Audit Hits Agency for Splitting Public Works Project

Did an agency improperly split a public works project into multiple projects in order to avoid triggering dollar thresholds requiring that work be publicly advertised?  

That was the question addressed in a recent report by the Washington State Auditor's Office in which they issued an audit finding against the Newport Hospital and Health Services (Pend Oreille County, Washington), a public hospital district.

How did the hospital split the project?  Although the facts are not clearly presented in the audit finding, it appears the auditor was suggesting that expenditures from 2008 to date of approximately $614,000 in renovation costs represented one project that should have been advertised and competitively bid. Here's how the auditor outlined how the $614,000 was actually procured:

• $125,800 - advertised for competitive bids
• $269,435 - competitive bids through the Small Works Roster process
• $  72,300 - work performed by hospital employees
• $145,985 - architectural and engineering services

One or multiple projects?   The hospital district disagreed with many of the findings by the auditor, including the auditor's assertion that the district "split the original project into smaller phases, which reduced the estimated project cost and eliminated the requirement for formal sealed bids."  Let's take a look at each of the procurement methods outlined above.

• Advertised for competitive bids:  Hospital districts are required by RCW 70.44.140 to publicly advertise projects over $75,000, unless the Small Works Roster process is used.  By publicly advertising work for $125,800, the district appears to have complied with the requirements for this part of the work.

• Competitive bids through the Small Works Roster process:  The district awarded what appears to be two contracts, totaling $269,435, through the Small Works Roster process.  According to RCW 39.04.155, the Small Works Roster process may be used for any project less than $300,000, in lieu of the requirements of RCW 70.44.140 of advertising projects over $75,000 (applicable to hospital districts).  The question here is whether these two projects were integrally tied into the work that was publicly advertised and the work performed by hospital employees, such that it really constituted one project and not multiple projects.  The audit report does not include any details on this question.

• Work performed by hospital employees:  RCW 70.44.140, which governs public hospital districts, implies that a project estimated to cost less than $75,000 may be performed by district employees rather than through a publicly advertised contract opportunity.  If the $614,000 of renovation work performed was really one project, then the district would not have had the ability to have work performed on that project by district employees.  If, however, the work performed by hospital employees was an independent project, in and of itself, and less than $75,000, then use of district employees would have been appropriate.

There are different thresholds for what work may be performed with an agency's own staff based on the type of agency.

• Architectural and engineering services:  It's unclear why the auditor included the district's costs for architectural and engineering services in the cost of the project.  Typically, the cost of such services is not considered as part of a public works project for the purposes of determining the thresholds for what selection process applies.  The audit also noted that the district failed to obtain these services consistent with RCW 39.80.

What is a public works "project"?  State law doesn't define a public works "project."  So what factors should go into making a reasonable decision as to what constitutes a project for the purposes of various bidding thresholds?  Here are some possible factors, all of which should be considered together when making an appropriate decision on what defines a specific project.

• Agency acting as prime contractor:  If the work to be performed would typically be performed by a single general or prime contractor responsible for coordinating the work of multiple trades, it may be inappropriate to split the project and have the agency act as its own prime contractor in coordinating the work.  Not only is there the risk of potentially splitting a project for bid threshold determinations, but an agency picks up liability in coordinating the work of multiple subcontractors, with possible on-site conflicts and warranty issues.

• Small Works Roster prohibition on splitting:  RCW 39.04.155 which governs Small Works Roster projects, prohibits splitting a project in order to be less than the $300,000 threshold for use of the Roster.  It states that "the breaking of any project into units or accomplishing any projects by phases is prohibited if it is done for the purpose of avoiding the maximum dollar amount of a contract that may be let using the small works roster process or limited public works process." [emphasis added]  Thus, splitting a project into units or phases may be appropriate, depending on the reasons for splitting it.

• Where is the work to be performed?  If the work to be performed is all at one location, it may suggest that it is one project.  Location, of course, isn't defined and is subject to interpretation.  If, however, the work to be performed is at multiple locations, it might be argued, depending on the facts, that the work constitutes multiple projects.

• What is the purpose of the work?  If there is a necessary connection between the different elements of the work, such that it is important to have one contractor be responsible for all of the work, perhaps the work should be considered as one project.  If, however, the work could be independently contracted for without compromising other parts of the work, then separate projects may be appropriate. 

• What is the duration of the work?  If similar work is to be performed over a period of time, it tends to suggest that the work may consist of multiple projects.  If, however, the work of separate "projects" is all performed at the same time, it might indicate that the work really is one project.  

• What is the funding source?  If the funding source for work is all the same, it may suggest that the work constitutes one project.  If the work is accomplished over a number of years in order to afford the work, it may be one project, or depending on the facts, it may be appropriate to have multiple projects.  Multiple funding sources may suggest multiple projects, but not always.

• What is the intent of multiple projects?  If the intent of having multiple projects, rather than one project, is to avoid triggering various bidding thresholds, such an action would be problematic.  If, however, the intent of having multiple projects, rather than a single project, is based on legitimate business and operational considerations, it may be appropriate to divide the work into multiple projects.

Your comments?  This list of factors is the beginning point for a discussion on how to evaluate what defines a public works "project."  I welcome any comments or suggestions you may have on how to make the determination of what constitutes a "project."

Mike Purdy's Public Contracting Blog 

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