Christopher I. McCabe, Esq.

Second Tier Subcontractor Recovers On Payment Bond That Waived Safe Harbor Provision

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The Pennsylvania Commonwealth Court recently held in a published opinion that the “safe harbor” provision in the Pa. Procurement Code, which shields sureties from second-tier payment claims where the general contractor has made full payment to its subcontractor, can be waived by contrary language in a payment bond.  This is welcome news for second-tier subcontractors on public works projects.  It is not welcome news for sureties, and will likely result in an immediate revision to “deficient” payment bonds issued on Pennsylvania public projects.

In Berks Prods. Corp. v. Arch Ins. Co., Berks Products Corporation, a second-tier subcontractor, supplied materials on a Wilson Area School District project under a subcontract with a first-tier subcontractor.  Skepton Construction, Inc., the general contractor, paid the first-tier subcontractor in full for the materials in question, but Berks remained unpaid to the tune of $52,679.26.  Berks then sued Arch Insurance Company which had issued a payment bond to Skepton.

Arch’s defense was that, under the “safe harbor” provision found in section 3939(b) of the Pa. Procurement Code, full payment by Skepton to the first-tier  subcontractor was a complete bar to Berks’s claim.  The statutory “safe harbor” states that: “Once a contractor has made payment to the subcontractor according to the provisions of this subchapter, future claims for payment against the contractor or the contractor’s surety by parties owed payment from the subcontractor which has been paid shall be barred.”  The “safe harbor” protects general contractors from having to pay twice – once to the subcontractor, and second to the sub-subcontractor.

In response, Berks argued that certain language of the payment bond waived the “safe harbor.” The specific language in question stated that the bond would remain in full force and effect if either the general contractor (the principal) or its subcontractor failed to pay for labor or materials. Because the first-tier subcontractor failed to pay Berks in full, the trial court found that the payment bond remained in effect and that the “safe harbor” had been waived by Arch.  On appeal, the Commonwealth Court upheld the trial court’s decision.  In its decision, the Commonwealth Court explained its holding as follows:

… the payment bond drafted by Arch herein provided that the bond shall remain in full force and effect until such time as both Skepton, the principal/general contractor, and any subcontractor, such as Tauber, make full payment for any labor and/or materials supplied for the school project. As the trial court noted, this language ensured that a third party such as Berks, which provided labor and/or materials for the project, would get paid in full.

This decision could tilt the playing field in favor of unpaid second-tier subcontractors, but only if the payment bond mirrors the language found in the Arch payment bond, or if there is other language that defeats the “safe harbor.” On the other hand, the ruling may be fleeting as sureties can easily overcome the holding by modifying any troublesome language in a payment bond.

If you are a second-tier subcontractor on a public project in Pennsylvania and remain unpaid, you should demand a copy of the payment bond and examine it carefully to determine whether the surety has waived the benefit of the “safe harbor.”  Better yet, contact experienced counsel for assistance in getting paid.

The Commonwealth Court decision can be found here.

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Posted on by Christopher I. McCabe, Esq. in Court Decisions, Surety and Bonding Leave a comment

Federal Indictment Charges Massive DBE Fraud In North Carolina

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Well, the proverbial shoe has dropped, and once again the U.S. Department of Transportation’s Disadvantaged Business Enterprise (DBE) program is in the news, with still another warning for contractors who have to comply with the DBE rules applicable to federally funded contracts.

This time, the locus is North Carolina.  The crime is conspiracy, money laundering, mail fraud, and wire fraud.  The companies charged are a paving contractor and the sham DBE it used.

On July 24, 2013, the U.S. Attorney’s Office for the Western District of North Carolina announced charges against Boggs Paving, Inc., and some of its executives, as well as Styx Cuthbertson Trucking Company Inc., the DBE firm used by Boggs.  This is from the official FBI press release:

According to allegations contained in the indictment, beginning in 2003 and through the present, Boggs Paving Inc. (“Boggs Paving”) fraudulently obtained federally and state funded construction contracts by falsely certifying that a disadvantaged business enterprise (“DBE”) or a small business enterprise (“SBE”) would perform and be paid for portion of the work on such contracts. USDOT’s DBE program provides a vehicle for increasing the participation of disadvantaged business enterprises in federally funded transportation-related projects. The indictment alleges that Styx Cuthbertson Trucking Company Inc. (“Styx”), a road construction hauler based in Monroe, North Carolina, owned by Styx Cuthbertson, was a certified DBE and SBE used by the defendants as a “pass through” entity to obtain such contracts.

