Legislature(2003 - 2004)

05/07/2003 09:01 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                                                                                                                                
     CS FOR SENATE BILL NO. 125(TRA)                                                                                            
     "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."                                                                                                                     
                                                                                                                                
                                                                                                                                
This was  the first  hearing for  this bill  in the Senate  Finance                                                             
Committee.                                                                                                                      
                                                                                                                                
Co-Chair  Wilken informed  that this legislation  would reform  the                                                             
method  through which  construction  claims against  the State  are                                                             
addressed. He relayed that, approximately  a year prior at a Senate                                                             
Transportation committee meeting  in Anchorage, the committee heard                                                             
testimony regarding the construction industry's frustration on this                                                             
issue.  He   continued  that,   as  a   result  of  that   meeting,                                                             
representatives  from the Department  of Transportation  and Public                                                             
Facilities and the  Associated General Contractors  of Alaska (AGC)                                                             
worked  together to  develop a  consensus on  how the  construction                                                             
claims process against the State could be revised.                                                                              
                                                                                                                                
RICHARD SCHMIDZ, Staff to Senator John Cowdery, the bill's sponsor,                                                             
informed the  Committee that the  Department of Transportation  and                                                             
Public Facilities and the AGC would present this legislation.                                                                   
                                                                                                                                
MARK O'BRIEN,  Chief Contracts  Officer,  Division of  Contracting,                                                             
Procurement and Appeals, Office  of the Commissioner, Department of                                                             
Transportation and  Public Facilities, informed the  Committee that                                                             
the  Department   has  been  working   with  AGC  to   improve  the                                                             
construction  claims   process.  He  stated  that   AGC  originally                                                             
presented  three  suggestions  toward  making  the  claims  process                                                             
"faster, fairer,  and less expensive,"  and he contended  that this                                                             
legislation would  adequately address their concerns.  He explained                                                             
that in order  to quicken the  claims process, specific  timeframes                                                             
"where none existed  and shortened timelines where  ones did exist"                                                             
as well as implementation  of an arbitration process  as opposed to                                                             
the current hearing officer process have been incorporated into the                                                             
proposal. He stated that specific timelines for resolution would be                                                             
identified in the  arbitration process. These timelines,  he noted,                                                             
"would serve to speed up the process  and reduce costs" as compared                                                             
to the  costs resulting  from attorney and  consultant fees  in the                                                             
current litigation process.                                                                                                     
                                                                                                                                
Mr. O'Brien specified that the arbitration decision would be final.                                                             
He noted  that with the  exception of appeals  based on charges  of                                                             
fraud, misapplication  of the law,  and a few other narrow  issues,                                                             
there would be no lengthy court appeal process.                                                                                 
                                                                                                                                
Mr. O'Brien communicated that the arbitration process would include                                                             
regulations regarding  the selection of an arbitrator  who would be                                                             
acceptable and fair to both parties.  He stated that implementation                                                             
of an arbitration system would reduce costs as it would shorten the                                                             
process and limit appeals.                                                                                                      
                                                                                                                                
Mr. O'Brien  acknowledged that the  award of costs and fees  is the                                                             
lone point of dissention remaining  between the Department and AGC.                                                             
He noted that  Rules 79 and 82,  as referenced in the  Department's                                                             
fiscal note #1, require payment  of attorney fees and claims costs.                                                             
He commented that these provisions would incur costs at "a baseline                                                             
average" of  $145,000 per year based  on an eleven-year  average in                                                             
which expenses ranged  from a high of $340,000 to a  low of $7,000.                                                             
He explained that this expense  would be subject to such factors as                                                             
the  complexity   of  the  case  and  the  length   of  litigation.                                                             
Furthermore, he explained  that in addition to these  expenses, the                                                             
cost of additional  attorney fees associated with litigating  these                                                             
awards is estimated to be approximately $6,000 per year or 20 hours                                                             
per  claim.  He  specified  that another  factor  is  the  Rule  68                                                             
provision that  allows for an "offer  of judgment." He  stated that                                                             
this factor is considered to be "a driver" in settling a claim.                                                                 
                                                                                                                                
Mr.  O'Brien  informed  that while  most  construction  claims  are                                                             
associated  with  federally  funded projects,  no  federal  funding                                                             
support  exists  for expenses  associated  with  Rules  79 and  82.                                                             
Therefore, he stated that an award  of costs and fees would require                                                             
general fund dollars.                                                                                                           
                                                                                                                                
Senator Hoffman asked  the dollar amount of claims  currently being                                                             
processed.                                                                                                                      
                                                                                                                                
Mr. O'Brien responded that he is  unsure of the current outstanding                                                             
claims amount.                                                                                                                  
                                                                                                                                
