State Bar of Texas Administrative and Public Law Section

The reason for the negative tone of this paper's title is the 40 minutes that Steve Ravel and Roy Minton will be talking about the Tejas case, not to mention the thousands of hours spent litigating it. As attorneys we can all admire their successful exit strategy. Our clients would prefer to avoid such challenging circumstances.

The State of Texas remains committed to an increasing use of private sector resources to do the State's work. "Privatization" is frequently billed as a politician's recent invention, and many of the creative applications are new (such as partnerships between state agencies and private businesses, bidding together to provide services to the State). However, the basic vehicle for privatization remains a government contract. Thorough review of longstanding public contract principles can enable you to help your clients get government contracts, keep them, get paid, and remain a viable business entity (i.e., avoid bankruptcy). "The best contract law attorneys anticipate issues and practice preventive law."⁽¹⁾

II. SCOPE AND STRUCTURE OF THE PAPER

A. A Government Contract is Not Just Like Contract Between Two Private Parties

The general principle established by the judicial system suggests a government contract with a private entity is a "proprietary" action governed by the same principles of contract law which govern contracts between two non-government parties. "When the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals." U.S. v. Winstar Corp., 116 S. Ct. 2432, 2464, (1996) (quoting Lynch v. United States, 292 U.S. 571, 579 (1934)); "[When the State of Texas] becomes a party to a contract with citizens, the same law applies to it as under like conditions governs the contract of an individual." Federal Sign v. Texas Southern University, 951 S.W.2d 401, 406-407 (Tex. 1997) (quoting Fristoe v. Blum, 45 S.W. 998, 999 (1898)).

Nevertheless, the law of private contracts has been supplemented (and superseded where there is a conflict) by an extensive body of statutory and regulatory law at each level of government. Consequently, the controlling law depends on the category of government involved.

B. Contracts with the Agencies of the State of Texas, Not Federal Agencies or Local Governments

Generally speaking, there is a separate body of law for contracts with federal agencies,⁽²⁾ contracts with local governments such as counties and municipalities,⁽³⁾ and contracts with state agencies. Most of this conference's attendees focus on a state agency practice, and therefore are most likely to be confronted with contract matters involving a state agency. This paper focuses on the requirements for contracts with Texas state agencies.

Bear in mind that the matter you handle might transcend the federal/state/local boundaries. For example, federal funds may be granted to a state agency to accomplish a federally mandated task. The state agency may subgrant the federal money (and maybe matching state money) to a local government, which uses the money to compensate a private contractor who actually does the work. In such cases, controlling law could be federal, state and/or local. Even if it is a clean "state only" project, there are many different requirements which could potentially apply. Identification of applicable law is the critical first step for everybody involved in the contracting process.

C. Issues to Focus Your Legal Research On

Procedure for Getting Selected as the Contractor
Negotiating and Drafting the Contract
Performing Under the Contract, Including Payment
Special Issues with Major Privatization Projects

III. IDENTIFY APPLICABLE LAW/POLICY/PRACTICE

If you become involved in a contract project involving a state agency, you should become familiar with at least the following laws (in addition to the contracting agency's solicitation document, e.g., IFB, RFP, RFO, etc.). The premise here is that a new client is considering bidding to get a contract with a state agency that you do not routinely practice before.

A. State Statutes

1. Agency Enabling Act.

Each agency's enabling act is different, so never assume that agency A's statute is like agency B's. You should look to see if the agency is authorized to contract with a private party, and if there are any restrictions or conditions on the authority to contract.

Is the agency expressly exempted from all or some of the general purchasing statutes? You should also check the agency's substantive authority relating to the project. Is the scope of work expected from the contractor consistent with the agency's powers? Does the statute give the agency (or some other entity, such as the State Auditor) oversight authority over contractors, such as the authority to review records, have an independent audit conducted, or even inspect the premises?

Does the enabling act provide a process for aggrieved persons to have agency actions reviewed? Does the process authorize judicial review? If so, does this waiver of sovereign immunity apply to actions by aggrieved contractors?

What type of organizational structure is established? Is there a full time governing body, or a part time, volunteer governing body? Does the Executive Director have broad authority by statute, or is it dependent on a delegation from the governing body?

Remember to look at all statutes that govern the agency's substantive activities. If there are multiple agencies involved look at all of them. This last point is especially important if there has been a recent merger/consolidation of agencies, or a spinoff, each of which can leave an ambiguous mix of statutes.

2. General Purchasing Statutes.

Tex. Gov't. Code Title 10, Subtitle D, State Purchasing and General Services, Chapters 2151 - 2177 (Vernon 1998); Tex. Gov't. Code Title 10, Subtitle F, State and Local Contracts and Fund Management, Chapters 2251 - 2255 (Vernon 1998). Chapter 2152 is the enabling act of the General Services Commission ("GSC"), the state agency charged with operating an effective and economical system for purchasing all goods and services for a state agency.

3. General Appropriation Act.⁽⁴⁾

First, look at the General Provisions ("riders") in Article IX. There are many Expenditure Limitations which directly affect state contracting. For example, Sec. 52 requires a state agency contracting for professional services using funds appropriated by this Act to "require the contractor to purchase products and materials produced in Texas when they are available at a comparable price and in a comparable period of time." Next, review the section of the Appropriation Act for the agency in question. There are agency-specific riders which can affect the contract project.

4. Tex. Gov't. Code Ch. 403 (Vernon 1990 & Supp.1998).

This statute establishes the warrant procedure through which the Comptroller of Public Accounts authorizes withdrawal of funds from the State's accounts and funds. This (or electronic transfer) is the procedure through which contractors are ultimately compensated by the State.

5. Tex. Gov't. Code Ch. 552 (Vernon 1994 & Supp. 1998).

The Texas Open Records Act ("TORA") governs how the agency handles documents and information in its possession. Vendors should know about the protection TORA provides against disclosure of trade secrets, commercial information and financial information. Of course, many vendors consult TORA to find ways to obtain their competi-tors' secret information, and it is also used to obtain agency information related to the purchasing process. It is also possible that a private contractor could be considered a "governmental body" under TORA, resulting in the availability of all or some of its records to the public. TORA is comprehensively covered in Thomas S. Leatherbury, The Texas Open Records Act, State Bar of Texas Prof. Dev. Program,. Advanced Administrative Law Course (1997), and in the materials prepared by this year's panelists on Hot Topics in Open Records.

6. Tex. Civ. Prac. & Rem. Code Ch. 107 (Vernon 1997 & Supp.1998).

This statute establishes a procedure for obtaining legislative approval to sue the state or a state agency. As described in Federal Sign, 951 S.W.2d 411, the availability of this remedy to an aggrieved government contractor satisfies the due course of law/due process requirements of the Texas and U.S. Constitutions. See H.C.R 118 from the 75th Legislature in 1997, an example of how the approval process works (or can work ⁽⁵⁾); see the Minton/Ravel paper for an alternative process.

B. State Agency Administrative Rules

1. Contracting Agency's Rule's

The agency substantive rules regarding the program in question should be reviewed, as well as any purchasing rules. Each agency is required by Tex. Gov't. Code � 2155.076 to adopt rules for resolving vendor protests on purchasing issues. The rules must be consistent with GSC's protest rules (1 Tex. Admin. Code � 111.3), and the rules must have standards for maintaining documentation during the purchasing process to be used if there is a protest. Section 2155.076 was enacted in 1997 by the 75th Legislature, and many agencies have not yet adopted protest procedures. The agency's general procedural rules should also be consulted, for issues such as delegation of authority to various staff members, and procedures for taking actions (e.g., filing documents with a Chief Clerk).

2. GSC Rules.

1 Tex. Admin. Code chapters 111 to 126, especially Ch. 113 which applies to GSC's Central Purchasing Division. Note that even if authority to conduct a particular purchase has been delegated from GSC to the agency, the agency still conduct it in accordance with GSC rules. 1 Tex. Admin. Code � 113.11(d) providing that GSC can withdraw delegation, and must report it to the Governor, LBB, etc, if the agency does not follow the GSC rules or laws related to delegated purchases.

3. Comptroller's Rules.

34 Tex. Admin. Code Ch. 5, Funds Management (Fiscal Affairs) applies to processing purchase vouchers for payment to vendors.

C. State Agency Policy and Practice

1. Memoranda of Understanding with Other Agencies

MOU's allocate responsibility between two agencies which have common responsibilities in a particular subject. For example, both TNRCC and DPS have responsibilities for parts of the State's motor vehicle emission inspection program. The two agencies have adopted an MOU which calls for coordination and consultation between them on I/M matters, including contracts let by each individual agency. ⁽⁶⁾

2. Internal Delegation Resolutions

Many agencies have internal documents authorizing individuals to take various actions relating to purchasing. Though not adopted as rules and not available through services which publish administrative laws, these documents can be useful in making prompt contact with the person who can effectively address your concern. A common scenario is that your client is familiar with the agency's "program people" who make the substantive decisions, but not familiar with the agency's purchasing staff; it is not uncommon that, the agency's "program people" are not familiar with the purchasing staff either.

