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The MTA Debarment Statue Can Lead to Dire Consequences to Contractors and Design Professionals

01.06.20  |  By Douglas R. Halstrom

On November 25, 2019, the Alliance for Fair and Equitable Contracting Today, Inc. ("AFFECT") filed lawsuits in the New York state and federal courts against the Metropolitan Transportation Authority ("MTA") seeking relief from the MTA's new debarment regulations established earlier this year.  AFFECT is a coalition that includes ACEC New York, The Associated General Contractors, New York State, The General Contractor's Association of New York, The New York Building Congress and the Building Trades Employer's Association.

The new MTA debarment statute implemented regulations to mandate a five year period of debarment if (1) a contractor fails to achieve substantial completion of their contractual obligations “within the time set forth in the contract, or in any subsequent change order, by more than 10% of the contract term” or (2) a contractor claims entitlement to additional costs later deemed to be invalid by 10% or more of the total adjusted contract price “pursuant by the contractual dispute resolution process”.  For purposes of this regulation, the term “contractor” includes anyone entering into a contract with the MTA, including design professionals.

To make matters worse, the new MTA regulations permit the MTA to debar not only the contractor, but its parents, subsidiaries and affiliates, and the contractor's directors, officers, principals, managerial employees and any person or entity with a 10% or more interest in the contract, as well as any joint venture and members of a joint venture that include the contractor or the contractor's parents.  The new regulations are alleged to be unconstitutional, as set forth in AFFECT's federal court Complaint, and are alleged to be unlawful, arbitrary and capricious under the State Administrative Procedure Act and violative of State Separation of Powers principles in the state court Complaint.  While these new regulations may be founded over legitimate concerns relating to the need to confine contracting to qualified contractors, they also appear to punish qualified entities innocently caught in the web of potentially overreaching regulations.  In a New York Law Journal article about the lawsuit published on November 26, 2019, a representative for Governor Cuomo was quoted as stating that "the law is designed to make sure that projects happen on time and on budget and that the taxpayers aren't getting ripped off." 

Despite the litigation over the constitutional and statutorial legitimacy of this new regulation, the new debarment rules are currently in place and will apply for the time being, which means that all contractors and design professionals currently under contract with the MTA will be subject to the new regulation, as will future entities contracting with the MTA, for the foreseeable future.  So what does this mean?  This means that finishing projects on time and within budget are even more important now than they were before because this new regulation imposes stiff penalties on those contractors and design professionals who fail to do so, namely a five year debarment from being able bid on future MTA work.  All entities doing business or hoping to do business with the MTA will need to pay closer attention to providing timely work product at a cost at or very near the contract price.  This means taking all the appropriate steps to assure the proper coordination of project teams in order to deliver work on time and within the contract price.

Moreover, while delays are certainly a major focal point of this new regulation, cost is also a major consideration.  This means that change orders will be more closely scrutinized insofar as excessive change orders under the meaning of this statute can also lead to debarment if "one or more of such claims are determined to be invalid under the contract's dispute resolution process . . . . and together the sum of any such invalid claims exceeds by 10% or more the total adjusted contract value."  As a result, extra care is required on the part of the design professional to make sure that contract documents address all aspects of the project requirements and that those performing the work assure themselves that they understand the entire scope of the contract documents on which they are bidding so as to reduce the potential for excessive extra-contractual claims.

The consequences under this new regulation are dire and may very well not withstand the challenges posed by AFFECT's litigation currently pending in both the New York state and federal courts. In the meantime, contractors and design professionals working on MTA projects must be thorough in their evaluation of the particular program on which they are bidding and must take extra steps to coordinate the timely completion of MTA projects.  

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