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You are here: Procurement Alert > Maryland Procurement Alert Spring 2010

Spring 2010
Actuary Held Liable For Millions To Maryland Retirement And Pension Systems.

The Maryland State Board of Contract Appeals ("MSBCA") approved a damage award totaling $72,965,146 against Milliman, Inc., ("Milliman") in favor of the Maryland State Retirement and Pension Systems ("MSRPS").

MSRPS is required under Maryland law to acquire actuarial services; that is, the service provider must annually evaluate data provided by MSRPS and make assumptions about State monies to be held in trust for various State pension and retirement systems. MSRPS has procured Milliman to provide these actuarial services since 1982. Milliman provided assumptions that established an amortized schedule to fund the State's retirement obligations.

According to the MSBCA, Milliman misinterpreted a data code every year between 1982 through 2004. Milliman correctly understood that the data code was provided to evaluate single life annuity benefit payment to MSRPS participants. Milliman did not understand that the code was also provided to evaluate surviving spousal benefits for retired judges and police. The result of the error was underfunded retirement and pension plans. As calculated by the MSBCA, MSRPS suffered a loss of contributions from the State in the amount of $34,208,960 plus $38,756,188 in investment losses ($72,965,146).

To hold an actuarial estimator monetarily liable for this error is controversial. Actuaries are held to a professional standard of care under the contract as well as the profession's own code. Actuaries are expected to understand data correctly in order to value economic assumptions. Economic predictions, however, are often imprecise and incorrect. In this case, there was some evidence indicating that MSRPS provided confusing or incorrect data to Milliman in 1982.

The MSBCA determined, as a matter of fact, that there were several occasions between 1982 and 2004 that Milliman could have discovered its error. Initially, there was a memorandum from a Mr. Klug explaining that the code included spousal benefits for judges and police but no one at Milliman responded to the notes and recommendations of Mr. Klug. Other inquires and correspondence throughout the years provided occasion for which Milliman should have realized that it was interpreting data incorrectly. Milliman finally discovered the error in 2004 when it conducted an audit of its methodology.

The MSBCA applied these facts to the common law doctrine of professional negligence and held that Milliman was liable for its negligence. The MSBCA determined that Milliman's negligence resulted in a breach of contract. The contract held Milliman to a high standard of care in evaluating data.

In sum, the MSBCA held that it was a violation of professional actuarial standard of care for Milliman to continually undergo its methodology with flawed data when it had multiple occasions to discover and correct its incorrect interpretation of the data. The MSBCA was most impressed with the cumulative nature of the lapse in professional care. It may have been true that the MSRPS was at fault in providing confusing data but the actuary has the burden of making sure that it is interpreting its client's data correctly.

Practice Tip: This case sets a strong precedent that professional services that are procured by the State of Maryland could be subject to substantial liability for errors that constitute a breach of professional care. The state may want to consider procuring services from offerors, other than the incumbent from time to time, in order to prevent this kind of cumulative error.

In the Appeal of Milliman Inc.
Docket No. MSBCA 2609

SHA Must Pay For Differing Site Conditions.

The State Highway Administration ("SHA") awarded a contract to Dick Corp. ("Contractor") for construction of retaining walls, among other things, on the Baltimore Beltway. Disputes arose over differing site conditions.

The invitation for bids ("IFB") made available soil and rock samples that did not affirmatively indicate the presence of subsurface boulders where the Contractor would be required to drill. An addendum of the contract specifications did provide that "boulders and/or cobbles were encountered in test holes for this project and that the presence of these materials may require special equipment."

The specifications contained the standard Differing Site Conditions clause which generally granted an equitable adjustment if the contractor encounters either type of unanticipated subsurface conditions:

Type 1: A latent condition differs from conditions as described by the contract documents; or

Type 2: Unusual or unknown conditions are discovered which differ materially from those ordinarily encountered and generally recognized as inherent in the type of work being done.

SHA awarded the contract to the Contractor, which, in turn, entered into a subcontract with Dominion Caisson Corp. ("Sub") to perform drilling in connection with the construction of a retaining wall. The Sub encountered layers of amphibolite rock. Tests of the rock later revealed that its compressive strength was as high as 31,780 pounds per square inch. One expert described the rock as an "earth driller's worst case scenario." As a result, the Sub's work took almost a year longer than anticipated, which in turn delayed other aspects of the project including paving work. In addition, the Contractor incurred other unanticipated costs such as the replacement of a $22,000 drill bit that broke in an attempt to break through the earth.

