Jocelyn Knoll and Lauren Roso | Dorsey | June 20, 2017
Recently, at least two experienced attorneys, one who represents contractors and the other who primarily represents public authorities, have published position papers opining whether Minnesota municipalities have the power and authority to use the Construction Manager at Risk (CMAR) contract delivery method when awarding construction contracts. The contractors’ attorney’s position is that public authorities cannot award a public works contract using the CMAR delivery method; the municipal attorney has taken the position that public authorities can award a public contract using the CMAR method. Who is right?
After studying the applicable statutes and legislative history, we believe state and local public authorities in Minnesota likely have the legal discretion to use best value sourcing to award construction contracts that use the CMAR delivery method. Minnesota’s Municipal Contracting Law applies directly to counties, towns, cities, school districts, and “other municipal corporation[s] or political subdivision[s] of the state authorized by law to enter into contracts.” Minn. Stat.
§ 471.345. The Municipal Contracting Law authorizes non-State public authorities (municipalities) to use the best value procurement option set forth in Minnesota Statutes §16C.28, subd. 1(a)(2) and 1(c). See Minn. Stat. § 471.345, subds. 3a and 4a. Chapter 16C is the State Contracting Law and normally applies only to the State and its agencies, but the carve outs in Section 471.345 and other statutes allow municipalities to also use best value award processes in lieu of awarding construction contracts to the lowest responsible bidder. Neither Sections 471.345 nor 16C.28 limit—or even address—the use of the various types of construction contract forms or project delivery methods that fall within the purview of best value. Section 471.345, subds. 3a and 4a, sets forth the specific provisions in Section 16C.28 that public authorities must follow when they award any construction contract using the best value process. Importantly, the best value law applies to “all construction contracts.”
Based on this construct, our understanding is that the Minnesota League of Cities (the “League”) advises its member cities that the best value carve outs in Section 471.345 expressly authorize municipalities to use the best value process set forth in Section 16C.28, subd. 1(a)(2) and 1(c) when awarding construction contracts, regardless of the type of construction contract form or the project delivery method. There is no dispute that CMAR is a type of construction contract. Accordingly, it makes sense that the League has taken the position that a CMAR contract is allowed under Minnesota’s best value law. The League’s position is supported by the statutes’ plain language and legislative history.
That said, to date, we are unaware of any Minnesota district or appellate court case where a disgruntled proposer or concerned tax payer has challenged a municipality’s best value sourcing of a Minnesota public construction contract where the public authority used the CMAR delivery method. Accordingly, a Minnesota court has not yet weighed in on whether municipalities have the authority under Section 471.345 to source public contracts using the CMAR delivery method. If Minnesota courts are asked to decide the issue, they will obviously analyze the applicable statutes and, if necessary, review the legislative history supporting the 2007 amendments to, among other statutes, Minnesota Statute Sections 471.345 and 16C.28. Based on the above, we believe a court would conclude Minnesota municipalities have the authority to source public contracts using the CMAR delivery method.
I. Minnesota Statutes Support Municipalities Using Their Best Value Contracting Authority to Source a Construction Project Using CMAR.
Minnesota’s Municipal Contracting Law allows municipalities to use the best value selection award process for construction contracts over $25,000. Minn. Stat. § 471.345, subds. 3a and 4a. Specifically, Subdivision 3a applies to construction contracts more than $100,000 and provides that “[a]s an alternative to the procurement method described in subdivision 3, municipalities may award a contract for construction, alteration, repair, or maintenance work to the vendor or contractor offering the best value under a request for proposals as described in section 16C.28, subdivision 1, paragraph (a), clause (2), and paragraph (c).” Subdivision 4a contains nearly identical language, but its application is limited to public contracts between $25,001-$99,999.99.
Best value procurement is a means of sourcing a contractor or vendor. Its focus is on the overall value of a contract, rather than just the lowest price responsible bidder. Best value is not a construction delivery method. “Best value procurement knows no boundaries when it comes to the method of project delivery.” Best Value Procurement: Lessons Learned, p. 26, REGENTS OF THE UNIVERSITY OF MINNESOTA (2009). Stated differently, Minnesota’s best value laws contain no limitation on the type of contract or construction delivery method that public authorities can use to deliver their construction projects.
