Highlights: The original version of this article was published in the Spring 2011 issue of Brickerconstructionlaw.com. It has been updated based upon experiences over the last eleven years and additional review of the statutes and case law.
Complex and specialized projects often place public owners in a situation where they are faced with competing forces of the statutory requirement to competitively bid construction work and the practical issues facing some public owners—public owners who require special equipment, systems or construction methods. In this article, Doug Shevelow explains the history of sole-source procurement and the potential conflict with competitive bidding requirements in Ohio. Doug also provides us with insight into how courts view the efforts of public owners to acquire special equipment, systems or construction methods, and how a public owner can go about acquiring them without running afoul of Ohio’s competitive bidding laws.
Background
In Ohio, odds are that a public water or wastewater treatment facility is owned either by a municipality, county or regional water and sewer district. These entities are required by statute to make a written contract with the “lowest and best bidder” for all construction contracts that exceed $50,000 unless they are using construction manager-at-risk or design/build delivery.
These owners sometimes do enjoy some narrow statutory exceptions to competitive bidding, however, such as for a “real and present emergency.” There are other exceptions, including for purchasing goods and services under the State Term Contract program administered by the Ohio Department of Administrative Services, for purchasing used equipment or supplies at public auctions or sales, and for purchasing services, material, equipment or supplies from another Ohio political subdivision.
On some construction projects, especially ones that are complex and involve new technologies, a public owner may have a very good idea of exactly what equipment and systems it wants, such as a particular water or wastewater treatment process. But the uniqueness of certain equipment and systems may mean that they are not readily available from more than one vendor, creating tension with statutory competitive bidding requirements.
Another problem arises when the desired equipment is not necessarily unique with respect to the rest of the world, but unique in that it is the only equipment that matches equipment or processes already used by the public authority, such as a particular HVAC or emergency power system.
The doctrine of sole-source procurement, when correctly applied, can help a public owner procure the equipment and processes it wants for its infrastructure project without running afoul of Ohio’s competitive bidding laws.
The Roots of Sole-Source Procurement
A public entity is not required to engage in competitive bidding in the absence of legislation requiring it. Shafer v. Streicher (1922), 105 Ohio St. 528, 534. Moreover, Ohio courts have recognized that not all procurements of services by public bodies are amenable to competitive bidding and, indeed, competitive bidding may be waived in some cases. This is roughly known as the “sole-source doctrine,” where courts have recognized that bids need not be solicited for certain specialized services.
The Supreme Court’s expression of this principle comes from State ex rel. Doria v. Ferguson (1945) 145 Ohio St. 12, para. 2 of the syllabus:
Although contracts relating to public projects, involving the expenditure of money, may not ordinarily be entered into by public officials without advertisement and competitive bidding as prescribed by law, an exception exists where the contract involves the performance of personal services of a specialized nature requiring the exercise of peculiar skill and aptitude.
In Doria, the service not subject to competitive bidding was preparing title abstracts. In Heninger v. Akron (1951) 112 N.E.2d 77, the Ohio Ninth District Court of Appeals cited Doria to excuse codifying city ordinances from competitive bidding.
The jurisprudence goes back further and includes construction. In State ex rel. Scobie v. Cass (1910), 13 Ohio C.C. (n.s.) 449, a courthouse construction commission was permitted to procure services for painting and decorating the interior walls and ceilings of a new courthouse without competitive bidding. The court held that the commission could award the interior decoration contract without bidding due in part to the rule announced in State ex rel. v. Mackenzie (1907), 9th Cir. Ct. Rep. (N.S.), 105:
When the contemplated construction is essentially and absolutely non-competitive, because of its artistic nature; or is strictly monopolistic, because of the function to be performed thereby is necessarily dependent upon a single means which is the subject of an exclusive patent, or franchise, or sole source of supply then the principle of competition is, so far forth, inapplicable.
Early Construction Cases: The Importance of Competition
On theother end of the spectrum are the earlier cases prohibiting proprietary specifications or “implied sole source” in favor of maximizing competition, under the theme that the purpose of competitive bidding is to provide for open and honest competition in bidding for public contracts and to save the public harmless, as well as bidders themselves, from any kind of favoritism or fraud in its varied forms. Cedar Bay Constr., Inc. v. City of Fremont (1990), 50 Ohio St.3d 19, 21.