To create the illusion that Styx was doing and being paid for the necessary work, the indictment alleges that, among other things, the conspirators ran payments through a nominee bank account in Styx’s name but funneled checks back to Boggs Paving and its affiliates, which were not DBEs or SBEs but were doing the actual work. The indictment further alleges that each time a deposit was made into the nominee account as supposed payment for construction work performed by Styx, a Boggs Paving employee would immediately cut a check from that Styx nominee account to the Boggs entity or another firm that had actually performed the work. In return, according to allegations contained in the indictment, Styx Cuthbertson received a kickback for allowing his name and DBE status to be used by Boggs Paving.

The seriousness of the charges can be found in the potential sentences.  This is also from the official FBI press release:

The conspiracy charge carries a maximum of five years in prison. Each wire and mail fraud count carries a maximum of 20 years in prison. The money laundering conspiracy charge carries a maximum of 20 years in prison. The money laundering charge carries a maximum of 10 years in prison. Each of the charges also carries a $250,000 fine

Needless to say, this is another wake-up call for contractors working on federally funded state highway projects.  Dot your i’s and cross your t’s!  Look before you leap!  And don’t even think about scamming the DBE program by using sham DBEs or “pass-throughs.”  If the DBE can’t perform, don’t use it. If the DBE doesn’t have equipment to perform, don’t use it. If the DBE doesn’t have the financial resources to get the job done, don’t use it. If you have any doubts about the DBE, do your due diligence.

If you can’t meet the DBE goal set for the federally funded contract because you cannot find any bona fide and capable DBEs available to perform the work, document and show your good faith efforts to meet the DBE goal, and then fight like hell for the contract award if you are the low bidder but are denied the contract.  Under the DBE regulations, a contractor cannot be denied the contract merely because it did not meet the DBE goal.  But a contractor can be charged with a crime if it meets the goal by knowingly using sham DBEs.  What’s worse? Losing the contract, but staying out of jail, or winning the contract, but going to jail?  Sounds like a no brainer to me.

The full FBI press release can be found here.  An article in the Charlotte Observer newspaper reporting on the federal charges against Boggs and its executives can be found here.

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Posted on by Christopher I. McCabe, Esq. in DBE/MBE/WBE Leave a comment

Subcontractor Officially Debarred From City Of Phila. Contracts

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On June 21, 2013, the City of Philadelphia debarred a subcontractor (and its owner) for violation of the City’s minority contracting rules.  The subcontractor, JHK, Inc., a subcontractor to prison health contractor Corizon Health Services, Inc., was debarred for two years for falsely representing its role as a woman-owned subcontractor in an agreement with Corizon.  JHK was supposed to provide first-aid services to prison inmates as a subcontractor to Corizon.  In fact, JHK provided no services.

Philadelphia Inspector General Amy L. Kurland had this to say about the debarment:

“This debarment sends a strong and definitive message: The City of Philadelphia will not tolerate businesses that circumvent the City’s antidiscrimination policies. We will continue working with Procurement, Finance and the Law Department to ensure that legitimate M/W/DSBEs have a fair shot at the contracting opportunities they deserve.”

Corizon itself previously entered into a $1.85 million settlement with the City and agreed to strengthen its corporate compliance program by reviewing all of its subcontracting agreements to ensure compliance with City anti-discrimination policies.  My post on that action can be found here.  The Inspector General’s executive summary of its investigation into Corizon and JHK can be found here.

In its press release, the Inspector General claims that this is the first involuntary debarment in the City’s history.  However, based on my own personal experience with the City’s Law Department, this claim is probably mistaken as I believe that, during the tenure of the late Procurement Commissioner Louis Applebaum, the City officially debarred a City prime contractor for falsifying invoices on a number of City contracts.

The lesson here? At the risk of beating a dead horse, don’t lie or cheat on public contracts, not to mention on any contract.  The risk is too great and the reward too little.

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Posted on by Christopher I. McCabe, Esq. in City of Phila., DBE/MBE/WBE, Phila. Inspector General, Responsibility Leave a comment

Bidder’s Response To RFP Does Not Create Contract

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In an unpublished opinion issued in November 2012, in a case brought by two disappointed bidders involving contracts awarded in 2002, the Commonwealth Court revisited some core principles of public bidding which are worth repeating.

