This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.
PUBLIC CONTRACTS -- Professional Services (computer software or programming services); (combination of purchase of commodity and professional services) -- Sole Source (acquisition of unique computer software) -- Contracts Requiring Bidding (purchase of canned or prepackaged computer software)
GENERAL MUNICIPAL LAW, §103: (1) The purchase of prepackaged or canned computer software constitutes the purchase of a commodity for competitive bidding purposes and does not fall within the professional services exception. (2) The services of a programmer to develop computer software which is customized to meet the particular needs of a municipality may be acquired without competitive bidding under the professional services exception. (3) Whether the purchase of prepackaged or canned software which is modified falls within the professional services exceptions depends on whether the professional service component of the contract is the primary or predominant part of the acquisition and whether there is an inextricable integration of professional services and the physical component. (4) When a contract falls within the professional service exception to competitive bidding, it is generally advisable to seek competition through the use of requests for proposals or, where appropriate, a less formal method, to assure an award is made in the best interest of the municipality and not in an arbitrary or capricious manner. (5) In appropriate circumstances, pre-packaged or canned software whose performance or functions are unique in the marketplace may be acquired without competitive bidding under the sole source exception if the software uniquely serves the public interest and is available from only one source. Prior opinions superseded to the extent inconsistent.
This is in response to your letter concerning a proposed method of procuring computer software. You state that the city proposes to hire a consultant to provide an assessment to help determine what type of software would best serve the city's needs. The consultant would assist the city in preparing a request for proposals (RFP). The consultant would also assist the city in the evaluation of the responses to the RFP, using a scoring sheet to evaluate the vendors, and the city would choose the vendor which came closest to meeting all of its needs. Presumably, price would be a consideration, but would not necessarily be the determinative factor. You ask whether this method of procurement may be used to purchase the software in lieu of advertising for competitive bids pursuant to General Municipal Law, §103.
General Municipal Law, §103 provides that, except as otherwise provided by the State Legislature, all purchase contracts involving an expenditure in excess of $5,000 shall be awarded to the lowest responsible bidder after public advertisement. In addition to the exceptions provided by the State Legislature (see, e.g., General Municipal Law, §§103, 104), there are also several well-established common law exceptions to the competitive bidding requirements of section 103.
The two common law exceptions which may pertain to the procurement of software are the exceptions for professional services and sole sources. The courts in this State have held that competitive bidding is not required for contracts for professional services (see, e.g., People ex rel. Smith v Flagg, 17 NY 584). Generally, professional services which fall within this exception involve specialized expertise, use of professional judgment, or a high degree of creativity in the performance of the contract (see People ex rel. Smith, supra; Trane v Broome County, 76 AD2d 1015, 429 NYS2d 487; Hurd v Erie County, 34 AD2d 289, 310 NYS2d 953; 1A Antieau, Mun Corp Law, §10.33). Competitive bidding also is not required when a municipality, in the public interest, requires an item for which there is no reasonable equivalent and which is available from only one source so that there is no possibility of competition (Harlem Gas v Mayor, 33 NY 309; Williams v Bryant, 53 AD2d 229, 385 NYS2d 425; 1986 Opns St Comp No. 86-25, p 41).
We note that General Municipal Law, §103 contains no authority to use an RFP procedure, such as the one outlined in your letter (cf. General Municipal Law, §120-w[e] authorizing an RFP procedure as an alternative to competitive bidding for certain contracts involving solid waste management). Consequently, if a purchase contract is subject to the competitive bidding requirements of General Municipal Law, §103, an RFP process may not be used.
With regard to the applicability of the professional services exception, we note initially that the term "purchase contracts" as used in General Municipal Law, §103 has been held to apply to contracts for the acquisition of goods and commodities, even when such commodities or goods are used in connection with highly technical systems (see, e.g., Exley v Village of Endicott, 74 AD2d 96, 427 NYS2d 68, mod on other grds, 51 NY2d 426, 434 NYS2d 426, involving acquisition of a telephone system). Therefore, it is our opinion that to the extent that a software purchase is merely the acquisition of a commodity, the professional services exception does not apply. In our view, software which is already developed for a particular use, such as prepackaged or canned software, falls within this category (see 1984 Opns St Comp 84-35 p 43). While we recognize that professional services are necessary to develop prepackaged or canned software for marketing, we believe it is the finished product, and not the professional services, which is being acquired in the case of prepackaged or canned software.
