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Inside This Issue:

  • Bid Bonds on Federal Contracts – Just the Fax
  • General Liability Subsidence Exclusion Is Major Concern
  • Web-Based Project Management Systems – Virus Security Briefing

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ARTICLE #1

Bid Bonds on Federal Contracts – Just the Fax

By: Hal Perloff, Esq.

Bidders on most sealed-bid federal contracts are required to furnish a bid guarantee along with their bids. The bid guarantee is usually provided in the form of a bid bond issued by a Treasury-listed surety company. The purpose of the bid bond is to guarantee the payment of liquidated damages to the government in the event the contractor refuses, or is unable to honor its bid and accept the award of a contract. This guarantee is usually 20 percent of the bid price.

Under the federal rules governing bids and contracts, a proper, enforceable bid guarantee is a matter of bid responsiveness – the bid of a contractor that fails to include a valid bid bond at the moment of bid opening must be rejected by the government (FAR 28.101-4). A bid guarantee is deemed acceptable if the government determines that the bid bond documents, including any powers of attorney appointing an attorney-in-fact, also known as an agent, with authority to bind the surety, would be enforceable against eh surety should the bidder fail to accept the contract award. If the government cannot determine definitely from the documents submitted with the bid that the surety would be bound, the bid must be rejected as nonresponsive.

Similar to the insurance industry, surety companies providing bonds often rely on authorized agents (attorneys-in-fact) to issue bid bonds for their customers. The sureties furnish their agents with corporate seals and blank bond forms. The surety also executes a power of attorney document authorizing the agent to issue bonds in the name of the surety. To prevent agents from issuing unauthorized bonds, many sureties have a practice of keeping powers of attorney at their home office and only sending a copy to the agent. The completed bid bond signed by the agent as well as the faxed power of attorney authorizing that agent to issue the bond are then included with the contractor’s bid. In two recent decisions, the General Accounting Office (“GAO”) has essentially declared this long-accepted practice invalid by upholding the government’s rejection of facsimile and photocopied powers of attorney accompanying otherwise valid bid bonds.

The first decision, Kemper Construction Co., involved an invitation for bids (“IFB”) issued by the U.S. Army Corps of Engineers (“Corps”) for construction of a shop and garage facility on the Mississippi River in Louisiana. Following bid opening, the fourth low bidder on the project was successful in persuading the Corps to reject as nonresponsive the bids of its three lower-priced competitors. The Corps’ basis for rejecting these bids was that the powers of attorney accompanying the bidders’ bid guarantees were faxed documents. According to the Corps, the faxed signatures on each bidder’s power of attorney documents were insufficient to demonstrate an intent on the part of the surety to be bound by the bond.

Kemper, the low bidder on the project, protested the Corp’s rejection of its bid to the GAO. Kemper’s bid bond was signed by an attorney-in-fact for the surety. The surety’s raised corporate seal was crimped over the agent’s signature. The bond was accompanied by a faxed copy of a power of attorney appointing that individual as attorney-in-fact for the surety. The power of attorney contained a certification that it was currently in full force and effect. The power of attorney also included a provision stating that “[t]this Power of Attorney is signed and sealed by facsimile under and by the authority of [a Resolution adopted by the surety’s Board of Directors]. . . .” The document recited the Board resolution which sated that the signature of a Corporate Officer “may be affixed by facsimile on any power of attorney” and that the signature of a Secretary and the seal of the Corporation may be affixed by facsimile to any certificate on such powers of attorney and “such facsimile signature and seal shall be valid an biding on the Corporation.” This language is substantially similar to the language used by many surety companies on their powers of attorney.

The GAO upheld the Corps’ rejection of Kemper’s bid. The GAO held that the Corps reasonably determined that without the original power of attorney it could not be certain that alterations had not been made to the faxed documents to which the surety did not consent. Therefore, Kemper did not unequivocally establish that its surety would be bound in the event Kemper failed to meet its obligations. Kemper argued that since the power of attorney expressly provided that signatures could be “affixed by facsimile,” the surety consented to be bound by the faxed document. The GAO, however, rejected this argument by finding that the phrase “affixed by facsimile” referred only to signatures produced by mechanical means (e.g., by stamp or automatic signature machine) and not by faxed or photocopied documents.

