Legislature(2003 - 2004)

04/29/2003 01:39 PM Senate TRA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     SB 125-STATE CONTRACTS                                                                                 
CHAIR JOHN COWDERY, bill sponsor,  read the bill title and stated                                                               
that  as  a  member  of  the  construction  trade,  he  has  been                                                               
frustrated with  the claims process for  a contract disagreement.                                                               
The  purpose of  the bill  is to  reform the  claims process  and                                                               
restore the confidence of the private sector.                                                                                   
Specific provisions of SB 125:                                                                                                  
    · Permits a contractor to seek arbitration if a procurement                                                                 
      officer's written decision isn't issued by its due date                                                                   
    · Provides that parties may agree to binding arbitration on                                                                 
      all appeals                                                                                                               
    · Tightens timelines, and eliminates redundant requirements                                                                 
    · Holds hearing officers and arbitrators to their required                                                                  
      deadlines; those who fail to be timely are disqualified                                                                   
      for one year                                                                                                              
    · Entitles contractors to recover some claim costs                                                                          
    · Spells out in regulation specific qualifications for                                                                      
      hearing officers and arbitrators                                                                                          
He explained  that companion bill  HB 250 was amended  to address                                                               
difficulties   the  Department   of   Administration  (DOA)   had                                                               
regarding provisions  in the procurement code.  Because he didn't                                                               
have  a  committee  substitute (CS)  prepared  to  address  those                                                               
concerns, he  asked for a  motion to adopt the  amended companion                                                               
bill as the working document.                                                                                                   
SENATOR THOMAS  WAGONER made a  motion to adopt CSHB  250(L&C) \I                                                               
version as a  conceptual amendment. There being  no objection, it                                                               
was so ordered.                                                                                                                 
MARK  O'BRIEN,  chief contracts  officer  for  the Department  of                                                               
Transportation  & Public  Facilities (DOTPF),  advised that  they                                                               
have been  working with the Associated  General Contractors (AGC)                                                               
to address  revisions to the  claims process. The  AGC approached                                                               
DOTPF  in  an  effort  to  solve  three  regulatory  problems  in                                                               
statute. They were looking for:                                                                                                 
   · Faster - The bill introduces specific timeframes and                                                                       
     shortened   timeframes.  Arbitration   is   offered  as   an                                                               
     alternate to the hearing process  and typically results in a                                                               
     quicker  and less  involved process  to get  to a  decision.                                                               
     Under  the  process,  arbitration   is  final  and  in  most                                                               
     instances, less expensive.                                                                                                 
   · Fairer - Selection of a neutral arbitrator goes a long way                                                                 
     toward providing a more fair and balanced decision.                                                                        
   · Less Expensive - Arbitration is less formal and more                                                                       
     expeditious and therefore less costly.                                                                                     
The administration doesn't  completely agree with the  AGC on the                                                               
Rule  79 and  82 provisions,  which  is the  recovery of  partial                                                               
costs and  fees to the prevailing  party. To see what  this might                                                               
mean to  the department they looked  at the last eleven  years of                                                               
claims history to  calculate what the Rule 79 and  82 costs would                                                               
have done  to the  payment of those  fees. They  calculated costs                                                               
and fees would have amounted  to an additional $145,000 per year.                                                               
This is  significant because most  claims are federal  aid funded                                                               
and  fees  are  non-participating  costs, which  means  they  are                                                               
general fund expenditures.                                                                                                      
2:00 pm                                                                                                                       
CHAIR COWDERY  said the way to  keep those costs from  coming out                                                               
of the  general fund is to  negotiate in good faith.  That's been                                                               
the problem  all along,  because there was  no incentive  for the                                                               
state to settle.  He opined that knowing it would  cost the state                                                               
would  be incentive  for  the state  to step  up  and settle  the                                                               
MR.  O'BRIEN agreed  and said  it would  encourage both  sides to                                                               
settle. The  Rule 68 provision is  also included and is  an offer                                                               
of settlement.                                                                                                                  
SENATOR WAGONER  said this  would make  many of  his constituents                                                               
MR. O'BRIEN  said Mr. Monkman  was available to  answer questions                                                               
regarding Rules 68, 79 and 82 and how those offers are made.                                                                    
RICHARD MONKMAN from  the Department of Law  (DOL) explained Rule                                                               
82 is unique  to Alaska and allows the prevailing  party to get a                                                               
percentage  of their  attorney's fees  on final  judgment. It  is                                                               
designed   to  encourage   settlement  because   there  is   cost                                                               
associated  with  losing the  judgment.  The  prevailing side  is                                                               
entitled  to  attorney's fees.  If  you're  claiming, you  get  a                                                               
percentage  of  your recovery  of  a  money judgment;  if  you're                                                               
defending, you  get a percentage  of the actual  attorney's fees.                                                               
The  fees may  be increased  or decreased  depending on  what the                                                               
judicial officer  determines is appropriate and  according to the                                                               
