The U.S. Department of the Treasury has stated in its Interim Final Rule and Final Rule applicable to Coronavirus State and Local Fiscal Recovery Funds (“Fiscal Recovery Funds”) that, with few exceptions, the procurement standards contained in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 C.F.R. Part 200) (the “Uniform Guidance” or “UG”) apply when a recipient or subrecipient of Fiscal Recovery Funds uses these monies to purchase goods or services. These procurement standards require a unit of local government receiving Fiscal Recovery Funds to abide by procurement procedures that are consistent with state law, locally adopted rules, and 2 C.F.R. §§ 200.317-200.327 in the Uniform Guidance.[1]
North Carolina law permits units of local government to enter into “design-build” contracts to design and construct public infrastructure.[2] And in selecting a “design-builder”, a unit must employ a qualifications-based selection process.[3] But the federal procurement standards contained in the Uniform Guidance specifically limit a non-Federal entity’s use of qualifications-based selection to the procurement of “architectural/engineering (A/E) professional services”, and note that qualifications-based selection “cannot be used to purchase other types of services through A/E firms that are a potential source to perform the proposed effort.”[4] Because units must abide by this UG provision when using Fiscal Recovery Funds, this restriction likely prohibits a unit of local government from employing the mandatory qualifications-based selection process set forth in G.S. § 143-128.1A to choose a design-builder to design and construct a project when expending Fiscal Recovery Funds.
In an apparent attempt to reconcile a conflict between selection processes under North Carolina law and the federal procurement standards, the General Assembly in December 2021 modified the standard of contract award in the public design-build statute (G.S. § 143-128.1A) for the expenditure of federal funds subject to the UG procurement standards.[5] This blog post explains how the legislature’s adoption of S.L. 2021-189, Section 1.6 opened a limited window for units of local government to consider using a design-build construction delivery process when expending Fiscal Recovery Funds.
North Carolina’s Public Design-Build Statute for Units of Local Government (G.S. § 143-128.1A)
Under North Carolina law, units of local government may “award contracts to erect, construct, alter, or repair buildings” or other horizontal infrastructure pursuant to the design-build method of contracting set forth in G.S. § 143-128.1A.[6] This delivery method allows units to contract with a “design-builder”, which state law defines as “[a]n appropriately licensed person, corporation, or entity that, under a single contract, offers to provide or provides design services and general contracting services” for the construction or repair of public infrastructure.[7] Under G.S. § 143-128.1A(e), a unit of local government must select a “design-builder” in accordance with Article 3D of Chapter 143 of the General Statutes (known colloquially as the “Mini-Brooks Act”).[8]
Prior to the 2013 enactment of G.S. § 143-128.1A, units of local government and state-level entities typically obtained authorization from the General Assembly to engage in design-build projects via local act or other special legislation. In 2001, the North Carolina Attorney General addressed in an advisory opinion whether public entities in North Carolina possessing legislative authority to engage in design-build projects were required to follow the qualifications-based selection process set forth in the Mini-Brooks Act when selecting a design-build team.[9] The Attorney General answered that question in the negative, stating (1) that “[t]he normal design-build process involves evaluation of technical proposals and award to the lowest bidder from among the proposals deemed technically satisfactory”; and (2) the “design-build process, by its very nature cannot be effectively implemented under a strict qualifications-based procurement requirement.”[10] Therefore, the Attorney General concluded that any statutory “exemptions for design-build projects should be presumed to supersede strict qualifications-based selection methods unless specifically stated otherwise in the authorizing legislation.”[11]When the legislature enacted G.S. § 143-128.1A in 2013 and authorized all units of local government to engage in design-build projects, it specifically stated otherwise by requiring that a unit follow the qualifications-based selection process in the Mini-Brooks Act when selecting a design-builder.[12]
