California Contractor Tests the Bounds of Job Order Contracting
By Garret Murai, February 15, 2021 (source: https://calconstructionlawblog.com/2021/02/15/california-contractor-tests-the-bounds-of-job-order-contracting/)
Most contractors have heard of design-bid-build, design-build, construction manager at risk, and even public private partnerships, various project delivery methods, which, at their heart, focus on balancing the interests of the various parties involved in a construction project, from owners, to design professionals, to contractors. There’s one project delivery method you may not be as familiar with though: Job Order Contracting, also known by its acronym JOC.
JOC contracting is a project delivery method used on public works projects and has been authorized to be used by California K-12 school districts, community colleges, CalState universities, and the Judicial Council of California, which, among other things, is responsible for the construction of California state courts. It is intended to be used on smaller, independent, long-horizon project typically involving maintenance, repair and refurbishment. Think periodic maintenance of facilities.
JOC contracts are administered by public entities issuing a request for proposals. The public entity then awards a JOC contract to the lowest responsible bidder. The lowest responsible bidder then enters into a JOC contract with the public entity. JOC contracts typically have a duration of one (1) year and are limited to a total construction value of $4.9 million increased annually based on the Consumer Price Index. When entering into a JOC contract, a JOC contractor agrees to perform work at prices set forth in a Construction Task Catalog also known as a unit price book which includes current local labor, material and equipment costs. Unit prices are then adjusted by a “bid adjustment factor” based on the JOC contractor’s bid. When work is needed, the public entity will then issue a job order to the JOC contractor.
The next case, Los Angeles Unified School District v. Torres Construction Corp., Case No. B291940 (October 26, 2020), 2nd District Court of Appeal, involved a JOC contract, a JOC contractor who charged rates higher than those specified in the unit price book, and the JOC contractor’s defenses against claims by the public entity that it had overcharged for its work.
The Torres Case
Torres Construction Corp. was awarded a JOC contract by the Los Angeles Unified School District. The JOC contract included a Construction Task Catalog with unit prices as well as general conditions. Under the general conditions, after a job order is issued by LAUSD, Torres and LAUSD were to participate in a “joint scope meeting” from which the parties would develop a detailed scope of work. LAUSD would then issue a request for proposals to Torres who would prepare a “job order proposal” setting forth the cost of performing the work in accordance with the unit prices set forth in the Construction Task Catalog. Once approved, the job order proposal becomes a part of the JOC contract.
Between 2005 and 2008, Torres performed work on five projects under the JOC contract involving the installation of kitchen equipment and electrical upgrades. In 2011, LAUSD audited Torres’ project files as it was permitted to do under the JOC contract. Under the JOC contract, LAUSD was permitted to conduct an audit for period of up to four (4) years from the date a notice of completion was recorded. If the audit revealed overpricing or overcharges in excess of one percent (1%) of the total contract amount, then, an adjustment would be made equal to the overpricing or overcharging and LAUSD would be entitled to be reimbursed for the cost of the audit. The audit performed by LAUSD revealed substantial irregularities in the amounts charged by Torres, specifically, Torres did not supply equipment specified in its job order proposals, did not use pricing in line with unit bid pricing in the Construction Task Catalog, and did not provide the services specified in its job order proposals.
In 2012, LAUSD filed suit against Torres and its performance bond surety Western Surety Company. While the case was pending, LAUSD filed a motion for summary judgment on certain of the job order proposals which it prevailed on. As to other job order proposals, the trial court granted LAUSD’s motion for directed verdict following trial at the close of evidence. And, finally, as to the final job order proposals, the jury found in favor of LAUSD, and the trial court later awarded LAUSD prejudgment interest and attorney’s fees.
Torres appealed.
The Appeal
On appeal to the 2nd District Court of Appeal, Torres made a number of arguments challenging the trial court’s granting of LAUSD’s motion for summary adjudication, LAUSD’s directed verdict, and the jury verdict. Among other things, Torres argued:
- The JOC contract, because it required that job order proposals be submitted after-the-fact, was not an enforceable contract but merely an agreement to negotiate.
- The JOC statute required that LAUSD obtain an estimate so that it could compare Torres’ job order proposal with the estimate, and because LAUSD failed to obtain an estimate, no contract was formed because LAUSD failed to satisfy a condition precedent to entering into a contract.
- By accepting Torres’ job order proposals, LAUSD waived its right to claim that Torres breached the pricing provisions of the JOC contract.