The Contractor sought equitable adjustments to compensate for costs attributed to delays that resulted from differing site conditions. SHA refused. SHA contended that the subsoil conditions were not materially different from those described in the contract documents.

On appeal, the Maryland State Board of Contract Appeals ("MSBCA") determined that a "Type 2" differing site condition did exist and that SHA must equitably adjust (time and money).

SHA's addendum language stated merely that "cobbles" or "boulders" may exist. This, according to MSBCA, did not put contractors on notice of the extreme conditions that existed. It was persuasive that no expert (including SHA's expert) predicted the conditions.

Practice Tip: It was obvious under the circumstances that the subsurface conditions were harsher than anyone had reasonably anticipated. The Contractor prevailed as a matter of fairness, as opposed to SHA's strict interpretation of the contract documents.

In the Appeals of Dick Corporation Docket Nos. MSBCA 2458 and 2459

Protests Over Bidder Qualifications/Responsibility.

The Maryland State Board of Contract Appeals ("MSBCA") faced two appeals in 2007 where problems arose with solicitation provisions requiring specific personnel qualifications and certifications.

In the first case, Mediterranean Construction Co., Inc. ("Mediterranean") protested the award of a contract to Decker Contracting, Inc. ("Decker") to repair and rehabilitate a building in Susquehanna State Park. Mediterranean was the third low bidder. Its bid was $23,000 higher than Decker's bid and $20,000 higher than the second low bid.

Mediterranean protested on the grounds that Decker failed to submit with its bid evidence of lead paint accreditation and lead paint certification for all workers that would work with lead paint on the project. Decker acknowledged receipt of the addendum that required such information must be submitted with the bid but failed to do so. It promptly submitted the required information after bid opening when requested by the procurement officer.

The procurement officer denied the bid protest because the lead paint documentation was a matter of responsibility, as opposed to responsiveness. Any such irregularity could be cured after submission of the bid.

On appeal, the Maryland State Board of Contract Appeals ("MSBCA") upheld the procurement officer's determination.

MSBCA determined that Mediterranean's allegations dealt with matters of bidder responsibility, i.e., Decker's capability to perform the project. The bid was responsive, i.e., it conformed in all material respects to the requirements contained in the solicitation. Therefore, it was within the procurement officer's discretion to allow Decker to cure its defects after bid opening. Other bidders were not prejudiced by the procurement officer's decision.

In the second case, JPMorgan Financial Services, Inc. ("JPMorgan") protested the award of a contract to ACS State and Local Solutions, Inc. ("ACS"). The contract was for services necessary to convert (to internet) payment of public assistance benefits by the Department of Human Resources ("DHR"). JPMorgan was the incumbent.

The RFP established certain qualifications for the project manager, including certifications as to various training. ACS identified its project manager and promised that he would have the required certification after taking a course that would be completed prior to award of the contract. That individual did not pass the certification course, as expected, and ACS replaced him with another project manager prior to contract award.

JPMorgan was the low-priced offeror, but ACS had the highest ranked technical proposal. DHR recommended award of the contract to ACS and the contract was awarded. After the contract was awarded, JPMorgan realized that ACS had originally identified a project manager who was not certified. JP Morgan filed a protest on that ground.

MSBCA expressed doubt in its authority to rescind a contract already awarded by the Board of Public Works, but rejected JPMorgan's appeal. The MSBCA determined the issue was a matter of responsibility, which could be resolved after bid opening. In order to be a responsible offeror, ACS only needed to assure in good faith that it would have a certified project manager in place at the time of award. The circumstances that led to the replacement here could have resulted if the individual had taken another job or became ill and unable to work for ACS.

Practice Tip: Matters of responsibility may be cured after bid opening. Experience and qualification of personnel are generally considered matters of responsibility.

In the Appeal of Mediterranean Construction Co., Inc. Docket No. MSBCA 2583

In the Appeal of JPMorgan Electronic Financial Services, Inc.
Docket No. MSBCA 2577

Bidders Must Submit Conforming Samples.

The Maryland Department of General Services ("DGS") rejected the bid of Outdoor Outfits ("Outdoor") to supply clothing items for Maryland correctional facility employees. The IFB contained detailed specifications for the clothing items, including winter uniform jackets. Bidders were required to provide a sample of their proposed items

Outdoor protested because the DGS procurement officer determined that Outdoor's proposed winter jackets were not in conformance with the technical specifications. Outdoor appealed to the Maryland State Board of Contract Appeals ("MSBCA"), which affirmed the procurement officer's decision.