The Mini-Brooks Act requires that units of local government “announce all requirements for . . . design-build services, and . . . select firms qualified to provide such services on the basis of demonstrated competence and qualification for the . . . services required[.]”[13] A unit must make this selection “without regard to fee other than unit price information”—and, after identifying the “best qualified firm”, a unit must negotiate a “fair and reasonable fee” for the design-build services sought.[14] To begin a negotiation process, a unit must receive either (1) in response to its initial solicitation, three submissions from qualified design-builders, or (2) in response to a second solicitation, one submission from a qualified design-builder.[15]
The Mini-Brooks Act does not specify the evaluation criteria that a unit must use when determining a firm’s “demonstrated competence and qualification.” But many units of local government use variations of the criteria set forth in the Federal Acquisition Regulation (“FAR”) that federal agencies employ when procuring architectural or engineering services.[16] Like the FAR, the Mini-Brooks Act permits (but does not require) units to solicit and consider “[e]xamples of prior complete work” when determining “demonstrated competence and qualification” and expressly encourages “discussion of concepts or approaches” to a proposed project.[17] But a unit may not solicit or consider any new “work product or design” for a proposed project prior to selecting a design-builder.[18]
Under G.S. § 143-128.1A, the evaluation criteria that a unit of local government uses to determine the “best qualified” design-builder with which to negotiate may not include consideration of a “fee”—and the Mini-Brooks Act provides specifically that “no costs or fees, other than unit price information, may be solicited, submitted, or considered as part of the selection process under [the Act].[19]”[20] In 2001 (prior to the legislature’s adoption of G.S. § 143-128.1A), the North Carolina Board of Examiners for Engineers and Surveyors interpreted the statute’s reference to “unit price information” as permitting respondents to requests for qualifications under the Mini-Brooks Act to provide to a unit “relative information with respect to general fees . . . not specific to tasks related to the project”, but not any “information . . . which can be easily correlated to a fixed price or a bid.”[21] Further, the Board stated that “project price may not be provided until a firm has been selected based upon a qualification based process.”[22]
A unit’s ability to receive “unit price information” likely do not permit it to assign weight to “general fees” in determining the “best qualified” respondent with which to begin negotiations. Neither the text of the Mini-Brooks Act nor any reported case makes clear exactly how much consideration, if any, a unit of local government could assign to “general fees” when determining a respondent’s “demonstrated competence and qualification.” Notably, a 2019 North Carolina State Construction Office form request-for-qualifications intended for use by a state agency in procuring design-build services does not request “unit price information” or note any intention to consider such information in determining a “best qualified” design-builder.
In the absence of additional clarity in G.S. § 143-128.1A or judicial interpretation, reluctance to assign substantive value to “unit price information” in determining the “best qualified” design-builder with which to negotiate is well founded. Identifying “unit price” as an evaluation criterion arguably shifts the standard of award from “best qualified” to “best value.” The General Assembly has established a “best value” standard of award for contracts that public entities award in other contexts.[23] But it did not set forth a comparable “best value” standard of award for design-build contracts when enacting G.S. § 143-128.1A. Instead, the legislature specifically required that a unit abide by the Mini-Brooks Act when selecting a design-builder—and in doing so, likely did not intend to permit a unit of local government to simultaneously consider competing price proposals from multiple firms when identifying a “best qualified” firm with which to negotiate. This choice has had consequences for the use of federal grant funds subject to the procurement standards in the Uniform Guidance.
Uniform Guidance Procurement Standards for the Proposals Methods (2 C.F.R. § 200.320(b)(2)) and Their Application to the North Carolina Public Design-Build Statute (G.S. § 143-128.1A)
The Interim Final Rule and Final Rule applicable to Fiscal Recovery Funds each provide that a recipient or subrecipient of these monies must follow the procurement standards set forth in 2 C.F.R. §§ 200.317-200.327 of the Uniform Guidance. Under those standards, when a unit of local government in North Carolina expends Fiscal Recovery Funds to purchase goods or services in an amount that exceeds the Simplified Acquisition Threshold (which, for construction or repair work is $250,000), a unit must follow one of two procurement methods: (1) the “sealed bids” method (2 C.F.R. § 200.320(b)(1)); or (2) the “proposals” method (2 C.F.R. § 200.320(b)(2)).
