Rush for Tax Credits, and Low Bid, Ends in Contractor Bankruptcy
In the rush to win federal stimulus tax credits for an environmental innovation center, the city of San Jose handed the project to a poor performing contractor, Applegate Johnston, that submitted the low bid. Now the Modesto-based contractor is bankrupt and the city and contractor's surety, Liberty Mutual, must find a way to finish the job.
The innovation center is to be the heart of the city's ambitious initiative to create a nucleus of environmental innovation and bring 25,000 "clean tech" jobs with it.
In June, the city's public works director wrote in a memo that he had been urging the contractor to finish by the end of the year. That goal now may be unattainable.
The project is currently six months late and $1.6 million over budget, say city officials. Workers for Applegate Johnston, the contractor, stopped going to the jobsite last month.
Calls to Applegate Johnston’s phone listing turned up only a message that the number has been disconnected. Sacramento attorney George Hollister, who is representing the firm in its bankruptcy, said the situation is unfortunate.
“They’re defunct,” he says.
The City's Perspective
How did it happen? Only San Jose's perspective can be learned.
Applegate Johnston submitted a low bid of $11.1-million and city officials awarded it the contract in May, 2011. The contract covered Phase II of work that involved renovation of 46,000 sq ft of warehouse space and construction of a roughly 10,000 sq ft household hazardous waste facility. A $1.3 million contingency fund was created for the project.
According to a memo written in June by Public Works Director David Sykes, the original contact called for completion in Dec., 2012. He wrote that "much of the delay in construction of the Project is attributable to Applegate," which had left structural steel sitting in a warehouse and did a poor job of managing subcontractors and complying with environmental and safety rules.
At the time of the project award, Applegate Johnston was running late in completing two city fire stations.
“We had some reservations, but not to the point that we found [the firm] non-responsible," recalls Sykes. "The bid goes to the lowest responsive and responsible bidder.”
Deadlines to qualify for the federal New Markets Tax Credit, a feature of the federal economic stimulus, left San Jose a limited window of opportunity for the project's bidding and award.
City officials had to meet a June 2011 deadline to qualify for $4.5 million in federal financing.
Limited Choices
“I don’t think we had a lot of choices and options available to us,” Sykes says. “I think, even looking back, we did the right thing to get that funding.”
He adds, “At the time, we reluctantly awarded the contract to Applegate Johnston.”
On the fire station jobs, the contractor’s performance left something to be desired.
“Initially, what we saw from them on Fire Station 19 was poor subcontractor management," says Sykes. "We expect the general contractor to manage, coordinate and ensure subcontractors do the work… And they’re subs weren’t performing well."
The Environmental Innovation Center will house a household hazardous waste drop-off center, a Habitat for Humanity ReStore, which sells discounted new and surplus construction material, and a clean and renewable energy demonstration center.
