Henry Goldberg is managing partner of Goldberg & Connolly, a construction and government contracting law firm based in Rockville Centre, N.Y.

N.Y.C. CM-Build Practice Flouts Competitive Bidding

The city’s CM-Build procurement program shows flagrant disregard for the state’s competitive bidding laws, and it is time for the industry to right this ship of illegal practices.

by Henry L. Goldberg

Competitive bidding laws are not convenient to implement, much like democracy itself.

While such laws often frustrate the procurement efficiencies typically found in private sector construction, the rules imposed in public bidding reflect the collective wisdom of generations of public works administration. They are designed to avoid repeating the notorious public works scandals of the past.

While new generations of bureaucrats and politicians implement shortcuts or expediencies because they think they know better, they forget that fraud, corruption, and cronyism eventually seep back into the system.

So it was with New York City’s hard-headed Giuliani administration, and so it is now with  Mayor Michael Bloomberg’s administration. The previous mayor effectively started the “privatization” of the city’s procurement laws, and the practice has exploded under Bloomberg.

Today, a significant percentage of the city’s public works building construction, but not heavy highway, as of yet, is conducted in a manner that clearly circumvents both the General Municipal Law and the State Finance Law.

The questionable procurement operates as follows: The city publicly issues an RFP for a “CM-Build” services contract. Once awarded the contract, the construction manager must provide a “turn key” project to the particular city agency, which is often the Department of Design and Construction.

The CM completely administers the project. It “selects” the Wicks prime contractors for general construction, HVAC, electrical, and plumbing work and all of the other subs and suppliers. This typically occurs without any publication of the bidding opportunity in the New York City Record and without a sealed, competitive bid opening.

This practice flies in the face of several laws designed to ensure fair, open bidding.

Firstly, it violates the Wicks law. When the CM selects the subs from a limited “pre-qualified” list of contractors and subcontractors with whom it is “comfortable,” it scuttles open competition. In doing so, the primes are treated as subcontractors of the CM, in direct violation of the Wicks Law.

 Though the CM-Build practice gives lip service to the concept of Wicks procurement via four separate sets of specifications, the Wicks Law’s intent was to assure that the four primes remain in direct privity with the owner. Further, the law requires that all money flows directly from the owner to each of the four trade primes, and that the primes and owner resolve all disputes, change orders, and claims directly, without financial involvement by a CM or a general contractor. None of this occurs under the city’s illegal CM-Build paradigm.         

The city’s practice also violates the state’s competitive bidding laws, which mandate that there can be no “gatekeeper at the bid room.” Open competition is strictly required, and any “qualifying” must be part of the post-bid process reserved for all bidder responsibility and bid responsiveness issues. In fact, the city’s mayoral agencies are actually prohibited from conducting prequalification, except in the case of a clear emergency, but this anticompetitive practice is a favorite of the public agencies.

In addition, the city’s CM-Build contract directly violates the State Finance Law with regard to required bonding. Section 137 of that law aims to protect subcontractors and materialmen by requiring bonding. But general contractor or CM payment bonds that arise from the CM-Build framework do not cover subcontractors and materialmen, frustrating the law’s intent. Contractual “promises” in the CM’s contract with the city stating that the CM or the city will pay the trades in a timely fashion can hardly be a substitute for strict compliance with the will of the New York State Legislature.

Yes, CM-Build makes construction easier for city agencies. Yes, work can probably be put out more quickly. Yes, the city enjoys the efficiency of CMs all but hand-picking their team, private sector-style, from a “pre-qualified” group of subcontractors based on prior successes. And yes, the practice skirts the controversial Wicks Law.

Indeed, the CM-Build framework is a public owner’s dream world. But it happens to be illegal for all too many reasons.

The opportunity for favoritism and cronyism is so rife that it is almost inevitable. Subcontractors complain that they don’t see many of the jobs now constructed by the city published in either the City Record or in Dodge Reports. Many that have bid to DDC and its predecessor agencies for years, even decades, have been completely shut out, defeating true competition and competitive pricing.

This is public contracting at its worst. The city’s mayoral agencies and authorities have come to rely on this illegal process to the point where the Housing Authority illegally “privatized” its $2 billion capital program through a handful of CMs. The agency’s entire procurement process has been handed over to private parties charged with administrating a simple, but legally indefensible, “turn key” operation.

This is not to say that very reputable CM firms involved in this process are committing wrongdoing. The firms are simply working within the new rules, bidding as construction managers to city agencies and professionally carrying out their contractual responsibilities.

Complete responsibility for the problem lies with the public owners that have set up this expedient procurement process outside the law. The city’s indifference to the law is a spreading cancer undermining competitive bidding.

While the practice has bubbled for some time, only recently has it truly gathered a head of steam. But when outside observers raise these issues to city agency leaders, they react with puzzlement and denial. The response often is that “it can’t be illegal, it’s so prevalent.” (Can you imagine if contractors offered that defense to an owner or, worse still, a prosecutor?)

Some city agencies feebly claim that this practice is reserved for alleged “emergency” cases. While this might have been true early in the Giuliani era, it is certainly not today, when hundreds of millions of dollars flow through the contracts. Such arguments appear to be no more than tacit acknowledgment that the pervasiveness of the whole scheme is illegal.

As stated, the competitive bidding laws are cumbersome, but they exist for good reason. As city agencies rely increasingly on this practice, they become dependent upon CM expertise, thereby diminishing their in-house cadre of trained procurement professionals who can effectively execute major public works projects pursuant to New York State law.

In addition, the lack of competition is costing the city. Without true competitive bidding, it is impossible for cronyism not to seep into the system, particularly with subcontractors on countless city public works projects being virtually hand picked. With only a handful of preselected companies allowed to bid, pricing can never be driven by the marketplace.

All contractors working on public sector jobs should be intolerant of this practice.  Even contractors and CMs that benefit from CM-Build should realize that the excessive cost to the system is not in anyone’s interest.