A. JOC Contract: Enforceable Contract or Mere Agreement to Negotiate
As to the first issue, whether the JOC contract was an enforceable contract or merely an agreement to negotiate, the Court of Appeal held that the JOC contract was an enforceable contract not merely an agreement to negotiate, because it contained “every key term of future job orders except one: the Scope of Work for any projects which LAUSD would assign to Torres.”
Further, held the Court of Appeal, as to the one key term not negotiated, the scope of work, a scope of work was ultimately agreed to by the parties after Torres submitted and LAUSD approved Torres’ job order proposals:
LAUSD is not suing on a Scope of Work that never materialized. There is no claim that the required Scope of Work for each job order was not established as required by the General Conditions of the JOCs. Under the General Conditions, once the Scope of Work is properly established, LAUSD issues its RFP, and the contractor is required to respond with a proposal which prices the work using the applicable formulas in the General Conditions. This is arithmetic, not negotiations.
B. LAUSD’s Failure to Obtain an Estimate: Failure to Satisfy a Condition Precedent or Not
Under the JOC statute, “[I]n order to prevent fraud, waste, and abuse,” a K-12 school district using a JOC project delivery method is required to “[p]repare for individual job order developed under a job order contract an independent unified school district estimate.” The estimate it to be “prepared prior to the receipt of the contractor’s offer to perform work” and is supposed to be “compared to the contractor’s proposed price to determine the reasonableness of that price before issuance of any job order.”
According to Torres, the statutory requirement that LAUSD obtain an estimate “prior to” receipt of Torres’ job order proposal was a condition precedent to entering into an enforceable contract, and because LAUSD failed to obtain an estimate “prior to” receipt of Torres job order proposal, the JOC contract was unenforceable.
The Court of Appeal disagreed finding that “[t]here is no language in the statute expressly conditioning a contractor’s duty to prepare a correctly priced proposal on LAUSD obtaining an independent estimate.”
Note: While I don’t necessary disagree with the Court’s conclusion that obtaining an estimate is not a condition precedent, I’m also not quite sure that I see the Court’s logic here, since the condition precedent argued by Torres’ is not its duty to prepare a correctly priced proposal, but rather LAUSD’s duty to obtain an estimate before receipt of Torres’ job order proposal as stated in the JOC statute (i.e., “prior to”).
C. Acceptance of Torres’ Job Order Proposals: Waiver by LAUSD of the Pricing Provisions of the JOC Contract or Not
Finally, Torres argued that by accepting Torres’ job order proposals, LAUSD waived the pricing provisions of the JOC contract even if the pricing contained in the job order proposals were at variance with the pricing provisions of the JOC contract. Again, the Court of Appeal disagreed.
First, the Court of Appeal pointed out, the JOC contract includes an anti-waiver provision which provided that:
No action or failure to act by [LAUSD] shall constitute a waiver of a right, remedy, or duty afforded to [LAUSD] under the Contract Documents, nor shall such action or failure to act constitute approval of or acquiescence in a breach thereunder, except as may be specifically agreed to in writing.
Second, the Court of Appeal pointed out, for there to have been a waiver, LAUSD would have had to have waived two rights, the right to have a proposal prepared by Torres in accordance with the JOC contract, and the right to audit Torres’ project files and recover overcharges:
Further, in order for appellants to prevail, LAUSD would have to have waived two rights: 1) the right to have a proposal prepared in accordance with the pricing formulas; and 2) the right to later audit the job order and recover overcharges. Appellants have not pointed to any admissible evidence showing that LAUSD personnel were aware that Torres’s proposals violated the General Conditions pricing formulas or that LAUSD expressly relinquished the right to require those formulas. Appellants point to the conduct of LAUSD personnel in approving and signing the job orders. Even assuming for the sake of argument that signing a job order without checking for pricing conformity could be viewed as conduct inconsistent with an intent to enforce the General Conditions pricing formula and that such waiver was not prohibited by the express terms of the anti-waiver provision, this conduct would only be inconsistent with an intent to enforce the pricing formulas through the job order issuance process. The conduct is not inconsistent with a belief that a subsequent audit could and would make a compliance determination and that any overcharges could be recovered. Thus, for waiver purposes, LAUSD’s conduct is not inconsistent with an intent to enforce the pricing formulas.
Finally, the Court of Appeal held that permitting a waiver would be inconsistent with the JOC process “by removing the requirement that a contractor follow the pricing formulas in the General Conditions in preparing its proposal.”
Conclusion
So, there you have it. A broad overview of the JOC project delivery method, which, unlike other kinds of project delivery methods, essentially includes two different proposal mechanisms, one when a contractor bids on a request for proposals, and another when a JOC contractor bids on a specific project, and one Appellate Court’s view of the application of contractual principals to that project delivery method.