This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its 2016 annual report findings entitled “Ministry of Transportation—Road Infrastructure Construction Contract Awarding and Oversight”, the Auditor General of Ontario found that the Ministry of Transportation failed to properly manage paving standards in the construction of provincial highways. As the report noted, the “Ministry of Transportation (Ministry) is responsible for the construction and maintenance of provincial highway and bridge infrastructure, which is currently valued at $82 billion”, and this portfolio “consists of about 40,000 km of highway lanes covering a distance of about 17,000 km, and almost 5,000 bridges and culverts.” The Auditor General found that the Ministry put contractor interest ahead of public interest due to pressure from the construction industry, and that the Ministry failed to implement proper testing to address identified issues relating to the premature cracking of pavement:
The road construction industry in Ontario is mainly represented by two groups: the Ontario Road Builders’ Association (ORBA) and the Ontario Hot Mix Producers Association (OHMPA). They consult with the Ministry on technical matters and lobby on behalf of their members’ interests.
Our audit found that, in 2000, the Ministry began identifying significant problems throughout the province with pavement cracking years before it is expected to, resulting in increased cost to taxpayers for highways having to be repaired or repaved sooner than expected, and increased inconvenience and time lost for drivers due to more frequent road work. In 2004, the Ministry confirmed that poor quality asphalt cement was the primary cause of premature cracking. In 2007, two tests for assessing the quality of asphalt and the likelihood of it cracking prematurely were developed; however, at the time of our audit, the Ministry had fully implemented only one of them—five years after it was developed—and was using the second on only a limited number of projects. This is the case because over the years, the Ministry decided not to implement all the tests due to multiple requests from the asphalt industry to not implement them.
Similarly, in response to requests from construction contractors who belong to ORBA, the Ministry made significant policy changes that benefit the contractors over taxpayers’ best interests.
The report also noted that the Ministry rewarded poorly performing contractors with bonuses, overpaid for work that was covered under warranty, continued to award contracts to contractors who had breached safety standards, and failed to ensure the independence of its performance testing:
The Ministry has also paid bonuses to contractors after it became aware that contractors may have tampered with samples, substituting good samples for testing in place of the actual asphalt used. As well, the Ministry has paid for costs to repair roads that should have been covered under contractors’ warranties. Although the Ministry works with contractors to change their behaviour through discussions and improvement plans, it rarely penalizes poorly performing contractors, including contractors that breach safety regulations, and allows them to continue to bid on and be awarded future contracts.
We also noted that it is the contractors, not the Ministry, that hire the professional engineers responsible for certifying that construction of structures (such as bridges) adheres to required standards. A few of these engineers have certified that construction, that was subsequently found to be unsafe, was in compliance with the standards.
The Auditor General determined that these contract management failures led to significant increased costs to the taxpayer for the delivery of substandard work:
We identified highway projects in all regions of the province where pavements had to be fixed for cracks much earlier than their expected life of 15 years—and some as early as only one year after the highway was open to the public. Sufficient documentation is not available for us to determine the full extent of this issue and the total additional cost paid by the Ministry to repair pavement because of premature cracking. However, we were able to examine five highway projects where all repair costs incurred because of premature cracking were tracked; we noted that the Ministry paid $23 million to repair these highways on top of the $143 million originally paid to pave them. The highways had to be repaired just one to three years after the pavement was laid.
The report also concluded that the efforts of lobby groups resulted in the Ministry making a series of policy changes to the benefit of the construction industry, including: (i) allowing delays in the payment of fines so that some become uncollectable; (ii) removing policies that discouraged contractors from repeatedly suing the government; and (iii) diluting contract dispute mechanisms so that contractors were encouraged to formally dispute more claims, rather than engage in dispute resolution.
With respect to delays in collected fines for performance breaches, the Auditor General observed that the Ministry lowered its practices from the standards applied in other provinces:
Prior to 2011, contractors had to pay liquidated damages (late fines) right away when they were late delivering on projects. However, the Ministry agreed to a change in its policy to allow contractors to delay paying fines if the contractor wanted to contest the fine. We noted that other provinces such as Alberta, British Columbia and Quebec collect fines immediately, then issue a refund if the dispute is resolved in the contractors’ favour. With this change in policy, contractors have been able to postpone paying a total of about $6 million in fines for up to four years. During these four years, two contractors went bankrupt; the Ministry will never be able to collect the $660,000 in late fines they owed.
Similarly, the Auditor General found that the Ministry removed a contractual protection that previously discouraged litigation by barring litigious contractors from future bidding opportunities:
Prior to 2015, the Ministry could prohibit contractors that filed multiple lawsuits that it deemed to be frivolous from bidding on future contracts. Lawsuits considerably add to the workload of Ministry staff and to legal costs for the Ministry. Upon the industry’s requests, the Ministry removed a contract clause in 2015 that had given the Ministry the ability to exclude litigious contractors from bidding on future contracts. Ministry records show that between 2007 and 2015, contractors filed 12 lawsuits. Prior to 2007, lawsuits were virtually non-existent. The new policy change may contribute to even more lawsuits.
Finally, the Auditor General found that the Ministry diluted its dispute resolution process, making it easier for contractors to sue the government over contract disputes:
In the Ministry’s original dispute-resolution process, a contractor wishing to make a claim against the Ministry had to escalate the claim through three levels within the Ministry before launching legal action. This process worked well given that about 95% of disputes were successfully resolved through this process. However, upon the industry’s request, the Ministry agreed in 2016 to change the process, allowing contractors to ask for a third-party referee to be involved at any level of the dispute process. There is a risk that referees may make middle-ground decisions instead of strictly applying the terms of the contract. This may create an incentive for contractors to file more claims and go directly to a referee.
In light of these findings, the Auditor General recommended that the Ministry immediately implement revised standards for testing paving contracts. The Auditor General also recommended that the Ministry develop policies and procedures that are in the best interest of the public, rather than in the interest of the construction industry. More specifically, the Ministry was urged to: (i) enforce warranties to avoid paying twice for faulty work; (ii) implement procedures that sanction and discourage poor contractor performance; and (iii) reinstitute the contractual safeguards that previously deterred recurring contractor litigation.
