MEMORANDUM 05-38

TO: Mayor Hornaday and Homer City Council

FROM: Walt Wrede

DATE: February 23, 2005

SUBJECT: Library Project / Solicitation of Bids

Two meetings ago the Council passed a resolution that authorized the city manager to take the library project out to bid if certain conditions were met. One of the primary conditions was that the manager had to be comfortable that enough funding was secured to cover the engineer’s estimate of the construction costs. This is the budget number the Council approved at the same meeting.

Attached to the resolution was a memorandum that contained a number of assurances that were provided to give the Council some comfort that we were not immediately going to bid and that it still had time to examine associated fiscal issues. The very last assurance was that the Council retained the option of not awarding a bid if the Sales Tax Proposition fails on March 22. It is this particular assurance that I would like to discuss.

Since that meeting, I have had an opportunity to speak with several contractors and others with experience in contracting and managing large public projects. As a result of these discussions, I have developed reservations about taking this project out to bid knowing that the Council might pull the plug if the sales tax proposition fails. It is generally agreed in contracting and legal circles that it is OK to refuse to award a bid if all of the bids come in too high. In other words, you can say no if you do not have enough money for construction. It is quite another thing to refuse to award a bid because you determine at the last minute, after the bids are solicited, that you don’t have the money to operate the facility. This can be seen as conducting business in bad faith and could potentially leave the City in a legally vulnerable position.

The contractors I spoke with expressed serious concerns about putting together bid proposals if there was uncertainty about whether the Council would actually award a bid. They said that they could easily spend $20,000 to $30,000 on a proposal for a project of this size and that it might not be worth the risk. The result could be that some qualified firms do not bid. Others might simply put a much lower level of effort into their bid and/or artificially inflate price quotes to cover the risk. A reduced level of effort could mean less detailed proposals and increase the chances for change orders or conflicts between the contractor and the City. None of this is in the City’s interest.

In my view, there are good reasons for the Council to make a commitment right now that it will award a bid if one comes in that is within our budget regardless of what happens on March 22. These reasons include:

• One option we have is to not solicit bids until after March 22. This would resolve the problem discussed above but it could result in significantly increased costs if we do not stay on schedule.
• The City will probably never be in a better position to get a new library built than it is right now. The funding for this project is like a house of cards and it could all come tumbling down if we delay awarding a bid or refuse to award one.
• If you award a bid, the fiscal obligations for FY 06 are not as onerous as you might think. You would be obligated to pay $104,000 per year in loan payments but M&O costs will not be anywhere near the numbers discussed. The construction schedule has occupancy of the building beginning in the fall of 2006. This means that M&O costs will only be a concern for one quarter of the budget year. Also, the $200,000 to $300,000 figure tossed around for M&O costs is only a draft budget estimate that was given to funding agencies at their request. It in some ways represents an ideal budget but the Council is not obligated necessarily to fund the library at that level. In short, you will have time to figure this out. If the ballot proposition fails on March 22, there will be other options (budget cutting, new revenues, collaborations) to explore.

Downside: It is possible that going to bid before the March 22 election and/or making a commitment now to award a bid regardless of the results of the election could have an impact on the election itself. It is hard to judge what that impact could be but it should be considered

RECOMMENDATION: That the Council confirms that it authorizes the Manager to take this project out to bid prior to the March 22, 2005 election provided that all agreed upon conditions are met and further, that it declares that it is committed to awarding a bid if one comes in from a responsible bidder that is within the adopted budget regardless of the results of the March 22 election.