The Kentucky Model Procurement Code (“KMPC”) governs the award of construction contracts by the Commonwealth, but does not automatically apply to a local government agency.  Only if the local governmental agency decides to adopt the KMPC does it apply.  But this may cause tension where a local public project can only be financed with assistance from state government.  In a recent Kentucky Court of Appeals case, Laurel Construction Company, Inc. v. Paintsville Utility Commission, 336 S.W.3d 903 (Ky.Ct.App. 2011), the effect of a Commonwealth grant of funds to local government’s procurement procedures, particularly the applicability or non-applicability of the KMPC to the local project, was examined.

In 2007, the Paintsville Utility Commission (“Commission”), a municipal entity providing water, sewer and gas services in Johnson and Lawrence counties, was in need of a new water tank.  In order to help fund the improvement, the Commission sought financial assistance from the State, eventually entering into a grant assistance agreement with the Kentucky Infrastructure Authority (“KIA”).  One provision of that agreement stated that “the [Commission] shall perform and/or cause to be performed all necessary acts (consistent with [the KMPC] and in accordance with applicable law) to plan design and construct the Project…”.   

With funding in place and the design completed, the Commission advertised for sealed bids for construction of the water tank.  Laurel Construction submitted a bid of $194,000.  Kentucky Glass Lined Tanks (“KGLT”) submitted a bit of $228,491.  Upon the recommendation of its designer and consultant, the Commission awarded the contract to KGLT, and Laurel Construction filed suit, alleging that the Commission had violated the KMPC.  The trial court entered summary judgment in the Commission’s favor, and Laurel Construction appealed. 

The Kentucky Court of Appeals affirmed the trial court’s order on multiple grounds.  First, the trial court found that the KMPC did not apply, as suggested by Laurel Construction.  The court examined the language of the grant agreement and found that the language did not bring the project within the scope of the KMPC, as the only reference to the statute was parenthetical in nature and only suggested that the Commission acts should be consistent with the KMPC, and nothing more.  Additionally, the court found that even if the grant agreement made adherence to the KMPC an express agreement of the grant of funds, failure to follow the KMPC by the Commission would be a breach of the grant agreement, not a violation of the KMPC.  The KIA and the Commission were the only two parties to the grant agreement.

Turning to Laurel Construction’s situation, the court found that because Laurel Construction was not a party to the grant agreement, it had no standing to assert a breach or violation of that agreement.  In order to proceed, Laurel Construction would have to have proven that it was an intended third party beneficiary of the grant agreement, which it could not.  The court noted that none of the provisions of the grant agreement indicated that it was made for the “actual and direct benefit” of Laurel Construction.

The court went further and examined the liberties that the Commission and similar entities enjoy when awarding contracts, finding that in procurements not governed by the KMPC, “absent a showing of fraud, collusion or dishonesty, a disappointed bidder has no standing to judicially challenge the award of a public contract to another bidder”.  In the course of its examination of the Commission’s procurement, the court noted that the Commission reserved the right to reject all bids, to look beyond the bid price to other factors, and recited Kentucky law “long recognizing that a low bidder is not necessarily the best bidder”.   Reviewing the record and finding that the Commission’s rejection of Laurel Construction’s bid was not arbitrary but instead based upon multiple considerations, the court further affirmed the trial court’s holding.

As Kentucky continues, like the rest of the nation, to experience economic challenges, more local entities likely will seek assistance from State government to finance their most pressing construction needs.  If a local governmental entity has not adopted the KMPC expressly, a mere grant of state funds will not operate to invoke the KMPC’s provisions, and the local entity’s own procurement protocols will continue to control its awards of construction contracts.