3. Internet Websites

Many agencies have created web sites which make more available all (or some) of the internal policy documents, individual decisions, etc. which have plagued administrative lawyers. These sources of information have not entirely solved the problem (you still don't know if the document is accurate, current, or authoritative). However, at least one has a starting point. The GSC and the Comptroller have internet sites with a substantial amount of policy, practice, and guidance relating to state purchasing. Many contracting agencies have their own sites. A list of internet addresses is provided at the end of this paper. Be sure to read the disclaimers carefully.

D. Federal Law

Federal law can apply to state agency contract in two general ways. First, as in the Tejas situation, the state program can be subject to (or even required by) federal substantive law. This can affect the state agency's program options, and therefore its contract options. The State's need for EPA approval of its motor vehicle emission testing program resulted in an extended period of uncertainty for Tejas after the centralized testing program was cancelled, while the State of Texas negotiated with EPA about what type of program would be approvable. This impasse was not finally resolved until Congressional action forcing EPA to approve Texas' new program. A comparable scenario involved the federal government's consideration of a waiver relating to outsourcing of public assistance eligibility determinations (the TIES project). The Clinton administration mulled over the waiver request for quite some time before bowing to pressure from organized labor and denying it. Although Texas had not contracted with anyone to perform these services, extensive preliminary work by the State and the potential bidders was put on hold and ultimately sent back to the drawing board.

A second area of federal influence is when conditions are placed on a state or other grantee or subgrantee to which federal funds are granted. For example, U.S. Department of Agriculture rules at 7 CFR � 3016.36(a) require that when procuring products or services under a grant "[t]he State will ensure that every purchase order or other contract includes any clauses required by Federal statutes and executive orders and their implementing regulations." This type of federal rules (which are based on the "Common Rule" adopted by all federal agencies ⁽⁷⁾) do not require all grantees which are states to comply directly with federal procurement standards. States, for example, may follow the policies and procedures used for procurements from non-federal funds. However, the federal procurement standards do apply to "non-state" grantees and subgrantees. The general rule is that if federal money is involved, there are federal "strings" attached. It is prudent, therefore to identify the source of funds which will be used to compensate the contractor. If all or some of the money is federal, one should ascertain what federal requirements are part of the package.

E. Constitutional Law

One should be cognizant of the possible applicability of several constitutional provisions which can provide a cause of action for vendors, bidders, and contractors, including the prohibition on legislation which impairs contracts, the due process/due course of law requirements and the prohibition on takings without compensation. In addition, the constitutional separation of powers between the branches of government (and the anti-delegation doctrine) could come into play in privatization contracts delegating to private contractors powers which the constitution delegates to the legislative, executive or judicial branches of government.

IV. THE STATE OF TEXAS PURCHASING PROCESS

A. What Type of Proceeding is a Government Purchasing Action?

A state agency procurement is neither a rulemaking action under the APA, nor a contested case hearing. Therefore, the vast majority of APA procedural requirements do not apply directly. Although the contracting process is more akin to an adjudication than a rulemaking, there are important differences between the APA contested case requirements and the requirements applicable to contracting actions.

The general purchasing statutes and rules do not provide extensive, detailed procedural requirements. The most notable protections are the public opening of bids and the public availability of bid tabulations.⁽⁸⁾ In addition, the agency is required to document the reasons for its decision to award to a particular bidder.⁽⁹⁾

Tex. Gov't. Code � 2155.076(a), which requires agencies to adopt protest procedures, takes a small step in the direction of a mandatory process by requiring that the rules include "standards for maintaining documentation about the purchasing process to be used in the event of a protest." This requirement is certainly less stringent than the detailed scheme for creating a record in APA contested case hearings.

Most agencies flesh out these procedural requirements to some degree in their solicitation documents. It is common that bidders are prohibited from contacting decisionmakers at the agency once the solicitation is issued, outside of formal inquiry processes which require notice to all potential bidders who received copies of the solicitation.

This is similar, but not identical, to the ex parte prohibition in contested cases under Tex. Gov't. Code � 2001.061. One of the critical differences is that the decisionmakers who are subject to the restricted contact are not as clearly defined as they are in contested cases. Typically evaluation committees consist of mid-level staff members, and the traditional "decisionmakers" (governing body, Executive Director, Administrator) may have little or no involvement in the evaluation of bids.⁽¹⁰⁾

The difference between purchasing procedures and contested case procedures reflects a fundamental legal difference. The primary purpose of competitive bidding requirements is to ensure the taxpaying public gets the best value when a government agency purchases goods and services. Protecting the interests of vendors participating in the process runs a distant second.

This prioritization accounts for results like Urban Electric v. Brownwood School District, 852 S.W.2d 676 (Tex. App.--Eastland 1993), in which a losing bidder's (also the low bidder) suit for damages failed on the grounds that an award of damages "would be contrary to the public interest that the bidding laws were designed to protect."⁽¹¹⁾ This longstanding rationale conforms with Texas administrative law: the Legislature, by not explicitly making purchasing actions contested cases, has chosen not to provide all the APA procedural protections to vendors.

B. Who Runs the Government Purchasing Action?

The GSC is the state agency with primary authority over state agency purchasing.⁽¹²⁾ However, the general purchasing statutes and GSC rules allow GSC to delegate a large portion of state purchasing functions to the agencies. In addition, various enabling acts exempt certain purchases from the general purchasing statutes (e.g., Tex. Gov't. Code � 466.105, exempting contracts with the Texas Lottery Commission for lottery operations from Article 601b, the precodification citation of the general purchasing statutes).

A critical difference is that delegated purchases remain directly subject to the general purchasing statutes and GSC rules, whereas purchases exempted from the general statutes and rules are not. The Lottery Act, for example, contains its own requirements for procurement procedures,⁽¹³⁾ and the Lottery Commission has adopted its own procurement rules.⁽¹⁴⁾

1. Delegated and Exempt Purchases.

The GSC is authorized by Tex. Gov't. Code � 2155.131 to delegate purchasing functions to a state agency. The Legislature has directed GSC to focus its efforts on purchases and contracts involving "relatively large amounts of money."⁽¹⁵⁾ Categories of purchases which have been generally delegated include commodity purchases of goods less than $25,000 ⁽¹⁶⁾ and service purchases less than $100,000.⁽¹⁷⁾ Agencies may not break down large purchases into smaller purchases to meet the dollar limits for delegation.⁽¹⁸⁾ Agencies are required to develop a procurement plan and submit it to GSC, and report delegated purchasing activity.⁽¹⁹⁾

There are several exemptions for particular types of purchases and particular categories of purchaser in Tex. Gov't. Code Ch. 2155, subchapter C. Pay particular attention to the scope of the exemption, as there is wide variability within subchapter C. For example, certain purchases of medical equipment may be made by medical or dental units of government, but must be made in accordance with applicable provisions of the general purchasing statutes and GSC rules. Tex. Gov't. Code � 2155.136. In contrast, certain purchases by the Veterans' Land Board are exempted from the entire subtitle D.

2. Cooperative Purchasing.

Cooperative purchasing allows one entity to conduct the procurement process on behalf of another entity or multiple entities. This process works best where there are many similarly situated entities which purchase identical or very similar equipment. For example, local governments across the State routinely purchase motor vehicles, for police cars, staff cars, etc. Competitive bidding is required for such purchases. Cooperative purchasing allows one entity, such as GSC, to provide purchasing services including competitive bidding to any agency or local governments which choose to use the service. This is an efficient alternative to each local government running its own separate procurement, and also provides lower prices through volume discounts.

State agencies and institutions of higher education are authorized to make purchases through group purchasing plans which they run themselves. Tex. Gov't. Code � 2155.134. GSC also runs its own Cooperative Purchasing Plan, which is available to qualified entities including any political subdivision of the state, as well as mental health community centers and assistance organizations that receive state funds.⁽²⁰⁾ In addition, Tex. Gov't. Code � 791.025 allows a local government, including a council of governments, to perform purchasing functions for other local governments under an interlocal cooperation contract. This satisfies the local government's requirement to seek competitive bids.

3. Which Agency Staff Make Purchasing Decisions?

GSC rule 1 Tex. Admin. Code � 111.1 retains to the commissioners all authority "not delegated to the executive director." The delegations are to be made by the commissioners in an open meeting. The delegations are not published in the Texas Administrative Code. The best way to identify which powers have been delegated is to contact the agency's general counsel and/or executive director's office.

Most other agencies have comparable arrangements. It is common for contracting authority to be sub-delegated to staff members below the ED level, so the ED does not have to be involved with acquisitions of desks and legal pads.

This can create difficulties, however, when agency procurement personnel who typically conduct "routine" purchases become involved in a major outsourcing contract. Such contracts can have significant program and policy considerations. Conversely, the "program people" most familiar with the policy considerations often have little or no experience with the purchasing requirements. ⁽²¹⁾

To a vendor, it is worth the effort to obtain the delegation documents, and sort out which agency staff are involved. Don't put blind faith in the program staff to ensure all the right people are on the meeting list/distribution list, or that all necessary internal approvals are being obtained.

Finally, if a vendor receives a draft contract from a program staffer that has no indication the agency's purchasing and/or legal staff were involved, resist the impulse to sign it and begin work. Possible problems with the procurement procedure are likely to surface at the worst time -- after performance, and before payment.

C. How Can A Vendor Monitor Government Contract Opportunities?

There are several different ways a potential vendor can become aware of government contract opportunities in time to bid on them. First, there are specific requirements for publicizing particular types of state government solicitations. A vendor should become familiar with what the purchasing agency is required to do.