“Sealed Bids” vs. “Proposals” Method Under the Uniform Guidance
The Uniform Guidance notes that the “sealed bids” method is the “preferred method for procuring construction.”[24] Using a sealed bid process under the Uniform Guidance largely mirrors the “formal” bidding process required under North Carolina law for construction or repair work let in a single-prime or multi-prime manner for a traditional design-bid-build project.[25] Like North Carolina law, a non-Federal entity using a “sealed bid” process must award a firm fixed price contract to the “lowest responsive and responsible bidder.”[26]
Recall that G.S. § 143-128.1A requires units of local government to award contracts for design-build services “on the basis of demonstrated competence and qualification . . . without regard to fee other than unit price information.” This standard of award is incompatible with the “lowest responsive and responsible bidder” standard of award for “sealed bids” under 2 C.F.R. § 200.320(b)(1)—and a unit would violate state law (G.S. § 143-128.1A) by awarding a design-build contract under the “sealed bids” method. If a unit desires to award a contract for design-build services, its procurement process must comply with the “proposals” method in 2 C.F.R. § 200.320(b)(2).
The Uniform Guidance does not prohibit use of the “proposals” method for construction work, but notes that the method is “generally used when conditions are not appropriate for the use of sealed bids.”[27] And while the Uniform Guidance does not address the conditions under which the “proposals” method might be appropriate for construction work, such conditions might include (1) a desire, due to time constraints, to avoid a sequential design-bid-build procurement process that involves contracting for and completing full design specifications prior to selecting a contractor; or (2) the existence of authority permitting a unit of local government to proceed with an construction delivery process other than design-bid-build.
“Proposals” Method Evaluation Factors and Qualifications-Based Selection
Except for the procurement of “architectural/engineering (A/E) professional services,” use of the “proposals” method requires a non-Federal entity to award a contract to a “responsible offeror whose proposal is most advantageous to the non-Federal entity, with price and other factors considered.” [28] A request for proposals “must be publicized and identify all evaluation factors [including price] and their relative importance.”[29]
The Uniform Guidance specifically allows non-Federal entities to make use of “qualifications-based procurement” only when contracting for “architectural/engineering (A/E) professional services”, which it defines as a process “whereby [an] offeror’s qualifications are evaluated and the most qualified offeror is selected, subject to negotiation of fair and reasonable compensation.”[30] The UG also makes clear that (1) “qualifications-based procurement” is a method “where price is not used as a selection factor”; (2) this method “can only be used in procurement of A/E professional services”; and (3) it “cannot be used to purchase other types of services through A/E firms that are a potential source to perform the proposed effort.”[31]
The Uniform Guidance does not define the scope of “architectural/engineering (A/E) professional services.” But neither the definitions of architectural or engineering services set forth in the federal Brooks Act (see 40 U.S.C. § 1102(2)) nor the defined scopes of the practices of architecture (see G.S. § 83A-1(7)) or engineering (see G.S. § 89C-3(6)) in North Carolina law would extend to construction work.
The Federal Emergency Management Agency (“FEMA”) has stated that a recipient of that agency’s financial assistance (e.g., Public Assistance under the Stafford Act) subject to the Uniform Guidance may use a design-build process where permitted by state law—but where “[c]onstruction costs . . . comprise a greater estimated total vale than design costs . . . FEMA expects [a] non-state entity to use procurement by competitive proposals or sealed bidding for the entire procurement rather than a qualifications-based procurement by competitive proposals.”[32] In other words, for work does not constitute architectural or engineering services, a recipient must consider price as an evaluation factor.
Because G.S. § 143-128.1A and Article 3D of Chapter 143 of the General Statutes require units of local government to select a “design-builder” on the basis of “demonstrated qualification and competence”, but do not authorize the use of “price” as a factor in identifying the “best qualified” firm, the North Carolina public design-build statute likely constitutes “qualifications-based procurement” under 2 C.F.R. 200.320(b)(2)(iv). And under that regulation, such a qualifications-based procurement presumably would not be permissible for the procurement of services (i.e., construction work) that do not constitute architectural or engineering services.
The qualifications-based selection process that units of local government in North Carolina must follow when selecting a design-builder under G.S. § 143-128.1A is an outlier when compared to the process used by the federal government and other states.[33] Use of the “proposals” method requires that a unit include price as a factor in proposal evaluation—and it is not clear that a negotiation process with the “best qualified” design-builder (as opposed to a “best-value” procurement process in which a public entity can simultaneously consider and assign value to prices submitted by multiple design-builders) satisfies the requirement that a non-Federal entity consider “price” under the “proposals” method. The General Assembly sought to remedy this problem in December 2021 when it passed Section 1.6 of S.L. 2021-189.