Conversely, when a municipality is engaging the services of a skilled programmer, who has specialized knowledge and expertise, to develop software which is customized to meet the particular needs of a municipality, this Office has previously stated that the professional services exception is applicable because of the degree of highly specialized skill involved (1980 Opns St Comp No. 80-465, p 134). However, a more difficult issue is presented when a municipality is acquiring both prepackaged software, which, when acquired alone, would be subject to competitive bidding, together with professional services. For example, such a situation may arise when professional expertise is applied to modify prepackaged or canned software to suit the particular needs of a municipality (see McArdle v Board of Estimate of Mt Vernon, 74 Misc 2d 1014, 347 NYS2d 349, 353, affd 45 AD2d 822, 357 NYS2d 1009).
The most pertinent New York State case involving the acquisition of a combination of goods and professional services is Matter of Burroughs Corp. v New York State Higher Education Services Corp, et al, 91 AD2d 1078, 458 NYS2d 702, mot for lv to app den 58 NY2d 609, 462 NYS2d 1025. In Burroughs, supra, the New York State Higher Education Services Corporation (HESC) was seeking a computer system to assist it in administering the State's student loan program. A detailed RFP, designed to upgrade, modernize and improve the efficiency and capacity of system then in use, was issued. It requested that proposals include hardware, software, personnel training and ongoing vender support services. Each vendor was required to demonstrate that its proposed system was capable of performing a prescribed task in three-quarters of the time required by the current system. The final selection of a proposal was based upon a weighted statistical comparison of various evaluation factors. The proposal of the petitioner in the case was rated last in the evaluation overall, although it was lowest in cost, and was not accepted. The petitioner challenged the award to a competitor alleging, inter alia, that the award violated the competitive bidding requirements of State Finance Law, §174 which contains competitive bidding requirements analogous to those contained in General Municipal Law, §103.
In holding that the contract fell within the professional services exception and, therefore, was not subject to the competitive bidding requirements of section 174, the court stated as follows:
"Both the RFP and the undisputed facts contained in the record establish that, rather than a group of physical articles of electronic hardware, HESC primarily was seeking the design of a computer system which would provide prompt, efficient, cost-effective computer services to satisfy its growing and increasingly complex needs for the next five years. Such a design required the employment of the highest skills in the field of computer science. Vendors were allowed considerable discretion in the RFP in proposing the hardware and software components of the system, and they were also encouraged by HESC officials to be innovative and flexible in meeting the required specifications in their design proposals. The instant case is indistinguishable from Matter of Doyle Alarm Co. [65 AD2d 916, 410 NYS2d 466] and American Totalisator Co. [44 AD2d 750, 396 NYS2d 308]. In those cases, just as here, the vendor was required to furnish physical components of the system. However, the State's competitive bidding laws were held not to apply because of the 'inextricable integration of scientific and technical skills' required with such physical components...." [Emphasis added]
Thus, the court's conclusion appears to be based on two key factors: (1) that HESC was primarily seeking a system design which required a high degree of special skill and (2) that there was an "inextricable integration" of those skills to the physical components of the system.
It is our opinion, therefore, that Burroughs stands for the proposition that a contract involving both a purchase and professional services may qualify under the professional services exception if two criteria are met: (1) the professional services component of the contract is the primary or predominant part of the acquisition and (2) there is an "inextricable integration" of the professional services and the "physical components" (1986 Opns St Comp No. 86-25, p 41). In our opinion, under this two step analysis, the strong public policy in favor of competitive bidding (see Associated Builders v City of Rochester, 67 NY2d 854, 501 NYS2d 653; Jered v NYCTA, 22 NY2d 187, 292 NYS2d 98) will be furthered because a contract which predominantly involves the purchase of goods and only incidentally involves acquisition of professional services will not be brought under the professional services exception. Further, a contract will only be deemed to constitute professional services when the biddable component of the contract cannot be separated from the professional services (see Datatrol, Inc. v State Purchasing Agent, 379 Mass 679, 400 NE2d 1218, 1227).
In order to determine whether a contract primarily involves professional services, we believe the "total character" of the agreement must be examined to ascertain its essential character or focus. The Court of Appeals has utilized such a "total character" analysis for purpose of determining whether contracts which have characteristics both of a contract for public work and a lease or license are subject to competitive bidding (see Exley, supra; Citiwide News v NYCTA, 62 NY2d 464, 478 NYS2d 593). In the case of an acquisition of both software and services, we believe that the following factors may be pertinent in making this determination: the amount of time and effort involved in tailoring the prepackaged or canned software; the degree of customizing necessary; the amount of time and effort involved in any personnel training services provided by the vendor; and the relative cost of the prepackaged or canned software and services, respectively.
