November 15, 1982
Mr. Robert E. Hayes
Davenport, Evans, Hurwitz & Smith
National Reserve Building
Sioux Falls, South Dakota 57102
Official Opinion No. 82-51
RE: Firm Bid Requirement
Dear Mr. Hayes:
Acting pursuant to instructions of the Sioux Falls School Board, you have requested an official opinion concerning the following facts:
FACTS:
The District intends to seek bids for the provision of fuel oil for the coming school year. These bids are necessitated by the fact that the District is on an interruptible natural gas service. The bids will be requested on a price per gallon basis, inasmuch as it is not possible to determine the amount which must be purchased, or the time at which it must be purchased. Past experience reveals that no bids will be received which quote a firm price for the school term.
SDCL 5-18-19.2 provides that, if 'firm competitive bids' are not received the school board may 'reject all bids and negotiate a contract for the purchase of the materials, supplies, or equipment at the most advantageous price . . .'
Based upon those facts you have asked the following question:
QUESTION:
Pursuant to this statute [SDCL 5-18-9.2] and in the event no firm bids are received, may the District negotiate a contract for the provision of fuel oil throughout the school term, which contract includes a provision whereby the price to be paid by the District from time to time is increased or decreased based upon documented increases or decreases in the supplier's costs?
The problem presented by the question you ask has been extremely troubling to local governmental units since the first oil embargo made the prices of oil and oil-related products subject to enormous and erratic fluctuations. Clearly, the overall import of SDCL ch. 5-18 relating to public bidding contemplates a firm bid at a set and stated price. For example, raising or lowering the bid price of fuel oil would have to be seen as modification of the bid and according to SDCL 5-18-8 modification of bids must be done prior to the time the bid is publicly opened and read. Similar comments could be made about bond requirements since they are inevitably stated in a percentage figure of a stated price. Most telling, however, is the legislative action set out in SDCL 5-23-19.1. The statute provides:
In the event that a contract price for goods entered into by the state of South Dakota becomes unreasonable in view of changing market conditions, the bureau of administration shall have the authority to cancel the contract or to adjust the contract price to meet such changing market conditions if it is necessary to obtain necessary materials at the required time. Any such contract price adjustment shall be justified in writing by the contractor to the bureau of administration and a copy of such adjustment and the written justification therefor by the contractor and the bureau shall be filed with the auditor-general. No such contract price adjustment shall allow for increased management costs or for an increase in the dollar amount of profit for the contractor having such contract. No contract price adjustment may be made for or during the first ninety days of an annual contract.
Clearly, the Legislature in the statute set out above granted authority to the State in its purchases to alter contracts to reflect changing market conditions. No similar authority has been given to units of local government.
An alternative method of dealing with the problem was enacted by the Legislature in 1979. SDCL 5-18-9.2 provides:
If after advertising for bids pursuant to § 5-18-3 for the purchase of materials, supplies or equipment, firm competitive bids are not received, the governing board of a unit of local government may reject all bids and negotiate a contract for the purchase of materials, supplies or equipment at the most advantageous price, provided that such materials, supplies or equipment meet the specifications of the original advertisement for bids. The governing body shall contact and attempt to obtain competitive quotations from at least three suppliers. A record of the names of the suppliers, the quotations received shall be documented, spread upon the minutes, and retained on file by the governing board.
In my opinion this statute gives local governmental units a substantial amount of flexibility when faced with situations in which no firm or fixed price bids are received; however, it does not allow the local governing body to enter into a continuing contract where the governmental agency and the contract provider engage in periodic negotiations regarding the price of the material or commodity. Rather, the statute contemplates a procedure whereby when the governmental entity does not receive any firm or fixed price bids, it may call for new bids or may make specific purchases of the commodity or material on the open market through the procedure of obtaining competitive quotations from at least three suppliers, spreading the names of the suppliers and the quotations received upon the board minutes, and making specific purchases from the supplier providing the lowest price at the time the quotations are sought. Since this process does not require advertising for bids each time a purchase is made, the purchasing agent for the governmental entity should have little or no difficulty in receiving quotations on the present price of any particular commodity from suppliers willing to do business with the purchasing entity.
The answer to your question is 'No' in that the District may not enter into continuing contracts whereby the buyer and seller periodically negotiate the price but may make purchases of specific materials on a sale-by-sale basis through following the procedure in SDCL 5-18-9.2.
Respectfully submitted,
Mark V. Meierhenry
Attorney General
