Legislature(2003 - 2004)

04/16/2003 03:20 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 250-STATE CONTRACTS                                                                                                        
CHAIR ANDERSON announced  that the first order  of business would                                                               
be HOUSE  BILL NO.  250, "An  Act relating  to protests  of state                                                               
contract   awards,  to   claims  on   state  contracts,   to  the                                                               
arbitration of  certain state  construction contract  claims, and                                                               
to hearings and appeals under  the State Procurement Code; making                                                               
conforming  amendments   in  the  State  Procurement   Code;  and                                                               
providing for  an effective  date."  [In  packets was  a proposed                                                               
committee substitute (CS), Version H.]                                                                                          
Number 0095                                                                                                                     
REPRESENTATIVE  JIM  HOLM,  Alaska  State  Legislature,  sponsor,                                                               
explained  that  HB  250  attempts  to  alleviate  problems  that                                                               
contractors  have  been having  in  the  extremely costly  claims                                                               
process.    The  desire  is to  have  expeditious  resolution  of                                                               
claims.   However, the perception  of the  construction community                                                               
is  that the  process has  slowly deteriorated  and is  no longer                                                               
fair or expeditious.                                                                                                            
REPRESENTATIVE  HOLM noted  that the  bill was  worked on  by the                                                               
Associated General  Contractors of  Alaska ("AGC of  Alaska") and                                                               
that  Dick Cattanach  had  negotiated with  Mark  O'Brien of  the                                                               
Department of  Transportation & Public Facilities  (DOT&PF); they                                                               
went through  the bill extensively.   Representative Holm pointed                                                               
out  that  the  sectional  analysis   [for  Version  H]  mentions                                                               
recovery  of   attorney  fees  and   how  the  process   will  be                                                               
Number 0206                                                                                                                     
REPRESENTATIVE GATTO moved to adopt  the proposed CS, Version 23-                                                               
LS0501\H, Bannister,  4/14/03, as a  work draft.  There  being no                                                               
objection, Version H was before the committee.                                                                                  
REPRESENTATIVE  HOLM   explained  that  presently  there   is  no                                                               
independent [third] party review  in contract resolution with the                                                               
state,  in either  the purchasing  departments or  contracts with                                                               
DOT&PF; it  is difficult  for people who  assert claims  for less                                                               
than $250,000 to afford them because of litigation costs.                                                                       
REPRESENTATIVE HOLM reported  that AGC of Alaska  and Mr. O'Brien                                                               
went through  potential problems  and "pretty much  solved them."                                                               
Referring  to the  written sponsor  statement, he  noted that  it                                                               
lists six of the most important  [modifications made by HB 250 to                                                               
current statute]:   1) if  a procurement officer doesn't  issue a                                                               
written  decision  by  the  due date,  the  contractor  may  seek                                                               
arbitration;  2)  on  appeals of  all  construction  claims,  the                                                               
parties can  agree to binding  arbitration; 3) the  timelines for                                                               
decisions   have  been   tightened  and   redundant  requirements                                                               
eliminated;  4)  an arbitrator  or  hearing  officer who  doesn't                                                               
issue a decision  by the deadline is disqualified for  a year; 5)                                                               
qualifications  for  arbitrators  and hearing  officers  will  be                                                               
established   by   the   commissioner  of   the   Department   of                                                               
Administration in  regulation; and 6) the  contractor is entitled                                                               
to recover some of the claims costs incurred.                                                                                   
REPRESENTATIVE HOLM called this a  balanced bill, and pointed out                                                               
that   there  are   time  constraints   because  of   the  coming                                                               
construction season.   He mentioned that it  has an indeterminate                                                               
fiscal note  because of the  inability to determine the  costs of                                                               
claims resolution.   He  suggested that it  would be  less costly                                                               
and a better  business situation, however, if people  had an easy                                                               
way to rectify their problems without litigation.                                                                               
Number 0455                                                                                                                     
DICK   CATTANACH,   Executive    Director,   Associated   General                                                               
Contractors of  Alaska, requested  that Mr.  O'Brien join  him at                                                               
the witness  table.  Noting  that they'd  worked on the  bill for                                                               
more than  two years, he said  about three months had  been spent                                                               
getting input  from the Department of  Law.  He noted  that there                                                               
was input  from the  Department of Administration  as well.   Mr.                                                               
Cattanach  told members  that  time is  critical  and noted  that                                                               
DOT&PF's  construction budget  is roughly  $400 million;  without                                                               
passage  of  the  bill,  that  $400 million  will  be  under  the                                                               
existing statute, rather than this bill.                                                                                        
MR. CATTANACH told  members the bill is a  compromise intended to                                                               
do three things:  speed up the  system, make it so the process is                                                               
viewed as more fair, and lower  claims costs.  First, with regard                                                               
to speeding up the system, he  explained that a claim comes about                                                               
because  the  contractor  and  the  owner  -  the  parties  in  a                                                               
construction contract  - disagree  about whether certain  work is                                                               