The GAO recently reiterated its holding in Schrepfer Industries, Inc., a bid protest that involved a Corps project to replace irrigation conduit at Chatfield Lake in Littleton, Colorado. The Corps rejected the low bid of Schrepfer as nonresponsive because the power of attorney accompanying its bid bond was a photocopied document. Relying on its earlier decision in Kemper Construction, GAO held that the Corps reasonably concluded that the photocopied power of attorney did not unequivocally established that the bond would be enforceable against the surety.

The Kemper Construction and Schrepfer Industries decisions have been met with much concern and confusion within the surety and government contracting communities. In response to these decisions, the Corps seems to be subjecting bid guarantees and powers of attorney to greater scrutiny. Many sureties are revising their business practices and providing their agents with stacks of blank, original powers of attorney containing mechanically produced signatures. While this revised practice addresses the problems raised in Kemper Construction and Schrepfer Industries, it comes at the cost of an important control sureties previously had over their agents.

The following points should be carefully considered in submittals on federal projects: (1) Use only original documents (bid bond and power of attorney) with the bid; (2) Ensure that bid bonds and power of attorney have original (wet-ink) signatures, or mechanically produced signatures if mechanically produced signatures are expressly permitted; (3) Ensure that the power of attorney is current as of the date of bid opening. The power of attorney should have a certificate stating that it is in full force and effect and has not been revoked. If the certification is dated prior to bid opening or contains no date at all it can provide a basis for the government to reject the bid as nonresponsive; and (4) Ensure that the penal sum of the bid bond is correct.
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The author is an attorney with the law firm of Wickwire Gavin, P.C., located at 8100 Boone Blvd., Suite 700, Vienna, VA 22182 (703) 790-8750; hperloff@wickwire.com.

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HILL INTERNATIONAL – Founded in 1976, Hill is a worldwide construction consulting firm which provides innovative approaches to both avoidance and resolution of construction disputes. It also offers clients a full spectrum of project management services, including a unique form of objective project management oversight designed to better assure that capital projects are completed on schedule and within budget. Hill is ranked in the top 15 largest Construction Management Firms by ENR magazine. Visit http://www.hillintl.com

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RISK MANAGEMENT WORKSHOPS PLANNED
ATLANTA – FEB 14, PHOENIX – FEB 28;
PARSIPPANY – MARCH 14; NEW YORK CITY MARCH 15
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In response to our readers response to the Feedback request that we did a couple months ago, we are scheduling a series of risk management workshops in several cities. The first of these will held in Atlanta on February 14. It will cover risk management topics such as design professional liability, documentation management (particularly electronic), project management (including web-based project management systems), a discussion of contractor claims management. Three (3) AIA continuing education learning units will be earned. A nominal charge of $39.00 will cover course materials and light refreshments. Workshops are also scheduled for Parsippany, NJ and New York City. For more information, go to: http://www.constructionrisk.com/workshops.htm
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ARTICLE #2

General Liability Subsidence Exclusion is Major Concern

By:  Robert G. Mahan, Esq.

The construction defect fiasco in California led to the creation, by the specialty insurers, of the subsidence exclusion for attachment to the commercial general liability policies of homebuilders. Originally the exclusion applied only to completed operations property damage and was limited to subsidence generally caused by foundation failures. It has evolved into the contractor’s worst nightmare.

Many companies have extended the subsidence exclusion into an “absolute earth movement exclusion” including earthquakes and are using it for all contractors. Most no longer limit the exclusion to either the property damage or completed operations hazard. One admitted regional insurer puts the exclusion on every policy it issues. Since the exclusionary language is so broad, it would be strictly interpreted against the finding of coverage. The courts in California have been of no help in mitigating the negative effects. (See Blackhawk Corp. v Gotham Ins. Co., 54 Cal App 4th 1090.)