Second, there are on-line (internet) postings, including a comprehensive list just begun by the Texas Department of Economic Development (the "Electronic State Business Daily"). Third, there are lists of potential vendors, such as GSC's Centralized Master Bidders List ("CMBL"). Certain purchasing methods require direct notice to potential vendors on the CMBL.

Finally, basic market research; i.e., monitoring long range planning at the agency/agencies that conduct programs in your company's area of expertise, can get a vendor in "on the ground floor."

1. Mandatory Publicity Based on Purchasing Method.

State agencies soliciting bids under the contract purchase method must publish notice in a newspaper of general circulation in the state, no later than seven days before the bid is due.⁽²²⁾ If the agency uses the open market purchasing method, newspaper notice is not required.⁽²³⁾ Rather, the agency must publicize the solicitation through one of the following: direct mail, telephone, telegraph, facsimile, on-line electronic transmission, or posting on the electronic commerce network (note the disjunctive). This list of possible methods is required for competitive sealed proposals,⁽²⁴⁾ and requests for proposals for automated information systems.⁽²⁵⁾

Major consulting service contracts are required to have notice published twice in the Texas Register. First, an invitation to provide offers must be submitted for publication in the Register no later than 30 days before the contract is entered into.⁽²⁶⁾ Within 10 days after the contract is entered into the agency must submit for Register publication a notice of the contract.⁽²⁷⁾ Failure to comply with either of these requirements renders the contract void.⁽²⁸⁾

2. On-Line Postings.

The Electronic State Business Daily is mandated by Tex. Gov't. Code � 2155.074, and is subject to implementing rules adopted by Texas Department of Economic Development in July, 1998.⁽²⁹⁾ All state agency procurements greater than $25,000 must be posted on the Business Daily.⁽³⁰⁾

The agency may post either the entire solicitation package or a notice containing basic information about the solicitation.⁽³¹⁾ If the entire package is posted, the minimum posting period is 14 calendar days, and if a summary notice is posted, the minimum posting period is 21 calendar days.⁽³²⁾

This posting requirement applies regardless of the source of funds, and to procurements otherwise exempt from GSC authority and Subtitle D.⁽³³⁾ This posting is in addition to, not a substitute for, other notice requirements, although several purchasing methods specify this type of posting as an acceptable way to publicize a procurement.⁽³⁴⁾

3. Lists of Potential Vendors.

GSC is mandated to maintain the CMBL by Tex. Gov't. Code Ch. 2155, subchapter E, �� 2155.261 - .270, and has adopted implementing rules at 1 Tex. Admin. Code � 113.4. A vendor wishing to be listed on the CMBL must submit an application to GSC identifying the class and item codes of goods and services provided, along with a $100 fee.⁽³⁵⁾

A state agency making a purchase greater than $15,000 must solicit bids or proposals "from each eligible vendor on the CMBL that serves the agency's geographic region."⁽³⁶⁾ Individual agencies are discouraged from maintaining their own bidders lists, and strict conditions are placed on such lists.⁽³⁷⁾

Another GSC list which can yield state contract work is the Historically Underutilized Business ("HUB") list.⁽³⁸⁾ The HUB program is discussed in more detail at Section IV(D) of this paper. "The GSC and state agencies shall use the directory to solicit bids from HUBs for state purchasing and public works contracts."⁽³⁹⁾ Agencies are encouraged to provide contractors with the list of certified HUBs for subcontracting.⁽⁴⁰⁾ Vendors which can qualify as a HUB should pursue HUB certification by GSC under 1 Tex. Admin. Code � 111.17.

Another list which a qualified vendor should be placed on is the Qualified Information Systems Vendor ("QISV") list under Tex. Gov't. Code Ch. 2157, subchapter B, �� 2157.061 - .067 and 1 Tex. Admin. Code � 113.19(c). Vendors on the QISV list can contract for "automated information systems" using the catalogue purchase program.

The catalogue program has extremely streamlined procedural requirements, and state agencies are authorized to purchase directly from QISV's, with essentially no GSC oversight. Given the unbridled discretion allowed them under the catalogue purchase program, state agencies are increasingly selecting this purchase method. Accordingly, all potential vendors should consider applying for designation by GSC as a QISV.

D. Special Conditions Affecting Vendor Qualifications (HUBs, etc.)

Several different procurement laws add socioeconomic issues to the procurement process, essentially adding preferences for vendors of certain classifications. The most well known is the HUB program, which has been a subject of intense political discussion in Texas for the last several legislative sessions. There are also procedures, including debarment and suspension of potential bidders and "revolving door" restrictions on activities of former state employees, which discourage award of state contracts to particular categories of vendors.

1. HUB Program.

The key point about the HUB program is that it does not establish mandatory, rigid quotas for use of contractors which are HUBs. Rather, state agencies shall "make a good faith effort" to assist HUBs to achieve the "purchasing goal" of not less than 30 percent of the value of contracts awarded for goods, services and construction. Tex. Gov't Code �� 2161.181, .182. See also 1 Tex. Admin. Code � 111.13(b), a GSC rule establishing different percentage goals for more precise categories of purchases.

The tradeoff for using goals, not quotas, is a set of firm requirements that the goals be actively pursued, both by agencies in selecting contractors, and by contractors when selecting subcontractors. There are extensive requirements for documentation of efforts to increase HUB participation, as well as oversight by GSC, the State Auditor,and the LBB (which has the authority to revoke the GSC's delegation of purchasing authority to an agency which is not complying ⁽⁴¹⁾).

One consequence of intense political debate over the HUB program is that the text of the program's statutes and rules is not entirely clear or consistent. For example, the term "HUB" is defined at Tex. Gov't Code � 2161.001(2) to include various business organizations (51% of a corporation, 51% of a partnership, all of a sole proprietorship) owned by "socially disadvantaged persons." The General Appropriations Act, however, defines HUB in terms of "economically disadvantaged person." In defining these terms, both statutes include Black Americans, Hispanic Americans, women, Asian Pacific Americans and Native Americans, and other groups which have suffered the effects of discriminatory practices or other insidious circumstances over which they had no control.

In order to be certified as a HUB in Texas, a business must submit a certification application to the GSC.⁽⁴²⁾ Denial of a HUB certification application may be formally protested.⁽⁴³⁾ GSC has the authority to conduct compliance reviews of certified businesses, and can revoke the certification if a business no longer qualifies as a HUB.⁽⁴⁴⁾ The GSC maintains a statewide directory of certified HUBs.⁽⁴⁵⁾

State agencies are required to establish a written plan for use of HUBs in purchasing,⁽⁴⁶⁾ although GSC rules allow the agency to meet this obligation by adopting GSC's HUB rules. GSC's rules also list steps which a state agency can take as part of its good faith effort to meet or exceed the purchasing goals, and provide that implementing the listed procedures creates the presumption of good faith.⁽⁴⁷⁾ Agencies may also demonstrate good faith by documenting why the HUB purchasing goals are not appropriate for that agency. ⁽⁴⁸⁾

Agencies are required to include in their solicitation and contract documents (for projects worth more than $100,000) the requirement that the contractor make a good faith effort to award necessary subcontracts to HUBs.⁽⁴⁹⁾ The contractor's purchasing goals are the same as the agency's. GSC's rules for contractors list several steps, which, if taken, are presumed to be a "good faith effort." They include sending notice of available subcontracts to at least five certified HUBs which perform the appropriate work. 1 Tex. Admin. Code � 111.14(c)(3). The key to avoiding problems with the HUB program is to review the suggested good faith requirements and ensure that your HUB program satisfies them.

2. Debarment and Suspension Program.

The federal government has had a debarment and suspension program for many years, through which problem contractors are officially prohibited from participating in federal government contracts. In 1997, the Legislature enacted Tex. Gov't Code � 2155.077, authorizing GSC to bar a contractor from participating in state agency contracts, for reasons including substandard performance, material misrepresentations, and breaching a contract with the state or a state agency. GSC adopted 1 Tex. Admin. Code �� 113.100 - .102 to implement the statute. The GSC is authorized to remove a vendor's name from the CMBL for 3 months to a year for "repeated complaints against the vendor."⁽⁵⁰⁾ GSC can also debar a vendor (and its successors-in-interest) for a variety of performance problems, which can result in a one to three year prohibition on contracts with state agencies.⁽⁵¹⁾ The GSC allows vendors proposed for debarment to respond, "to ensure due process to vendors."⁽⁵²⁾

3. Preferences.

The general purchasing statutes, and GSC's implementing rules, establish several preferences.⁽⁵³⁾ They do not affect whether a vendor is qualified to bid, but rather provide the preferred vendor categories (or product categories) an advantage during the selection process. Some of the preferences are Texas resident bidders,⁽⁵⁴⁾ HUBs, persons with mental or physical disabilities, energy efficient products, recycled products and rubberized asphalt paving.

4. "Revolving Door" Laws.