(S.L. 2021-189, Section 1.6): December 2021 Modifications to G.S. § 143-128.1A for Federal Grant Funds Subject to 2 C.F.R. Part 200
In December 2021, the General Assembly enacted S.L. 2021-189, which added Sections 5.17(a) and (b) to the Current Operations Appropriations Act of 2021 (S.L. 2021-180). Those new sections did not amend G.S. § 143-128.1A to conform to the two-step procurement processes that the federal government or other states employ in design-build procurement. Instead, they provided a temporary option for a unit of local government expending federal grant funds subject to the UG procurement standards to consider “price” when issuing a request for qualifications for design-build services.
These changes opened an avenue for a design-build solicitation under G.S. § 143-128.1A to be consistent with the UG “proposals” method. The remainder of this section explains how this legislation modified the design-build authority in G.S. § 143-128.1A.
SECTION 5.17.(a) Notwithstanding any other provision of law, any unit of local government (unit) that contracts for design-build services using federal funds subject to the procurement standards set forth in 2 CFR Part 200 (Uniform Guidance), in whole or in part, shall comply with either:
(1) G.S. 143-128.1A in its entirety and all applicable federal requirements related to the use of the federal funds.
(2) All of the following:
a. G.S. 143-128.1A(a), (b), (c), and (f). In satisfying the requirements of G.S. 143-128.1A(c)(5), the public notice of the request for qualifications shall be issued at least 7 days before the date of the opening of proposals. The public notice shall identify all selection criteria, including price, and the relative weight of the selection criteria.
b. If after the solicitation for design-builders not as many as three responses have been received from qualified design-builders, the unit shall again solicit for design-builders. If as a result of the second solicitation not as many as three responses are received, the unit may make a selection as provided in sub-subdivision c. of this subdivision even though fewer than three responses were received.
c. The unit shall select and commence contract negotiations with the design-builder whose response is ranked most advantageous to the unit based on the selection factors identified as provided in sub-subdivision a. of this subdivision. If a contract cannot be negotiated with the highest ranked design-builder, negotiations with that design-builder shall be terminated and negotiations shall be initiated with the next-highest ranked design-builder.
d. All applicable federal requirements related to the use of the federal funds.
“SECTION 5.17.(b) This section expires on December 31, 2025; provided, however, any design-build contract executed pursuant to this section prior to December 31, 2025, shall be valid and the unit may continue to make payments under the contract entered into prior to December 31, 2025, so long as the contract was executed as provided in subsection (a) of this section.”
Section 5.17(a)(1)
The first portion of the bill preserved the ability of units of local government to comply with the qualifications-based selection process for a design-builder in G.S. § 143-128.1A and “all applicable rules relating to federal funds.” In theory, this section permits a unit to use a qualifications-based selection process for the procurement of a design-builder, as long as applicable federal regulations or the terms and conditions of a particular form of federal financial assistance allow it. But for the reasons stated previously, following the qualifications-based selection process in G.S. § 143-128.1A does not seem to comport with the “best value” selection process and consideration of “price” that 2 C.F.R. § 200.320(b)(2)(iii) mandates for non-A/E services.
Section 5.17(a)(2)a.
The second portion of the bill contains changes that more clearly shift the standard of award for a design-build contract from a qualifications-based award to one based upon “best value”—and these amendments permit a unit using federal funds subject to the UG procurement standards to make a selection of a design-builder in a manner consistent with the “proposals” method in 2 C.F.R. 200.320(b)(2).
Under Section 5.17(a)(2)a., units have a range of options when asking for “price” information from potential respondents—and are not limited to asking for “unit price.” As a practical matter, however, because S.L. 2021-189 did not permit a two-step selection process in which a unit can ask potential design-builders to submit a well-developed design in response to a request for proposals—developing a “lump sum” or “fixed firm” price may be challenging for offerors. A unit could ask for such a price in its request for qualifications, but it is not clear that 2 C.F.R. § 200.320(b)(2) necessarily requires a consideration of total construction cost to select a design-builder.