covered  in the  contact;  the current  claims process  reputedly                                                               
takes upwards of two years to  resolve in some cases.  Second, he                                                               
reported that  right or wrong,  contractors have a  perception of                                                               
unfairness because claims officers are  selected by DOT&PF from a                                                               
list  maintained  by DOT&PF,  based  on  criteria established  by                                                               
DOT&PF; the  bill changes the  system, with  a lot of  it modeled                                                               
after the arbitration of  AAA [American Arbitration Association].                                                               
Mr. Cattanach remarked,  "We're going to be  recommending the use                                                               
of arbitration  more."   Third, he noted  that members  have told                                                               
him a  significant claim  may cost  $250,000 to  prosecute; those                                                               
costs aren't recovered under the current statute.  He said:                                                                     
     The theory that we're espousing  is that the reason the                                                                    
     contractor  has  to spend  that  money  is because  the                                                                    
     claim that  he ultimately  ... gets  was not  the claim                                                                    
     that he  was offered; therefore,  he has to  spend that                                                                    
     money to get what was  reasonably his, as determined by                                                                    
     a  third  party.   We  recognize  their  difference  of                                                                    
MR. CATTANACH  explained that  the bill  addresses court  rules -                                                               
Rules 68,  79, and  82   - with  respect to  how those  costs are                                                               
determined.   He  deferred  to  Mr. O'Brien  for  details on  the                                                               
fiscal note and related his belief  that this bill will result in                                                               
a significant improvement.  He encouraged members' support.                                                                     
Number 0751                                                                                                                     
MARK O'BRIEN,  Chief Contracts Officer;  Contracting, Procurement                                                               
and   Appeals;  Office   of  the   Commissioner;  Department   of                                                               
Transportation   &  Public   Facilities,  pointed   out  positive                                                               
benefits in terms of the three  goals of being faster, more fair,                                                               
and less expensive.   The bill shortens  some existing timeframes                                                               
in statute  and creates timeframes  where none existed.   It also                                                               
offers  arbitration -  generally  considered  less expensive  and                                                               
onerous, and requiring less preparation  and associated costs and                                                               
fees - as an  alternative to the hearing process.   He said it is                                                               
both  faster and  less  expensive.   The  arbitration process  is                                                               
final; there is  no appeal to the courts unless  there has been a                                                               
gross misrepresentation or fraud,  for example, and thus normally                                                               
there  won't be  the additional  costs  and legal  fees of  going                                                               
through  a court  process.   As for  fairness, the  bill requires                                                               
adoption of regulations to govern  the selection process [for the                                                               
hearing  officer].    "We  look   forward  to  working  with  the                                                               
Department of Administration to  get those established and create                                                               
some specific guidelines on the selection," he remarked.                                                                        
Number 0886                                                                                                                     
MR. O'BRIEN  reported that [the  state's] only  disagreement with                                                               
AGC of Alaska  was on the issue  of costs and fees.   Noting that                                                               
Rules  79 and  82 allow  recovery  of partial  attorney fees  and                                                               
costs for the prevailing party,  he explained that it slices both                                                               
ways:  if the state prevails,  there is an opportunity to recover                                                               
some of  its cost.   Generally, though,  the prevailing  party is                                                               
defined as the  person who receives any  judgment.  Historically,                                                               
[the  claimant] almost  always receives  something.   If  someone                                                               
with a $200,000 claim is  awarded $15,000 by the hearing officer,                                                               
[the state]  may think it's  a "win,"  but [the claimant]  is the                                                               
prevailing party and thus receives  attorney fess and costs, or a                                                               
portion of them.                                                                                                                
MR. O'BRIEN explained  the calculations for the fiscal  note.  He                                                               
said he'd  looked at  the last  11 years'  records on  claims and                                                               
used  an  example of  a  $2  million  claim  with a  $.5  million                                                               
judgment by  an arbitrator, based  on actual cases in  that range                                                               
for which costs  and fees were typical; it was  calculated that a                                                               
contractor  who was  the prevailing  party would  receive roughly                                                               
$73,000 for  his/her portion  of the  costs and  fees.   He noted                                                               
that under  almost any  scenario, there  will be  a cost  [to the                                                               
state].  Using  that model and looking at the  claims history for                                                               
11 years, applying roughly the  same factors, Mr. O'Brien said it                                                               
had  been averaged  over  the 11-year  period,  resulting in  the                                                               
estimate in the fiscal note of $145,000 a year.                                                                                 
MR. O'BRIEN  pointed out that  $145,000 is the  baseline estimate                                                               
of possible liability [to the  state], since hearing officers and                                                               
arbitrators have  the ability  to enhance those  fees based  on a                                                               
number of  factors including protracted litigation  or associated                                                               
costs that  are particularly  high.  Another  key factor  is that                                                               
Rule 79  and Rule 82 costs  and fees aren't eligible  for federal                                                               