Notably, there are many different types of construction contracts (e.g., lump sum, unit price, cost plus percentage of cost, cost plus fixed fee, cost plus fee plus profit sharing, cost plus sliding fee, guaranteed maximum price (GMP), Engineering Procurement Construction (EPC), Construction Manager Agency (CMA), Design-Build, CMAR, and others). The numerous types of construction contract forms can be assigned to two broad categories: price given in advance contracts (price-based contracts) and cost reimbursement contracts (cost-based contracts). Price-based contracts fit within the lowest responsible bidder framework. In contrast, cost-based contracts fit within the best value framework.
Accordingly, if a municipality exercises its best value authority under Sections 471.345, subds. 3a or 4a, and follows the applicable statutory requirements set forth in Section 16C.28, there is no law that expressly prohibits the municipality from sourcing a construction project using any type of contract form or delivery method, including CMAR.
In sum, an entity that agrees to a CMAR delivery method is committing to act as a construction manager and deliver the project within a GMP and by a specified time. The construction manager provides professional services and acts as a consultant to the owner in both the design and construction phases of the project, and may also perform some of the construction itself. The construction manager thus is responsible to manage and control construction costs to come in under the GMP.
Turning back then to Minnesota’s statutory scheme, which allows municipalities to utilize a CMAR delivery method in a best value framework, Minnesota’s Municipal Contracting Law expressly incorporates pertinent provisions from the State’s Best Value statute, Section 16C.28. The Best Value statute sets forth the legal parameters for the state’s award of construction contracts using the best value procurement method:
(a) All state building and construction contracts entered into by or under the supervision of the commissioner or an agency for which competitive bids or proposals are required may be awarded to either of the following: …
(2) the vendor or contractor offering the best value, taking into account the specifications of the request for proposals, the price and performance criteria as set forth in subdivision 1b, and described in the solicitation document. …
(c) When using the procurement process described in subdivision 1, paragraph (a), clause (2), the solicitation document must state the relative weight of price and other selection criteria. The award must be made to the vendor or contractor offering the best value applying the weighted selection criteria. If an interview of the vendor’s or contractor’s personnel is one of the selection criteria, the relative weight of the interview shall be stated in the solicitation document and applied accordingly.
Minn. Stat. § 16C.28, subd. 1(a)(2) and 1(c) (emphasis added). And, under the Municipal Contracting Law, those parameters and permissions also apply to municipalities. Minn. Stat. § 471.345, subds. 3a and 4a. Under Chapter 16C, and for the purposes of construction contracts, “best value” is defined as a procurement method that considers price and other criteria, Minn. Stat. § 16C.28, subd. 1b(1)-(9). Because the statute expressly applies to “all” construction contracts, it makes sense that there is no list of the types of allowable construction contract forms or delivery methods. Further, there is no requirement that the public authority wait to source a best value construction project until the project is completely designed or it knows the full price of the project; rather, the requirement is that the public authority must consider performance and price, in part, as part of its best value award process. Minn. Stat. § 16C.28, subd. 1b. While the Legislature requires public authorities to consider price when sourcing best value contracts, the statute does not define price or provide any framework for complying with the requirement. See generally Minn. Stat. §§ 16C.02 (“Definitions”); 16C.28, subd. 1b (“Best value; definition”); or 16C.32 (“Design-build contracts, Definitions”); and 471.345.
II. The League Advises Its Member Cities That Their Best Value Authority Includes Contract Awards Using CMAR.
Public authorities, including cities, counties, public entities, and corporations in Minnesota can award contracts based on a best value selection process. See Minn. Stat. §§ 412.311, subd. 2; 429.041, subd. 2a; 469.015, subd. 1a; 469.101, subd. 5a; and 471.345, subds. 3a, 4a, and 5. Attorneys representing League members advise Minnesota cities that they have discretion to use best value to source construction projects using the CMAR delivery method. While we are aware that some municipalities are initially entering into Construction Manager Agency contracts and then subsequently converting those contracts to CMAR contracts, we believe the better procurement practice is to award a CMAR contract from the start, ensuring the contract is competitively let in accordance with the best value criteria set forth in Minn. Stat.
The League’s Handbook for Minnesota Cities provides:
Best value provides an alternative to the competitive bidding process for contracts for construction, building, alteration, improvement, or repair work. A city may award this type of contract to the vendor or contractor offering the best value through the request for proposals process set forth in state law.
* * * * * * * * * * * * *
[a] city’s request for proposal (RFP) must set forth the criteria to evaluate best value contracting. The RFP also must state the relative weight assigned to price, as well as to other selection criteria.
LMC Handbook, Chapter 22, pp. 26-27.