Among the specifications, there were detailed requirements for a "badge tab" on the winter jackets. Outdoor's proposed jacket deviated from those specifications. DGS found that badges hung loosely from the badge tab when attaching a badge to the sample jacket. As a result, Outdoor's bid was deemed nonresponsive. On appeal, Outdoor contended the variation was minor and that DGS should allow the variation to be modified.

The Code of Maryland Regulations states that a bid must conform in all material respects to the requirements contained in the IFB. A material deviation occurs when the price, quantity, or quality of the goods or services is affected.

In an earlier case, the MSBCA has held that failure to provide a sample (when required) constituted a material deviation from the IFB; thus, the MSBCA reasoned, it follows that providing a non-conforming sample is also material deviation of the IFB. The IFB in this instance was not vague in its description of specifications for the badge tag. The quality of the goods was affected and therefore rejection of the bid was appropriate.

Practice Tip: A bidder should not materially deviate from the specifications of an IFB because an agency may not allow for alteration to conform to the specifications after bid opening.

In the Appeal of Outdoor Outfits
Docket No. MSBCA 2588

Ambiguous Contract Specs Are Interpreted Against Government.

A contract dispute arose between the Maryland Transit Administration ("MTA") and Premium Transit Services, Inc. ("Premium") regarding the supply of brake parts for MTA buses. Premium interpreted the specifications as meaning MTA would provide used brake cores, which Premium would inspect and reassemble. MTA interpreted the contract as requiring Premium to supply new brakes when ordered. The Maryland State Board of Contract Appeals ("MSBCA") agreed with Premium and ordered MTA to pay damages for breach of contract.

Prior to the Request for Quotation to establish blanket purchase orders ("BPO") which led to the contract at issue, MTA issued a similar BPO. The prior BPO included a section titled "Used Assemblies," which MTA acknowledged was intended to establish a brake core exchange program.

The new BPO contained a similar provision but without specific language that reserved to MTA the option not to provide brake cores. The exchange of cores is standard in the industry. Premium based its quote to MTA, in part, on its understanding from the previous BPO and also its knowledge of customary practices in the industry. The MSBCA concluded the specifications were ambiguous, i.e., the language was susceptible to more than one reasonable interpretation.

The reasonableness of Premium's interpretation was enhanced by the fact that the difference between Premium's quote was extraordinarily lower than its competitor. This was due to the fact that MTA unlawfully had unilateral communication with the competitor and disclosed that it was seeking a quote for only new brake parts. Despite the unlawful communication, the extreme difference in quotes, according to MSBCA, should have tipped MTA off that the contract was ambiguous.

The MSBCA held that any reasonable person familiar with the practices in the industry would have concluded that the contract called for an exchange program. The MSBCA speculated that MTA only interpreted the contract otherwise when it discovered that MTA's buses had a different type of brakes than anticipated in its newly purchased bus fleet. The MTA no longer had brakes to exchange for reassembly when it desired different brakes.

Practice Tip: Industry standards may be helpful in determining the reasonableness of interpreting specifications that may be susceptible to more than one interpretation.

In the Appeal of Premium Transit Services, Inc.
Docket No. MSBCA 2530

Bid Protestors Must File Quickly.

Civil Construction, LLC ("Civil") protested the State Highway Administration's ("SHA's") decision to award a community safety and enhancement project to the apparent low bidder Omni Excavators, Inc. ("Omni"). Civil was the second low bidder.

Bid opening for the project was held on August 24, 2006. SHA announced Omni was the low bidder, however, it was also announced that Omni's bid was irregular because it had insufficient bid security. Eventually, SHA determined that Omni's bid was sufficient and notified all bidders of its intent to award the contract to Omni.

On September 15, 2006, Civil filed a bid protest on the grounds that Omni's insufficient bid amount was a material defect that required rejection of its bid. The procurement officer denied the protest as untimely. Maryland procurement regulations require the filing of a bid protest within 7 days after the basis for the protest was known or should have been known. Civil, according to the procurement officer, should have known of the basis of its protest on August 24 when the alleged irregularity was publicly announced. Civil contended that it reasonably expected the procurement officer to conclude that the low bidder's bid security was, in fact, defective. It was not until the procurement officer - acting wrongfully, according to Civil - decided the bid security was sufficient.