Vendors who have hired former state employees should also be aware of the revolving door restrictions at Tex. Gov't Code � 572.054. These restrictions on the employee's activities after leaving the state apply to the person, so a vendor would not be disqualified. At the least, however, the vendor could face difficult staffing decisions. Section 572.054(b) restricts a former state employee from receiving compensation regarding any "particular matter" in which the person participated while a state employee. The Texas Ethics Commission ("TEC") issues advisory opinions interpreting � 572.054, and has issued several which focus on the meaning of "particular matter" in the contracting context. TEC has generally not given a broad interpretation to the "matter" subject to the prohibition.⁽⁵⁵⁾ GSC has adopted rules implementing revolving door restrictions in state contracting.⁽⁵⁶⁾ In addition, General Provision 52 of the 1997 General Appropriations Act prohibits an agency's use of appropriated funds for consulting, professional services or employment contracts with an individual previously employed by that agency within 12 months after the former employee's departure.

5. Political Patronage/Umbehr Decision.

The U.S. Supreme Court's decision in Board of County Commissioners, Wabaunsee County, Kansas v. Umbehr, 116 S. Ct. 2342 (1996) extended the doctrine of "unconstitutional conditions" to government contractors. The doctrine, which had long protected government employees from termination for exercising their First Amendment right to speak about political matters, was extended to government contractors. The Court reasoned there is not a difference of constitutional magnitude "between independent contractors and employees in this context," and "recognize[d] the right of independent contractors not to be terminated for exercising their First Amendment rights." 116 S. Ct., at 2352. The same reasoning would apply to initial contracting decisions, as well as renewal and termination.

E. What Purchasing Methods are Available?

There are several purchasing methods established by the general purchasing statutes. Section 2155.063 directs that acquisition of goods and services be accomplished by competitive bidding whenever possible, except as otherwise provided by subtitle D. The key variable on this issue is the type of product being purchased, as there are different purchasing methods available depending on whether the agency is buying commodities, consulting services, computers, etc.

1. Competitive Bidding/Contract Purchase Method.

The Contract Purchase method is set forth at Tex. Gov't Code �� 2156.001-.011 and GSC rules 1 Tex. Admin. Code �� 113.5, 113.6. This method involves agency preparation of detailed technical specifications as to the product sought. It is also known as the IFB process, as the agency solicitation document is frequently titled "Invitation for Bids." The key feature is that the agency's decision is based on which of the responsive bidders offers the lowest price. Competitive bidding is the preferred method, to be used whenever possible, except for emergency purchases, proprietary or sole source purchases, or competitive sealed proposals. 1 Tex. Admin. Code � 113.1(b).

2. Competitive Sealed Proposals.

This method is governed by Tex. Gov't Code �� 2156.121 - .127, and GSC rules at 1 Tex. Admin. Code � 113.7. If the GSC or purchasing agency determines that competitive bidding is not practical or disadvantageous to the state, it may use competitive sealed proposals. GSC rule 1 Tex. Admin. Code � 113.7(a)-(d) establishes criteria and a procedure for making the determination.

Essentially, if the product criteria cannot be precisely and definitively established in technical specifications, such that price alone can be the sole, decisive criteria, competitive sealed proposals can be used. This method is commonly known as the RFP method, as the agency solicitation document is called a "Request for Proposal."⁽⁵⁷⁾ The key feature of this method are the evaluation criteria which must be in the RFP, to be used by the agency to measure how well a proposal meets desired performance requirements.⁽⁵⁸⁾ The purchasing agency must establish an evaluation plan, and evaluate the proposals by objective norms whenever possible.⁽⁵⁹⁾

Frequently, agencies use evaluation committees, in which several persons "grade" the proposals. This method also allows negotiations with proposers after submission, but before selection of the winner by the agency (although all "acceptable" proposers must be given a chance to discuss and revise their proposals ⁽⁶⁰⁾).

3. Open Market Purchase Method.

This method is governed by Tex. Gov't Code �� 2156.061 - .066, and allows the purchasing agency to acquire goods and services on the open market, if the GSC determines an open market purchase is the "most effective" method. The agency must, if possible, obtain three competitive bids.⁽⁶¹⁾ The agency has several options for seeking bids, and is not required to publish a newspaper advertisement.⁽⁶²⁾

4. Automated Information Systems.

Chapter 2157 creates purchasing methods for a particular category of products, "automated information systems."⁽⁶³⁾ The preferred method is the catalogue purchase method in Tex. Gov't Code � 2157.061-.067 and GSC rule 1 Tex. Admin. Code � 113.19.⁽⁶⁴⁾

The catalogue method allows the agency to purchase directly from a GSC-approved vendor (a "QISV," for Qualified Information Systems Vendor ⁽⁶⁵⁾), without any competitive bidding process.

All products in the QISV's "catalogue" must comply with applicable rules promulgated by the Department of Information Resources.⁽⁶⁶⁾ Chapter 2157 also allows a competitive sealed proposal method for acquisitions of automated information systems or telecommunications products, if the purchasing agency determines competitive bidding is not practical or is disadvantageous to the state.⁽⁶⁷⁾

5. State Building Construction Projects and Acquisition of Existing Buildings.

Chapter 2166 governs most state building projects, which must be authorized by the Legislature.⁽⁶⁸⁾ GSC is required to work with the "using agency" (to which the funds for construction are appropriated) on the working plans and specifications.

GSC advertises for bids and proposals in a newspaper and in the Texas Register, and the contract is "awarded to the qualified bidder making the lowest and best bid in accordance with the law on awarding a state contract."⁽⁶⁹⁾

6. Leasing Space to State Agencies.

Chapter 2167 allows GSC to lease space for state agencies if it has determined state owned space is not available.⁽⁷⁰⁾ GSC selects the lessor/space through competitive bidding ⁽⁷¹⁾, or, if competitive bidding is nor practical or disadvantageous to the state, through competitive sealed proposals.⁽⁷²⁾

7. Telecommunications Services.

GSC is designated the state agency responsible for obtaining telecommunication services.⁽⁷³⁾ GSC may use any of the purchase methods in chapters 2155, 2156, 2157, and 2158 to purchase, lease, or lease-purchase telecommunications equipment. The rules for GSC's Telecommunications Services Division (which runs the State's TEX-AN network) are at 1 Tex. Admin. Code ch. 121.

8. State Travel and Fleet Services.

GSC is responsible for obtaining the state's travel services under Chapter 2171. GSC rules establish a system for travel agent services which is roughly comparable to the catalogue purchase system for computer services.⁽⁷⁴⁾ GSC also manages the state vehicle fleet, and the applicable statue and rules include the alternative fuel program to reduce vehicle emissions.⁽⁷⁵⁾

9. Highway Projects.

The Texas Department of Transportation ("TxDOT"), rather than GSC, manages one of the largest segments of State contracts, highway construction contracts. The applicable law is found in Tex. Trans. Code ch. 223, and TxDOT rules at 43 Tex. Admin. Code ch. 9.

This category of contracting is strongly affected by federal money. Recall the extensive political debate in Washington when the federal Highway Bill was reenacted this year, and the many conditions and requirements which were added. Any vendor in this area should become familiar with the federal statute, as well as the implementing regulations by federal agencies.

10. Consulting and Professional Services Contracts.

Agencies may contract with a consultant if there is a substantial need for his services, and the agency cannot provide the services itself, or through a contract with another state agency.⁽⁷⁶⁾ Any contract over $15,000 is defined as a "major consulting services contract," and must go through procedures that include prior notice to the LBB and Governor's Office of Planning and Budget, obtaining a finding from the Governor's Office of Planning and Budget that the contract is necessary, publication in the Texas Register before entering into the contract, and publication in the Texas Register after entering into the contract.⁽⁷⁷⁾ Major consulting contracts are subject to oversight by many officials, including GSC, the Governor's Office of Planning and Budget, the LBB and the Comptroller. The Comptroller has adopted rules to implement its portion of this program, at 34 Tex. Admin. Code � 5.44.

F. The Bidding/Evaluation/Award Process (and Protests)

1. Nature of the Process.

There is a split in authority regarding whether a bidder (or potential bidder) has an interest which is protected by the due process and due course of law provisions of the U.S. and Texas Constitutions.⁽⁷⁸⁾ Regardless of whether procedural protections are constitutionally mandated, some degree of procedural requirements are imposed by applicable statutes.

Most agency solicitation documents add more procedural requirements. These requirements track the fundamental elements of due process: (i) notice (publicity regarding the solicitation, description of the products sought and the basis on which the decision will be made); (ii) impartial decisionmakers,⁽⁷⁹⁾ (iii) a decision based on a record (a bidder's contacts with decisionmakers are typically restricted to the formal communications described in the solicitation document); (iv) a written explanation of the agency decision; and (v) an opportunity for review.

A potential bidder should scrutinize all of the applicable procedures to ensure it does not violate any of them (which can result in disqualification) and that it obtains maximum value from the authorized opportunities to communicate with the agency.

2. Influencing the Content of the Solicitation.

The best time for a potential bidder to influence the content of a solicitation document is before it is formally issued, when there are no legal restrictions on such contact. These contacts can yield valuable insights about the agency's expectations, and pave the way for a successful long term working relationship. Many agencies try to restrict such contacts, instead steering potential bidders to a pre-bid conference to which known potential bidders are invited.

After the solicitation is issued, there are generally two opportunities to influence it. First, many protest rules ⁽⁸⁰⁾ allow protest of the solicitation, not just the award. If the solicitation is flawed, a potential bidder should consider a protest, and a request that the agency exercise its discretion to suspend the solicitation pending resolution of the matter.⁽⁸¹⁾ This action might appear drastic, but if there is potential for the issue to affect the outcome, final resolution at an early point could avoid being sent back to square one much later in the game.