This problem is no longer limited to California nor to specialty insurers. A major national insurer specializing in contractors has recently added an absolute subsidence exclusion for use in Arizona, Colorado, and Nevada. Insurers may use this endorsement wherever market conditions allow.

Why the big concern for most contractors?

· No coverage for bodily injury arising out of a trench collapse on an ongoing job.
· Possible coverage problems arising out of equipment upset.
· Any earthquake induced bodily injury or property damage is excluded.
· Subcontractors may have this exclusion on their policies.

What can you do to eliminate or mitigate the problem?

· Use a different insurer — even California has A-rated insurers with minimum exclusions.
· Request the exclusion be deleted — especially for premiums over $35K.
· Obtain separate subsidence coverage where available.
· Require your subs to disclose all exclusionary endorsements during bid
process.
· Obtain a side letter from the insurer limiting the areas where the
exclusion applies.

Large general contractors and public entities, such as Caltrans, are becoming more and more sensitive to the use of exclusionary endorsements on policies where they are named as additional insureds. There is a requirement on both the Caltrans insurance specifications and the AGC of California standard form subcontract that exclusionary endorsements be set forth in the insurance certificates.

Robert G. Mahan Esq. is Managing Member of Mahan Insurance LLC, with offices in Anaheim, CA, and Mystic, CT. This article first appeared in California “Constructor” / Volume 32, Number 1 / January 2001.

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ARTICLE # 3

Web-Based Project Management Systems – Virus Security Briefing

As the editor of this newsletter, I (Kent Holland) hesitated to include this material as an article since many will conclude (rightly) that is sounds like it promotes Constructware, Inc.’s particular system.  This is because it was written by one of their software engineer responsible for security and was intended for use as a client briefing paper.  Since it is written by Constructware as a briefing to its own customers, and it is naturally focused on the benefits that Constructware believes are offered to its customers by virtue of its protocols and procedures.  The issues raised and the methods Constructware states that it uses to provide security contain provide food for thought. I have heard so many questions and complaints lately about web-based systems creating potential breaches of security for the architects, contractors, project owners and others that use them, that it seemed appropriate to include the article in this newsletter and invite questions and comments by our readers to be submitted into our discussion board. We have created a special new section dedicated to Web-based project management systems to encourage such a discussion. Try it out at http://discussion.constructionrisk.com/discussionboard/.

By Ryan Watts, Software Engineer
Constructware, Inc.  (See Editor’s Note at Conclusion of Article)

As more and more computer viruses plague the Internet, questions continue to come up regarding the safety of the ASP security model. Specifically, people worry that there may be an increased risk of contracting a virus or losing data to a virus when utilizing an ASP (e.g. Constructware). It is prudent to be concerned about this; after all viruses are becoming more sophisticated in the way they propagate and more aggressive in the damage that is delivered. However, if you examine the weaknesses that are typically exploited by viruses, the ASP model will actually prove beneficial by reducing your virus risk.

It should be understood that no computer system is 100% removed from the threat of computer viruses. Everything is at risk from standalone workstations to complex wide-area networks. The risk level is what can and should be controlled. Risk must be minimized to the lowest level possible, while maintaining desired functionality. This balance becomes your acceptable risk factor, which may fluctuate slightly over time.

Vulnerability to viruses varies from a number of different factors. It all depends on the type and complexity of any specific network, however the following items generally contribute the most to a specific risk factor:

· Internet connectivity
· Firewall type, configuration, policies, etc.
· Network design
· E-Mail platform and configuration
· User education
· Antivirus software used (if any)
· Network OS Type, set-up, complexity, etc.
· Services available (both internal and external)

Most corporate networks include all of the items listed above in some form or another. Depending on how these items are implemented or configured, the risk factor will vary from network to network. Constructware reduces risk by eliminating many of the common methods exploited by viruses. Constructware also limits exposure by maintaining a very small “footprint” on the Internet.

Consider the most common form of propagation or method of attack used by viruses:

· Active program execution – When a user consciously executes a program executable that has been infected by a virus.

· Passive program execution – The user automatically executes Code on a computer without direct intervention. This is typically invoked through another event like opening an e-mail message.