A good example is found in Mog v. City of Cleveland, 27 Ohio Dec. 62, (Ohio Com Pl. 1915), where the court was very confident of its engineering know-how and relied upon a statute dating from the 1800s, which prohibits municipalities from requiring “the exclusive use of a patented article or process protected by trademark or wholly controlled by any person, form or corporation or combination thereof” to prohibit the City of Cleveland from purchasing a $43,000 boiler system, the specifications for which were written around a design belonging solely to Babcock and Wilcox.[1] The court’s criticism of the Director of Public Utilities was colorful, written in a style not seen for quite some time:
He is quite frank in his preference in this direction. Indeed, it is more than a preference; it is a bias in favor of that type and a prejudice against all other types of styles of boilers. The testimony distinctly shows that his prejudice is unwarranted, that his bias is the result of a one-sided tendency of his mind, a species of sterling auto-hypnotism, and is not the result of thorough, candid, impartial investigation.
Id. at 78.
Despite this poetic prose, Mog leaves open the question: what if the sole sourced system is truly the best, or at least the court believes the engineer if the engineer comes to that conclusion? The following three cases provide some insight:
In State, ex rel. Schaefer v. Bd. of Commissioners of Montgomery County (1967), 11 Ohio App.2d 132, the court held that a county’s specifications for incinerator equipment were so narrow that competitive bidding was stifled in violation of statutory requirements.
In Fischer Auto & Service Co. v. Cincinnati (Hamilton C.P. 1914), 26 Ohio Dec. 103, a public owner was enjoined from buying an automobile when the specifications were too narrowly tailored to a certain make and model. The court used the terms “closed specification” and “open specification” to differentiate between an implied sole-source specification and a generic specification.
However, the courts in both cases, although striking down the challenged procurements, did implicitly acknowledge that there is a place for sole-source procurement. In Fischer, the court recognized that an open specification was workable only when “there was at least one other engaged in the same business.” In Schaefer, in citing to Doria, supra, the court recognized the sole-source procurement doctrine when it stated “[i]t may be evidence would show that these matters should be excepted from competitive bidding.” But the court did not have enough evidence in front of it to make a determination that competitive bidding could be bypassed. Like in Mog, the court was asking for hard third party evidence, not simply the strong opinion of the owner, when it held:
It is argued in the reply brief that the respondent board ‘with expert advice, has determined that the incinerator and complementary equipment sought, with the requisite expertise for installation, are available from only one source * * *’.
Whether the board's determination in this regard is based on actual facts concerning the state of the art or industry of manufacture and installation of incinerator equipment is a matter which the respondent board must plead and prove—we cannot take judicial notice of such facts.
For an example of a successful sole source procurement that was cited by the Schaefer court, see The Gamewell Co. v. Phoenix (C.A. 9, 1954) 216 F.2d 928, where the court recognized that a certain city-wide fire alarm system may be specified as sole source when it is patented and the sole source is technically justified.
Modern Practice: Recognition of Express Sole Source for Equipment and Systems Based on Owner’s Discretion
In modern construction procurement, the question of sole source most often involves equipment and systems to be furnished and installed by one or more of the bidding contractors, instead of sole sourcing an entire contract to a particular contractor.[2] HVAC equipment, roofing systems and water/wastewater treatment equipment are common examples. One approach, whose origins quite possibly lie within requirements set out by those entities funding the work, is to require that three or more manufacturers be listed as acceptable for each piece of equipment in the technical specifications.
But there are times when the equipment or systems are sufficiently unique that a particular system or piece of equipment must be used to ensure the project’s success, at least in the mind of the owner. On a water or wastewater project, a particular tertiary filter, membrane process or filter press may have been pilot tested and the entire project may have been designed around it. On a building project, the owner may strongly desire a certain brand and model of HVAC equipment or controls, because that is what was installed in the owner’s other numerous buildings, making operations and maintenance more efficient. The need for this approach has even been codified for some Ohio public owners such as school districts. (See R.C 3313.46(B)(2), allowing “single source” procurement with 2/3 vote of Board of Education).
Another way for an owner to obtain the equipment or system that it desires without running afoul of competitive bidding laws is to include the equipment or system as one of several choices in the base bid and then specify the exact equipment desired as an alternate (or vice versa), thereby requiring bidders to provide pricing. If the owner decides that the price for the equipment it prefers is acceptable, then it may evaluate the overall bids taking that into account. This approach, which also helps protect against price gouging, has been accepted by the courts throughout Ohio. See e.g., Metzger-Gleisinger v. Mansfield City School District, 2005-Ohio-2727.
If the owner is convinced of the necessity of sole source, and there are no other comparable equipment or systems available, this is when the owner must make a strong technical justification and proceed under the great discretion afforded to public construction owners under Ohio law and expressly name the make and model of the equipment to be included in the bid—i.e. use express sole source.