Civil filed an appeal with the Maryland State Board of Contract Appeals ("MSBCA") and SHA moved to dismiss. MSBCA concluded that Maryland regulations do not allow a procurement officer to consider a bid protest when not timely filed. The MSBCA has no jurisdiction to hear an appeal that is not timely filed.

Practice Tip: Bidders must act with reasonable diligence and file a protest as soon as irregularities in another bidder's bid are discovered. A bidder is at risk if it waits until the procurement officer determines whether the irregularity makes the bid non-responsive.

In the Appeals of Civil Construction, LLC
Docket No. MSBCA 2564

Complaint About Defective Specs Is Unpersuasive.

The University of Maryland College Park ("UMCP") entered into a contract with the Barton Marlow Company ("Barton Marlow") to install air ventilation ductwork at UMCP's Biotechnology Institute. The parties disagreed on the contract requirements. UMCP contended that the contract required testing of all the duct systems. Barton Marlow contended that it was only required to test certain portions of the ductwork. Barton Marlow requested compensation for UMCP's demand for additional ductwork testing.

The contract specifications provided that all duct systems, as opposed to all duct work, should be tested:

All medium pressure duct systems shall be leak tested in strict conformance with chapter 10 of the SMACNA High Pressure Duct Construction Standards.

The Maryland State Board of Contract Appeals ("MSBCA"), interpreted the specifications and concluded "all duct systems" does not mean "all ductwork".

There was also an ambiguity in the contract regarding whether Barton Marlow was required to follow the more stringent 1975 High Pressure Duct Construction Standards, which required all ductwork should be tested. There were more lenient 1985 High Pressure Duct Construction Standards, suggesting that only certain portions of the system should be tested.

Where an ambiguity exists in a contract, the MSBCA must determine whether the ambiguity is patent or latent. If the ambiguity is patent, i.e., glaring, the bidder will be deemed to have waived any complaint unless the protest is filed prior to bid opening. If an ambiguity is latent, i.e., hidden, the ambiguity will be construed against the procuring agency, as drafter of the specifications assuming the bidder reasonably relied on its pre-bid interpretation.

The MSBCA determined that the ambiguity was latent. The MSBCA explained, "while ultimately causing reasonable persons to differ as to its meaning, the ambiguity is not of such a character as to be clear or glaring or obvious in the instance of initial review."

The MSBCA determined, however, that Barton Marlow was not entitled to additional compensation. The MSBCA determined that an exception to traditional contract interpretation rules should prevail because Barton Marlow was an integral member of the design team. In its role, Barton Marlow was obligated to review contract specifications as they were prepared. If there was a mistake or ambiguity in the contract specifications, it was incumbent on Barton Marlow to reveal that before the contract was executed. It would be "folly," as described by the MSBCA, to allow Barton Marlow to seek compensation for its own mistake.

Practice Tip: Where a party is involved in the design of a project, it cannot later complain if the specifications - for which it was partly responsible - were ambiguous.

In the Appeal of Barton Marlow Company
Docket No. MSBCA 2568

Don't Confuse "Should" With "Shall" In Interpretation of Specs.

The Department of Housing and Community Development ("DHCD") invited bids to provide training seminars. The IFB requirements stated that the contractor "should" provide recipients of seminars a continuing education credit recognized by the International Association for Continuing Education and Training ("IACET").

Only one of three bidders, Tri-State consultants ("Tri-State") was recognized by IACET and so Tri-State protested that the other bidders were ineligible to be awarded the contract. The procurement officer disagreed and denied Tri-State's protest for the reason that the IACET recognition was discretionary.

The MSBCA, on appeal, determined that the procurement officer reasonably interpreted the term "should" to mean the IACET recognition was discretionary. The MSBCA explained that the procurement officer has wide discretion in determining eligibility of bidders and the decision will not be overturned unless it is arbitrary and capricious. Here, it was not.

Practice Tip: When interpreting the requirements of an IFB, contractors should recognize that the terms "shall" and "should" are seldom (if ever) interchangeable. The procuring agency allows itself discretion in awarding bids if it instructs bidders that they "should" meet a particular requirement. If a prospective bidder has other qualifications, or offers a low price, it need not refrain from competing unless the contract specifications clearly establish specific credentials.

In the Appeal of Tri-State Consultants
Docket No. MSBCA 2590

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Scott A. Livingston, Esq.
301.951.0172 (fax)
7979 Old Georgetown Rd.
Suite 400
Bethesda, MD 20814
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