Indiana law requires political subdivisions undertaking public construction projects to engage in a detailed competitive bidding process, designed to ensure that public work construction projects are completed at a competitive cost when public funds are involved. Although the competitive bidding laws are not applicable to all public construction projects, public entities must be cautious not to structure their contractual arrangements for the sole purpose of avoiding the application of the public bidding laws.
Indiana law requires political subdivisions undertaking public construction projects to engage in a detailed competitive bidding process, designed to ensure that public work construction projects are completed at a competitive cost when public funds are involved. The statute sets cost thresholds at which the bidding procedures must be employed, and also sets forth a detailed procedure for conducting the bidding process. While a complete discussion of the process is beyond the scope of this article, it is critical for public entities to understand when they are subject to the public bidding laws.
In a recent case decided by the Indiana Supreme Court, an Evansville area school corporation ran afoul of the public bidding laws when it failed to follow the procedures set forth in the public bidding statute for renovations on an existing building owned by the school corporation. In Alva Electric, Inc. et al v. Evansville-Vanderburgh School Corp. et al, a school corporation wanted to renovate its warehouse into administrative offices. See Alva Electric, Inc. et al v. Evansville-Vanderburgh School Corp. et al, 82S01-1307-PL-473. Knowing it was unable to utilize bonds or a tax increase to fund the project, the school corporation negotiated a price for the project with a contractor, without following the public bidding laws set forth in Ind. Code. § 36-1-12-1 et seq. The school corporation proposed an arrangement whereby it would convey the building to a local private non-profit entity, and this private foundation would contract with the construction company. After the work was completed, the foundation would sell the building back to the school corporation on an installment contract, and the installment payments would be used to make payments to the contractor that performed the work, as negotiated between the contractor and the school corporation. The admitted purpose of this arrangement was to avoid the application of the public bidding laws.
A group of local contractors later sued the school corporation and the private foundation, alleging that the arrangement violated the state’s public bidding laws. The trial found no violation of the public bidding laws, even though it determined that there was no doubt that the school corporation engaged in the transaction to avoid the application of the public bidding statutes. On appeal, the Court of Appeals reversed this finding, and the Supreme Court affirmed the Court of Appeals.
The Supreme Court reasoned that under the facts of the case, it was clear that the private foundation was acting on behalf of the school corporation throughout the project. The school corporation was heavily involved in and controlled the project from start to finish. Affirming the Court of Appeals’ holding, the Supreme Court held that it was clearly a violation of the public bidding statutes to proceed as the school corporation did in conveying the building to the private foundation for the stated purpose of avoiding the public bidding laws, while maintaining such control over the project.
Public entities, such as school corporations, are afforded a variety of options for financing public works construction projects. These entities must understand, however, that the public bidding laws cannot be circumvented in the manner attempted by the school corporation involved in the Alva Electric case. The Supreme Court stopped short of holding that all conveyances of public buildings to private entities for construction purposes automatically violate the public bidding laws. However, where it is clear that the sole purpose of the conveyance was to avoid the public bidding statutes, and the public entity remains largely in control of the project, the Supreme Court has indicated that it will look at the substance of the arrangement instead of the form, and will find a violation where circumvention of the law is the driving force behind the details of the relationship.