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Cities have the ability to contract with independent contractors for the provision of services that citizens need. This is often done when a city cannot afford to hire city employees to do the work or when the service required is specialized for the city’s operations. City officials should review the advantages that contracting might bring, how they will attract potential contractors and ensure the contract is appropriate for the work requested.
Advantages of Contracting for Services
Cities are called upon to provide a variety of services to city residents. Many of those services can be performed by city employees, but in some circumstances the city and its residents may be better served by contracted services. For instance, it would be ideal if all cities employed a city attorney and a city engineer. However, in smaller cities there is often not enough work to do in these categories to justify the expense of full-time professional employees. In those circumstances, smaller cities typically contract for the needed services.
Likewise, cities provide services that call for a considerable investment in facilities, equipment, experienced management and staffing. Collection of solid waste is a prime example of a service that smaller cities may choose to contract for rather than attempt to make the investment needed to adequately provide that service utilizing city employees.
When a city employs an individual, they must meet minimum wage requirements and pay overtime or compensatory time off when necessary under federal wage and hour laws, which it is not required when using a contractor or a contractor’s employees. In addition, neither a contractor nor its employees are eligible for city benefits such as vacation, sick leave, health insurance or any of the retirement plans that cities participate.
Finally, employment discrimination statutes and the Family and Medical Leave Act generally do not apply to a contractor, and to the extent they may apply to a contractor’s employees, the city does not have to take on the burden of administering the application of those laws for those employees.
Employee vs. Independent Contractor
Given the advantages of using contract services, many employers may be tempted to reclassify an existing employee as an “independent contractor”, or “retain” a person as a “contractor”, in order to avoid the expense and burdens associated with employment. Cities need to be careful when defining someone as an employee or contractor.
The Internal Revenue Service (IRS) uses a 20-point test to determine whether an individual is an employee or contractor. There are three categories of the test that help provide clarity:
- Behavioral Control – This focuses on whether the employer has a right to direct and control how the worker performs their tasks.
- Financial Control – This takes into consideration whether the employer has a right to control business aspects of the worker’s job, such as how they are paid, if the worker’s services are available to other businesses and if the worker can make a profit or a loss.
- Type of Relationship – This looks at whether the parties have a written contract describing the relationship, if the employer provides the worker with employee benefits and if the work performed by the worker is a key element to the employer’s regular business.
Misclassifying a worker can result in several liabilities for the employer, including back pay and overtime compensation, payment of income taxes that should have been withheld, payment of attorneys’ fees and other penalties by the employer, and criminal sanctions. A city in Iowa would also have to contend with back payment of Iowa Public Employees Retirement System (IPERS) contributions as well as claims for payment of state income tax which should have been withheld.
Procurement of Contract Services
When a city makes the determination to contract for a certain service to the city or to its residents, the next determination the city must make is how to go about procuring the contract for that service, and how to identify and contact potential providers of that service. Along the way the city will have to determine if there are any legal requirements it must comply with in procuring that service. Finally, the city will have to decide which of the more commonly used procurement methods it will use to identify, contact and obtain proposals from the field of potential providers. There are two generally recognized methods for procuring a contract for services – solicitation of bids and request for proposals.
Solicitation of Bids
Under this method the city would first develop a set of bid specifications, describing in detail the desired services and the qualifications which bidders must possess in order to bid on the contract. This method is typically used in those situations where the service can be described with sufficient detail to allow bidders to put together a bid with their proposed fee for those services.
There are two methods of soliciting bids – direct solicitation of firms that are available and qualified to do the work or advertisement of a notice to bidders. When using direct solicitation, the city would notify bidders by sending the solicitation for bids to firms that the city recognizes as qualified and available to provide the services. A notice to bidders can be published using a process similar to that required for obtaining competitive bids on a public improvement project under Chapter 26 of the Code of Iowa.
