Procurement Perspectives: Contractor’s risks and options on municipal projects

Many of my clients have said that the provisions in municipal contracts will likely scare off sensible contractors.

It may be argued, of course, that the owner is no more responsible for unknown adverse conditions than the contractor, and unless well versed in construction, probably has less ability to identify and avoid such conditions than the contractor.

Moreover, there is some truth to the proposition that the contractor can often devise a work-around solution when such conditions are discovered that the owner cannot.

However, these points overlook the fact that the provisions that are sometimes set out in the documents do not just simply require the contractor to exercise reasonable care and to take appropriate mitigation measures. They transfer the entirety of the risk from the owner to the contractor.

Some contractors may very well prove willing to assume such risk, but if they do, they will adjust their bid prices accordingly.

Here are some provisions related to risk transfer:

• Requiring a contractor to assume the risk of unknown faults when carrying out the renovation of a building: The contractor will likely assume that the city suspects existence of serious problems. The contractor will increase the price quoted by a significant amount to reflect this assumption.

• Limiting a contractor’s opportunity to assess risk associated with a prospective contract: There may be legitimate reasons to restrict the number of site visits, taking photographs and the carrying out of tests, but each such limitation increases the amount of uncertainty associated with a contract. Such uncertainty will be reflected in the final price.

• Unrealistic completion dates and liquidated damages: Major projects cannot be carried out overnight, particularly when they are weather sensitive or extensive approvals are required. Where a city requires the contractor to commit to an unrealistic date, and provides for the payment of liquidated damages if that date is not met, the contractor will likely factor the extra time required to complete the work into the contract price. As a result, the city ends up paying itself for late delivery.

• Setting the qualifications to bid too high: If the range of experience required to qualify to submit a bid excludes all local contractors, then the municipality will be forced to deal with those who are remote to it. Not only is it likely to increase in travel and accommodation cost, it may also lead to a lower level of service. It is worth mentioning the opposite situation is more usually the case.

Often arbitrary qualifications are a poorly disguised effort at a local preference. For instance, while experience in swimming pool construction may be an advantage for the proponent to be selected for the construction of a competition level swimming pool, it is difficult to see what additional value is obtained by requiring that experience to be in Prince Edward Island.

• Asking for unnecessary detail as part of the bidding process: For one recent municipal tender, the bidders were required to provide an 11-page breakdown itemizing how the bid price was calculated. Demanding this kind of detail generally serves little purpose. Since the contract was not based on unit price, even the possibility of an unbalanced bid offered little justification for the amount of information required. Working out a detailed proposal in this manner is time consuming, particularly since individual contractors may not have priced their bids in the same manner as imagined by the person who drew up the form of tender.

One of the basic goals of the tender process is to simplify the selection of the contractor. When the terms of the tender impose unreasonable demands for the provision of information, the effect is quite the opposite. Someone has to pay for this kind of detail and that will invariably be the customer.

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.