As to whether the professional services are "inextricably integrated" with the "physical component", we believe the two components must be so uniquely related that, as a practical matter, the physical component may not be factored out and bid separately (1982 Opns St Comp No. 82-146, p 185). For example, in Autolite v N.J. Sports Expo. Authority, 85 NJ 363, 427 AD2d 55, cited favorably in Burroughs, supra, the court, in finding the necessary "inextricable integration", noted that the computer system under review needed specially trained technicians to continuously supervise day-to-day operations, rather than simply standby personnel who are called upon to act only in case of malfunction (see also Doyle, supra). Similarly, for such inextricable integration to exist in the case of a software acquisition, it is our opinion that there must some compelling need in the public interest for the same contractor or vendor to provide both the physical component, (i.e., the prepackaged or canned software), and the modification, training and other professional services.
It should be noted that the court in Burroughs, supra, in addition to holding that the professional services exception applied, further found that the award of the contract was not otherwise arbitrary and capricious. In so holding, it noted that HESC's "comprehensive evaluation report amply establishes a rational basis upon which its award was made and, indeed, demonstrates that it acted consistently with the philosophy of section 174 of the State Finance Law in basing its determination on objective criteria for selecting a contractor on the basis of responsibility, quality and cost efficiency" (91 AD2d at 1079-80, 458 NYS2d at 704-705). Thus, even when a contract meets the necessary criteria for professional services, it is generally advisable to seek competition through use of RFP's or, where appropriate, a less formal method, to assure an award is made in the best interest of the municipality and not in an arbitrary or capricious manner (see also Opn No. 86-25 and citations therein).
As indicated above, another exception to the bidding requirement which may be applicable to certain software purchases is the sole source exception. The exception has been applied in the case of public utility services (Harlem Gas, id.; Williams, id.) and to patented items which are determined, in good faith and without intent to arbitrarily inhibit or restrict competition, to be required in the public interest (1983 Opns St Comp No. 83-105, p 129; see Baird v Mayor, 96 NY 567).
This Office, for example, has suggested that if a municipality, acting in good faith and without intent to arbitrarily restrict or inhibit competition, determines that a patented product uniquely serves the public interest, that product may be specified to the exclusion of others (1987 Opns St Comp No. 87-4, p 6; 1986 Opns St Comp No. 86-25, p 41; Gerzof v Sweeney, 16 NY2d 256, 264 NYS2d 376). Further, we have concluded that if the product is determined to be available only from one source so that no possibility of competition exists, the product may be acquired without competitive bidding (Opn No. 86-25; supra 1983 Opn No. 83-105, supra). In determining whether the item is required in the public interest, it is our opinion that the municipality should be prepared to show, at a minimum, the unique benefits to the municipality of the item as compared to other products available in the marketplace; that no other product provides substantially equivalent or similar benefits; and that, considering the benefits received, the cost of the item is reasonable in comparison to other products (id.). It would seem that the same analysis could be applied to products, although not patented, whose performance or functions are unique in the marketplace.
Accordingly, if a municipality objectively determines that particular prepackaged or canned software uniquely serves the public interest and that such software is available for only one source, it would appear that the software could be acquired without competitive bidding under the sole source exception. As noted, the municipality should be prepared to show, at a minimum, the unique benefits to the municipality of the software to be purchased as compared to other software in the marketplace; that no other software provides substantially equivalent or similar benefits; and that, considering the benefits received, the cost of the software is reasonable in comparison to other software in the marketplace.
Finally, we note that, apart from considerations of the applicability of the sole source or professional services exceptions, a municipality's authority to standardize on particular makes of equipment, material or supplies may be pertinent to a software purchase. Pursuant to General Municipal Law, §103(5), the governing board of a municipality, by resolution adopted by 3/5 vote, may determine that, for reasons of efficiency or economy, there is a need to standardize purchase contracts for a particular type or kind of equipment, material or supplies. Upon the adoption of a proper standardization resolution, a municipality may provide in its specifications for a particular make or brand to the exclusion of all other competitors (1982 Opns St Comp No. 82-44, p 57; see Hodge & Hammond v Burns, 23 Misc 2d 318, 202 NYS2d 133; General Building Contractors v City of Syracuse, 40 AD2d 584, 334 NYS2d 730). Therefore, in an appropriate circumstance, a municipality may standardize on a particular make of software if the municipality can objectively demonstrate that efficiency and economy will be served. For example, a standardization resolution might be considered if the design or operation of hardware which is owned by the municipality is peculiarly suited to or compatible with a particular make of software and cannot be economically altered (see 1958 Opns St Comp No. 58-484, unreported; 1981 Opns State Comp No. 81-410, p 453).
Prior opinions of this Office are hereby superseded to the extent their analyses or conclusions are inconsistent herewith.
July 13, 1988
Juanita M. Crabb, City Mayor
City of Binghamton