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Bond change raises questions

Late revision resulting in low guarantee benefited small players

Hey there, time traveller!
This article was published 27/11/2013 (1358 days ago), so information in it may no longer be current.

Six days before the deadline for construction companies to bid on the police headquarters project, the city changed the eligibility rules in an effort to reduce costs and allow smaller contractors to bid on what's become a $172-million job.

The contract was awarded to the only regional players in a field where the other three bidders were large, national firms.

The new police headquarters on Graham.


The new police headquarters on Graham.

Now, the city says it made the last-minute change partly at the behest of a national surety organization -- which vehemently denies it offered such advice.

On Jan. 12, 2011, the city issued a final addendum to the guidelines governing which companies could bid on construction-management services for the transformation of the former Canada Post building into the new headquarters.

The change involved a reduction in the threshold for what's known in the construction industry as a performance bond, which is the amount of money a construction company has to put up to guarantee it can finish the job.

This bond acts like insurance for a construction company's client. If a firm cannot complete the work, the client may cash in the bond.

Winnipeg's original request for proposals for the project, issued in 2010, called for construction companies to put up a cheque for 50 per cent of the total bid price, or $51 million of what was then a $102-million project.

On Jan. 12, 2011, the city reduced this guarantee to a cheque for $25 million, which was less than one-quarter of the value of the work. The bid period closed six days later.

On Feb. 10, 2011, the city awarded the first phase of the construction contract to a joint venture between Caspian Projects and Akman Construction, two Winnipeg firms. Akman later left the project and the city negotiated the final construction contract with Caspian alone.

The Surety Association of Canada, the national body for companies that issue construction bonds, says a 25 per cent guarantee is uncommon in Canada's construction industry. The industry standard calls for clients to demand a cheque for either 50 per cent or 100 per cent of the total value of the job, surety association president Steven Ness said in an interview from Mississauga, Ont.

The city, however, said it reduced the level of security at the behest of the same organization.

"The city, in consultation with various surety companies and at the urging of the Surety Association of Canada, determined that lowering the bonding requirements on the headquarters project could provide a broader base of potential bidders and potentially provide savings on the project cost," capital projects manager Jason Ruby wrote in a report to council last week.

The Surety Association of Canada, however, insists it did nothing of the sort.

"Bulls**t. That's absolute hooey," Ness said. "No one from this organization ever encouraged any such action by the City of Winnipeg at all. It begs the question of who is saying we did."

Winnipeg materials manager Barb D'Avignon insisted in a statement the surety association, along with a Winnipeg surety broker, encouraged the city on Dec. 14, 2010, to revise the bonding requirements, "which at the time, appeared to eliminate smaller contractors."

Ultimately, the city alone determined $25 million in bonding was sufficient for the job, D'Avignon said.

Recommending a reduction in the construction bond level would be irresponsible, Ness said.

Such a move shouldn't broaden the range of firms eligible for the work, he added. "You're either qualified, or you're not. If you are qualified, you can get 50 per cent or 100 per cent," he said. "I really don't know why anyone would do this, other than somebody believed there would be vast cost savings."

Lower projected costs did help Caspian and Akman win the initial construction award. "The Caspian/Akman joint venture was the highest-scoring respondent to the (request for proposals) and the lowest-priced bidder," Ruby wrote in his report.

Three other construction companies bid for the job: PCL Construction, Graham Projects and Stuart Olson Dominion Construction. All are all among Canada's 50 largest construction companies, ranking No. 1, No. 6 and No. 14, respectively, on a 2013 sales ranking compiled by Reed Construction Data.

Neither Caspian nor Akman made Reed's Top 50 list this year.

PCL, Graham and Stuart Olson Dominion have an unlimited bonding capacity, their online company profiles state. Caspian does not state its capacity online, but president Armik Babakhanians said his firm has no trouble obtaining any bond it desires.

Babakhanians said cutting the size of the bond specified by the city would not benefit his company. "All I know is there is a full bond on the project," he said, adding a higher bond would add layers to the project cost.

PCL and Graham declined to comment. Stuart Olson Dominion vice-president Rich Graumann described a lower bond as a trade-off: The city would have less security, but would also pay less and potentially have more bidders.

Akman did not respond to requests for comment. Several city councillors have asked the city to explain why Akman left the project and what allowed the city to award the final contract to Caspian.

Ruby's report stated Akman assigned its portion of the contract award to Caspian.


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