The underlying facts concerned an Request for Proposals issued by Hazleton Area School District for school bus transportation contracts.  The school district awarded the contracts, not to the lowest bidders, but to other bidders based upon the model year of the buses proposed for the contracts. The low bidders sued and challenged the award and also asserted a tortious interference claim against the competing bidders.

As a preliminary matter, the Court noted that the low bidders’ standing as taxpayers did not also give them a cause of action for breach of contract or tortious interference.  Taxpayer standing does not translate into a claim for damages.

The Court first held that the bidders’ response to the school district’s RFP did not create a binding contract with the school district.  The bidders argued that the circulation of the RFP constituted a unilateral contract offer which was accepted by the school district.  The Court rejected this position and reiterated the long-standing rule in Pennsylvania that an invitation to bid or an RFP is merely an invitation for an offer and is not an offer itself.  Rather, the bid is the offer which the public entity is free to accept or reject.  Thus, the Court held that the issuance of the RFP did not bind the school district to award the bus contracts to the low bidders.

Second, the Court held that there was no interference by the other competing bidders with the low bidders’ “prospective” business relationship with the school district.  The competing bidders were free to ask the school district to consider the age of the buses in making its decision to award the bus contracts. This sort of conduct was privileged and could not subject the other bidders to a tortious interference claim by the disappointed bidder.

The moral of the story?  Bid protests are not easy to win, especially where the bid protests are based on unwarranted extensions of the law and where counsel argue points that have no support in public bidding law and muck up their clients’ claims with silly theories like tortious interference with contract.

The decision in Yurcho v. Hazleton Area School District can be found here.

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Posted on by Christopher I. McCabe, Esq. in Bid Protests, Court Decisions Leave a comment

USDOT Inspector General Issues Audit Critical Of DBE Program

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On April 23, 2013, two years after initiation of its audit, the Office of the Inspector General (OIG) of the U.S. Department of Transportation (DOT) issued a final audit report on the administration of the DOT Disadvantaged Business Enterprise (DBE) Program.

In its audit, the OIG assessed whether (1) the DOT provides adequate DBE program management, (2) DOT’s Operating Administrations and recipients sufficiently oversee and implement the DBE program, and (3) the DOT achieves its program objective to help develop DBEs to succeed in the marketplace.  The OIG’s audit concluded that the DOT does not provide effective program management for the DBE program.

The OIG audit focused, in part, on the utilization of DBEs by prime contractors on federally-funded projects.  The dire statistics concerning use of DBEs in general and in Maryland are worth noting:

The Department has limited success in achieving its program objective to develop DBEs to succeed in the marketplace because recipients place more emphasis on getting firms certified as DBEs rather than assisting them to identify opportunities and to market themselves for DBE work on federally funded projects. As a result, the majority of certified DBE firms from the six States we visited—especially smaller firms—have been unsuccessful in obtaining federally funded contracts. For example, at the 6 States we visited, less than 20 percent of the 7,689 certified firms actually received work on federally funded projects.


For example, of Maryland’s 560 DBEs that received awards through the DBE program, 4 firms consistently win the most contracts—over 100 contracts each, for a total of 609 contracts. In contrast, 202 of those 560 Maryland DBEs have won only 1 DBE contract since becoming certified.

The statistics concerning Maryland are troubling to say the least.  Maryland has 4,863 DBE firms in its DBE directory. Of this number, only 560 DBE firms have ever obtained a contract.  That is only a 12% participation.  But of that number, four are consistent repeat recipients of contracts.  That means only 0.1% of DBEs in Maryland are getting the lion’s share of the contracts!  This would also seem to suggest that the remaining 4,859 DBEs are defunct, not capable of performing work, not interested in performing work, or simply certified firms with no interest in ever obtaining federally-funded work.  If that is the case, why are these firms listed in the DBE directory and what use is the directory?  These are troubling questions not answered by the OIG audit report.

Here is the conclusion from the OIG audit report:

DOT has spent billions of dollars through its DBE program to remedy past and current discrimination against socially and economically disadvantaged individuals competing for federally assisted projects. However, weaknesses in DBE program management and implementation have allowed ineligible firms to win DBE contracts and have left the majority of DBE firms without work. The Department’s fragmented DBE program management structure can only be effective if Operating Administrations and recipients are offered clear DBE guidance and training with which to implement the program. Because the Department’s DBE guidance and training is not sufficiently comprehensive, it must take a more proactive oversight approach to ensure that recipients comply with DBE regulations and make progress toward achieving DBE program goals. If the Department does not provide more comprehensive guidance and training or strengthen its program management, the DBE program may continue to be exposed to billions of dollars in fraud, waste, and abuse.