In its bid specifications and in its published notice to bidders, the city should state that the contract will be awarded to the lowest responsive, responsible bidder. In this context, the term responsible focuses on the bidder. A responsible bid is a bid submitted by a bidder who is capable of performing the work. A responsible bidder possesses the necessary financial and technical capability to perform the work and has the ability to complete the work as demonstrated by past performance. Most cities require a bidder to obtain a bid bond to show responsibility, as surety companies typically conduct a very careful and thorough evaluation of the financial and technical capability of any contractor who applies for a bid bond. If a bidder can get a bid bond, chances are good the bidder would also be able to obtain a performance bond, if the city chose to impose that requirement.
The term responsive focuses on the bid. In order for its bid to be considered responsive, the bidder must agree in the bid to do everything required in the bid specifications without any conditions, qualifications or exclusions. If a bidder proposes to perform the services in a manner other than what is specified in the bid specifications, the bid would be considered non-responsive.
Under the solicitation for bids method the primary determining factor is quantitative. Assuming that all bidders are responsible and all bids are responsive, the sole remaining factor for determining the successful bidder would be the lowest dollar bid to provide the specified services.
Request for Proposals (RFP)
This procurement method allows a city to use both qualitative and quantitative measurements to determine the successful proposer. Under the RFP method, the cost to provide the service is but one of several factors that can be used to determine which proposal is the best. While the successful proposer should be both responsive and responsible, it is not required that the city select the lowest cost proposal. Other factors which can be used to determine the successful proposer include: the experience and expertise of the proposer; the proposer’s involvement in service assignments of similar scope and complexity; the proposer’s ability and availability to provide on-going services, including maintenance, training and upgrading. The RFP method is thus uniquely adapted to the procurement of complex services where the exact services to be provided cannot be described and quantified in “specifications”, but where the desired outcome can be identified in the RFP and where individual proposers are given great latitude in coming up with a proposed “solution”.
Under the RFP process the city would first establish a description of the “project” for which it is seeking services, and would then describe the services it is seeking to obtain, or the desired outcome it is seeking to achieve, all for inclusion in the RFP. The city could also include in the RFP the minimum qualifications, prior experience and expertise that proposers would have to demonstrate in their proposals. In addition, the RFP could require proposers to document their ability and availability to provide additional services, such as maintenance, training and upgrading after provision of the initial services.
Finally, the city should develop the criteria it would use to evaluate the proposals it receives. Depending on the nature of the services to be provided, some or all of the following evaluation criteria may be appropriate: the proposer’s project overview; experience, qualifications and expertise; capabilities and resources; quality and thoroughness of the proposal; references; geographic location; project delivery schedule; and proposed fee for services. Each of the evaluation criteria would then be weighted in relation to the other criteria. Ideally, the evaluation criteria and their weighting would be included with the RFP so all potential proposers could determine how they stack up against the city’s evaluation criteria.
As with the solicitation of bids two methods of soliciting proposals are available – direct solicitation, where the RFP is sent to firms recognized by the city as available and qualified to do the work, or publication of the RFP. Depending on the services desired, there are a variety of trade organizations that can facilitate conveying the city’s RFP to prospective companies.
Legal Considerations
The Brooks Act, 40 U.S.C 471, Title IX, Selection of Architects and Engineers, and federal implementing regulations (23 CFR 172 and 49 CFR 18) regulate the process for procuring architectural and engineering services for projects or activities funded with federal funds. Generally, under the Act and the federal regulations, a city or other government entity using federal funds for a particular project or activity would have to use a qualifications-based selection process to procure architectural or engineering services for that project or activity. Under a qualifications-based selection process a government entity cannot use “proposed price” or “proposed fee” as a factor in making its selection from among the persons of firms making a proposal to provide that service. Under that process the government entity would issue a Request for Qualifications (RFQ) in lieu of an RFP. The RFQ could solicit information on all of the criteria and factors identified above for inclusion in an RFP, except “proposed price” or “proposed fee”. The proposed price or fee would not come into play and could not be considered until the initial review and evaluation had been completed, and only then would the governmental entity be allowed to solicit the proposed price or fee from the successful proposer and negotiate the price or fee with the successful proposer.
