Public Contract Code section 5110 provides a very narrow exception to the general rule that a contractor cannot recover costs of work performed if a construction contract with a public entity is invalidated. More specifically, subsection (a) provides that if a public contract “is later determined to be invalid due to a defect or defects in the competitive bidding process caused solely by the public entity,” the contractor may recover its reasonable costs, specifically excluding profit, of the labor, equipment, materials, and services furnished by the contractor prior to the determination that the contract is invalid.

In a recent Court of Appeal decision, Hensel Phelps Construction Co. v. Department of Corrections & Rehabilitation, the court held that the proper interpretation of the plain language “later” is that the parties to a challenged public contract may enter into that contract pending a final decision of the challenge. However, if the challenge is ultimately resolved by invaliding the contract, then the contractor may recover its reasonable costs only if it was invalidated due to a defect in the competitive bidding process for reasons solely chargeable to the public entity. The court further stressed that if the contractor is found to be even partly at fault, then the contractor cannot recover costs under the statute.

In Hensel Phelps, the California Department of Corrections and Rehabilitation (“CDCR”) awarded an $88 million contract to Hensel Phelps Construction Company (“Phelps”) as the low bidder. West Coast Air Conditioning Company (“West Coast”), the second-low bidder, successfully challenged the contract in an underlying action on the grounds that Phelps’s bid was “non-responsive as a matter of law” due to its “non-waivable mathematical/typographical errors.” The errors related to Phelps’s failure to list license numbers and other required subcontractor information and submitting a revised bid form after the bid deadline that included substantial alterations to the percentages of work of subcontractors.  Phelps then brought this action under Public Contract Code section 5110 against CDCR seeking to recover its reasonable costs expended on the project.

To determine whether Phelps was entitled to recovery, the court considered both the plain language of the statute and the San Diego Superior Court’s reasoning for invalidating the contract in a prior proceeding. The Court of Appeal held that Phelps could not recover because the contract was invalidated due to mathematical and typographical errors in Phelps’s bid and not for any defect in the competitive bidding process.  Moreover, even assuming the defect was within the competitive bidding process, Phelps still could not recover because Phelps was partly at fault. The court stated, “[e]ven if we were to agree that CDCR were at fault to some degree for failing to reject Phelps’s flawed bid, it was at minimum the combination of Phelps’s flawed bid and CDCR’s failure to reject it which resulted in an invalid contract.” In other words, for Phelps to recover, the defect must have been caused solely by CDCR. Alternatively, collateral estoppel applied because the issue of why the contract was invalid had been litigated and decided in a prior proceeding. Lastly, the Court of Appeal affirmed the trial court’s ruling that the CDCR could not recover money already paid to Phelps because the CDCR did not properly challenge the trial court’s ruling on that issue.

In the prior proceeding, West Coast recovered its bid preparation costs of $250,000 from the CDCR when the contract with Phelps was invalidated. The CDCR paid Phelps approximately $3.5 million which the CDCR was unable to recover from Phelps.  Moreover, Phelps was denied recovery of $2.9 million in costs incurred prior to invalidation of the contract. This was an expensive legal exercise for both the CDCR and Phelps and illustrates the perils of entering into a contract pending a final decision on a challenge of the contract award.

Practice Tips:

Contractors: Make sure you understand and comply with all competitive bidding rules. Bidders on a public works project are conclusively presumed to know the limits of an agency’s contracting authority and a contractor’s good faith belief that the contract was valid is not enough to defeat a challenge to the contract award.  Strict compliance with the subcontractor listing law is particularly important.  While a public entity may allow bidders up to 24 hours after the bid deadline to submit information other than the subcontractor name and location, license number, and public works contractor registration number, a bidder can change only inadvertent errors in listing a subcontractor license number or public works registration number within 24 hours after bid opening.  Other material errors in filling out the bid form may entitle a bidder to withdraw, but not change, a bid if written notice is provided to the public entity within five working days.  Therefore, it is essential for bidders to carefully complete all bid forms, maintain an accurate copy of all bid forms submitted, immediately and carefully review bids for errors, and consult with legal counsel if a material error is discovered.  While every contractor strives to achieve award of a contract, the Hensel Phelps case illustrates the fact that sometimes the best business decision is to withdraw a bid with material errors even if a public entity mistakenly believes the errors can be waived.          

Public Entities: Make sure you understand and comply with all competitive bidding rules in order to award the contract to the lowest responsive, responsible bidder. Public entities should strive to simplify bidding forms, minimize duplicate information, and minimize opportunities for bidders to make mistakes. Additionally, it is important to carefully evaluate bidder deviations from bidding requirements. When in doubt, public entities should consult legal counsel if bid errors: affect price; determine the identity of who will perform particular portions of the work; could give a bidder an unfair advantage over other bidders; or fall within statutory grounds for a bidder to withdraw its bid. While no one wants a disgruntled bid protester to hold a project hostage, for high dollar projects, particularly with a bid that is significantly lower than the engineer’s estimate, public entities should seriously consider whether a rejection of all bids, clarification of bidding forms and procedures, and a re-bid could minimize errors and a legal challenge. It is critical to understand the significant financial risks involved in moving forward with construction when a contract is under judicial review.                

For more information about this topic please contact:

Barbara R. Gadbois, Esq.

or Nargess N. Hadjian, Esq.

email: bgadbois@gibbsgiden.com; nhadjian@gibbsgiden.com

Barbara Gadbois, a graduate of University of California at Los Angeles School of Law has been a partner of the firm since 1993. She concentrates her practice in the development and management of construction projects, including drafting and negotiation of bid and contract documents, procurement issues, public works, competitive bidding requirements, bid protest issues, pre-qualification, project delivery methods, design-build projects, risk allocation in contracts, claims avoidance, and project closeout.

Nargess N. Hadjian, a graduate of Pepperdine University School of Law and member of the Law Review, is an associate practicing in the Los Angeles office where she primarily focuses her practice in the defense of litigation matters involving construction-related claims in addition to drafting bid and contract documents for private and public construction projects.