The OIG audit report will likely add fuel to the fire of long-time critics of the DBE program.   A link to the OIG audit report can be found here.

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Posted on by Christopher I. McCabe, Esq. in DBE/MBE/WBE Leave a comment

Commonwealth Court Voids Drug Contract Where Price Was Not A Factor In Contract Award

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In March 2011, the Pennsylvania Department of Public Welfare (DPW) issued a Request for Proposals (RFP), under a competitive sealed proposal process, seeking proposals for the supply of pharmaceuticals for its Developmentally Disabled Centers.  The pricing structure set out in the RFP provided that the winning vendor would be reimbursed through Medicare, Medical Assistance (MA), or private insurance.  Apparently, DPW would not consider price as a factor in its award of the contract.

DPW received four bids and awarded the contract to Diamond Drugs whose proposal was scored the highest.  Omnicare filed a protest with DPW and argued that DPW violated the Procurement Code by failing to consider price as an element of the bids when it contracted to purchase pharmaceuticals for which there was no set pricing scheme and where DPW would pay for drugs not covered by Medicare, MA, or a private insurer.  Section 513(g) of the Procurement Code requires that a purchasing agency consider price in the competitive sealed proposal process. DPW argued that that its actions were proper because it would pay the same regardless of which vendor won the contract. DPW rejected the protest.  Omnicare then appealed to the Commonwealth Court of Pennsylvania.

On May 15, 2013, the Commonwealth Court sustained the protest and voided the contract.  The Commonwealth Court first held that the protest was timely as it was filed within seven days after notice of the contract award was posted to the DPW website.  The Commonwealth Court rejected DPW’s argument that the protest was untimely because the RFP provided Omnicare with enough information on which to base its bid protest.  The Commonwealth Court next held that the contract violated the Procurement Code because DPW will pay directly for non-compensable medications even though it did not consider price as a factor in its award.

The Commonwealth Court wrote:

In doing so, and in failing to consider pricing for non-compensable drugs as an element of the proposals, DPW deprived itself and the offerors of the opportunity to discover whether an offeror could offer better prices for non-compensable drugs than those arrived at by using the MA pricing formula. Given that the offerors’ prices for non-compensable drugs could have differed, DPW violated Section 513(g) [of the Procurement Code] by failing to consider pricing as an element of the proposals.

The Commonwealth Court decision in Omnicare, Inc. v. Department of Public Welfare can be found here.

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Posted on by Christopher I. McCabe, Esq. in Bid Protests, Court Decisions, Procurement Code Leave a comment

Proposed Bill Will Exclude School Work From Separations Act

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The Pennsylvania Separations Act was enacted in 1913, a century ago. It requires public entities to solicit separate bids and award separate contracts for plumbing, heating, electrical, and ventilating work that is part of a public construction project where the costs of construction generally exceed $4,000.

In recent years, there have been many efforts in the Pennsylvania General Assembly to do away with the Separations Act or to limit its application.  None have been successful.  This year, there are again efforts brewing in the General Assembly to exclude school construction from the requirements of the Separations Act, with one bill progressing more quickly than others.

On April 17, 2013, HB324 was reported out of the House Education Committee.  This bill amends the Public School Code to provide for the removal of the Separations Act requirements for school construction.

The sponsor of HB324 provides this rationale for his bill:

My legislation will relieve school districts of the mandate to comply with the Separations Act and will give them the flexibility to determine whether a single or multiple prime delivery system provides the most efficient and cost-effective way to complete a project.

It remains to be seen whether this latest effort to amend the Separations Act will be successful.

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Posted on by Christopher I. McCabe, Esq. in Separations Act Leave a comment

Philadelphia Inspector General Shines Spotlight On Use Of MBE Pass-Through

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The City of Philadelphia continues its crackdown on abuses in its minority subcontracting program.

On May 6, the Philadelphia Office of the Inspector General (OIG) announced that a former certified, minority-owned business, JHS & Sons Supply Co., was improperly used by ten other prime contractors on City contracts.  The OIG previously exposed the improper arrangement between prime contractor William Betz Jr. Inc., and JHS, which resulted in a two-year debarment of the Betz firm.  My earlier post on the OIG enforcement action against Betz can be found here.

