Sacramento regional sewer district accused of violating its own contracting rules

Sacramento’s regional sewer district once again faces criticism for its handling of a nearly $2 billion project to upgrade its Elk Grove treatment plant, this time for tentatively awarding a $415 million contract to a firm with the same parent company as another bidder on the project.

Two companies with losing bids have filed protests with the Sacramento Regional County Sanitation District, arguing that Spain’s ACS Group violated district rules intended to stop collusion among contractors. A handful of companies that did not bid on the project also submitted complaint letters, saying the district could end up promoting unethical contracting by allowing bids from sister companies.

The tentative contract winner, Seattle-based Dragados USA, and another contractor that bid on the project, Flatiron West of Benicia, are both subsidiaries of ACS. Representatives of Flatiron West and Dragados USA say they operate independently and routinely compete against each other.

Some public agencies elsewhere in the country have specifically disallowed the practice.

We learn from each protest and will continue to work with our board of directors on ways we can improve.

Sanitation district chief Prabhakar Somavarapu

Companies have filed protests against four contract awards since the district started its massive EchoWater project, an upgrade prompted by a 2011 state decision ordering the district to reduce pollutants in the water it discharges to the Sacramento River.

In total, unsuccessful bidders have challenged almost $600 million in contracts. Only one of the three protests resolved so far has been upheld by the sanitation district’s board, but board members have expressed growing frustration with the staff’s handling of contracts. Last year, one losing bidder went to court to challenge a contract, though it ultimately lost.

Upholding the most recent challenge would likely mean choosing an alternative bid $28 million higher than the one by Dragados USA. A decision by the district last year to disqualify a contractor for bid irregularities led to a $14 million cost increase.

The district board – made up of city council members and county supervisors from Sacramento and Yolo counties – was asked Wednesday to approve a contract with Dragados USA to build a biological nutrient removal station. But after several board members complained that staff had not fully vetted complaints about the tentative award, the board delayed the decision until its April 27 meeting.

The district’s project specifications say that only “one bid from any individual, firm, corporation, or association, under the same or different names, will be accepted.” The rule is intended to prevent two companies from acting in concert to influence the bidding process or having the appearance of such collusion.

Nevertheless, district staff recommended awarding the contract to Dragados USA because of an opinion from the county counsel’s office stating that Dragados USA and Flatiron West are “distinct legal entities.”

Several board members attending Wednesday’s meeting questioned the decision, in part because an attorney from the office said little was done to independently verify claims by Dragados and Flatiron West about their relationship to ACS.

“Exactly what you put into this policy to deter, happened,” said Sacramento City Council member and mayoral candidate Angelique Ashby. “I think this could have been handled differently.”

She said ACS only furthered the impression of its control by telling media outlets recently that ACS had won the award. Reuters and other news agencies made that report, failing to note the decision was actually a tentative award to Dragados USA.

Sacramento County Supervisor Susan Peters also complained about staff’s handling of the contract. “This should have been independently investigated and verified,” she said. “That didn’t happen. I have a problem with that and it will affect how I vote.”

Attorney Tom Krider, representing Dragados USA, told the board that ACS exerts no control over the company. Representatives of Dragados USA and Flatiron West sent letters to the board saying they did not communicate about the district contract.

It is clear that there is a violation here.

Stan Van Vleck, attorney for a losing bidder

But attorney Stan Van Vleck, representing Balfour Beatty Infrastructure of Fairfield, said the district’s regulations don’t require proof that Dragados USA and Flatiron West colluded on the contract bids, because the potential for such action is enough to reject the tentative award. Balfour Beatty filed one of the protests and stands to win the contract if the board rejects Dragados’ bid.

“It is clear that there is a violation here,” Van Vleck said.

Van Vleck presented the board with information from ACS’ consolidated financial statements that said Flatiron West and Dragados USA and its other subsidiaries are consolidated and “presented as those of a single economic entity” and that ACS has the “capacity to exercise control” over its subsidiaries.

Attorney Scott McElhern, who is working with Van Vleck, said the potential for collusion was raised by Flatiron West’s decision not to protest the tentative award. Flatiron West was initially named the low bidder, but the district threw out the company’s proposal because of a math error. A Flatiron West representative told the board that the company did not appeal because it conceded its error.

Van Vleck and a representative of another contracting firm presented the board with cases from agencies that would not accept separate proposals from ACS companies.

A 2011 letter from the Port of Long Beach tells a Flatiron West representative that the port and the California Department of Transportation would not accept separate proposals from Flatiron and Dragados because of ACS’ ability to exercise control over them.

A Washington, D.C., water and sewer district changed its bid requirements for projects with the only apparent purpose of addressing the conflict of interest between the companies, according to a letter to the district from S.A. Healy Co., a contractor that did not bid on the EchoWater project. Flatiron and another ACS company withdrew after the change for the D.C. project.

“Allowing affiliated companies to bid against each other sets a terrible precedent for the public competitive bidding process,” Jim McDonald, senior vice president for Healy, wrote in his letter.

Krider and other representatives of Dragados and Flatiron did not dispute that some agencies have prevented them from making separate bids for projects. However, they said those projects were different than the Sacramento sewer project and the agencies made the prohibition clear at the start. Flatiron raised the conflict issue with the district before the tentative award was made, and was told there was not a problem, district records show.

District board members did not indicate how they might vote when the contract comes back for a decision. But most of the board members who spoke said they were concerned about how staff handled the dispute, saying some of the issues could have been resolved before they were brought to the board. County Supervisor Patrick Kennedy said he wants a subcommittee created to examine the district’s contracting regulations, and board chair and fellow Supervisor Phil Serna indicated he agreed.

Problems with subcontractors were at the heart of three previous contract disputes at the district. The district threw out a tentative award last year because the low bidder had a subcontractor without proper insurance.

Last year, the board awarded a $114 million contract to Teichert Construction of Davis, despite receiving a bid that was $13.8 million lower from another company. The low bidder had a subcontractor without a state contracting license at the time of the bid, although the contractor received the license by the time the board made the award. The district also faced criticism because it had “pre-qualified” the subcontractor for use by contractors, even though it did not have its license then.

Sacramento Superior Court Judge Timothy Frawley ruled last June that the district followed state law in awarding the contract to Teichert.

The final dispute involved a similar issue, but with the district reaching a different result. In that case, the district awarded a $40 million contract to Flatiron West, even though the company listed two subcontractors for one job, allegedly in violation of state contracting law. The district said the mistake was irrelevant, because it was a typographical error.

Clint Myers, vice president of the company that filed the protest, Myers and Sons Construction, said the district has been inconsistent in its interpretations of the law, and that has led to more challenges by contractors.

District engineer Prabhakar Somavarapu, the district’s top official, said the number of complaints by contractors “does not imply an inherent deficiency in our processes. However, we learn from each protest and will continue to work with our board of directors on ways we can improve.”