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Did UTA skirt law to save at contractors' expense?

Published August 12, 2013 3:18 pm

Public finance • Some subcontractors say agency's creative financing was hurting small businesses.
This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

The Utah Transit Authority this week will officially finish its massive "Frontlines 2015" TRAX and FrontRunner extensions two years early and $300 million under budget. But an attorney says some contractors believe UTA achieved that in part by skirting, or even breaking, state law at their expense.

At issue is whether UTA exceeded legal caps on how much money it withheld to ensure that contractors finish work appropriately. It also avoided paying normally required interest on such money. UTA says it broke no laws and in fact is proud of what it calls innovations beyond normal withholding methods to handle cash-flow problems caused by the recession to help save millions.

As UTA finishes the 2015 projects by opening the Draper TRAX extension on Sunday, it says those changes were a key reason projects were completed early and under budget. Other "Frontlines 2015" projects include TRAX extensions to Salt Lake City International Airport, West Valley City and South Jordan, and the FrontRunner commuter-rail route between Salt Lake City and Provo.

Skirted law? • Attorney Dana Farmer contends UTA skirted state law, and maybe broke it — and hurt smaller subcontractors and suppliers who could least afford it.

Farmer said he became aware of the issue as he taught classes for industry groups on construction law. After explaining to attendees that state law allows withholding up to 5 percent of costs until all work is completed to a client's satisfaction — and interest must be paid on it — he said he "had people come up and say, 'How can UTA hold 6 percent retention?' " They also wanted to know how the agency could get away without paying interest on the withheld funds.

Farmer said some of his clients eventually told him that was happening. "Most of them don't make 5 percent profit, so it hurt them" as they waited for money and often paid interest on loans to cover costs.

He said those groups do not want to be identified because it could hinder their ability to win future UTA work, but they want the practice changed.

UTA contracts obtained through open-records requests and examined by The Salt Lake Tribune and Farmer appeared to allow essentially what subcontractors described because of some creative moves by the agency.

Recession twists • Steve Meyer, UTA chief capital development officer, says everything was legal and aboveboard — and explained how the deals developed.

He starts with an example of how normal withholding procedures work: "They invoice us $100. We keep $5 of that and send it to the state treasurer's office and it's in an interest-bearing account" to ensure work is completed well, while UTA would pay the other $95 billed.

But Meyer said UTA changed that as it ran into some trouble — and opportunities — as the recession hit.

"Revenues kept going down as the recession hardened," he said. At the same time, UTA found contractors were offering great bids and prices for work because few other construction projects were available, and they were hungry for jobs.

Contractors said they would like to move even faster than planned if possible, but the recession was forcing UTA to maybe slow things down even more to help with its cash flow — although most construction money was coming from bonds, or borrowed money.

New system • He said UTA conducted "mutual brainstorming" with prime contractors that came up with a unique solution in 2009.

If UTA would cease the normal 5 percent withholding, contractors would bill 94 percent of possible work at a time — and defer billing the other 6 percent until later stages of construction with no interest charged. He said even without traditional withholding, UTA still had performance bonds to guarantee that work would be completed to its satisfaction.

"So now they are going to invoice us $94 [instead of $100]," Meyer said. "We pay $94. Then we had a plan that over time as the cash flow improved in the out years, they would go ahead and bill us that [remaining $6]."

This strategy helped with UTA's cash flow, prevented slowing the project and allowed contractors to keep crews working and purchasing materials that often were cheaper from eager, underworked suppliers during the recession.

"We consider this one of the innovative ideas we had to meet the challenge of the projects," Meyer said. He added almost all of the money has now been paid, except for some ongoing work.

Legal? • Instead of calling that new system a withholding — which is capped at 5 percent by state law — contracts were amended to call it a "cash flow recovery withholding" of 6 percent.

"It does not matter what they call it, it's still retention," Farmer contends, and by state law should be capped at 5 percent.

The attorney says while the arrangement may have helped the prime contractors, smaller subcontractors have told him it hurt them because while they were being paid 94 cents on the dollar initially, they often had to pay their own subcontractors and suppliers 100 percent — which cut into their profits or forced some to keep paying interest on loans.

"It's not their job to subsidize UTA," especially when the agency says the projects came in $300 million under budget, Farmer said.

The attorney said he has nothing in the works currently to challenge the UTA withholding strategy on behalf of his clients.

Meyer is satisfied UTA's actions are legal, frugal and defensible.

"This was all aboveboard. Our attorneys have looked at that, and they feel comfortable that we were within the requirements" of the law.

"It wasn't something we just sprung on people," he added. "They were aware, and they were a partner in this" as contracts were amended. "We couldn't have done it if they wouldn't accept it. We couldn't have unilaterally done it."

Use over? • Meyer says the system was used because of unique circumstances caused by the recession, so it may not be followed in the future.

"It was a unique situation. The recession put us in an interesting spot. We were getting great value from our contractors. There was a lot of availability of materials and manpower because the housing industry and others had gone down," Meyer said. "With all the challenges of the recession with lack of revenue, there were opportunities. I think this demonstrates how we were able to balance that."