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The Subcontractor and Construction Project Bidding

The Court of Special Appeals of Maryland recently affirmed a few understood yet not entirely verified rules of law relating to the establishment and enforcement of mechanic’s liens brought by laborers of a subcontractor. Aside from drawing what is now a bright-line interpretation of Maryland’s mechanic’s lien statute on this issue, the Court may have inadvertently sent the art of construction bid preparation into a tail-spin.

In the published opinion of Judd Fire Protection v. Larry Davidson, et al., (Kenny, J. Filed June 1, 2001), the Court elucidated the right that employees of a lower-tiered subcontractor have to file a mechanics’ lien even though their employer had executed a lien waiver. In doing so, the Court affirmed the position that in order for a lien waiver to be effective against a person or entity, they must effectively be a party to the waiver. The Court affirmed that laborers did have standing to pursue a mechanics’ lien against the property, provided they had complied with statutory requirements. That left the Court to consider how the measure of damages should be determined. In doing so, the Court entered the arena of construction contract bidding and may have left behind an unintended result.

The Court was asked to consider whether the Circuit Court for Baltimore County erred when it failed to use the subcontract price as the maximum measure of damages due the subcontractor’s laborers. The trial court considered each laborer as an independent sub-subcontractor, and calculated the damage awards based on the hourly wage of the laborer and the amount of labor each invested into the project. Those awards greatly exceeded the total subcontract price for the amount of work performed. The subcontract price was based upon a line item, unit price bid structure of $17/per sprinkler head installed. The Court of Special Appeals overturned the trial court’s ruling, holding that the appropriate damage calculation can be based on the contract pricing schedule. In so holding, the Court stated, “The contract price is a ceiling upon the lien claim.”

In making its pronouncement, the Court overlooked the art of construction bidding where unit priced, line item bidding is used. In preparing a bid, a contractor must structure the bid so that not only is he the lowest, responsive bidder but so he can earn enough from contract performance to live to bid another day. Where estimated quantities are used against which the contractor bids a unit price for each line item to be supplied, an adroit contractor will chose a lower number where an under-run of quantity is suspected on a given line item, and a higher unit price where an over-run of bid quantities is suspected. With payment based upon actual quantities supplied, such procedure will net the contractor a higher return than if each line item unit price was more reflective of the fair value of the unit work. Indeed it is not unknown to find “penny” bids for some line items. Thus, any unit price found in a bid may not be chosen to be reflective of the fair value of the unit of work but instead could well be part of a bidding strategy as described, be selected in order to front-load the payment schedule, or for a myriad of other reasons.

The Court in Judd apparently did not realize the limited utility of these unit prices for purposes of determining the fair value of the work performed as the Court declared the unit price sacrosanct. The mere simplicity of calculating damages based on the line item, unit bid price may have appeared highly appropriate since the subcontract only included one unit price line item – an estimated 749 sprinkler heads at $17/per head – and nothing more. This situation is not typical and the Court did not differentiate. Where more than one line item exists, application of the measure of damages articulated in Judd could be a double-edged sword. For the contractor responsible for installing an undervalued line item, this damage award could be very chilling, as the award would not reflect the true value of his services. Likewise, if the subcontractor happened to be the party responsible for the king’s golden goose, the owner could be faced with a judgment award greatly in excess of the true value added to the owner’s property.

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