DICK CATTANACH, Executive Director,  Associated General Contractors                                                             
of Alaska,  spoke in support of  this "fair and balanced"  bill. He                                                             
stated  that  while  he  appreciates   the  concern  regarding  the                                                             
potential level of  the fiscal note, he asserted that  the proposed                                                             
process would speed things up and would be less expensive. He noted                                                             
that AGC  worked diligently with  the Department of  Transportation                                                             
and Public  Facilities, the Department  of Law, and other  affected                                                             
parties to address this issue.                                                                                                  
                                                                                                                                
Co-Chair Wilken  asked whether the  industry is satisfied  with the                                                             
results of those discussions.                                                                                                   
                                                                                                                                
Mr. Cattanach confirmed.                                                                                                        
                                                                                                                                
Amendment  #1: This  amendment  inserts a  new section  on page  1,                                                             
following line 5 as follows.                                                                                                    
                                                                                                                                
     Section 1. AS 36.30.005 is amended by adding a new subsection                                                              
     to read:                                                                                                                   
          (d) Notwithstanding the provisions of AS 36.30.627, the                                                               
     University of Alaska is not required to arbitrate construction                                                             
     contract claims unless the university specifically agrees to                                                               
     the arbitration.                                                                                                           
                                                                                                                                
Co-Chair Wilken offered Amendment  #1 and objected for explanation.                                                             
                                                                                                                                
Co-chair  Wilken explained  that  this amendment  would exempt  the                                                             
University of Alaska  from the binding arbitration  requirement for                                                             
claims valued at  less than $250,000 unless the claim  was mutually                                                             
approved by both  the University and the contractor.  He noted that                                                             
no other provisions of the bill  would be affected by this proposed                                                             
change.                                                                                                                         
                                                                                                                                
WENDY REDMAN, Vice President of University Relations, University of                                                             
Alaska  stated  that  the  University   was  not  involved  in  the                                                             
aforementioned  discussions  due  to  the  understanding  that  the                                                             
University would  not be impacted by the legislation.  However, she                                                             
advised that the University is  seeking the exemption for the small                                                             
claims section, and  she noted that there is no opposition  to this                                                             
exemption request.  In addition, she expressed that  the University                                                             
has a good  working relationship  with AGC. Continuing,  she stated                                                             
that the  University  would be  involved in  the implementation  of                                                             
procedures pertaining to this legislation.                                                                                      
                                                                                                                                
Co-Chair Wilken removed his objection.                                                                                          
                                                                                                                                
Senator B.  Stevens asked whether  the University utilizes  a State                                                             
procurement officer.                                                                                                            
                                                                                                                                
Ms.  Redman   responded  that  the   University  has  an   in-house                                                             
procurement officer.                                                                                                            
                                                                                                                                
Senator B. Stevens asked the University's total annual construction                                                             
budget.                                                                                                                         
                                                                                                                                
Ms  Redman specified  that  the amendment  addresses  small  claims                                                             
valued at  $250,000 or  less. She continued  that the  University's                                                             
construction  budget  ranges between  $20  million  to $40  million                                                             
annually.                                                                                                                       
                                                                                                                                
Senator B. Stevens asked the importance  of excluding this level of                                                             
contractor claims.                                                                                                              
                                                                                                                                
Ms.  Redman explained  that  the bill  specifies  that small  claim                                                             
arbitration  could be initiated  "solely at  the discretion  of the                                                             
contractor,"  without the  approval of the  University. She  stated                                                             
that because the majority of University  construction projects fall                                                             
into the small claim  category, its attorneys have  determined that                                                             
the  bill's  current  language  is not  in  the  University's  best                                                             
interest.                                                                                                                       
                                                                                                                                
Senator B.  Stevens ascertained  therefore, that  the basis  of the                                                             
amendment would be to address the concern that the University would                                                             
be  negatively   impacted  because   of  the  multitude   of  small                                                             
contractors it deals with.                                                                                                      
                                                                                                                                
Ms. Redman affirmed that the majority  of University projects would                                                             
be  classified   as  small  projects.   She  reiterated   that  the                                                             
University's  legal council  has  determined that  this bill  might                                                             
influence small contractors to pursue arbitration measures.                                                                     
                                                                                                                                
Senator  B. Stevens  asked  what the  University's  alternative  to                                                             
arbitration would be.                                                                                                           
                                                                                                                                
Ms. Redman  responded  that the  alternative would  be the  current                                                             
settlement process through which  hearings are conducted. She noted                                                             
that the University's  attorneys have determined that  the proposed                                                             
arbitration process might remove the incentive to settle.                                                                       
                                                                                                                                
Senator  Hoffman surmised  therefore,  that contrary  to  testimony                                                             
stating  that  the  arbitration  process  would  shorten  the  time                                                             
involved in settling claims, the University has determined that the                                                             
arbitration  process would  lengthen  its time  required to  settle                                                             
disputes.                                                                                                                       
                                                                                                                                