The second opportunity to affect the solicitation after issuance is the inquiry process. Many solicitations allow potential bidders to submit questions and suggested changes to the agency, which responds to them in writing. All potential bidders are typically sent the responses to all inquiries, as well as any amendments of the solicitation documents.

The deadlines for initial protests and bidder inquiries are frequently very short (e.g., 10 days), so potential bidders should prepare as best they can. Carefully monitor the development and issuance schedule, promptly distribute the solicitation to members of your team, and be prepared to act quickly. Consider also that amendments of the solicitation (whether as a result of inquiries or by the agency sua sponte) likely create another entire round of participation opportunities. In other words, you may be able to send in more inquiries, and file another protest.

3. Bid/Proposal Preparation.

It cannot be overemphasized that Texans want to run Texas. Even after countless, vivid demonstrations of this principle, out-of-state vendors still come into this state and tell Texas agencies "You should do it the way we did it in New Jersey." The Corollary of this principle is to give the agency what it asked for in the solicitation. First, read the instructions very carefully, and make sure your bid is formatted and organized as required by the solicitation, and any applicable laws. In particular, study GSC rule 1 Tex. Admin. Code � 113.5(a). Make sure the bid contains all required information, and doesn't contain information that is not requested. Bids containing a material failure to comply with advertised specifications must be rejected,⁽⁸²⁾ although "minor technicalities" can be waived by the purchasing agency.⁽⁸³⁾

Another bid preparation issue to carefully consider is trade secrets. First, determine whether submission of trade secret or other proprietary information to the agency is necessary or beneficial. If so, become familiar with the available TORA protection for trade secrets and other confidential information, the Attorney General decision process under TORA and your opportunities to participate in that process (plus your opportunities for judicial action, if necessary following the AG decision process). Also become familiar with the purchasing agency's practices regarding handling of information labeled confidential, their practice regarding TORA requests, especially whether/how/when they notify a the submitter of the confidential information that a request for the information has been submitted. Finally, monitor the TORA process closely, and never assume appropriate steps are being taken by the agency or the AG to protect your confidential information.

4. Selection Criteria.

Several different selection criteria are set forth in the general purchasing statutes and GSC rules, and it is difficult to reconcile the different provisions. As to competitive bidding, � 2156.007(a) requires the purchasing agency to award the contract to the "bidder offering the best value for the state ⁽⁸⁴⁾ while conforming to the specifications."

Section 2156.007(d) directs the purchasing agency to consider, in addition to price, a list of factors including quality of goods, performance history and ability to perform. Of course, these subjective criteria are somewhat inconsistent with the objectivity that is one of the benefits of competitive bidding. For example, assume Bidder A proposes to provide products that just barely meet the specifications, and Bidder B proposes products of a quality that significantly exceeds the specifications at a cost that is slightly above Bidder A's cost. Can the agency rely on � 2156.007(d)(1)("quality of the goods") to determine Bidder B is the better value? Section 2155.074, added by the Legislature in 1997 may resolve this issue. It provides that, in determining "best value," purchase price and meeting specifications are the "most important considerations." Section 2155.074(b) allows the purchasing agency to consider other factors (including product quality and performance history) as long as the other factors that will be considered are (i) approved by GSC for purchases greater than $100,000; and (ii) specified in the request for bids (competitive bidding) or request for proposal (competitive sealed proposals) under � 2155.075.⁽⁸⁵⁾

Lack of certainty about what criteria will be considered to determine "best value" in any particular procurement action could be addressed through the bidders conference/inquiry/protest procedures, before bids are prepared and submitted. Early clarification would likely serve the interest of most, if not all, of the participants. For example, an agency which did not get the requisite GSC approval and include the criteria in the solicitation document might find itself unable to effectively consider all of the factors relating to "best value."

Additional criteria have been specified for purchases of "automated information systems" under Chapter 2157.⁽⁸⁶⁾ Section 2157.003 defines "best value" for these systems, incorporating by reference the criteria in �� 2155.074 and 2155.075, and adding factors including compatibility to exchange with existing data, technical support requirements and compliance with DIR rules. Section 2157.063 authorizes an agency to purchase directly from a QISV if the product is the best value and "in the state's best interest." The latter determination is made by considering factors such as installation and hardware costs and "overall life-cycle cost of the system or equipment."

5. Selection Procedure.

In a competitive bidding (IFB) process, there is a public bid opening of the bids, frequently one hour after the deadline for submission of sealed bids.⁽⁸⁷⁾ The bids are tabulated, and the contract is awarded under the criteria described above. Bid tabulation documents are available for public inspection.⁽⁸⁸⁾ The evaluation and award procedure is covered by GSC rules at 1 Tex. Admin. Code � 113.6.

The procedure for competitive sealed proposals (RFPs) involves a public opening of the proposals, but only the names of the proposers are revealed at that time.⁽⁸⁹⁾ The proposals are then evaluated, frequently by an evaluation team.⁽⁹⁰⁾ The agency has the option of either awarding the contract after its internal evaluation, or "discussing" (i.e., clarifying, modifying, negotiating) the proposals with any of the offerors.⁽⁹¹⁾

If conducted, discussions must allow any acceptable proposer an equal opportunity to discuss its proposal. After negotiations, a deadline is set for submission of the best and final offer.⁽⁹²⁾ The agency has the option of refusing all offers.

Negotiations of additional contract terms and conditions are also allowed under the catalogue purchase method.⁽⁹³⁾ GSC has issued a "Best Practice" Guideline for catalogue purchases directing that "each vendor should be provided with the same information." GSC has also issued guidance on "Negotiations and Catalogue Purchases" which says "all negotiations should be allowed with all qualified vendors if one or more is given the opp[o]rtunity to change their offer."

6. Protest Procedure.

Protest rules (required by � 2155.076 to be consistent with GSC protest rules at 1 Tex. Admin. Code � 111.3) allow a "actual or prospective bidder" to file a protest within 10 working days after the aggrieved person knows, or should have known, of the action complained of. There have been questions about whether a vendor which does not submit a bid or proposal has standing to protest, or whether a vendor whose expected role was subcontractor has standing. However, the broad scope of the GSC rules appears to settle such questions in favor of standing.

The short period for filing a protest presents a procedural dilemma. Despite the requirements that agencies document the procurement process, it is difficult or impossible to obtain all of the documentation within 10 days. It may be necessary to file an initial protest within 10 days based on what is known to that time, and file supplemental protests as additional information becomes known.

Protests under GSC rules must be sworn, contain the information listed in 1 Tex. Admin. Code � 111.3(c), and must be served on other identifiable interested parties. The appropriate GSC division director considers the protest, and can solicit written responses to the protest from other interested parties. The director is required to issue a written determination on the protest, and has the authority to order the contract void, or take other remedial action.⁽⁹⁴⁾ The director's decision can be appealed to the GSC executive director, who has the discretion to refer the matter to the full Commission.⁽⁹⁵⁾

Aggrieved parties should pay particular attention to the performance schedule when evaluating protest/litigation strategy. A stay of performance under 1 Tex. Admin. Code � 111.3(b) will allow the protest to be considered without altering the equities of the situation. However, if the performance is not stayed, a protestor should consider judicial remedies which can ensure the status quo is maintained until the claim is resolved, and the vendor's chances of ultimately getting the work are not impaired.

V. CONTRACT TERMS

Circumstances often conspire to cause vendors to give short shrift to negotiating final contract terms. The primary focus is always on getting the work, and after the award, it is easy to shift the focus to performance. Avoid this trap by planning ahead, getting copies of recent similar contracts involving the agency, scrutinizing any contract terms which are in the solicitation document, and becoming familiar with the issues which can/should be cleared up before the contract is signed.

A. Source of Contract Terms

With some exceptions, the contract terms are not mandated by statute and rule.⁽⁹⁶⁾ Therefore, the terms can be negotiated by the parties, subject to a substantial caveat concerning terms which are characterized as non-negotiable in the solicitation document. The contracting agency typically starts the process by including contract terms in the solicitation document. Even when there are opportunities for negotiation of final contract terms after award, the parties should avoid major changes from the solicitation document. Such changes can provide a basis for challenging the procurement, on the grounds that the project as modified did not go through competitive bidding.

Frequently, the final contract incorporates by reference the agency's solicitation document and the vendor's bid or proposal, and establishes which document controls in the event of a conflict. Be sure to review all documents which are incorporated by reference into the contract, and make sure the entire contract is circulated to everyone who will be involved with it.

The following contract terms warrant special attention.

B. Scope of Work

Clarity is essential, of course. The technical specifications for many state agency contracts are developed by program people, who may not be as familiar with writing for legal clarity as their counterparts in the private sector. Ideally, ambiguities on this issue will be worked out through the pre-bid conference/inquiry/ process when the solicitation is first issued. Contract negotiation presents another, final chance to resolve issues here.

C. General Government Provisions

The potential applicability of the Open Records Act ("TORA"), Open Meetings Act and the entire body of laws that govern state agencies should be carefully considered. There are some who assert that a government contractor should be subject to these laws "in the same way" a state agency is, and there has been activity in this area in the last several legislative sessions. Private contractors are not yet subjected to the entire body of general government law. However, the project will proceed more smoothly if both parties are aware of the effect, if any, of these laws, and reach a mutual understanding of how the purposes served by these laws (oversight and accountability) will be achieved.