list of 11  criteria that the court may consider.  As a mechanism                                                               
for  fees and  costs,  DOL  believes that  using  those rules  is                                                               
advisable and assumes the AGC attorneys agree.                                                                                  
Rule 79 is a list of  costs that are partially recoverable by the                                                               
prevailing party. Rule  68 is the meet or beat  rule. At any time                                                               
during litigation, a party may make  a rule 68 offer of judgment.                                                               
Once the  offer is tendered, it  is irrevocable for ten  days and                                                               
may be  accepted at  any time  during that  period. If  the party                                                               
accepts the case it's over, but  if it doesn't, the case moves to                                                               
trial and  a hearing. Then the  claimant must meet that  offer or                                                               
they aren't considered  the prevailing party for  the purposes of                                                               
attorney's  fees  and costs.  Again,  this  rule is  designed  to                                                               
encourage settlement.                                                                                                           
CHAIR  COWDERY asked  if it  was true,  as some  contractors have                                                               
charged, that  some attorneys use  this as  a ploy rather  than a                                                               
good faith effort to settle.                                                                                                    
MR. MONKMAN said  it probably is in some cases,  but the offer is                                                               
irrevocable for ten  days and the rule allows  multiple offers so                                                               
a higher offer could be made and accepted.                                                                                      
CHAIR COWDERY asked how the state determines attorney fees.                                                                     
MR. MONKMAN replied  they are based on actual  cost and overhead.                                                               
If a  contractor wins,  it wouldn't  matter whether  his attorney                                                               
was paid $100 per hour or twice  that, the fees would be based on                                                               
CHAIR COWDERY asked Mr. O'Brien  whether money had to be escrowed                                                               
until settlement when a claim was large and lengthy.                                                                            
MR.  O'BRIEN said  there is  no escrow  requirement. As  with any                                                               
other  judgment, the  money  would be  collected  from the  owing                                                               
CHAIR COWDERY  said he  was interested in  who would  collect the                                                               
interest  on the  claim until  settlement time  and whether  they                                                               
receive federal funds for the size  of a project on an engineer's                                                               
estimate or the actual costs.                                                                                                   
MR. O'BRIEN said  they are reimbursed for the actual  cost by the                                                               
federal aid system excluding any  interest they would have to pay                                                               
on a  claim. Any interest  owed would  be taken from  the general                                                               
fund  portion  of  their  capital budget  rather  than  from  the                                                               
federal aid portion.                                                                                                            
CHAIR  COWDERY  questioned  who   gets  the  interest  on  bonded                                                               
MR.  O'BRIEN  said the  interest  generally  goes back  into  the                                                               
projects that are funded by the bond.                                                                                           
CHAIR COWDERY asked what would happen  if the project was of less                                                               
value than the bond value.                                                                                                      
MR. O'BRIEN said he didn't know.                                                                                                
CHAIR  COWDERY asked  if DOTPF  didn't  use the  interest on  the                                                               
money for a project during the course of the project.                                                                           
MR. O'BRIEN said  there are a number of  projects packaged within                                                               
a bond  and some of them  cost more than estimated  and some cost                                                               
less.  If  the  bond  structure provides  that  interest  may  be                                                               
expended  on  the capital  project  then  it  is applied  to  the                                                               
overruns and  shortfalls within the  total bond project.  He said                                                               
he didn't  know what happens to  any money that isn't  spent over                                                               
the course of the project.                                                                                                      
CHAIR COWDERY  asked if you  could mix money from  different bond                                                               
MR. O'BRIEN said no.                                                                                                            
SENATOR OLSON  asked if any  other departments had the  same type                                                               
of provision for recovery of attorney fees.                                                                                     
MR.  O'BRIEN  replied this  would  cover  any agency  within  the                                                               
executive  branch that  receives the  delegation of  authority of                                                               
construction from DOTPF.                                                                                                        
SENATOR OLSON  asked if  the Department  of Corrections  would be                                                               
entitled to recovery of fees.                                                                                                   
MR. O'BRIEN said  they would. The calculation they  made based on                                                               
the estimate of  attorney fees included claims  from all agencies                                                               
with construction contracts that were adjudicated through DOTPF.                                                                
SENATOR OLSON asked how he justified the zero fiscal note.                                                                      
MR.  O'BRIEN   explained  the  fiscal  note   was  asterisked  as                                                               
indeterminable. The analysis  showed it was an  estimate based on                                                               
historical amounts  and they listed  the formula for  arriving at                                                               
an estimate.                                                                                                                    
SENATOR OLSON  said there could be  a budget draw under  the bill                                                               
MR. O'BRIEN agreed. They estimated up to $145,000 per year.                                                                     
CHAIR COWDERY commented that gives DOTPF incentive to not go to                                                                 
the Legislature because they were unable to settle a claim.                                                                     
MR. O'BRIEN replied that point could be argued.                                                                                 
SENATOR WAGONER made a motion to move CSSB 125(TRA) and attached                                                                
fiscal note from committee with individual recommendations.                                                                     
There being no objection, it was so ordered.                                                                                    

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