Among other things, a unit might consider asking respondents to its fees to provide the general conditions of the contract, design-builder fees, or fees for required design services. The key in satisfying the requirements of the “proposals” method is (1) making price an evaluation factor, and (2) assigning a relative weight to price and other evaluation criteria. Section 5.17(a)(2)a. permits a unit to do that.
Units should be aware that Section 5.17(a)(2)b. requires issuance a public notice of its request for qualifications at least 7 days before the opening of proposals. G.S. § 143-128.1A does not contain a comparable requirement.
Section 5.17(a)(2)b-d
With one exception, the remainder of Section 5.17(a)(2) leaves the procurement process in G.S. § 143-128.1A largely intact. Like G.S. § 143-128.1A(d), Section 5.17(a)(2)b requires either (1) in response to a unit’s initial solicitation, three submissions from qualified design-builders, or (2) in response to a second solicitation, one submission from a qualified design-builder. And as it can under G.S. § 143-128.1A(d), once a unit has identified the highest scoring design-builder, it may commence negotiations with that highest scoring firm.
Unlike G.S. § 143-128.1A(e), the bill does not indicate that a design-builder must certify to a unit that a design professional was selected on the basis of its qualifications.
Section 5.17(b)
The alternative design-build authority that S.L. 2021-189 provides is not permanent—it extends only to December 31, 2025. Units should remain aware that, as of this writing, Treasury regulations require a unit of local government to obligate all Fiscal Recovery Funds prior to December 31, 2024. See 31 C.F.R. § 35.5(b).
The Bottom Line
In the coming months, Treasury may produce additional procurement-related guidance for Fiscal Recovery Funds that affects the analysis in this blog post. Units seeking to use the design-build method of construction delivery for projects funded in part or in whole by Fiscal Recovery Funds should work closely with counsel to follow the proper procurement method under state law and the Uniform Guidance.
[1] See 2 C.F.R. § 200.318(a).
[2] See G.S. § 143-128.1A.
[4] 2 C.F.R. § 200.320(b)(2)(iv) (emphasis added).
[5] See S.L. 2021-189, Section 1.6.
[6] See G.S. § 143-128(a1)(6) (for authority to construct buildings using the design-build method of construction delivery); G.S. § 143-128.1A (providing units of local government with independent authority to construct horizontal infrastructure using the design-build method of construction delivery).
[7] See G.S. § 143-128.1A(a)(1); G.S. § 143-128.1B(a)(2) (defining “design-builder”).
[8] See G.S. § 143-128.1A(e) (“The design-builder shall be selected in accordance with Article 3D of this Chapter.”).
[9] See Advisory Opinion: Application of North Carolina’s” Mini-Brooks Act” (N.C.G.S. § 143-64.31) to Subcontracted Professional Services and “Design-Build” Contracts, Op. N.C. Att’y Gen., 2001 WL 729564 (Office of the N.C. Att’y Gen. June 19, 2001).
[10] Id. at *5.
[11] Id. (emphasis added).
[12] See G.S. § 143-128.1A(e)
[14] Id.
[15] See G.S. § 143-128.1A(d).
[16] See 48 C.F.R. § 36.602-1(a) (requiring that federal agencies evaluate potential architectural or engineering firms on the basis of (1) “[p]rofessional qualifications necessary for satisfactory performance of required services; (2) [s]pecialized experience and technical competence in the type of work required, including, where appropriate, experience in energy conservation, pollution prevention, waste reduction, and the use of recovered materials; (3) [c]apacity to accomplish the work in the required time; (4) [p]ast performance on contracts with Government agencies and private industry in terms of cost control, quality of work, and compliance with performance schedules; (5) [l]ocation in the general geographical area of the project and knowledge of the locality of the project; provided, that application of this criterion leaves an appropriate number of qualified firms, given the nature and size of the project; and (6) [a]cceptability under other appropriate evaluation criteria”).
[18] Id.
[20] Id. (emphasis added).
[21] See N.C. Board of Examiners for Engineers and Surveyors, The North Carolina Bulletin: Question and Answer Summary, CEC/NC Special Conference on New Rule in Rules of Professional Conduct for Engineers and Surveyors (Jan. 16, 2001) (on file with author).