As required by Minn. Stat. § 16C.28, the League sponsors training for its member cities on how to source contracts using the best value award method. Attorneys who conduct the training focus part of the session on CMAR contracts. Moreover, several Minnesota cities and counties that have participated in the training have used the best value selection process to award CMAR contracts (e.g., City of Eagan and St. Louis County). As discussed, we are not aware of any legal challenge to those awards.
III. The History of Minnesota’s Best Value Law and Its Incorporation Into § 471.345 (and other Statutes) Confirms the Legislature Intended Non-State Public Authorities to Have the Discretion to Use the CMAR Delivery Method.
In 2007, the Minnesota Legislature amended Chapter 16C to authorize the State and its agencies to award construction contracts using either the lowest responsible bidder or the best value methods. 2007 Minnesota Session Laws, Chapter 148-H.F. No. 548. Today, the best value legal framework and parameters for construction contracts is set forth in Minn. Stat. 16C.28. Importantly, at the same time it authorized the State to award construction contracts using best value contracting, the Legislature amended several other procurement statutes, including Section 471.345, to allow non-State corporations and entities and Minnesota cities and counties to use best value contracting. ID.
Two years earlier, in 2005, the Legislature had granted limited authority to the State and its agencies to use design-build and the CMAR delivery methods when awarding State construction contracts. 2005 Minnesota Session Laws, Chapter 78-S.F. No. 1335. Today, the design-build and CMAR statutes that expressly apply to the State and its agencies are set forth in Minnesota Statutes Section 16C.33 and .34, respectively. Notably, in 2001, the Legislature authorized MnDOT to source construction contracts using the design-build delivery method. In 2002, the Legislature authorized the Department of Administration, the University of Minnesota, and MnSCU to source construction projects funded in the 2002 bonding bill using the design-build delivery method. The Legislature later authorized these public entities to use design-build beyond 2002. Likewise, in 2002, the Legislature authorized Hennepin County to source construction contracts using the design-build delivery method. Minn. Stat. § 383B.158. Subsequently, municipalities and other public authorities in Minnesota clamored for the legal authority to use non-traditional delivery methods, including design-build and CMAR. The State and its agencies, in turn, wanted discretion to award all construction contracts using the lowest responsible bidder or best value procurement systems, regardless of project delivery method. Other public authorities in the State supported this effort, as did certain industry groups. Thus, in 2007, State lawmakers introduced, considered, and enacted best value legislation that authorized State and non-State public authorities to award all construction contracts using a competitive bidding or best value procurement process. See Sections 16C.28 and 471.345.
To determine whether the Legislature and proponents of the best value contracting law intended the amendments to allow best value sourcing of construction contracts to include the CMAR delivery method, we studied the legislative history of amendments to Chapter 16C and Section 471.345. Our research included listening to audio recordings from the hearings where legislators debated the bill and interested industry representatives testified. Our review revealed that the history of the best value amendments is consistent with our interpretation of the plain language of the statute, i.e., non-State agencies have the authority to use a best value procurement process to award any type of construction contract, including CMAR, provided the procurement process follows the framework set forth in the Best Value statute.
A summary of our findings and observations are set forth below.
1. Legislative History: Price
– The general purpose of the best value statute is to encourage consideration of “value” generally, and seek the “best overall performance over the cheapest price up-front.” State and Local Government Operations and Oversight Committee Hearing (Mar. 26, 2007) (Senator Metzen, bill author). This suggests that full price is not required for best value contracting.
– The overarching concern expressed in the legislative hearings was the subjectivity involved in selecting a best value contractor. The Legislature’s inclusion of price as a consideration when using best value was done to retain an element of objectivity. But there was no explicit discussion of the price requirement.
– The inclination of those testifying in support of the best value amendment and its application to non-State entities was to make clear that so long as the entity requesting best value proposals to source a construction contract could state relative weight of price in general, the lack of a hard-bottom-line number would not foreclose the possibility of using design-build, CMAR, or some other contract or project delivery method.
2. Legislative History: Best Value and Project Delivery Methods
The legislative hearings suggest strongly that best value contracting includes projects delivered by the design-build and CMAR methods. Significantly, advocates of best value contracting relied heavily on the success the University of Minnesota and Department of Administration had in using design-build and CMAR contracts after Section 16C.33-34 provided those entities the option to use alternative procurement methods.
○ The University conducted 27 pilot projects using both the design-build and CMAR methods; projects came in on average at thirteen-percent below budget.
○ Mike Perkins, University of Minnesota, Local Government and Metropolitan Affairs Committee Hearing (Feb. 28, 2007): The University has been using best value for over a year and a half, including design- build and CMAR projects. The best value statute would “expand” considerations for CMAR contracting and provide more guidance for that process. (Emphasis ours.)