The ten other contractors identified by the OIG are: Burke Plumbing & Heating, Inc.; Clements Brothers and Sister, Inc.; DMC Environmental Group, Inc.; Buzz Duzz Plumbing, Heating, & Air Conditioning, Inc.; Edward Hughes and Sons, Inc.; Martin Johnson Plumbing and Heating, Inc.; Paragon Contracting; J.J. Magnatta, Inc.; John Stevenson, Inc.; and S. Murawski & Sons.  The contracts ranged in value from $100k to $350k.  The OIG has reached agreements with eight of these ten prime contractors.  JHS has also been removed from the City’s registry of certified, minority-owned contractors.

Inspector General Amy L. Kurland said of her office’s recent action:

It was clear from the beginning that this problem was widespread.  These settlements meet our goal of ensuring that companies comply with our antidiscrimination requirements. Our mission is to bring companies into compliance, not to put them out of business.

This latest OIG enforcement action again illustrates the extreme peril that prime contractors face in using “pass-through” entities to satisfy the City’s minority subcontracting requirements.  If you think you can get away with it, think again.  The City will eventually catch up with you, and by then it will be too late to protect yourself.

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Posted on by Christopher I. McCabe, Esq. in City of Phila., DBE/MBE/WBE, Phila. Inspector General Leave a comment

Amendments to Prevailing Wage Act Proposed

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It’s that time of year again, when Republican legislators in the Pennsylvania General Assembly seek to amend the Pa. Prevailing Wage Act.  There are now several proposals to do just that, and two bills are farther along in the process than the many others that have been proposed. In April, the House Labor and Industry Committee voted along straight party lines to report out of committee two bills proposing changes to the Prevailing Wage Act.

The first bill, HB796, will raise the threshold amount from $25,000 to $100,000.

The second bill, HB665, will exempt routine road maintenance contracts.

In addition to these two bills, still more bills have been proposed. Here is a small sampling of some of the other bills pending in the General Assembly:

HB1095 would impose a 3-year moratorium on the Prevailing Wage Act.

HB999 would exempt KOZs from requirements of the Prevailing Wage Act.

HB1257 would require at least 51% of a project to be paid with public monies before the Prevailing Wage Act would apply.

It seems likely that this year will see some changes to the Prevailing Wage Act. What those exact changes will be still remains to be seen.  Of course, these newest proposed amendments may lead nowhere, as the amendments proposed last year never came to pass.

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Posted on by Christopher I. McCabe, Esq. in Prevailing Wage Leave a comment

Public Bidding 101: Bid Bonds

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This post is one in a continuing series on the basic tenets of public bidding in Pennsylvania.  The subject of today’s post is the bid bond.

A bid bond is a form of bid security and is typically required to be submitted with all bids for public contracts in Pennsylvania.  The instructions on public bids will ordinarily describe the bid bond requirements for the bid in question.  These instructions should be followed lest the bid security is insufficient and the bid is rejected for that reason.  A bid bond is essentially a guarantee, backed by a surety company, that the bidder will execute the contract if it is awarded to the bidder.

The failure of a bidder to execute an awarded contract will expose the surety on the bid bond to liability. That liability is typically 10% of the bid price. The bidder’s failure to execute an awarded contract may also subject the bidder itself to additional liability if the bid bond amount does not cover the spread between the bidder’s price and the next lowest price.  Of course, the public entity must strictly adhere to the bidding requirements and award requirements before it can seek to enforce the bid bond.  The failure to do so will likely invalidate any attempt to forfeit the bid bond. 

Thus, the Commonwealth Court held in Travelers Indem. Co. v. Susquehanna County Comm’rs, 17 Pa.Cmwlth. 209, 331 A.2d 918, 920 (1975), that where a public entity failed to give written notice of its acceptance and provide the contract documents for execution there could be no forfeiture of the bid bond.  Likewise, in Hanover Area School District v. Sarkisian Brothers, Inc., 514 F.Supp. 697 (M.D.Pa.1981), the federal district court  held that a public entity’s failure to provide the lowest bidder with all the documents necessary to finalize the transaction as required by the bid instructions precluded recovery on the bid bond.

If you are bidder faced with a forfeiture of a bid bond for failure to execute a public contract you may have an out if the award was not made in accordance with the bidding instructions.  As always, you should consult with an experienced attorney for assistance.


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Posted on by Christopher I. McCabe, Esq. in Public Bidding 101, Surety and Bonding Leave a comment