Ms. Redman clarified that this  legislation would introduce binding                                                             
arbitration as  a method to settle  small contractor disputes.  She                                                             
stated that  while the State  has experience  with this issue,  the                                                             
University  has not.  She  acknowledged that  University  attorneys                                                             
might  eventually   conclude  that   it  might  be  an   acceptable                                                             
alternative.  However, she stated  that because the University  was                                                             
not involved in the aforementioned discussions, the concern is that                                                             
the small  claim arbitration mandate  might increase its  number of                                                             
arbitrations and litigations.                                                                                                   
                                                                                                                                
Senator  Bunde voiced  being  nervous "that  a  State agency  would                                                             
escape the  full impact of this  law." He attested that  this would                                                             
set  a  poor  precedent  unless  the  University   already  has  an                                                             
arbitration  process  in place  that would  be  duplicated by  this                                                             
mandate. He asked  whether the University currently  has in place a                                                             
system to adjudicate these small claims.                                                                                        
                                                                                                                                
Ms. Redman replied that the University  must adhere to and abide by                                                             
the  State  procurement   code  that  has  established   provisions                                                             
pertaining to hearings and the appeal process.                                                                                  
                                                                                                                                
Senator Bunde stated everything "except for this exemption."                                                                    
                                                                                                                                
Ms. Redman concurred.                                                                                                           
                                                                                                                                
Senator Olson agreed with Senator Bunde's comments.                                                                             
                                                                                                                                
Senator Olson asked AGC's position on the amendment.                                                                            
                                                                                                                                
Mr. Cattanach  commented  that the $250,000  small claims  category                                                             
limit was  agreed upon after six  months of discussion  between the                                                             
AGC and the Department of Transportation and Public Facilities that                                                             
determined that a binding arbitration determination would be a fair                                                             
method of addressing a claim. He  asserted that arbitration is very                                                             
expensive and  that it would  not unusual to  spend a quarter  of a                                                             
million dollars  when prosecuting a  claim. He shared that  after a                                                             
hearing  is  conducted,  a  contractor   might  determine  that  an                                                             
independent arbitrator could levy  a fair opinion without incurring                                                             
further  expense. He  stated that  claims below  $250,000 could  be                                                             
handled  quicker  and  cheaper  via  the  arbitration  process.  He                                                             
specified  that claims  in excess  of that amount  would be  better                                                             
managed through the routine claims process.                                                                                     
                                                                                                                                
Mr. Cattanach stated that AGC agrees with the University's position                                                             
on this amendment  because the University  was not involved  in the                                                             
process.  Additionally,  he  commented   that  the  University  has                                                             
committed  to  work  with AGC  to  determine  whether  the  binding                                                             
arbitration process would work  with University projects. He voiced                                                             
confidence  that it would  work. Therefore,  Mr. Cattanach  replied                                                             
that AGC supports the amendment.                                                                                                
                                                                                                                                
Co-chair Wilken removed his objection to the amendment.                                                                         
                                                                                                                                
There being no further objection, Amendment #1 was ADOPTED.                                                                     
                                                                                                                                
Amendment #2: This conceptual amendment addresses a technical error                                                             
in the  bill whereby  Sections  1 and 15  of the  bill specify  two                                                             
differing effective  dates pertaining  to the applicability  of the                                                             
bill. The clarifying language being inserted into the bill reads as                                                             
follows.                                                                                                                        
                                                                                                                                
     Sec. 16. The uncodified law of the State of Alaska is amended                                                              
     by adding a new section to read:                                                                                           
          APPLICABILITY. Sections 1-16 and 18 of this Act apply to                                                              
     a contract if the contract is entered into on or after the                                                                 
     effective dates of secs. 1-16 and 18 of this Act.                                                                          
                                                                                                                                
Co-Chair Wilken moved for the adoption of Amendment #2.                                                                         
                                                                                                                                
There being no objection, Amendment #2 was ADOPTED.                                                                             
                                                                                                                                
Senator Taylor asked whether this legislation would alleviate other                                                             
[unspecified] issues that have been discussed over the years.                                                                   
                                                                                                                                
Mr. Cattanach  responded that  by implementing  a fair and  quicker                                                             
process, the legislation would  address other [unspecified] issues.                                                             
                                                                                                                                
Senator Taylor voiced support of the legislation if it would result                                                             
in improving  "the Department's  reluctance to  adjust claims  in a                                                             
good faith  and meaningful  manner that  has literally  bankrupted"                                                             
numerous  businesses. In  addition,  he noted  that a  contractor's                                                             
bonding ability is  jeopardized when a timely determination  is not                                                             
forthcoming.                                                                                                                    
                                                                                                                                
Senator Taylor moved to report the bill, as amended, from Committee                                                             
with individual recommendations and accompanying fiscal note.                                                                   
                                                                                                                                
There  being  no objection,  CS  SB  125 (FIN)  was  REPORTED  from                                                             
Committee with indeterminate fiscal  note #1 from the Department of                                                             
Transportation and Public Facilities.                                                                                           
                                                                                                                                

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