· Network shares or file mappings – When a virus is executed, it may try to copy itself or infect other files on network drives that are mapped to the user’s workstation. Viruses may also attempt to produce copies, and infect or delete existing files on available network shares/volumes that are unmapped.

· E-Mail – Many viruses, upon execution, will generate numerous e-mail messages with the virus as an attachment.

· Network protocol – Viruses attempt to propagate by scanning a network (i.e. the Internet) for vulnerable hosts. Effects can range from logical damage to the host or actual propagation of the virus.

Constructware provides a high level of security against these threats through the following design benefits:

· Uploaded files are never executed on any of the production Constructware servers. This completely eliminates the threat of an infected file being executed and invoking another form of propagation (e.g. infecting other files, producing additional copies, generating e-mail messages, etc.).

· Users are never attached directly to Constructware in a manner where an infected user can compromise the security of files stored on a Constructware server (i.e. users do not map to Constructware drives). All uploads and downloads from the Constructware server must be done through the browser.

· Files located on a Constructware server are safe from any infected users of the system. Since users can’t directly modify files located on a Constructware server, uploaded files are more secure.

· The Constructware internal messaging does not have the functionality of invoking program execution automatically. Nor does any client e-mail program have the ability to invoke any files that have been uploaded to Constructware. This eliminates the risks associated with passive program execution.

· It is not possible for viruses to use the Constructware messaging system for mass distribution of e-mail messages with infected files attached. Constructware messaging doesn’t support the MAPI functionality exploited on other commercially available messaging systems.

· Constructware is able to maintain an extremely small footprint on the Internet. Ports and server services that are required to support the product (i.e. exposed to the Internet) are very minimal. This provides less of a target for a virus to leverage an attack.

Additionally, Constructware’s standard operating practices enhance the overall design and protection for our clients:

· All files uploaded to the servers are scanned in real-time as well as at scheduled intervals. As a result, infected files are either repaired or quarantined.
· Antivirus updates are implemented as they are introduced.
· Servers are kept up to date with manufacturer recommended patches.
· Constructware operations continuously monitor industry news and events for quick access to any new threats.

So, what are the next generation viruses going to be like? How are they going to propagate and what type of damage will they inflict? No one knows the answer to these questions, which has many people concerned. How can you protect a computer system against an unknown threat that can surface at any time? This is where the ASP model proves beneficial.
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About the Author: Ryan Watts is a software engineer and Security Officer for Constructware, Inc. For more information on the content of this article,
mailto:ryan.watts@constructware.com

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HILL INTERNATIONAL – Founded in 1976, Hill is a worldwide construction consulting firm which provides innovative approaches to both avoidance and resolution of construction disputes. It also offers clients a full spectrum of project management services, including a unique form of objective project management oversight designed to better assure that capital projects are completed on schedule and within budget. Hill is ranked in the top 15 largest Construction Management Firms by ENR magazine. Visit http://www.hillintl.com

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ZURICH NORTH AMERICA INSURANCE – For information on the Zurich Subguard ™ default insurance and other innovative construction insurance products, you may call Jacobus Vrolijk at 952-841-2121 or e-mail him at Jacobus.Vrolijk@zurichna.com. For information on Zurich’s innovative design professional liability products such as Owner’s Protective Professional Liability, Contractor’s Protective Professional Liability and Architects and Engineers Professional Liability policies, you may contact Richard Zarandona at Richard.Zarandona@Zurichna.com.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

The newsletter is published and edited by J. Kent Holland, Jr., Esq., a construction lawyer serving as Of Counsel to the law firm of Wickwire Gavin, P.C. and risk management consultant to Zurich North America design professional liability unit. We are always glad to accept high quality articles from construction lawyers and professional consultants to include in the newsletter or the articles archive section of our website.

This newsletter is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law. Further, the content and comments in this newsletter are provided for educational purposes and for general distribution, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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Copyright 2002, ConstructionRisk.com, LLC

Editor: J. Kent Holland, Jr., Esq.
1313 Dolley Madison Blvd.
Suite 333
McLean, VA 22101
703-623-1932
Kent@ConstructionRisk.com