Legislature(2003 - 2004)

05/07/2003 09:01 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     CS FOR SENATE BILL NO. 125(TRA)                                                                                            
     "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                                                            
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken informed  that this  legislation  would reform  the                                                            
method  through which  construction  claims  against  the State  are                                                            
addressed. He  relayed that, approximately a year  prior at a Senate                                                            
Transportation  committee meeting in Anchorage, the  committee heard                                                            
testimony regarding the  construction industry's frustration on this                                                            
issue.   He  continued   that,  as   a  result   of  that   meeting,                                                            
representatives  from the  Department of  Transportation and  Public                                                            
Facilities  and the Associated General  Contractors of Alaska  (AGC)                                                            
worked  together to  develop  a consensus  on how  the construction                                                             
claims process against the State could be revised.                                                                              
RICHARD SCHMIDZ, Staff  to Senator John Cowdery, the bill's sponsor,                                                            
informed  the Committee that  the Department  of Transportation  and                                                            
Public Facilities and the AGC would present this legislation.                                                                   
MARK  O'BRIEN, Chief  Contracts  Officer, Division  of Contracting,                                                             
Procurement and  Appeals, Office of the Commissioner,  Department of                                                            
Transportation  and Public Facilities,  informed the Committee  that                                                            
the  Department   has  been   working  with   AGC  to  improve   the                                                            
construction   claims  process.  He   stated  that  AGC   originally                                                            
presented  three  suggestions   toward  making  the  claims  process                                                            
"faster,  fairer, and less  expensive," and  he contended that  this                                                            
legislation  would adequately address  their concerns. He  explained                                                            
that in  order to quicken  the claims process,  specific  timeframes                                                            
"where none  existed and shortened  timelines where ones  did exist"                                                            
as well as  implementation of an arbitration  process as  opposed to                                                            
the current hearing officer  process have been incorporated into the                                                            
proposal. He stated that  specific timelines for resolution would be                                                            
identified  in the arbitration process.  These timelines,  he noted,                                                            
"would serve to  speed up the process and reduce costs"  as compared                                                            
to the  costs resulting  from attorney  and consultant  fees  in the                                                            
current litigation process.                                                                                                     
Mr. O'Brien specified that  the arbitration decision would be final.                                                            
He noted  that with  the exception  of appeals  based on charges  of                                                            
fraud, misapplication  of the  law, and a  few other narrow  issues,                                                            
there would be no lengthy court appeal process.                                                                                 
Mr. O'Brien communicated  that the arbitration process would include                                                            
regulations  regarding the selection  of an arbitrator who  would be                                                            
acceptable and  fair to both parties. He stated that  implementation                                                            
of an arbitration system  would reduce costs as it would shorten the                                                            
process and limit appeals.                                                                                                      
Mr. O'Brien  acknowledged that  the award of  costs and fees  is the                                                            
lone point of  dissention remaining between the Department  and AGC.                                                            
He noted  that Rules 79  and 82, as referenced  in the Department's                                                             
fiscal note #1,  require payment of attorney fees  and claims costs.                                                            
He commented that these  provisions would incur costs at "a baseline                                                            
average"  of $145,000 per  year based on  an eleven-year average  in                                                            
which expenses  ranged from a high  of $340,000 to a low  of $7,000.                                                            
He explained that  this expense would be subject to  such factors as                                                            
the  complexity   of  the  case  and   the  length  of  litigation.                                                             
Furthermore,  he explained that in  addition to these expenses,  the                                                            
cost of additional  attorney fees  associated with litigating  these                                                            
awards is estimated to  be approximately $6,000 per year or 20 hours                                                            
per  claim.  He  specified  that  another  factor  is  the  Rule  68                                                            
provision  that allows for  an "offer of  judgment." He stated  that                                                            
this factor is considered to be "a driver" in settling a claim.                                                                 
Mr.  O'Brien  informed  that  while  most  construction  claims  are                                                            
associated  with  federally  funded  projects,  no  federal  funding                                                            
support  exists  for  expenses  associated  with  Rules 79  and  82.                                                            
Therefore, he  stated that an award of costs and fees  would require                                                            
general fund dollars.                                                                                                           
Senator Hoffman  asked the dollar  amount of claims currently  being                                                            
Mr. O'Brien responded  that he is unsure of the current  outstanding                                                            
claims amount.                                                                                                                  
DICK CATTANACH,  Executive Director, Associated General  Contractors                                                            
of Alaska,  spoke in support  of this "fair  and balanced"  bill. He                                                            
stated  that  while   he  appreciates  the  concern  regarding   the                                                            