As to TORA, a contractor must understand the public information status of any information submitted to the agency. Consequently, if ten boxes of information is submitted to the agency as part of the agency's contract oversight, it is public information subject to disclosure. On the other hand, if the agency staff goes to the contractor's office and reviews the information there without making copies, the ten boxes are not public information (although the agency staffer's notes and investigation reports would be public information).

Vendors should also consider TORA � 552.003(1)(A)(x), which includes in the definition of "governmental body" the part of "an organization, corporation, commission, committee, institution, or agency that is supported in whole or in part by public funds." Judicial interpretation and AG opinions on this provision establish that "typical" government contractors are not intended to be considered "governmental bodies" subject to TORA.⁽⁹⁷⁾ A distinction is made between contracts requiring a measurable amount of service for a certain amount of money (not a "governmental body") vs. contracts in which the vendor receives general support from the agency ("governmental body"). A vendor, especially where there is necessary generality in the description of deliverables, should ensure that the contract clearly negatives any suggestion of "general government support."

The Open Meetings Act ("TOMA") definition of "governmental body" does not yet include a provision like � 552.003(1)(A)(x), but a vendor may wish to request a contract provision memorializing its authority to conduct business without TOMA's requirements on official deliberations.⁽⁹⁸⁾

Another general government provision that contractors should consider is official immunity, which generally protects government employees from personal liability for discretionary decisions made in the course of their official duties. For example, if a TNRCC employee approves a remediation plan for a leaking gasoline tank, and the implementation of the plan results in property damages, the agency employee is immune from personal liability. If a private contractor is making a discretionary decision, official immunity would likely not protect him. One answer is to insure against such losses. The point is that contractors, especially those making discretionary decisions, should independently evaluate their insurance needs.

D. Intellectual Property Issues

General Provision 58 in the 1997 General Appropriations Act prohibits state agencies from spending appropriated funds for research unless the agency has adopted and filed with the LBB a policy which establishes and protects the state's property rights with respect to patentable products, processes or ideas that might result from the research. Consequently, agency contract negotiators have little flexibility when a vendor insists on ownership of patents which result from the project. One option is a contract provision granting the vendor rights to use the products, processes or ideas. This preserves the state's property rights.

As with any contract involving intellectual property, the vendor should thoroughly evaluate all aspects of the licensing issues, including scheduling and budgeting for obtaining any licenses necessary to perform and reconciling the terms of any licenses with the requirements of the contract.

E. Changes/Amendments

A fundamental difference between private contracts and government contracts is in the area of changes. In private contracts it is generally possible to restrict the scope of the changes. Government, however, generally cannot by contract restrict its sovereign authority to govern. As discussed in detail in the Winstar decision,⁽⁹⁹⁾ the "reserved powers" doctrine holds that "a state government may not contract away an essential element of its sovereignty."⁽¹⁰⁰⁾

The reserved powers doctrine, and its relation to the constitutional restrictions on legislation that impairs contracts, is at the heart of the controversy described in the paper by Steve Ravel and Roy Minton, Tejas Litigation: How to Sue the State and Win Under a Privatization Contract. The cold, hard fact is that a vendor cannot generally "lock in" the state agency to run the project as described in its solicitation for the entire term of the contract (or to run the project at all). When this fact is coupled with a government contractor's limited access to the Texas judicial system, it becomes apparent that a vendor must make an extra effort to obtain contractual provisions which adequately address changes. Vendors should consider a nonjudicial procedure (arbitration, mediation, contested case hearing) that enables the vendor to protect their interests. For example, if the legislature cancels the most profitable element of a contract, will the vendor be compelled to perform the remaining elements, even if it loses money doing so? Will the vendor have an opportunity to terminate without default in that case? Will the vendor have an opportunity to renegotiate overall price? A wide range of changes can alter the project, and it is not possible to anticipate every one. The vendor should ensure it has authority to compel a process to amend the contract if changes occur (rather than depending on mutual agreement, or unilateral action by the state), and that the procedure triggered by such changes can produce effective relief.

F. Early Termination

Vendors should fine tune the triggers for early termination by the state agency. Termination for cause (default) provisions should be narrowly drafted. Vendors should consider a mandatory notice of deficiency and an opportunity to cure process. If necessary, this process could be limited to particular grounds for termination for cause. Vendors should consider requesting comparable procedures for terminations for convenience.

G. Transition Issues

These issues are especially important with ongoing programs, for which the agency enters into periodic, back-to-back contracts. At the end of the contract's term, the vendor will have to transition, either back to the agency or to a new contractor. There will be issues including equipment, records, ongoing projects, and communication and other obligations after the transition date. The best approach here is to think through the transition issues ahead of time as much as possible, and consider transition due to early termination as well as scheduled termination.

VI. CONTRACT PERFORMANCE

A. Agency Oversight

Agency oversight of a contractor's activities while performing the contract ranges from minimal (inspection of the products delivered) to extensive (monthly activity reports, internal and external financial and performance audits and premises inspections for major privatization contracts). Once again, the level of oversight is primarily determined by project-specific requirements established in the solicitation document and the contract itself. There are, however, some general requirements.

The most critical step in the oversight process is the certification by the state agency that the goods or services were received in accordance with the contract under which they were purchased.⁽¹⁰¹⁾ This is the first step in getting paid, discussed below. As the subsequent steps cannot occur unless the agency certifies the contractor has performed, and the agency's employees are prohibited from submitting purchase documents to the Comptroller if the employee has "any doubt about its legality or propriety,"⁽¹⁰²⁾ vendors have every incentive to ensure the agency is satisfied with the products delivered.

Vendor's should also be aware of the State Auditor, a legislative agency with broad authority to "conduct an audit or investigation of any entity receiving funds from the state."⁽¹⁰³⁾ The State Auditor's powers include access to all of the books, accounts, confidential or unconfidential reports and other records in any entity subject to audit.⁽¹⁰⁴⁾ The State Auditor can also require the assistance of the audited entity's employees, and can issue subpoenas for witnesses and documents.⁽¹⁰⁵⁾ A comparably broad audit requirement is provided in the common rule, generally applicable to contracts funded with federal funds.⁽¹⁰⁶⁾

B. Payment

A comprehensive statutory and regulatory process governs payments to vendors under contracts with state agencies. The key players are the Comptroller, the purchasing agency, and GSC. The applicable statutes are Tex. Gov't Code �� 2155.381, .382; Tex. Gov't Code ch. 2251; and Tex. Gov't Code ch. 403. The applicable GSC rules are at 1 Tex. Admin. Code � 113.15 and the Comptroller's rules are at 34 Tex. Admin. Code � 5.51.

The first step in the payment process is the vendor's submission of a two part invoice to the purchasing agency.⁽¹⁰⁷⁾ The purchasing agency reviews the invoice, and if approved, submits it to the Comptroller and GSC using the state's USAS ("Uniform Statewide Accounting System"), including a properly executed purchase voucher certifying that the goods or services were received.⁽¹⁰⁸⁾ After audit, as applicable, by GSC and the Comptroller, the Comptroller transmits payment (either electronically to the vendor's bank, or by a warrant sent to the purchasing agency or to the vendor ⁽¹⁰⁹⁾).

Under Section 2151.021 payment is late if not made within 30 days of receipt of the invoice by the purchasing agency (or performance, if later). Late payments accrue interest at the rate of 1% per month, payable by the purchasing agency.⁽¹¹⁰⁾ Contractors are required to pay subcontractors within 10 days of receipt of payment.⁽¹¹¹⁾

VII. MAJOR OUTSOURCING/PRIVATIZATION PROJECTS

Major outsourcing or privatization projects, such as the centralized vehicle testing program, the operation of the State lottery, or the eligibility determinations for human services programs, present issues beyond the routine government contract. The distinction between these terms is as follows:

"Outsourcing--the strategic use of outside (public or private) resources to perform functions and services traditionally provided by internal staff (e.g., support functions); this can include limited vendor assistance with the performance of internal support functions by agency staff (e.g., contracted internal audits, technology acquisition assistance and planning)
Contracting out--providing public services through private sources that (usually) does not involve the delegation of discretionary governmental authority (e.g., the purchase of health care services for recipient of public assistance)
Privatization--the complete delegation of public authority to a private contractor for specified services with few public controls."

Steve Aragon, Privatization of Government Services: Tips from an Alleged Privateer, Travis County Bar Association Administrative Law Section, 12th Annual Advanced Administrative Law Seminar (1998).

The first unique issue is a matter of procedure. Most of the large projects are excluded from the general purchasing statutes by the applicable enabling legislation. Although GSC is available for consultation, the purchasing agency is thrust into the breach to develop the procurement procedure for the "biggest state contract ever." Second, privatization projects, in which functions traditionally performed by government are contracted to private parties, raise constitutional questions about whether the "anti-delegation" doctrine has been violated. Third, transfer of responsibilities (and funding) from a state agency to a private entity will trigger a strong response from organized labor, possibly resulting in political and judicial activities.