Ohio statutory municipalities, counties and regional water and sewer districts (organized under ORC Chapter 6119) award construction contracts under the “lowest and best” bidder standard. The inclusion of the term “best” gives the municipality considerable discretion to consider and compare the qualifications of the bidders and equipment suppliers for a contract. See Cedar Bay Const., Inc. v. City of Fremont (1990), 50 Ohio St.3d 19, 21. “[C]ourts in this state should be reluctant to substitute their judgment for that of [public] officials in determining which party is the single ‘lowest and best bidder.’” Id. Contrast that holding with the hands-on approach of the trial judge in Mog.
So, the municipal owner must be prepared to demonstrate that the decision to specify certain equipment as sole source is rational. Transparency of the selection process and technical justification are the owner’s best friends for demonstrating rationality. Such a documented justification of the sole-source determination is what the owner was missing in the Schaeffer case.
In a water or wastewater treatment setting the technical justification could be in the form of pilot or bench-scale testing of certain equipment, or hands-on evaluation of the equipment in other installations. For cases involving HVAC controls and equipment, or emergency power generators, an evaluation of the cost savings from system-wide uniformity would be helpful.
Underperforming Sole-Sourced Equipment
What happens when the owner is so disappointed in the performance of its sole-sourced equipment that it declares a breach? If the contractor installed it correctly it may have the defense of the Spearin doctrine, i.e. the owner’s implied warranty of the correctness of the plans. More specifically, a contractor is generally not liable for malperformance of a sole-sourced equipment or material supplier, absent contract language to the contrary. See Cooper Co. v. Decapo Const. 1981 Ohio App. LEXIS 10520, where a brick supplier imposed by the owner created project delay for which neither the general contractor or its masonry subcontractor could be held liable. Some courts call this the “implied warranty of suitability.”
In most cases there is no contract between the owner and manufacturer, so the owner may want to be talking in terms of breach of warranty[3], and hopefully made arrangements to be beneficiary of a robust warranty. If the express warranty between the manufacturer and general contractor is weak, there is case law supporting a claim that representations made by the manufacturer that the owner relied upon in selecting the equipment may rise to a warranty, one that even trumps a later watered-down express written warranty between the manufacturer and contractor. See Bobb Forest Products, Inc. v. Morbark Industries, Inc. 2002 Ohio 5370.
Beware the “Black Box” Project.
Finally, the operation of individual pieces of modern treatment plant equipment typically is controlled by a computer called a Programmable Logic Controller (PLC). There may even be PLCs nested within certain collections of equipment such as a skid mounted filter array, which must interface with overall plant PLC or other nested PLCs. The PLC sends output signals to a Human Machine Interface (HMI), typically a computer terminal that displays a graphical representation of the treatment process along with numerical operating values for control parameters such as flow rates, pressures, tank levels, pH, temperature, pump and valve status, etc.
The HMI will usually accept inputs to turn certain pieces of equipment off and on, as well. But the computer code that controls the PLC, hence overall plant operations and all HMIs, is kept in the memory of the PLC, and oftentimes can only be modified, or even accessed, by the programmer, typically an employee of the equipment manufacturer or the equipment aggregator who assembles others’ equipment into a multifunction treatment process. The manufacturer or aggregator can oftentimes be a sole source. It is imperative that the owner require electronic and hard copies of all PLC programming, as well as the key that gives access to the PLC program. The owner also needs to specify security protocols to protect the programming from hackers, or worse. Getting these important contractual considerations is easier when negotiating directly with a sole source provider. Otherwise, the owner will never have full control of its plant.
Alternative Project Delivery
The case law discussed above is based upon traditional design-bid-build project delivery. However, alternative project deliveries such as Construction Manager at Risk and Design-Build should not impede sole sourcing. At its heart, Construction Manager at Risk is simply a variation of design-bid-build. And Design-Build grants inherently more discretion to the design-builder from the start, often focusing more on achieving performance standards than complying with Owner-prescribed technical specifications.
Conclusion
There is a place for sole source procurement in public contracting. As long as a sole source proponent is able to demonstrate a rational, subjective belief that the chosen contractor or supplier delivers the best value for the work because it is uniquely qualified, or that it is impossible for the work to be performed or equipment to be supplied by others, a court should not substitute its judgment for that of the public owner, and allow the procurement to stand.
[1] Surprisingly, this statute, the former G.C.3811, survives today as R.C. 715.68. But this prohibition seems easily solved by the simple addition of the phrase “or equal” to the specification.
[2] Even so, there are certain processes, such as for in situ repair of underground pipe, which may be used by only one particular contractor, or which may even be patented and licensed to very few contractors within a geographical region.
[3] The owner might also want to explore bringing a contract claim as a third party beneficiary to the sales contract, and indeed can even require such rights through the prime contract.
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