aid  through  the  federal  highway bill.    Most  of  [DOT&PF's]                                                               
contract  appeals  - the  $400  million  construction budget  Mr.                                                               
Cattanach mentioned  - are through  the federal highway  bill, he                                                               
noted,  but those  provisions don't  allow  reimbursement to  the                                                               
state for costs and fees.   Hence any judgment for costs and fees                                                               
will require a  general fund payment from [DOT&PF]  and any other                                                               
department   that  has   "construction  authority   with  federal                                                               
Number 1068                                                                                                                     
REPRESENTATIVE  CRAWFORD  asked  what  happens when  there  is  a                                                               
contract for less than $25,000,  and whether it is cost-effective                                                               
to go into arbitration for a few thousand dollars in dispute.                                                                   
MR.  O'BRIEN explained  that  something like  98  percent of  the                                                               
claims  brought forward  by such  contractors are  settled before                                                               
ever  becoming  an appeal  at  the  level of  the  commissioner's                                                               
office.   In many  cases, they're  able to work  it out  with the                                                               
project manager  on-scene as well  as the prime contractor  if it                                                               
is a subcontract situation.   The appointment of hearing officers                                                               
and  arbitrators applies  to those  2-3 percent  of the  cases in                                                               
which the parties absolutely cannot come to an agreement.                                                                       
Number 1150                                                                                                                     
REPRESENTATIVE CRAWFORD  conveyed his understanding  from talking                                                               
to  contractors that  some just  give up  because it  isn't cost-                                                               
effective to  pursue several thousand  dollars when  the contract                                                               
may only be  for $25,000.  He mentioned a  contractor who built a                                                               
fence at Bethel airport; when  DOT&PF changed the specifications,                                                               
the contractor  was stuck  with 3,000 feet  of fencing  that cost                                                               
too  much to  transport back  to Anchorage.   He  reiterated that                                                               
many times people give up instead  of being part of the 2 percent                                                               
who [appeal].                                                                                                                   
MR. O'BRIEN  said he  would argue  that this  arbitration process                                                               
offers  a better  opportunity, at  less cost,  than those  people                                                               
have ever had.                                                                                                                  
REPRESENTATIVE CRAWFORD asked that  the even smaller contracts be                                                               
looked after.                                                                                                                   
Number 1234                                                                                                                     
REPRESENTATIVE  GUTTENBERG  observed  that  page 6  of  the  bill                                                               
discusses the commissioner's ability  to extend the timeline, but                                                               
also disciplines an  arbitrator who doesn't make a  decision in a                                                               
timely manner.   He  asked whether  there has  been a  history of                                                               
that problem.  If not, he asked why is it in the bill.                                                                          
MR. O'BRIEN answered:                                                                                                           
     I've been  doing this  since 1998,  and there  have not                                                                    
     been a  significant number of  complaints.  In  fact, I                                                                    
     honestly don't  remember a  single complaint  about the                                                                    
     length  of   time  that  a  hearing   officer  had  the                                                                    
     decision.  Generally, the complaint  is the length that                                                                    
     the  contracting officer  at  the first  level has  the                                                                    
     decision.   ... But there were  some concerns addressed                                                                    
     by the AGC [of Alaska]  during ... the discussions that                                                                    
     we  had that  there  could well  be  an instance  where                                                                    
     they're  not  getting  a timely  delivery  by  ...  the                                                                    
     arbitrator of  the decision  after he's  had it  in his                                                                    
     hands  for a  final decision.   And  so they  wanted to                                                                    
     build  in kind  of a  punitive  measure ...  to try  to                                                                    
     encourage a quick decision.                                                                                                
Number 1325                                                                                                                     
MR.  CATTANACH   also  responded,   saying  contractors   have  a                                                               
perception that the timeline does  "slip."  He explained that the                                                               
contractor already  would have  paid the  costs back  before ever                                                               
filing  a  claim,  and  would  want  that  money  as  quickly  as                                                               
possible.  "So we put some  teeth into this," Mr. Cattanach said,                                                               
noting  that an  arbitrator  now will  have  timelines; if  those                                                               
aren't met, the  arbitrator will be barred  from participating in                                                               
the arbitration process for a year.                                                                                             
Number 1360                                                                                                                     
REPRESENTATIVE  GUTTENBERG  offered  his  understanding  that  an                                                               
arbitrator would be an independent  contractor.  He asked whether                                                               
a hearing officer would be a state employee.                                                                                    
MR. O'BRIEN said no.                                                                                                            
Number 1391                                                                                                                     
MICHAEL SWALLING, President,  Swalling Construction Company, told                                                               
members his company has been in  business about 56 years and that                                                               
