SAN JOSE -- A Modesto contractor awarded an $11 million contract to build a San Jose environmental center despite finishing two city fire stations late has walked off the job and filed for bankruptcy with the unfinished project more than six months overdue and $1.6 million over budget.
Applegate Johnston's team failed to show up at the Las Plumas Avenue job site last month and filed bankruptcy papers two weeks later, jeopardizing the project's completion and complex financing and forcing the city this week to delay occupancy of a key tenant until next year.
City officials said the deadlines to qualify for that financing under a federal stimulus program as well as the strict rules governing public project bidding steered them into a deal with a builder they've come to regret.
"Everybody had concerns about Applegate," City Attorney Rick Doyle said. City officials overseeing the project "thought they could manage it" by closely monitoring the construction, he said, "but that turned out not to be the case."
No one answered Applegate Johnston's company phone, and it no longer accepts messages. The company's bankruptcy lawyer, George Hollister, did not answer repeated requests for comment.
The Environmental Innovation Center, on about 4 acres at 1608 Las Plumas Ave., is supposed to house a household hazardous waste drop-off center, a Habitat for Humanity "ReStore" selling discounted new and surplus construction material and a "cleantech demonstration center" where "innovators will test clean and renewable energy projects."
City officials say the center will meet a number of San Jose's environmental goals, including replacing an old abandoned housing department warehouse with an environmentally efficient "green" building, providing clean technology jobs and diverting waste from landfills. An initial phase of the project completed in 2010 provided modern stormwater treatment and energy-saving street lighting.
City officials had hoped to complete the second phase by last December. With Applegate Johnston now in bankruptcy court, city officials are now working with the contractor's insurer in hope of getting the center completed by the end of this year to meet lender and tenant demands.
The city had estimated the second-phase construction would cost $12.5 million to $13.1 million. Applegate Johnston's offer was the lowest among the nine contractors that bid on the project in April 2011. Under the city charter, San Jose officials either had to grant the contract to the lowest bidder or rebid the project.
Though Applegate Johnston pitched itself as "quality to the core," there were lots of red flags. San Jose was already having trouble with Applegate Johnston, which the city had earlier hired to build two new fire stations. One was completed 113 days late, and the other was seven months behind schedule when the company bid on the environmental center.
Applegate Johnston also was among low bidders whose proposals drew objections. A rival bidder claimed Applegate Johnston's proposal was incomplete because it failed to list a subcontractor to perform acoustical gypsum plastering. And a nonprofit group that monitors regulatory compliance on public works projects said Applegate Johnston and other low bidders had listed subcontractors with licensing issues. City officials, however, deemed the objections meritless and decided neither issue disqualified Applegate Johnston from bidding on other San Jose projects.
"We were aware they weren't performing that well," said Harry Freitas, the city's deputy director of public works. "But they were the lowest bidder on the job, and the city charter requires us to award to the lowest responsible bidder."
San Jose's only option at the time was to rebid the project. But city officials were rushing to meet a June 30, 2011, deadline that would qualify the project for some $4.5 million in "New Markets Tax Credit" financing, in which lenders could receive tax credits from the U.S. Treasury Department.
With San Jose strapped for cash and lenders tightfisted in the recession, it was an opportunity city officials didn't want to miss. Rebidding the project would have blown the deadline for the New Markets financing and reduced funding for the project. So the City Council in May 2011 awarded the contract to Applegate Johnston.
"What drove this is we had to close the financing," Doyle said.
Problems arose within months. The New Markets financing was so unfamiliar and complex that the city attorney sought outside advice on the transaction. City officials later found the deal required the contractor to have more insurance and bonding than the city had called for in its bid.
Applegate Johnston agreed to obtain the additional insurance and bonding, but only if the city waived a $282,000 penalty for finishing the fire station late. City officials reluctantly agreed in early 2012 after concluding it would cost as much or more to pursue the penalty.
City officials acknowledge not all the project's problems are the contractor's fault. Toxic asbestos and lead in the old warehouse required more cleanup work than anticipated. But city officials still blame Applegate Johnston for most of the project's troubles.
Freitas said different bidding procedures can help avoid the kind of problems that arose with Applegate Johnston. Cities can use a "prequalification process" to narrow the field of bidders, or use a "design-build" contract like the city used for its successful airport renovation. But Freitas and other city officials note that over a "decade of investment" in which the city built dozens of projects including a new city hall, police and fire stations and libraries, they have had few abandoned projects.
"Fortunately," City Councilman Sam Liccardo said during an update last week, "we don't do this a lot."
But Councilman Ash Kalra still felt somehow the city could have avoided the mess.
"Shame on us for going with Applegate Johnston," Kalra said. "That's all I'm going to say on this."
Contact John Woolfolk at 408-975-9346. Follow him on Twitter at Twitter.com/johnwoolfolk1.
San Jose's Environmental Innovation Center project is temporarily stalled by a contractor bankruptcy. A brief history: