Pennsylvania Supreme Court Upholds the Validity of a Construction Management Contract Awarded without Competitive Bidding in Malloy v. Boyertown Area School Board


The Pennsylvania Supreme Court has decided a much discussed case on construction management, holding that school districts may secure professional services from construction management firms without bidding. See Malloy v. Boyertown Area School Board, 540 Pa. 308, 657 A.2d 915 (1995), rev'g, 158 Pa. Cmwlth. 1, 620 A.2d 1283 (1993). The pendency of this case engendered considerable interest and comment,1 including a prior Saul, Ewing Update.2 The decision is likely to have a substantial impact on how school districts and other governmental entities in the Commonwealth organize and conduct their public construction projects.

At issue in Malloy was a school district's decision to administer its upcoming construction project with a construction management ("CM") firm to perform pre-construction and construction-phase services. Challengers to the CM contracts argued that the services being performed constituted "work upon a building," required by statute to be bid by the School Code.3

Different groups interested in the outcome of the Malloy case, not surprisingly, saw the case from considerably different perspectives. As the general proposition, school districts involved in construction projects, and for that matter other local governments as well, feared that their discretion in selecting construction managers without formal, low-price bidding could be lost. Consequently, the Pennsylvania School Board Association participated as amicus curiae in the Supreme Court, arguing for recognition of school district discretion. For their part, CM firms feared that the usual process of professional selection (often by sole sourcing or through interviews) by school districts, counties and municipalities would be disrupted.4 The general contractors hoped for precisely that result, given their perception that the practice of hiring construction mangers (and the usual dismantlement of the general trades contract into a dozen or more separate prime contracts), was limiting their school district work.

The Pennsylvania Supreme Court perceived the issue in the case in the broadest of terms, as presenting the question of whether in general construction management contracts awarded without bidding are legal. At least in part this could be attributable to the fact that the legal "combatants" declined to acknowledge the existence in the trial court record of any unique or distinguishing factual limitations. For the most part, their arguments approached the issue of the legality of awarding construction management contracts without bidding from perspectives that were broad and generalized, and not dependent upon facts in the case. The Supreme Court ultimately decided the Malloy case in the broad fashion envisioned by the parties, holding that construction management contracts are within a professional services exemption and not required to be bid.

Since many other public construction statutes have either express or implied exemptions for "professional services," the Malloy decision will have broad applicability to the selection of construction managers and other construction professionals, by counties, municipalities, and their authorities and beyond the specific context of school district construction.

Public Construction

Public construction in Pennsylvania presents to school districts, counties, municipalities, and their authorities special and unique challenges. Public projects are generally recognized as involving substantial potential for unnecessary waste, especially in connection with those projects undertaken (1) with only a minimum complement of in-house administrators and technical staff, and (2) using the multiple-prime construction contractors. Often, the "fault" for unnecessary waste does not rest with the administrators, or even the contractors. The specific reasons for waste on public construction projects include: (1) lack of adequate project planning; (2) the failure to deal adequately with Pennsylvania's Separations Act; and, (3) the failure to adopt an adequate project organization and utilize, in a measured and careful way, outside consultants including "construction managers" to provide project assistance.5

The Malloy v. Boyertown Case

Following a decision by the Boyertown Area School District to retain a construction management ("CM") firm in connection with a public construction project, an action was brought in the Court of Common Pleas by Heidi Malloy, a taxpayer of the school district who objected to the district's CM agreement. The CM firm in question is one that at the time was affiliated with a general construction contracting firm. Under the $525,000 contract, the CM was required to provide a wide range of pre-construction and construction-phase services. To an outside observer, it is at least arguable that some of the construction-phase services would be those otherwise performed by a general contractor. The Court of Common Pleas held that the construction management contract in question was exempt from bidding because of an implied exception for professional services found in the School Code and in prior caselaw. The Commonwealth Court reversed, holding that the statute in question, unlike other public construction statutes, created no exemption for professional services, and that -- since some aspects of the CM agreement were in the nature of construction work, therefore constituting "work of any nature...upon a school building" under the School Code, 24 P.S. 7-751 -- the CM agreement was unlawful.

The Pennsylvania Supreme Court granted allocatur, reversed the Commonwealth Court's ruling, and reinstated the ruling of the trial court, holding that the CM agreement between the district and the CM firm need not have been bid. In doing so, the Supreme Court relied on a line of cases upholding selection of service providers offering professional advice and assistance to public entities. After reviewing prior Supreme Court decisions arising in other contexts,6 the Court concluded that professional service exemptions under the School Code were implicit in the school district context under the School Code as a matter of statutory construction.

Critical to an understanding of the Supreme Court's decision and indeed critical to applying this case in future situations, is an understanding of the Court's treatment of a central factual issue: whether construction work was actually being performed by the CM. Based upon its reading of the record and the facts, the Supreme Court concluded that the agreement "did not obligate the [construction manager] to perform any actual physical construction work."7 In future situations, CM contracts that in fact involve physical work will not be protected by the Malloy decision, and should ordinarily be found to be unlawful if not bid.