he  has been  with the  company  30 years;  much or  most of  the                                                               
company's  work  is   with  DOT&PF.    Specifying   that  he  was                                                               
testifying in favor of HB 250, he said:                                                                                         
     For  nearly  25  years,  I  had  no  formal  claims  on                                                                    
     [DOT&PF] work.   All the  disputes I had  were resolved                                                                    
     pretty much  at the project  level within what  I would                                                                    
     consider a  reasonable amount of  time.  About  5 years                                                                    
     ago I  had my first claim;  it went all the  way to the                                                                    
     hearing-officer ...  level for  resolution, and  I came                                                                    
     away from  that experience  very dissatisfied  with the                                                                    
     time, the  cost, and the  process [for]  resolving that                                                                    
     construction dispute.                                                                                                      
     And since  then, I've  had two  more ...  formal claims                                                                    
     with  [DOT&PF].    At the  beginning,  they  were  both                                                                    
     denied  in their  entirety, ...  and were  both delayed                                                                    
     significantly during the  administrative portion of the                                                                    
     process,  up   through  the  contracting-officer-appeal                                                                    
     level.   Both  disputes  eventually  were settled  last                                                                    
     year for  a total of $591,000.   But it took  two years                                                                    
     and $250,000  in legal  and expert  expenses to  get to                                                                    
     the settlement table.  Frankly, that's a crime.                                                                            
     Unlike any  other legal  dispute, where  the prevailing                                                                    
     party  receives  some  compensation  for  the  expenses                                                                    
     incurred, I  got nothing.   All  of that  250 [thousand                                                                    
     dollars] basically  came out of the  settlement, and so                                                                    
     I got  a very  poor return  on the  dollars ...  that I                                                                    
     spent getting that settlement.   It's not a fair system                                                                    
     the way  it is set up  right now.  Frankly,  it was all                                                                    
     the justice that I could afford.   I had to settle, and                                                                    
     I had to move on.                                                                                                          
Number 1488                                                                                                                     
MR. SWALLING continued:                                                                                                         
     My perception right now of  the current process is that                                                                    
     it's  basically a  war  of attrition.    The state  has                                                                    
     nothing to lose by  delaying, denying, or obfuscating a                                                                    
     construction  claim   for  as  long  as   it  can,  and                                                                    
     everything to  gain by forcing the  contractor to spend                                                                    
     as  much   money,  time,  and  effort   to  pursue  the                                                                    
     settlement of the dispute.   And at this point, they've                                                                    
     got  almost  unlimited  resources and  the  ability  to                                                                    
     extend response  dates almost at their  will, while the                                                                    
     contractors  are forced  basically to  do the  opposite                                                                    
     and respond to fixed  timelines or basically lose their                                                                    
     right to pursue  the claim.  They also  have to finance                                                                    
     the  work and  pay  the cost  incurred,  and then  pay,                                                                    
     additionally, the  cost of legal and  professional help                                                                    
     to help pursue the claim.                                                                                                  
     House Bill  250 provides an  incentive to the  state to                                                                    
     settle  these disputes  in a  more timely  fashion, and                                                                    
     allows the  contractor to recover  some of the  cost of                                                                    
     pursuing what  is ultimately rightfully  his.   I think                                                                    
     it solves  some of the  inequities in this  process; it                                                                    
     doesn't  solve them  all, but  moves the  state in  the                                                                    
     right direction.  And I think it should be passed.                                                                         
Number 1535                                                                                                                     
REPRESENTATIVE GATTO asked Mr. Swalling  whether he'd figured out                                                               
what the difference  would have been with regard  to his $250,000                                                               
loss if this legislation had been in place.                                                                                     
MR. SWALLING  answered that  he doesn't know  what Rule  82 would                                                               
provide, but suggested  there would have been some  recovery.  He                                                               
said  the  bill  does  provide   an  incentive  to  get  [claims]                                                               
resolved.  He  emphasized the importance of time and  the need to                                                               
settle these and move on.                                                                                                       
Number 1583                                                                                                                     
CHAIR ANDERSON, upon determining there  were no questions for any                                                               
of the testifiers, closed the public hearing.                                                                                   
Number 1592                                                                                                                     
REPRESENTATIVE  ROKEBERG moved  to report  CSHB 250,  Version 23-                                                               
LS0501\H, Bannister,  4/14/03, out  of committee  with individual                                                               
recommendations and  the accompanying indeterminate  fiscal note.                                                               
There being  no objection,  CSHB 250(L&C)  was reported  from the                                                               
House Labor and Commerce Standing Committee.                                                                                    

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