Legislature(2003 - 2004)
04/16/2003 03:20 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 maintained. 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 opinion. 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 funding." 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.