potential level  of the fiscal note,  he asserted that the  proposed                                                            
process would speed things  up and would be less expensive. He noted                                                            
that AGC  worked diligently  with the Department  of Transportation                                                             
and Public  Facilities, the  Department of  Law, and other  affected                                                            
parties to address this issue.                                                                                                  
Co-Chair  Wilken asked whether  the industry  is satisfied  with the                                                            
results of those discussions.                                                                                                   
Mr. Cattanach confirmed.                                                                                                        
Amendment  #1: This  amendment  inserts  a new  section  on page  1,                                                            
following line 5 as follows.                                                                                                    
     Section 1. AS 36.30.005 is amended by adding a new subsection                                                              
     to read:                                                                                                                   
          (d) Notwithstanding the provisions of AS 36.30.627, the                                                               
     University of Alaska is not required to arbitrate construction                                                             
     contract claims unless the university specifically agrees to                                                               
     the arbitration.                                                                                                           
Co-Chair Wilken  offered Amendment #1 and objected  for explanation.                                                            
Co-chair  Wilken  explained that  this  amendment would  exempt  the                                                            
University  of Alaska from the binding  arbitration requirement  for                                                            
claims valued  at less than $250,000  unless the claim was  mutually                                                            
approved by  both the University and  the contractor. He  noted that                                                            
no other provisions  of the bill would be affected  by this proposed                                                            
WENDY REDMAN, Vice President  of University Relations, University of                                                            
Alaska  stated   that  the  University  was  not  involved   in  the                                                            
aforementioned  discussions   due  to  the  understanding  that  the                                                            
University  would not be impacted  by the legislation. However,  she                                                            
advised that the  University is seeking the exemption  for the small                                                            
claims section,  and she noted that  there is no opposition  to this                                                            
exemption request.  In addition, she  expressed that the  University                                                            
has a  good working relationship  with AGC.  Continuing, she  stated                                                            
that  the University  would  be involved  in the  implementation  of                                                            
procedures pertaining to this legislation.                                                                                      
Co-Chair Wilken removed his objection.                                                                                          
Senator B.  Stevens asked  whether the University  utilizes  a State                                                            
procurement officer.                                                                                                            
Ms.  Redman   responded   that  the  University   has  an   in-house                                                            
procurement officer.                                                                                                            
Senator B. Stevens asked  the University's total annual construction                                                            
Ms  Redman  specified that  the  amendment  addresses  small  claims                                                            
valued  at $250,000  or less. She  continued  that the University's                                                             
construction  budget  ranges  between  $20 million  to  $40  million                                                            
Senator B. Stevens  asked the importance of excluding  this level of                                                            
contractor claims.                                                                                                              
Ms.  Redman explained  that  the  bill specifies  that  small  claim                                                            
arbitration  could be  initiated "solely  at the  discretion of  the                                                            
contractor,"  without the  approval  of the University.  She  stated                                                            
that because the  majority of University construction  projects fall                                                            
into the small  claim category, its  attorneys have determined  that                                                            
the  bill's  current  language  is  not  in  the  University's  best                                                            
Senator  B. Stevens  ascertained therefore,  that  the basis of  the                                                            
amendment would be to address  the concern that the University would                                                            
be  negatively   impacted   because  of  the   multitude  of   small                                                            
contractors it deals with.                                                                                                      
Ms. Redman affirmed  that the majority of University  projects would                                                            
be  classified   as  small   projects.  She   reiterated  that   the                                                            
University's  legal  council has  determined  that  this bill  might                                                            
influence small contractors to pursue arbitration measures.                                                                     
Senator  B.  Stevens asked  what  the  University's  alternative  to                                                            
arbitration would be.                                                                                                           
Ms.  Redman responded  that  the alternative  would  be the  current                                                            
settlement process  through which hearings are conducted.  She noted                                                            
that the University's  attorneys have  determined that the  proposed                                                            
arbitration process might remove the incentive to settle.                                                                       
Senator  Hoffman  surmised  therefore, that  contrary  to  testimony                                                            
stating  that  the  arbitration  process   would  shorten  the  time                                                            
involved in settling claims,  the University has determined that the                                                            
arbitration  process  would lengthen  its  time required  to  settle                                                            
Ms. Redman clarified  that this legislation would  introduce binding                                                            