[22] Id.
[23] See, e.g., G.S. § 143-135.9(a)(1) (defining a “Best Value procurement” as “[t]he selection of a contractor based on a determination of which proposal offers the best trade-off between price and performance, where quality is considered an integral performance factor”); G.S. § 143-129.8(b)(2) (permitting political subdivisions of the State to award contracts for certain “information technology” to the person or entity that submits the “best overall proposal”).
[24] 2 C.F.R. § 200.320(b)(1).
[25] See G.S. § 143-129 (setting forth the formal bidding process for “construction or repair work”).
[26] 2 C.F.R. § 200.320(b)(1)(ii)(D).
[27] 2 C.F.R. § 200.320(b)(2).
[28] 2 C.F.R. 200.320(b)(2)(iii) (emphasis added). One commentator has noted that “use of this language signals a trade-off process in federal procurement.” Jonathan D. Shaffer & Nora K. Brent, Federal Grant Practice, § 41.61, n. 14 (2021) (emphasis added). A “trade-off” under FAR Part 15 is one form of “best value” procurement in which a federal agency might perform “tradeoffs among cost or price and non-cost factors” and “to accept other than the lowest priced proposal.” 48 C.F.R. § 15.101-1(c). And so it might be feasible for a unit of local government to use such a “trade-off” procurement method where authorized under state law—but the “proposals” method cannot be read to suggest that a unit can contract for construction work using qualifications-based selection without conducting some form of price competition.
[29] 2 C.F.R. § 200.320(b)(2)(i).
[30] 2 C.F.R. § 200.320(b)(2)(iv).
[32] Fed. Emergency Mgmt. Agency, Procurement Disaster Assistance Team (PDAT) Field Manual, Procurement Information for FEMA Award Recipients and Subrecipients (FM-207-21-0002) (Oct. 2021) § 3.2.
[33] See 41 U.S.C. § 3309 (authorizing acquisition of design-build services by federal civilian agencies using a “best value” approach); 48 C.F.R. Subpart 36.3 (setting forth policies and procedures for the use of a two-phase “best value” design-build procurement procedure by the federal government). Only a limited number of states permit public entities to procure design-build services using a qualifications-based selection process. See Design-Build Institute of America, States with Design-Build Qualifications Based Selection 2022 (Jan. 2022) (reflecting nine states in which at least some public entities (including state-level entities) have authority to award design-build contracts using qualifications-based selection). For a comprehensive listing, see Design-Build Institute of America, 2021 State Statute Report (Aug. 2021) (reflecting state public design-build statutes enacted as of June 24, 2021). In at least three of those states, units of local government still have an option to make a “best-value” award for design-build contracts. These states include Arizona (Ariz. Rev. Stat. Ann. § 34-602(A)(3) (permitting units of local government in Arizona to enter into design-build contracts); id. § 34-603(E) (permitting a qualifications-based selection process for selection of a design-builder without initial consideration of price); id. § 34-603(F)(9) (permitting, in lieu of a qualifications-based selection process, an award to the responsive and responsible offeror for design-build services based upon a scoring of technical and price proposals)); Colorado (Colo. Rev. Stat. § 30-20-1104(1) (permitting counties to award integrated project delivery contracts); id. § 31-25-1304(1) (permitting municipalities to award integrated project delivery contracts); id. § 30-20-1106(2) (permitting county to award integrated project delivery contract that “represents the best value” to the procuring county); id. § 31-25-1306(2) (permitting municipality to award integrated project delivery contract that “represents the best value” to the procuring municipality)); and Florida (Fla. Stat. § 287.055(9)(c) (requiring municipalities, political subdivisions, school districts, and school boards to award design-build contracts by the use of a competitive proposal selection process or a pure qualifications-based selection process)). Only Nebraska appears to prohibit its local governments from requesting price proposals from all design-build offerors. See Neb. Rev. Stat. § 13-2907(9) (requiring that a local government’s request for proposals for a design-build contract require a “written statement of the design-builder’s proposed approach to the design and construction of the project”, but specifically disallowing receipt of “price proposals”). Absent authorization from the General Assembly outside of G.S. § 143-128.1A (e.g., in a local act), units of local government in North Carolina do not possess such authority.
