Legislature(2003 - 2004)

05/06/2003 08:45 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 250                                                                                                            
                                                                                                                                
     "An Act relating  to protests of state  contract awards,                                                                   
     to  claims on  state contracts,  to  the arbitration  of                                                                   
     certain  state  construction  contract  claims,  and  to                                                                   
     hearings and  appeals under the State  Procurement Code;                                                                   
     making  conforming amendments  in the State  Procurement                                                                   
     Code; and providing for an effective date."                                                                                
                                                                                                                                
REPRESENTATIVE JIM HOLM, SPONSOR,  provided information about                                                                   
the bill.   He noted  that the bill  was important  given the                                                                   
amount of contract  work outstanding in the  state this year.                                                                   
He  explained  that the  Associated  General  Contractors  of                                                                   
Alaska and the Department of Transportation  had collaborated                                                                   
to  create a  proposal  that worked  for  both  parties.   He                                                                   
discussed the  difficulty of  construction claims  in Alaska,                                                                   
due to  the costs  of litigation and  arbitration.   He noted                                                                   
that arbitrations had  in the past been drawn out  to a point                                                                   
when  they were  no longer  financially  feasible for  either                                                                   
party.  He maintained  that the bill meets the  needs of both                                                                   
contractors  and the  state, and  facilitates more  expedient                                                                   
negotiations,  placing all  parties  on equal  standing.   He                                                                   
referred to the  sectional analysis of the  Sponsor Statement                                                                   
as follows:                                                                                                                     
                                                                                                                                
     The purpose of HB 250 is to modify the construction                                                                        
     claims  process   to  once  again  create   a  fair  and                                                                   
     expeditious  claims process.  Specifically  HB 250  will                                                                   
     modify the  procurement code pertaining  to construction                                                                   
     claims in the following manner:                                                                                            
                                                                                                                                
          1. If a procurement officer does not issue a                                                                          
             written decision by the due date, the                                                                              
             contractor may seek arbitration.                                                                                   
                                                                                                                                
          2. On appeals of all construction claims, the                                                                         
             parties can agree to binding arbitration.                                                                          
                                                                                                                                
          3. The   timelines   for   decisions    have   been                                                                   
             tightened, and redundant requirements have been                                                                    
             eliminated.                                                                                                        
                                                                                                                                
          4. An arbitrator or hearing officer who does not                                                                      
             issue   a   decision   by   the    deadline   is                                                                   
             disqualified for a year.                                                                                           
                                                                                                                                
          5. Qualifications for arbitrators and hearing                                                                         
             officers   will    be    established   by    the                                                                   
             commissioner of administration in regulation.                                                                      
                                                                                                                                
          6. The contractor is entitled to recover some of                                                                      
             the claims costs incurred.                                                                                         
                                                                                                                                
                                                                                                                                
     Prompt passage of HB 250 will expedite contractor's                                                                        
     claims and return fairness to the process.                                                                                 
                                                                                                                                
Representative Croft  referred to Section  7 of the  bill and                                                                   
asked if  currently each  side of  the negotiations  paid for                                                                   
their own costs related to the  claims process.   He observed                                                                   
that the bill  would authorize full costs related  to rule 82                                                                   
[of the Alaska Rules of Civil Procedure].                                                                                       
                                                                                                                                
MARK   O'BRIEN,   CHIEF   CONTRACTS    OFFICER,   CONTRACTING                                                                   
PROCUREMENT  AND APPEALS,  DEPARTMENT  OF TRANSPORTATION  AND                                                                   
PUBLIC   FACILITIES,    in   response    to   questions    by                                                                   
Representative   Croft,  confirmed   that   the  bill   would                                                                   
introduce provisions under Rule  79 and Rule 82 [Alaska Rules                                                                   
of Civil  Procedure] to the recovery  of both costs  and fees                                                                   
for claims adjudicated under AS 36.30.                                                                                          
                                                                                                                                
Representative  Croft  referred to  a  reform  of the  claims                                                                   
process in  the previous year.   Mr. O'Brien stated  that the                                                                   
process  had existed  for two  years, but that  this was  the                                                                   
first time  the bill  had been  introduced to address  issues                                                                   
agreed upon by  both the State and contractors.   In response                                                                   
to a question by Representative  Croft, Mr. O'Brien confirmed                                                                   
that last year  a provision was added to collect  interest on                                                                   
claims  back to  the date  upon which  they were  filed.   He                                                                   
noted that the bill does not affect that provision.                                                                             
                                                                                                                                
