Best in Law: Sole-Source Construction Contracts

By Gregory Snarr
 
Commercial and residential property owners and managers engage in many projects to construct and maintain their properties.
 
From interior and exterior painting, flooring and lighting to paving and asphalt coatings, such as seal coat or asphalt slurry — owners put out bids and hire contractors. For these projects, if an owner requires the use of a specific product or particular brand of paint, flooring or sealcoating, that specification creates the need for a sole-source contract.
 
Sometimes, representatives of these manufacturers will even offer to write the specs for the owners to make sure their product is “the one” specified. The benefit to the manufacturer is clear; however, do they have the owner’s best interests in mind when creating these sole-source contracts?
 
In reality, owners whose projects require a specific brand or propriety product may actually be assuming additional and unnecessary risk. For example, who is responsible if the owner specifies that a bidding contractor use “Brand X” asphalt sealcoating product for a parking lot project and that product fails, proves undeliverable according to project deadlines or is the source of any number of problems?
 
California courts have grappled with this issue in various circumstances and, when presented with the problem, insurance companies have also responded similarly — and it is the owner or manager who is often left holding the bag.
 
The owner cannot look to the contractor for a product fail or delay in delivery because the contractor did exactly what the owner requested, sealcoat the parking lot with “Brand X.” Likewise, if “Brand X” cannot be timely delivered and the entire project is delayed, can the owner really look to anyone else? Remember, even if the manufacturer offered to and did write your spec, there is no contractual agreement between the owner and manufacturer — it is the contractor who is hired and is simply following orders by applying your specified product brand.
 
Not being able to look to the contractor for aid, the owner then looks to the manufacturer; yet, they find that, because there is no privity of contract between the owner and manufacturer, seeking indemnification proves difficult. Likewise, turning to its insurance company, the owner finds no coverage because, in the eyes of the insurance adjuster, the sole-source contract becomes a type of guarantee for which the owner assumed all risks.
 
A safer and more logical approach is to put out a performance-based specification. Thus, instead of, for example, an asphalt sealcoat spec stating the contractor must use “Brand X,” it says the contractor must use a sealcoat that meets a certain standard, such as those required in the Standard Specifications for Public Works Construction, also known as the “Greenbook.” This way, the owner does not become a guarantor of “Brand X” and does not assume risks for product failure or delivery delays, and the contractor remains responsible for applying a product of a specific caliber.
 
Another option, though less optimal than the performance-based specification, is to qualify the specification with “or equal.” For those familiar with public works contracts, this term will sound familiar. In fact, sole-source contracting is illegal for public works contacts under Public Contract Code section 3400. This code section prohibits any public works contact from “calling for a designated material, product, thing or service by specific brand or trade name unless the specification is followed by the words ‘or equal’ so that bidders may furnish any equal material, product, thing or service.” This code section was enacted to encourage competitive bidding, guard against favoritism fraud and corruption, and to obtain the best economic result for the project. While not legally bound by Public Contract Code section 3400 on your private project, are these outcomes not also desirable?
 
Possibly more important, however, is the desire to reduce risk on your private construction project. To do so, property owners and managers will do well to stay away from the sole-source contract, which benefits only the manufacturer of the product specified. It is recommended that owners apply performance-based specifications to get the best-performing product, encourage competition, eliminate price gauging, reduce risk and obtain the best economic — and worry-free — results.
 
* This article first appeared in The Press-Enterprise on Oct. 29, 2017. Republished with permission.