arbitration  as a method  to settle small  contractor disputes.  She                                                            
stated  that while the  State has  experience with  this issue,  the                                                            
University  has  not. She  acknowledged  that  University  attorneys                                                            
might  eventually   conclude   that  it  might   be  an   acceptable                                                            
alternative.  However, she  stated that because  the University  was                                                            
not involved in the aforementioned  discussions, the concern is that                                                            
the small  claim arbitration  mandate might  increase its number  of                                                            
arbitrations and litigations.                                                                                                   
Senator  Bunde  voiced being  nervous  "that  a State  agency  would                                                            
escape the  full impact of  this law." He  attested that this  would                                                            
set  a  poor  precedent   unless  the  University   already  has  an                                                            
arbitration  process  in place  that  would  be duplicated  by  this                                                            
mandate. He  asked whether the University  currently has  in place a                                                            
system to adjudicate these small claims.                                                                                        
Ms. Redman replied  that the University must adhere  to and abide by                                                            
the  State   procurement  code  that   has  established   provisions                                                            
pertaining to hearings and the appeal process.                                                                                  
Senator Bunde stated everything "except for this exemption."                                                                    
Ms. Redman concurred.                                                                                                           
Senator Olson agreed with Senator Bunde's comments.                                                                             
Senator Olson asked AGC's position on the amendment.                                                                            
Mr. Cattanach  commented  that the  $250,000  small claims  category                                                            
limit was  agreed upon after  six months  of discussion between  the                                                            
AGC and the Department  of Transportation and Public Facilities that                                                            
determined that a binding  arbitration determination would be a fair                                                            
method of addressing  a claim. He asserted that arbitration  is very                                                            
expensive  and that it  would not  unusual to spend  a quarter  of a                                                            
million dollars  when prosecuting  a claim.  He shared that  after a                                                            
hearing  is  conducted,   a  contractor  might  determine   that  an                                                            
independent arbitrator  could levy a fair opinion  without incurring                                                            
further  expense. He  stated  that claims  below  $250,000 could  be                                                            
handled  quicker  and  cheaper  via  the  arbitration   process.  He                                                            
specified  that claims  in excess  of that  amount  would be  better                                                            
managed through the routine claims process.                                                                                     
Mr. Cattanach stated that  AGC agrees with the University's position                                                            
on this  amendment because  the University  was not involved  in the                                                            
process.  Additionally,   he  commented  that  the  University   has                                                            
committed  to  work  with  AGC  to  determine  whether  the  binding                                                            
arbitration process  would work with University projects.  He voiced                                                            
confidence  that it  would work.  Therefore,  Mr. Cattanach  replied                                                            
that AGC supports the amendment.                                                                                                
Co-chair Wilken removed his objection to the amendment.                                                                         
There being no further objection, Amendment #1 was ADOPTED.                                                                     
Amendment #2: This conceptual  amendment addresses a technical error                                                            
in the  bill  whereby Sections  1  and 15  of the  bill specify  two                                                            
differing  effective dates  pertaining to  the applicability  of the                                                            
bill. The clarifying language  being inserted into the bill reads as                                                            
     Sec. 16. The uncodified law of the State of Alaska is amended                                                              
     by adding a new section to read:                                                                                           
          APPLICABILITY. Sections 1-16 and 18 of this Act apply to                                                              
     a contract if the contract is entered into on or after the                                                                 
     effective dates of secs. 1-16 and 18 of this Act.                                                                          
Co-Chair Wilken moved for the adoption of Amendment #2.                                                                         
There being no objection, Amendment #2 was ADOPTED.                                                                             
Senator Taylor asked whether  this legislation would alleviate other                                                            
[unspecified] issues that have been discussed over the years.                                                                   
Mr. Cattanach  responded  that by  implementing a  fair and  quicker                                                            
process, the legislation  would address other [unspecified]  issues.                                                            
Senator Taylor voiced support  of the legislation if it would result                                                            
in improving  "the  Department's reluctance  to adjust  claims  in a                                                            
good faith  and meaningful  manner  that has  literally bankrupted"                                                             
numerous  businesses.  In addition,  he  noted that  a contractor's                                                             
bonding ability  is jeopardized when  a timely determination  is not                                                            
Senator Taylor moved to  report the bill, as amended, from Committee                                                            
with individual recommendations and accompanying fiscal note.                                                                   
There  being  no  objection,  CS SB  125  (FIN)  was  REPORTED  from                                                            
Committee with  indeterminate fiscal note #1 from  the Department of                                                            
Transportation and Public Facilities.                                                                                           

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