Legislature(2003 - 2004)
05/07/2003 09:01 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ 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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