Mr.   O'Brien  added   that  when   the  Associated   General                                                                   
Contractors (AGC) approached the  office, they were trying to                                                                   
make  the process  faster,  fairer and  less  expensive.   He                                                                   
stated  that the  bill specified  time  frames and  shortened                                                                   
existing  time frames.    He noted  that  most people  viewed                                                                   
arbitration  as a  better process  and pointed  out that  the                                                                   
bill made  arbitration outcomes  final, involving  the courts                                                                   
in only a  few circumstances.  He explained  that arbitration                                                                   
decisions might  be appealed if  the cases included  fraud or                                                                   
gross  misapplication  of  the  law.   He  stated  that  this                                                                   
prevented a lengthy and expensive  process that would include                                                                   
both arbitration and a court case.                                                                                              
                                                                                                                                
Mr.  O'Brien  stated that  the  bill  would  put in  place  a                                                                   
selection  process ensuring  a  neutral third  party that  is                                                                   
acceptable to both  sides.  He explained that  prior to this,                                                                   
the  hearing officer  was appointed  by  the commissioner,  a                                                                   
practice  that  contractors  viewed  as  being  unfair.    He                                                                   
maintained  that these  factors would  make the process  more                                                                   
expedient and impartial.                                                                                                        
                                                                                                                                
Mr. O'Brien pointed out that the  only issue about which they                                                                   
had not  reached complete  agreement was  that of  provisions                                                                   
pertaining to  Rules 79 and  82.  He  referred to  the fiscal                                                                   
note,  which  listed  associated  costs.   He  discussed  the                                                                   
contractors'  viewpoint that  they should  be able to  recoup                                                                   
hearing costs  and fees  in order  to actually recover  their                                                                   
court appointed  awards.   He noted that  in the  past eleven                                                                   
years, claims costs roughly averaged  $145 thousand per year,                                                                   
averaging  from  between  $350   thousand  and  $7  thousand,                                                                   
depending on the complexity and  length of cases. In addition                                                                   
there  were  costs and  fees  associated  with  adjudication,                                                                   
which varied  based on  the complexity  of litigation.  These                                                                   
varying  costs are  taken into  consideration  in the  fiscal                                                                   
note.   He emphasized that these  costs were not  federal aid                                                                   
participating, making the costs a general fund expense.                                                                         
                                                                                                                                
Representative  Croft addressed  the  concern of  determining                                                                   
the extent  of claims,  and asked  if this  was mitigated  by                                                                   
Section  7  (b), which  allowed  an  offer of  judgment.  Mr.                                                                   
O'Brien confirmed that this was  correct, making it difficult                                                                   
to calculate  the costs  unless one assumed  that no  Rule 68                                                                   
offer existed, preempting the  payment of costs and fees.  He                                                                   
explained  that  this  was  the   "meet  or  beat"  rule  and                                                                   
sometimes resulted  in the payment  of a substantial  portion                                                                   
of state costs.   He maintained  that this was a part  of the                                                                   
bill  that  the   AGC  and  the  Administration   felt  would                                                                   
encourage  settlement.   He  stated that  the  Administration                                                                   
supports the bill.                                                                                                              
                                                                                                                                
DICK  CATTANACH,   EXECUTIVE  DIRECTOR,  ASSOCIATED   GENERAL                                                                   
CONTRACTORS  OF   ALASKA  testified  via   teleconference  in                                                                   
support of  the bill.   He emphasized  the importance  of the                                                                   
provisions  that generated  the fiscal  note, and added  that                                                                   
the  fiscal note  would only  manifest if  the Department  of                                                                   
Transportation  and  Public  Facilities  did not  change  its                                                                   
procedures.   In  regard to  the  costs not  being offset  by                                                                   
federal  dollars,   he  maintained   that  contractors   were                                                                   
currently  paying   all  costs.    He  noted   examples  when                                                                   
contractors paid over $250 thousand  in legal fees for a $530                                                                   
thousand claim.  He maintained  that the bill encouraged both                                                                   
sides to arrive at reasonable amounts.                                                                                          
                                                                                                                                
WENDY REDMAN, VICE PRESIDENT,  STATEWIDE PROGRAMS, UNIVERSITY                                                                   
OF  ALASKA testified  and raised  concern  about the  section                                                                   
which  required  mandatory  arbitration  in regard  to  small                                                                   
claims.    She  stated  that  the  University  had  not  been                                                                   
considered  in crafting  the bill,  and had  requested to  be                                                                   
exempted  from   that  section.    She  indicated   that  the                                                                   
University would  work with the other provisions  of the bill                                                                   
and  communicate with  AGC  and  DOT in  the  coming year  to                                                                   
examine  the small  contract claims  arbitration  procedures.                                                                   
She  expressed  support  of  the   bill  with  the  requested                                                                   
exemption.                                                                                                                      
                                                                                                                                
In response  to a  question by  Representative Whitaker,  Ms.                                                                   
Redman stated that  the amount that delineated  a small claim                                                                   
was less than  $250 thousand.  Representative  Whitaker asked                                                                   
about the rationale for requesting  an exemption.  Ms. Redman                                                                   
stated   that  attorneys   felt  it   would  encourage   more                                                                   
litigation.                                                                                                                     
                                                                                                                                