Specific testimony supporting the proposition that best value encompasses CMAR and other delivery methods such as design-build provides further support that the Legislature did not intend to limit best value sourcing to specific types of contracts or delivery methods.
○ Rich Miller, Construction Trades Council, Local Government and Metropolitan Affairs Committee Hearing (Feb. 28, 2007): best value “does not require a specific procurement system.” (Emphasis ours.)
○ Rich Miller, Construction Trades Council, State and Local Government Operations and Oversight Committee Hearing (Mar. 1, 2007): Design- build, CMAR, and job-order contracting are variations of best value contracting.
○ Representative Hilstrom, Commerce and Labor Committee Hearing (Mar. 13, 2007): The University already has the authority “to do this” (discussing best value contracting, through use of design-build and CMAR).
○ Rich Miller, Construction Trades Council, Governmental Operations, Reform, Technology and Elections Committee Hearing (Mar. 20, 2007): Other bills providing the Department of Administration with the ability to use different contracting methods in the past (design-build/CMAR/job- order); these are “similar tools.”
Indeed, the Minnesota Commissioner of Administration, the person charged with establishing procedures for developing and awarding best value requests for proposals for State construction projects, has identified those documents as “Construction Best Value Procedures.” And those best value procedures include sourcing projects using the CMAR delivery method.
The 2007 amendments to add the term “proposal” in addition to the term “bid” in Minn. Stat. § 16C.28 is telling. A request for proposals, as opposed to an invitation for bids, allows a public authority to solicit proposals to achieve best value considerations, even when the full terms of the contract or the design of the project is not entirely known. This scenario completely aligns with the CMAR delivery method. Indeed, one of the hallmarks of the CMAR delivery method is that construction may start before design completion (commonly referred to as “fast-tracking”), which, in turn, reduces the project schedule.
In practice, public authorities use best value to source construction contracts “to match the best qualified contractor to the project, thereby reducing the owner’s risk and increasing the value received.” Best Value Procurement: Lessons Learned, p. 3, REGENTS OF THE UNIVERSITY OF MINNESOTA (2009). This broad discretion and flexibility makes sense because value considerations can—and frequently do—include specific diversity goals for a project. Unfortunately, when public authorities award construction contracts to the lowest responsible bidder using the traditional design-bid-build delivery method, the low bidder frequently falls short of the public authority’s goal for diversity hiring for the project. For example, a recent March 29, 2017 MINNEAPOLIS STARTRIBUNE article entitled “Diversity in hiring falls short of goals for public construction projects,” discusses the challenges public authorities encounter when they award public construction contracts. “Contractors don’t have to meet the goals to win bids—there’s wiggle room for those that come up short but demonstrate ‘good faith efforts’ in their hiring,” according to Velma Korbel, director of the Minneapolis Department of Civil Rights. One of the many advantages of using best value sourcing and the CMAR delivery method is an experienced CMAR contractor can help position the project so it meets or exceeds diversity goals.
That said, regardless of the contract type or project delivery method, cost realism should always play an important part in public authorities’ source selections. This means that although the statute does not require the public authority to issue an RFP requiring all proposals to include a total (or guaranteed) price for the construction of the project at the outset of the initial award for preconstruction services, price criteria is always a consideration. For a CMAR contract, pricing criteria commonly considered by a public authority includes: preconstruction fee, construction fee, at-risk fee, general conditions, and contingency. In most cases, the parties will agree to a guaranteed maximum price (GMP) later in the design process.
The best value alternative available to municipalities, as set forth in Section 471.345, is not without important safeguards. To avoid favoritism, and to include transparency in the process, Minnesota’s best value law includes two important safety measures. Significantly, the solicitation document must state the “criteria to be used to evaluate the proposals,” and the “relative weight of price and other selection criteria.” The award must be evaluated “in an open and competitive manner,” and must be made to the vendor or contractor offering the best value applying the weighted selection criteria.” These measures are intended to reduce potential abuses by forbidding post-bid changes to the weighting schedule identified in the solicitation document. Further, full disclosure of all criteria and sub-criteria and their weighted ranking provides a standard of objectivity in a process that will include the subjective evaluation of contractor proposals.
CMAR is a proper best value contracting method when a municipality’s request for proposal explicitly lists price considerations and states the relative weight that will be given to each selection criteria. CMAR complies with the requirements of the best value alternative set forth in Section 471.345, subds. 3a and 4a, and fits under both the letter and spirit of the best value legislation.