Contracting 101

Stephen C. Buckley, Legal Services Counsel

Q: Are NH municipalities required to use competitive bidding when buying materials and services or when undertaking construction projects?

A: As a general rule, there is no state law requiring competitive bidding for town contracts and purchases unless a public official is involved as one of the sellers or contractors.

Q: What rules govern bidding by public officials?

A: There is no statutory prohibition against public officials bidding for contracts with a town. If a public official is a seller or contractor (or wishes to be), RSA 95:1 requires competitive bidding if the value of the goods or services will exceed $200. In the hypothetical instance where the value of a construction project to replace the Central Fire Station will be far more than $200, if the Deputy Fire Chief wished to bid for the construction management contract for this project, the Town must use competitive bidding to select the contractor.

Q: Can town meeting vote to require competitive bidding?

A: Towns may vote, by a warrant article at town meeting, to establish a centralized purchasing department for the town in accordance with RSA 31:59-a. If the warrant article is approved, the selectmen must appoint a purchasing agent, who may establish rules and regulations for competitive bidding for town purchases. See RSA 31:59-a through 31:59-d. When a town adopts RSA 31:59-a, the authority to purchase all materials, equipment, printing, furniture, furnishings of every name and nature is vested in the appointed purchasing agent.

Q: What is the legality of a municipal competitive bidding regulation that either (a) limits contract work to bidders who are residents or (b) preferring residents?

A: A municipal public bidding regulation that bars non-residents from bidding on a municipal contract would likely be found to violate the “privileges and immunities” clause of the U.S. Constitution.  Generally the “privileges and immunities” clause of the U.S. Constitution prohibits discrimination against the citizens of other states in seeking work on public works contracts unless there is a “substantial reason” to discriminate. In United Bldg. And Const. Trades Council of Camden County And Vicinity v. Mayor And Council of City of Camden, 465 U.S. 208 (1984), the U.S. Supreme Court invalidated a City of Camden ordinance that required 40% of the employees of contractors and subcontractors working on city construction projects be city residents.

Court decisions in New Hampshire that are associated are those dealing with municipal employment. The New Hampshire Supreme Court has held that residency requirements for municipal employees infringe on the fundamental constitutional right to travel. Such a restriction is lawful only if the municipality can show that the “restriction is necessary to achieve a compelling state interest.” Seabrook Police Assoc. v. Seabrook, 138 N.H. 177, 179 (1993). Such a restriction must also be narrowly drawn to achieve its purpose. In Donnelly v. Manchester, 111 N.H. 50 (1971), and Angwin v. Manchester, 118 N.H. 336 (1978), residency requirements for school employees were held to be invalid. It is likely the New Hampshire Supreme Court would apply the same constitutional analysis to a nonresident’s interest in bidding on a public works contract, and invalidate a competitive bidding limitation if the municipality did not have a compelling interest to limit bidding to residents.

Q: What are the general rules of the road for conducting a public bidding process?

A: When a town decides to use competitive bidding, it must be conducted fairly. The town can reject all bids, but if it decides to accept one over the others, it must choose the “lowest responsible bidder” who has complied with all the terms of the RFP, without showing favoritism. Curran, Inc. v. Auclair Transp. Inc., 121 N.H. 451 (1981). That does not mean that the lowest bidder in dollar amount must be accepted in all cases; if that low bid has not responded to all terms of the RFP, or has proposed materials that are different from those specified, or if the bidder cannot meet a required condition, such as provision of a performance bond, it may be rejected. All bidders must be treated fairly and equally with respect to the town’s competitive bidding procedures, such as receiving notice. Irwin Marine, Inc. v. Blizzard, Inc., 126 N.H. 271 (1985).

Q: Can contract specifications be changed during the bidding process in response to changing conditions?

A: A municipality cannot, after putting one set of specifications out to bid, decide to accept a bid that is calculated on different specifications. If the municipality desires to use the new specifications, it must reject all bids, advertise the new specifications and allow the other responsible bidders to submit new bids based on the new specifications. Marbucco Corp. v. City of Manchester, 137 N.H. 629 (1993).

Q: When must a municipality require a public works payment and performance bond?