Representative  Croft  asked  why  the  University  would  be                                                                   
different  from other  portions of state  government.   Wendy                                                                   
noted that AGC and DOT had been  working on the bill for over                                                                   
a year,  and explained  that the University  was not  part of                                                                   
that discussion and did not have  the same types of projects,                                                                   
such as roads.                                                                                                                  
                                                                                                                                
Representative  Stoltze pointed  out that  the Department  of                                                                   
Natural  Resources and  other  agencies  engaged in  projects                                                                   
different from  the Department  of Transportation  and Public                                                                   
Facilities, and asked why they would not also be exempted.                                                                      
                                                                                                                                
Ms.  Redman  pointed  out that  the  University  was  treated                                                                   
differently than  a state agency under the  state procurement                                                                   
code.  They are directed, as are  the Railroad and the Courts                                                                   
System, under  AS 36.30.005 to establish  features equivalent                                                                   
to the  state, but are governed  under the Board  of Regents.                                                                   
Representative  Croft asked  if the  [Alaska State]  Railroad                                                                   
had been considered  in the bill.  Ms. Redman  was unaware of                                                                   
those provisions.                                                                                                               
                                                                                                                                
Representative  Whitaker  observed  that factors  that  might                                                                   
work for one state agency might  not necessarily work for the                                                                   
University.   Wendy  reiterated   that   the  Department   of                                                                   
Transportation  and  Public  Facilities  had  a  considerable                                                                   
amount  of time  to work  with  the bill  and increase  their                                                                   
comfort  level.  She  speculated  that in the  course of  the                                                                   
coming year, the University might  increase its comfort level                                                                   
as well.                                                                                                                        
                                                                                                                                
Representative  Holm stated that  the Alaska Railroad  was in                                                                   
support of and is considered in the bill.                                                                                       
                                                                                                                                
Representative Whitaker MOVED Amendment #1.                                                                                     
                                                                                                                                
     Sec. __ AS 36.30.005                                                                                                       
                                                                                                                                
     (d)   Notwithstanding the  provisions of 36.30.627,  the                                                                   
     University  of  Alaska  is  not  required  to  arbitrate                                                                   
     construction  contract  claims  unless  it  specifically                                                                   
     agrees to such arbitration.                                                                                                
                                                                                                                                
                                                                                                                                
In   response   to   a   question    by   Vice-Chair   Meyer,                                                                   
Representative  Whitaker stated that  he was not  yet certain                                                                   
where the amendment would be placed.                                                                                            
                                                                                                                                
Ms. Redman referred  to section 36.30.005 of  the procurement                                                                   
law,  not  included  in  HB  250,   and  explained  that  the                                                                   
amendment  would add a  section that  included that  statute.                                                                   
She  added  that  the  bill  as  written  would  prevent  the                                                                   
University from  arbitrations in  small contracts,  and noted                                                                   
that  the  University  desired  to become  involved  in  such                                                                   
negotiations, without  it being  mandated solely on  the part                                                                   
of the  contractor.  She  indicated that the  amendment would                                                                   
allow the  University to move  forward in gaining  experience                                                                   
with these arbitrations.                                                                                                        
                                                                                                                                
Representative Whitaker clarified  that 36.30.005 had not yet                                                                   
been included in  the bill, but stated that  if the amendment                                                                   
were adopted, then  the bill language should be  changed in a                                                                   
manner to accept it.                                                                                                            
                                                                                                                                
In  response to  a question  by  Representative Stoltze,  Mr.                                                                   
Cattanach  observed  that  the  amendment  would  exempt  the                                                                   
University from binding arbitration  on claims less than $250                                                                   
thousand.   He pointed out  that as the  bill was  written, a                                                                   
contractor could decide to challenge  a decision by a hearing                                                                   
officer through  a third party  arbitration.   The University                                                                   
was  asking   for  exemption   due  to   problems  they   had                                                                   
experienced with binding arbitration.   He stated that, since                                                                   
the University had not been involved  in discussions with the                                                                   
Department of  Transportation and Public Facilities  over the                                                                   
past  two  years,  the  Department of  Law  did  support  the                                                                   
exemption.                                                                                                                      
                                                                                                                                
There being NO OBJECTIONS, the Amendment was ADOPTED.                                                                           
                                                                                                                                
Representative  Foster MOVED to  report CSHB 250(FIN)  out of                                                                   
Committee   with    individual   recommendations    and   the                                                                   
accompanying fiscal note.                                                                                                       
                                                                                                                                
CSHB  250 (FIN)  was REPORTED  out  of Committee  with a  "do                                                                   
pass"  recommendation  and  one  zero fiscal  note  from  the                                                                   
Department of Transportation and Public Facilities.                                                                             
                                                                                                                                

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