protest amount is at least 10 percent of the estimated contract value, the appellant must pay a bond in the amount of .05 percent of the contract value but not more than $10,000.

Haw. Rev. Stat. Ann. § 103D-709.

If signed into law, the proposed bill would eliminate both the tiered bond structure and the $10,000 bond cap currently in play. Instead, protestors would be required to pay 1 percent of the total estimated value of the contract, a change that would result in higher bond rates across the board except for procurements of less of $100,000.

Supporters of the proposed bill argue that bid protests cause delays in the completion of major state procurement projects and result in increased costs for contractors. It is therefore clearly an intended consequence of the bill to discourage contractors, particularly small-business contractors unable to take the monetary risk, from appealing bid protest decisions. But the proposed bill fails to actually identify the goals to be achieved by removing the tiered bond structure and the bond cap. And while it is evident that the legislature wants to further discourage frivolous appeals of bid protest decisions, it makes no mention of and appears to have little concern about valid, albeit potentially risky, protest appeals.

The state legislature acknowledged that the protest process “can be lengthy” and that establishing a deadline for resolution of bid protests would expedite the review process, reduce costly delays on contracts, and result in lower costs for taxpayers. It does not, however, address the quality of those now-quicker decisions nor provide contractors with assurances that those decisions will be well reasoned and ultimately fair. These concerns are exacerbated under the proposed legislation, given that the first tier of Hawaiian protest review is conducted by the entity responsible for award of the contract, and ultimately it may lead to less-substantive oversight of bid protest decisions.

While the use of a protest appeal bond is not exclusively a Hawaiian creation (indeed, it is also used in California, Nevada, Florida, South Carolina, and Utah), the size and remoteness of the State may enhance the impact of the bond’s increase. It remains to be seen, but the higher bond rate could even limit competition by potentially discouraging contractors from submitting proposals and bids. While this is sure to impact competition among medium and small businesses, if contractors know that an independent review of procurement decisions requires a potentially large bet, many may not be willing even to walk into the casino in the first place. Contractors will know what the cards hold by June 21—the deadline for Governor Ige to inform the legislature of the bills he intends to veto.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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