7 Key Risks for Contractors in Transit Procurements

By Michael A. de Gennaro

Your company has reviewed an RFP issued by a municipal authority to select a firm to operate and maintain transit services, and the business team has signed off on the economics of submitting a bid. As your company’s counsel, you have been tasked with identifying the legal risks of the procurement, with the aim of identifying the “most important” considerations. In many instances, legal review will be approached as more or less a formality, with your colleagues on the commercial team having previously determined that a proposal shall be submitted. In rare instances, legal review will be a key factor in determining whether or not to proceed. No matter the case, following is a brief discussion of seven key legal risks to consider, from a contractor’s perspective, in a transit procurement of any size or scope.

1. Vague contract provisions. Quality of procurement documents can vary widely, due to a number of factors. Be sure to identify incomplete or unclear statements of work, contract terms and specifications. For example, some RFPs may be conceptual in nature and omit to state with specificity what price structure or risk shifting provisions will apply in the final contract. Liquidated damages provisions may contain overly-broad language, or be based on subjective criteria that are subject to arbitrary and capricious interpretations by municipal authorities. Special attention should be paid to procurements that feature rolling stock or other equipment furnished by the authority to ensure that all such equipment is clearly described within the operative documents.
    
2. Re-negotiation clauses. Many transit procurement documents deal with changes vis-à-vis change order provisions in the contract’s terms and conditions. However, it is the agency and not the contractor who is typically given control of the change order process. For example, a contractor may request re-negotiation of its fees or service rates if there is a change in service hours over the course of a set time period. Following a good faith review of the contractor’s request, the authority can either grant or deny the request.?
    
3. Termination. Typically, transit procurement documents will provide for termination of the contract by the authority for convenience or contractor’s default. Although there is typically little room to negotiate termination provisions, it is proper to insist on clear timelines for notice of default and an opportunity to cure of 30-60 days. Also, attempts should be made to limit termination for default to material terms of the contract.
    
4. Insurance. Beware of excessive insurance requirements. In most transit procurements, insurance professionals should assist contractor’s legal and commercial teams to assess specific types and levels of coverage required. Performance bonds or letters of credit may be required in addition to insurance policies, and the amounts of, and cost of obtaining, such bonds should be carefully considered.
    
5. Indemnification. Indemnification provisions have, for a number of reasons, become increasingly broad in scope in favor of transit authorities. For example, the contractor may be asked to indemnify the authority against liabilities of any kind arising “directly or indirectly” from the contract. In other instances, an authority may request indemnification with no stated termination date. Although insurance purchased by the contractor provides protection from some costs related its indemnification obligations, shifting the risk to the authority in cases where the latter is better positioned to control the risk will be a sensible solution in many cases.
    
6. Maintenance and Repairs. Increasingly, overly-broad contract provisions require contractors to assume responsibility for maintenance and repairs that are effectively beyond the scope of the procurement. For example, a contract may provide that vehicle inspections performed by the contractor are subject to re-inspection by a third party selected by the authority and, in the event of a failure to re-inspect, the contractor is responsible for latent defects. In other cases, the contractor may be expected to mitigate additional maintenance costs due to extreme environmental circumstances, e.g., heat in Houston, or cold in Anchorage. Contractors should not underestimate the potential additional costs that could arise under such circumstances.
    
7. Dispute Resolution. Although not limited to transit procurements, dispute resolution provisions require special consideration. For most transit procurements, a multi-step process would be beneficial to both the authority and the contractor. APTA has recommended a process including negotiations at the project management level, review by a board for long term contracts, non-binding mediation and final resolution by either arbitration or judicial proceeding.

Every transit project presents its own particular set of legal risks and this discussion does not purport to be comprehensive. Nevertheless, the issues identified above appear consistently in procurements both large and small, and they deserve special focus and consideration by contractor’s legal counsel. 

About the author: Michael A. de Gennaro is a partner with PilieroMazza and heads the Business and Corporate Law Group.  He may be reached at [email protected].