A. Anti-Delegation Doctrine

The delegation doctrine, which is based on the constitutional grant of government powers and separation of powers, is rarely a problem for delegations of legislative power to administrative agencies. Recently, the Texas Supreme Court relied on the doctrine to strike down a legislative delegation to a "private" entity. Texas Boll Weevil Eradication Foundation, Inc. v. Lewellen, 952 S.W.2d 454 (Tex. 1997). Although the delegation was by legislation, not by contract, the majority's rationale would apply as well to contracts under which traditionally governmental functions are performed by the private sector. The Court first thoroughly discussed the anti-delegation doctrine in the entirely governmental context. The Court then emphasized the complexity and "troubling constitutional issues" presented by delegations to a private entity. After concluding the Foundation was a private entity, the Court surveyed the possible criteria for determining whether a delegation to a private entity is constitutional. The Court established an eight-part test, and applying it to the Foundation, held the delegation to be unconstitutional. The criteria included whether the delegation was narrow in extent, duration and subject matter; whether the Legislature has provided sufficient standards; whether the Foundation's actions are reviewable by state government; and whether the Foundation was making rules, or also applying them to particular individuals. Justice Cornyn, joined by three other justices, wrote a vigorous dissent in which he emphasized precedent that focussed on the presence of proper standards and oversight by the delegating authority. Justice Cornyn's dissent cited many longstanding delegations which might not pass under the majority's eight-part test, as well as the uncertain fate of delegations-to-come, such as "school choice" and private prisons. There will likely be opportunities for the Supreme Court to further refine the application of the anti-delegation doctrine to private contracts.

B. Council on Competitive Government

Many of the major privatization projects to date have involved new projects, such as the State Lottery, in which the state was presented with the up-front question of whether to add new state employees to handle a project, or to have the project handled by the private sector from the beginning. The Lottery Commission is a perfect example of this process, as a relatively small agency staff created and now manages an operation which adds billions of dollars to the state's budget.

The Council on Competitive Government ("Council") was created by the Legislature in 1995, and directed to extend this type of efficiency to activities already being performed by state agencies. Tex. Gov't Code � 2162.102 requires the Council to "identify commercially available services being performed by state agencies and study the services to determine if they may be better provided by selecting the service providers through competition with other state agency providers of the same services or private commercial services." If the Council makes this determination, it can require the agency in question to "go through any process, including competitive bidding, developed by the council." � 2162.102(b). The statute requires the Council to award the contract to the bidder which "presents the best and most reasonable bid, which is not necessarily the lowest bid."⁽¹¹²⁾ The Council's contracts are expressly exempted from another state law limiting or regulating state purchasing.⁽¹¹³⁾ The Council has promulgated rules at 1 Tex. Admin. Code ch. 401. Proposers are required to describe their staffing patterns and benefit packages, including health insurance, retirement, and worker's compensation insurance, as well as a "detailed statement explaining how they will meet the requirements of the contract."⁽¹¹⁴⁾ The Council's rules defer most of the details of the selection process to the solicitation document.⁽¹¹⁵⁾

One of the Council's most visible efforts to date is the TIES project, involving a proposed competition to provide eligibility determinations for several human services programs. This program was aggressively opposed by organized labor, on behalf of state employees whose jobs could potentially be eliminated. Labor ultimately derailed the project by obtaining a ruling from the Clinton administration that would have precluded use of private workers for certain functions. It has been reported that the Council and the Health and Human Services Commission are restructuring the project.

When projects previously performed by state employees are outsourced or privatized, there will likely be disgruntled, terminated employees (even though many are in fact hired by the private contractor because of their experience and expertise). Contractors in this circumstance should anticipate this litigation, and ensure as best they can through contract provisions that their exposure is minimized, and that the litigation does not disrupt performance.

INTERNET WEBSITES RELATING TO STATE PURCHASING

General Services Commission
Central Services Building
1711 San Jacinto
P. O. Box 13047
Austin, Texas 78711-3047
512/463-3035
http://www.gsc.state.tx.us
Texas State Department of Economic Development
Electronic State Business Daily
Stephen F. Austin Building
1700 N. Congress
P. O. Box 12728
Austin, Texas 78711-2728
512/936-0100

http://www.texas-one.org
Comptroller of Public Accounts
Lyndon B. Johnson Building
111 E. 17th Street
P. O. Box 13528
Austin, Texas 78711-3528
512/463-4600
800/252-5555
512/475-0352 facsimile
http://window.state.tx.us

FOOTNOTES

1. ABA Section of Public Contract Law, Government Contract Law: The Deskbook for Procurement Professionals (1995), p. 4.

2. Contracts with federal agencies are subject to a comprehensive set of laws, including the federal Property and Administrative Services Act of 1949, 41 U.S.C. �� 251-260, and the Federal Acquisition Regulations (FAR), 48 CFR chapter 1.

3. See Tex. Local Gov't. Code Ch. 252 (Vernon 1998), Purchasing and Contracting Authority of Municipalities; Tex. Local Gov't Code Ch. 271 (Vernon 1998), Purchasing and Contracting Authority of Municipalities, Counties and Certain Other Local Governments.

4. General Appropriations Act, 75th Leg., R.S., ch. 1452. This is the Appropriations Act passed in 1997, effective September 1, 1997, providing appropriations for fiscal year 1998 (September 1, 1997 through August 31, 1998) and FY 1999 (September 1, 1998 through August 31, 1999).

5. There is ample evidence that the Chapter 107 process does not always work, and, from a vendor's perspective, frequently does not work. Justice Enoch's dissent in Federal Sign cites the Texas House of Representatives, Interim Report to the 75th Legislature 9 (1996), which reported that only six percent of the requests to sue in the preceding 8 years had been granted. It is essential to communicate to a potential government contractor that the litigation alternative which is routinely available in other jurisdictions is (1) not automatically a remedy in Texas, and (2) is run through a legislative (i.e., political) process. Considerable attention has been paid to this issue in recent years. See James E. Cousar, Sovereign Immunity After Federal Sign v. Texas Southern University, State Bar of Texas Prof. Dev. Program. Advanced Administrative Law Course (1997), and change in this area of the law is possible. Government contractors and their counsel should monitor, and participate in, future developments.

6. 30 Tex. Admin. Code � 7.110.

7. 53 Fed. Reg. 8033 (Mar. 11, 1988).

8. Tex. Gov't. Code � 2156.005; Tex. Admin. Code � 113.5(b).

9. Tex. Gov't. Code �� 2156.009 and 2156.125(d); Tex. Admin. Code � 113.7(n).

10. In one matter an inquiry was made seeking the identity of the evaluation committee, so the potential bidder could know who not to communicate with. The agency declined to identify them on the theory that doing so would increase the chances of improper communication, increasing the chances of inadvertent improper communication.

11. The Court cited James L. Isham, Annotation, Public Contracts: Low Bidder's Monetary Relief Against State or Local Agency for Nonaward of Contract, 65 A.L.R.4th 93 at 104 (1988). "Although a public contractor whose low bid is wrongfully rejected by a government entity is often held to have standing to prosecute an action for injunction, mandamus, or declaratory judgment [citing 64 Am Jr 2d, Public Works and Contracts �� 87-89], it is less frequently held that there is a remedy for damages in such cases, the basic reasoning being that while equitable, extraordinary, or declarative relief may serve the public interest by preventing the award and execution of a contract for an excessive amount, permitting damages in such cases serves the bidder's interest alone, and is contrary to the public interest the competitive bidding laws were designed to protect, further burdening a treasury already injured by paying too high a price for the goods or services." Id, at 99. This "double payment" rationale presumes the first contractor is paid (or recovers damages) for the initial performance, or partial performance. This assumption is not necessarily valid under Texas law.

12. Tex. Gov't. Code � 2155.061.

13. Tex. Gov't Code � 466.101.

14. 16 Tex. Admin. Code � 401.101.

15. Tex. Gov't. Code � 2155.002.

16. 1 Tex. Admin. Code � 113.11(a)(1).

17. 1 Tex. Admin. Code � 113.11(a)(4).

18. 1 Tex. Admin. Code � 113.11(c)(5).

19. 1 Tex. Admin. Code � 113.11(h) and (j).

20. 1 Tex. Admin. Code �� 113.81 - .88.

21. One agency's program staff, after several confrontations with a GSC staffer, solved the problem by hiring him.

22. Tex. Gov't. Code � 2156.002.

23. Tex. Gov't Code � 2156.061.

24. Tex. Gov't Code � 2156.122.

25. Tex. Gov't Code � 2157.122.

26. Tex. Gov't Code � 2254.029.

27. Tex. Gov't Code � 2254.30.

28. Tex. Gov't Code � 2254.34(a).

29. 10 Tex. Admin. Code Ch. 199.

30. Tex. Gov't. Code � 2155.074(c).

31. Tex. Gov't. Code � 2155.074(g).

32. Tex. Gov't. Code � 2155.074(i).

33. Tex. Gov't. Code � 2155.074(a).

34. Tex. Gov't. Code � 2155.074(m).

35. Tex. Gov't. Code � 2155.266; Tex. Admin. Code � 113.4(b).

36. Tex. Gov't. Code � 2155.264.

37. Tex. Gov't. Code � 2155.268; 1 Tex. Admin. Code � 113.4(h); 1997 Appropriation Act General Rider 56, prohibiting use of appropriated funds for maintaining any agency list other than the CMBL.