While the Supreme Court's decision arises specifically in the context of a firm identified as a "construction management" service provider, the prior caselaw and doctrinal foundation for the Malloy decision, and the decision itself, support a broader proposition: public entities must bid construction work (ordinarily to multiple prime contractors), but are not required to bid agreements with professional service providers, whether those providers are part of a design team (such as architects and engineers) or part of the pre-construction and construction-phase project oversight and project management effort. Project oversight and management can be provided not only by firms that describe themselves as construction managers, but also by a variety of firms providing separately value engineering, constructibility review, independent design review, project monitoring and observation, inspection, scheduling and similar administrative services.8 Given the numerous impediments to efficiency with which public owners must contend, the Supreme Court, it appears, saw no compelling reason to further limit or hamstring local efforts to manage projects effectively and therefore broadly upheld school district discretion to select project management service providers.

The question of whether a particular service is within the professional services exemption will depend first upon whether the agreement contemplates physical construction work. If not, then the existence of an exemption from bidding will depend upon the precise nature of the services involved. Malloy held that, in the CM agreement before it, "distinctiveness and the quality of service are the paramount concern..." 540 Pa. __, 657 A.2d at 919. Where there is a "special relationship between the [public] owner" and the service provider, and where that provider owes a "special duty of loyalty" to the public body because that service provider is in essence the owner's agent, duty bound to act in "good faith and always in the furtherance" of the public owner's interest, 540 Pa. at __, 657, A.2d at 919, then the professional service exemption should apply. Hibbs (construction inspector/clerk-of-the-works), Belacastro (testing services and use of data processing software and hardware requiring expert advice) and Stratton v. Allegheny County, 245 Pa. 519, 91 A. 894 (1914) (contact for architectural services) were cited as examples of such situations. In general it appears that, with appropriate contractual provisions and utilizing a permissible selection process, school districts and other governmental entities can select from among a full range of professional construction service providers.

Conclusion

Following the Pennsylvania Supreme Court's decision in Malloy v. Boyertown, school districts and other governmental entities in Pennsylvania may select construction management firms to provide project management services without bidding, as long as the CM firms perform no physical construction work. The Supreme Court has provided the school districts and other public owners with the discretion to choose other project management service providers as well. At the same time, the decision necessarily leaves school districts, counties, municipalities and their authorities with the same difficult issues concerning the kind of project management assistance required for their particular projects and about the cost of project management services that may appropriately be incurred.

This Update was prepared by William W. Warren, a partner in Saul, Ewing's Harrisburg Office, and head of the Firm's Local Government Construction Planning Group. For additional copies of this Update, copies of the prior Update on the Malloy case in the Commonwealth Court, and copies of the other articles cited here, please contact Mr. Warren's office at 717-238-7698, write him at Penn National Insurance Tower, 2 North Second Street, 7th Floor, Harrisburg, PA 17101 or contact him through e-mail at wwarren@saul.com.

Note: Posted articles are for general information only and should not be considered legal advice.


ENDNOTES

1. See G. Aman, "Important Developments in Public Contracts Law," The Authority (August 1995) (analysis of the Supreme Court decision); J. Damgaard & L. Viozzi, "Commonwealth Court Holds that Construction Management Services Contract Are Subject to Competitive Bidding Requirement in Public School Code, " Pennsylvania Association of Bond Lawyers (September, 1993) (the impact of the subsequently reversed Commonwealth Court decision from the public finance perspective). "return to text"

2. See Saul, Ewing, Remick & Saul LLP Update from the Government Contracts Group, "Commonwealth Court Decision in Boyertown Area School District Case Calls into Question the Validity of a Construction Management Contract Awarded Without Bidding," July, 1994. Copies of the Updateare available upon request. "return to text"

3. See 24 P.S. 7-751 (1992, which provides in pertinent part: All constructions, reconstruction, repairs, maintenance or work of any nature...uponany school building or ...property...exceed[ing] $10,000.00...shall be done under separate contracts [using]...competitive bids. [Emphasis added] ). "return to text"

4. The fears of the construction management community were pronounced enough to warrant the introduction of House Bill 398 (P.N. 2995), introduced February 10, 1993. "return to text"

5. Seegenerally, "Planning and Managing a Capital Construction Project for School Districts," a paper presented by the undersigned to the Pennsylvania Association of School Business Officials on March 18, 1997. "return to text"

6. See In re: 1983 Audit Report of Belacastro, 528 Pa. 29, 595 A.2d 15 (1991) (County Code with explicit exemption); Hibbs v. Arensburg, 276 Pa. 24, 119 A. 727 (1923) (1919 version of School Code). See also as a matter of general interest, Eliason v. School District of Springfield Township, 54 D. & C.2d 52 (Del. Co. 1970). "return to text"

7. 540 Pa. at __, 657 A.2d at 916. This factual conclusion, based upon our reading of the agreement in the record, is at least questionable. However, since this conclusion is both preliminary to the Supreme Court's ultimate decision and an essential part of it, the proposition that the CM did no actual construction work on the District's project must be treated as a "given" in this analysis. "return to text"

8. In effect, the CM "package" of services can, in appropriate circumstances, be "unbundled" and a more narrow and refined set of services selected for use on a project. See generally W. Warren, "Use of Project Management Services on Construction Projects," The Authority(August 1995). "return to text"