A: Under RSA 447:16, a municipality must obtain a public works payment and performance bond when a contract for the construction, repair or rebuilding of public buildings, public highways, bridges or other public works involves an expenditure of $35,000 or more. A performance bond would endure faithful performance of the contract by the prime contractor. A payment bond would ensure that all subcontractors and materialmen engaged to do work or deliver materials for a public works project are paid in full.

Q: Are there implied duties that govern all contracts in New Hampshire?

A: In every agreement there exists an implied covenant that each of the parties will act in good faith and deal fairly with the other. Griswold v. Heat Corporation, 108 N.H. 119, 124 (1967). The duty to act in good faith when carrying out the terms of a contract applies in equal measure to a municipality that is party to a contract. Seaward Construction Co., Inc. v. City of Rochester, 118 N.H. 128 (1978).

Q: What are most common forms of construction contracts in New Hampshire and what are the advantages and disadvantages of each?

Below are the three forms of construction contracts and advantages and disadvantages of each:

Design-Bid-Build: A design-bid-build project proceeds in multiple stages, with the design of the project being performed by a different individual or entity from the party that completes the construction. The project owner typically begins by engaging an architect and/or an engineer to provide design services, which may consist of any or all services necessary to take the project from the conceptual design stage through final design of the project and the preparation of construction documents. Regardless of whether the owner is a private or a public entity, the design professionals are generally selected based on their qualifications, and then engaged through a process of negotiation, as opposed to competitive bidding.

Advantages: Design work is finished before a contractor is selected, which permits the contractor to be selected based on competitive bids for a precisely-defined scope of work.

Disadvantages: The contractor is not involved in the design process, making meaningful and timely input on issues such as choice of materials, constructability and pricing not likely to be available. “Fast Track” construction is not an option. Bidders unlikely to suggest project improvements in order to avoid price increases that might make the contractor’s price less competitive.

Design-Build: The main feature is that both the design and construction of a project are performed by a single entity. Rather than engaging a design firm and then a construction firm, the owner engages one firm, generally through a single contract, to take the project from inception to completion. The design-builder may be, for example, a construction company with design professionals on staff, or a construction company that engages designers for purposes of the project. Joint ventures between design firms and contractors are also sometimes formed for the purpose of contracting with an owner for design-build services.

Advantages: The design and construction professionals are working together as a team from the beginning, and this generally leads to a better, more efficient design reflecting the value engineering generally missing from the design-bid-build project. The owner may look to one entity without regard to whether the problem arises out of the design or the construction. Design-build projects often permit construction to begin as soon as the design-builder is comfortable that the design for the early stages of construction is established.

Disadvantages: Design-Build may reduce, if not eliminate, competition among contractors and the best price thought to flow from such competition. Fear of uncontrolled costs of construction. Owners will not have the security of knowing that the work is being performed by the lowest qualified bidder.

Construction Management: Construction management is a project delivery method that is now in common use in New Hampshire. There are two principal forms of construction management. First, the construction manager (“CM”) is hired by the owner, at or near the outset of the project, to act as the owner’s agent during design and construction and consults with the design team during the design phase and then enters into contracts and manages construction on the owner’s behalf. Then the CM is compensated for its services based on either a flat fee or an hourly rate schedule. Second, the construction management consists of the owner engaging the CM, again at or near the outset of the project, to work with the design team and then actually to construct the project with the CM compensated for its “preconstruction” services in the form of a fixed or hourly fee. The CM is then paid for its construction services, usually by reimbursement of actual construction costs plus a fee expressed as a percentage of such costs. The CM agrees, however, that the cost of construction plus its fee will not exceed a certain figure, known as the “guaranteed maximum price,” or GMP.

Advantages: Permits the involvement of the construction manager early on in the process to permit input on alternative designs, materials, constructability and value engineering. Allows for fast track construction.

Disadvantages: During the construction phase tends to resemble the traditional design-bid-build model.

Revised and reprinted in part from materials prepared by Attorney Richard C. Gagliuso, Nashua, NH, for the May 29, 2015 Continuing Legal Education Program, with permission from the NH Bar Association.

Stephen C. Buckley is Legal Services Counsel with the New Hampshire Municipal Association. He may be contacted at 800.852.3358 ext. 3408 or at legalinquiries@nhmunicipal.org.