38. Tex. Gov't. Code � 2161.061; 1 Tex. Admin. Code � 111.22.

39. 1 Tex. Admin. Code � 111.22.

40. 1 Tex. Admin. Code � 111.13(c)(6).

41. General provision 124(9) of the 1997 General Appropriations Act. The LBB can also transfer to GSC funds which had originally been appropriated to the noncomplying agency.

42. 1 Tex. Admin. Code � 111.17.

43. 1 Tex. Admin. Code � 111.18.

44. 1 Tex. Admin. Code � 111.21.

45. Tex. Gov't Code � 2161.064.

46. Tex. Gov't Code � 2161.123, 1 Tex. Admin. Code � 111.15

47. 1 Tex. Admin. Code � 111.13(c).

48. 1 Tex. Admin. Code � 111.13(d).

49. 1 Tex. Admin. Code � 111.14(a).

50. 1 Tex. Admin. Code � 113.102(a).

51. 1 Tex. Admin. Code � 113.102(d),(f).

52. 1 Tex. Admin. Code � 113.102(e).

53. Tex. Gov't Code �� 2155.441-.448; 1 Tex. Admin. Code � 113.8.

54. Tex. Gov't Code � 2155.444; 1 Tex. Admin. Code � 113.8(b)(1). See also Tex. Gov't Code � 2252.002, establishing a procedure to account for residence preferences in the non-resident bidder's home state.

55. Tex. Ethics Comm. Op. No 353 (1996): prohibition limited to "specific purchasing needs" on which the state employee worked; Tex. Ethics Comm. Op. No 364 (1997): Lottery Commission employee who had monitored a company's compliance with a Lottery Commission contract could be employed by the company as long as the job "does not involve the specific contract he worked on." See also Tex. Ethics Comm. Op. No 324 (1996): TNRCC employee who had worked on permit approval of proposed groundwater monitoring system could work on certification of the system on the outside, because the permit approval and certification are "separate matters." But see Tex. Ethics Comm. Op. No 365 (1997): former TxDOT employee who had performed early steps in the right-of-way acquisition process while with the agency could not work for a private contractor on the later steps in the agency's acquisition of the same properties.

56. 1 Tex. Admin. Code � 111.4.

57. Tex. Gov't. Code � 2156.122(1); 1 Tex. Admin. Code � 113.7(e).

58. Tex. Gov't. Code � 2156.121(b); 1 Tex. Admin. Code � 113.7(f),(g).

59. 1 Tex. Admin. Code � 113.7(g),(i).

60. 1 Tex. Admin. Code � 113.7(l).

61. Tex. Gov't Code � 2156.062(1).

62. Tex. Gov't Code �� 2156.063, 2156.061.

63. "Automated information system" is defined at Tex. Gov't Code � 2157.001(1). See also Attorney General Opinion No. DM-375 (1996).

64. The catalogue method is to be used unless the purchasing agency determines the best value may be obtained by another method in Subtitle D. Tex. Gov't Code � 2157.061.

65. Tex. Gov't Code � 2157.062; 1 Tex. Admin. Code � 113.19(c)-(g).

66. DIR's rules are at 1 Tex. Admin. Code ch. 201.

67. Tex. Gov't Code � 2157.121.

68. Tex. Gov't Code � 2166.251(a).

69. Tex. Gov't Code �� 2166.253, 2166.255(a).

70. Tex. Gov't Code � 2167.002(1).

71. Tex. Gov't Code � 2167.053.

72. Tex. Gov't Code � 2167.054.

73. Tex. Gov't Code � 2170.002.

74. 1 Tex. Admin. Code � 125.27. Other travel services may be acquired by GSC using competitive bidding, competitive sealed proposals or negotiation. 1 Tex. Admin. Code � 125.17(a) allows GSC to select one of these purchase methods "at its discretion."

75. Tex. Gov't Code � 2171.103; 1 Tex. Admin. Code �� 125.63 - .69.

76. Tex. Gov't Code � 2254.026.

77. Tex. Gov't Code �� 2254.028, 2254.029, 2254.030.

78. Although it is clear that an incumbent contractor, whose property interest in the contract is fully realized, has a heightened property interest which cannot be deprived without due process.

79. 1 Tex. Admin. Code � 111.4(c), prohibiting agency employees from working on a contract if they have a financial interest in the contract, including prospective employment. See also Latecoere Intern., Inc. v. U.S. Dept. of Navy, 19 F.3d 1342, (11th Cir. 1994), in which a federal agency's selection was reversed because of bias against the plaintiff.

80. E.g., GSC's 1 Tex. Admin. Code � 111.3.

81. 1 Tex. Admin. Code � 111.3(b).

82. Tex. Gov't Code �� 2156.008, 2156.007(a); 1 Tex. Admin. Code � 113.6(a). If your bid contains an exception to the advertised specifications, avoid characterizing it as outcome determinative (e.g., "this bid is contingent on the following ...."), as case law indicates such a description means the change is "material."

83. 1 Tex. Admin. Code � 113.6(a)(1).

84. In 1997 the Legislature substituted the term "best value for the state" for the term "lowest and best bid."

85. There are some interesting statutory construction points that could affect the attempt to reconcile these provisions. First, � 2156.007 is in subchapter A, which only applies to the Contract Purchase Procedure (competitive bidding). Second, although � 2155.074 is apparently broader in application, it does say "for purchases of goods and services under this chapter...." [emphasis added]. It appears the intent was that � 2155.074 apply to all purchases under Subtitle D.

86. See also 1 Tex. Admin. Code � 113.7(j), listing evaluation criteria for purchases of automated information and telecommunication systems using the competitive sealed proposal method.

87. Tex. Gov't Code � 2156.005(c); 1 Tex. Admin. Code � 113.5(b).

88. Tex. Gov't Code � 2156.005(d); 1 Tex. Admin. Code � 113.5(b)(4).

89. 1 Tex. Admin. Code � 113.(h). Under Tex. Gov't Code � 2156.123(b), the contents of the proposals become available to the public after the contract is awarded (subject to any exceptions to disclosure under TORA).

90. 1 Tex. Admin. Code � 113.7(i).

91. 1 Tex. Admin. Code � 113.(k).

92. 1 Tex. Admin. Code � 113.7(m).

93. Tex. Gov't Code � 2157.063(a).

94. 1 Tex. Admin. Code � 111.3(e).

95. 1 Tex. Admin. Code � 111.3(g).

96. Some exceptions: Tex. Gov't Code � 2157.005, which requires GSC and DIR to jointly develop a technology access clause (relating to visual impairment) for inclusion "in all state contracts involving automated information systems." Contracts subject to the federal common rule (federal funds involved) must include contract terms listed in, e.g., 7 CFR 3016.36(i).

97. Kneeland v. NCAA, 850 F.2d 224 (5th Cir. 1988), cert denied 488 U.S. 1042 (1989). Attorney General ORDs on this point include ORD No. 1 (1973)(bank with government body's account not subject to TORA); ORD No. 228 (1979)(North Texas Commission a "governmental body" because of a contract provision construed to be general support rather than an "arms-length contract for services"); ORD No. 621 (1993)(Arlington Economic Development Fund a governmental body, and Arlington Chamber of Commerce partially a governmental body). AG Opinion No. JM-821 (1987) found a volunteer fire department to be a governmental body, in part based on the fact that it provides "one of the services traditionally provided by governmental bodies."

98. A related issue that might come up is public (or media) requests to attend meetings between the contractor and agency. Such meetings are not subject to TOMA, and agency staff generally use their discretion to avoid media circuses; however, a contractual provision setting up ground rules could benefit both the contractor and the agency.

99. 116 S. Ct. 2432 (1996). This decision was a significant factor in Judge Hart's reasoning in the April 4, 1997 letter opinion in the Tejas case.

100. 116 S. Ct., at 2461, citing U.S. Trust v. New Jersey, 97 S.Ct. 1505 (1977).

101. Tex. Gov't Code � 2155.322(a)(1); 1 Tex. Admin. Code � 113.15(b).

102. 34 Tex. Admin. Code � 5.51(c)(2).

103. Tex. Gov't Code � 321.013(a).

104. Tex. Gov't Code � 321.013(e).

105. Tex. Gov't Code �� 321.013(d), 321.018.

106. E.g., 7 CFR � 3016.36(i)(10), requiring access by the Comptroller General of the U.S., the federal agency, the state and local agencies to any of the contractor's books, records and documents which are directly pertinent to the contract. The officials are specifically allowed to make excerpts and transcriptions of the documents they examine.

107. Tex. Gov't Code � 2155.381(a); 1 Tex. Admin. Code � 113.15(a).

108. 1 Tex. Admin. Code � 113.15(b). The required contents of purchase voucher are listed in the Comptroller's rule 34 Tex. Admin. Code � 5.51(d).

109. 1 Tex. Admin. Code � 113.15(d)(3).

110. Tex. Gov't Code �� 2151.025, 2151.026.

111. Tex. Gov't. Code � 2151.022.

112. Tex. Gov't Code � 2162.102(c)(5).

113. Tex. Gov't Code � 2162.105.

114. 1 Tex. Admin. Code � 401.61.

115. 1 Tex. Admin. Code � 401.62(b).

State Bar of Texas Administrative and Public Law Section

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GOVERNMENT OUTSOURCING: WHAT COULD GO WRONG?

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