October 12, 1994

Mr. Maurice C. Christiansen
Auditor General
427 South Chapelle
Pierre, South Dakota 57501-5070

OFFICIAL OPINION NO. 94-08

Purchasing items competitively bid by other government entities

Dear Mr. Christiansen:

You have requested an official opinion from this Office regarding the following factual situation:

FACTS:

In some instances, the specifications relating to the purchase of a piece of equipment are lengthy and very detailed. The specifications correspond to the needs of the purchaser, which generally vary from entity to entity. To accommodate its specific needs, a subsequent purchaser may desire to make a number of changes in specifications.

SDCL 5-18-18 allows one local government entity to enter into a contract with the lowest responsible bidder of an item competitively bid by another government for up to twelve months after the date of the contract award. However, certain industries experience rapid changes in technology. The models of certain products, such as computers, are often updated and changed within a few months of a bid award. The newer models may be cheaper, better and faster than the models they replaced.

One of the specifications involved in bidding is a trade-in. A trade-in simply means that an entity wants to trade in an item that is no longer needed to help reduce the cash necessary to purchase the new items. A bid proposal incorporating a trade-in typically begins with an original bid amount, less the trade-in allowance established by the bidder, resulting in the net bid amount.

To illustrate, assume government Y desires to purchase item B by trading-in item A. Three bidders submit proposals.

Original bid amount of item B

Less: Trade-in allowance of item A

Net bid price

Government Y would award the contract to Bidder 1, as the lowest responsible bid.

Taking the circumstances of the above trade-in a step farther, in some instances the original bid amount of the lowest responsible bidder (Bidder 1), is utilized by other entities for cash outright purposes.

Based on that factual scenario, you have asked the following questions:

QUESTION NO. 1:

If one entity awards a contract based on the bid of another entity, may the item acquired vary from the specs of the original bid? If so, is there a limit to the amount of changes allowed?

QUESTION NO. 2:

May an entity utilize another entity's bid to purchase a model other than the one originally purchased by the first bidder if the alternative model still meets the original specifications?

QUESTION NO. 3:

If one entity accepts a bid net of a trade-in allowance, may another entity utilize the accepted bid if it has a similar item to trade-in? If so, may differences in trade-in allowance be accepted in such circumstances?

QUESTION NO. 4:

If one entity accepts a bid net of trade-in allowances, may another entity contract with the successful bidder by utilizing the original bid amount for a cash outright purchase?

IN RE QUESTION 1:

SDCL 5-18-18 provides in pertinent part:

The provisions of <185><185> 5-18-1 to 5-18-17, inclusive, may not be construed to regulate or apply to . . . the purchase by one local government entity from the lowest responsible bidder of an item competitively bid in the previous twelve months by itself or another local government entity or the state at the bid price or less. . . .

The South Dakota Supreme Court in Fonder v. City of Sioux Falls, 71 N.W.2d 618, 620 (S.D. 1955) noted that the legislative objective underlying the requirement of competitive bidding by public corporations is "to guard against favoritism, improvidence, extravagance, fraud and corruption." The Fonder court quoted American Jurisprudence with approval:

Since they are based upon public economy and are of great importance to the taxpayers, laws requiring competitive bidding as a condition precedent to the letting of public contracts ought not to be frittered away by exceptions, but, on the contrary, should receive a construction always which will fully, fairly, and reasonably effectuate and advance their true intent and purpose, and which will avoid the likelihood of their being circumvented, evaded, or defeated.

Fonder, 71 N.W.2d at 620-621, quoting, 43 Am.Jur., Public Works and Contracts, 26. Given that Supreme Court standard, exceptions to competitive bidding laws must be narrowly construed by this Office.

Under the Fonder standard, it is my opinion that a governmental entity entering into a contract on the basis of the lowest responsible bid proposed to another government entity, as provided in SDCL 5-18-18, has only limited authority to vary its specifications from those of the original bid. It must achieve "substantial compliance" with the original bid letting, the same standard that the governing body would have applied in selecting a lowest responsible bidder had the later contract been the result of a fresh competitive bidding process. Fenske Printing Co. v. Brinkman, 349 N.W.2d 47, 48 (S.D. 1984). The test approved by the court in Fenske to assess "substantial compliance" is whether the variance between a bid and the underlying specifications are "material." Gridley v. Engelhart, 322 N.W.2d 3, 8 (S.D. 1982). Materiality occurs when the variance gives one bidder a substantial advantage or benefit not enjoyed by other bidders. Id.

The answer to your first question is that to take advantage of the statute, the variance between items purchased by way of an original and then a subsequent bid may not be "material" and that the new item must be in "substantial compliance" with the specifications set out in the original bid letting.

IN RE QUESTION 2:

The answer to the second question is "yes," again assuming that the different model's specifications contain no "material" variance from the original bid specifications. In answering this question, I am aware that many manufacturers routinely offer newer models that actually represent only negligible product changes. As long as the item purchased from the lowest responsible bidder contains no material variance from the original specifications, the second government entity may purchase the alternative model item from the low bidder.

IN RE QUESTION 3:

It is my opinion that a governing entity may not utilize the exception under SDCL 5-18-18 to purchase an item from another entity's low bidder when the original bid specifications included a trade-in allowance. In my opinion, the trade-in specification represents a material specification which, by its very nature, must be modified for the subsequent purchase. Simply speaking, two trade-ins are never the same and, consequently, it would be a contravention of the bid laws to allow a secondary entity to piggyback a bid when that initial bid specification included a specified trade-in provision.

IN RE QUESTION 4:

Given my answer to Question 3, above, the clear answer to your fourth question is, "No." As stated in the answer to Question 3, a trade-in allowance is a material specification, so the exception under SDCL 5-18-18 cannot be utilized when the secondary entity intends no trade-in. It is my opinion that the SDCL 5-18-18 exception is intended to be implemented by governing bodies purchasing quantities of standard grade items. Obviously, that is not the situation with large equipment where most such bids include a trade-in allowance for a specific piece of equipment. The statutory exception is a narrow one and was not intended to allow governing bodies to circumvent the bid laws just because the item or a similar item has been purchased by another governmental entity through the competitive bid process.

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