If a South Dakota school district advertises for bids on fuel oil and no supplier will offer a firm fixed price for the school year, may the district sign a continuing contract with one supplier under which the price is adjusted up or down each delivery to track the supplier's documented costs?
Plain-English summary
The Sioux Falls School District faced a problem familiar to many districts post-1973. They needed fuel oil for the coming year (their natural gas service was interruptible, so oil was a real fallback). When they advertised for bids on the oil, no supplier would commit to a firm price for the whole school year. Oil markets were volatile and suppliers refused to be locked in. The district's counsel, Robert Hayes, asked AG Mark Meierhenry whether the district could negotiate a continuing contract that adjusted the price up or down each delivery based on documented supplier-cost changes.
Meierhenry said no. The South Dakota public bidding statutes (SDCL ch. 5-18) contemplated firm bid prices. A bid that could be renegotiated mid-contract was not really a bid; it was a contract for whatever the supplier decided to charge. The legislature had explicitly given the state Bureau of Administration authority to renegotiate state contracts in changing market conditions (SDCL 5-23-19.1), but had given no parallel authority to local governmental units. That absence was meaningful: the legislature knew how to authorize renegotiation when it wanted to.
The escape valve for local units was SDCL 5-18-9.2. If firm bids were not received, the governing body could reject all bids and then negotiate purchases at the most advantageous price, subject to obtaining competitive quotations from at least three suppliers and documenting the quotations on the minutes. The key restriction: this was a sale-by-sale mechanism, not a continuing contract. The district could buy each fuel delivery from the lowest of three quotations and document the choice. It could not lock into a continuing contract with one supplier whose price changed with their cost.
The opinion explicitly noted that this was workable. Quotations could be solicited quickly and did not require re-advertising. The district could acquire fuel in a market-responsive way while satisfying the public-bidding statutes.
Currency note
This opinion was issued in 1982. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. SDCL ch. 5-18 has been amended significantly since 1982; modern procurement decisions should be analyzed against current statutory text and any administrative guidance from the SD Bureau of Administration.
What the opinion meant at the time
For Sioux Falls and similar districts, the answer was practical even if not what counsel wanted. They could buy fuel from the cheapest of three quotations each delivery cycle. The administrative workload (three calls per delivery, document in minutes) was real but manageable.
For local governmental units generally, the opinion drew a hard line. Continuing variable-price contracts were not authorized. The legislature had to provide the mechanism if local units wanted that option. They had not done so.
For fuel suppliers, the implication was that their selling relationship with any one school district would be transactional under SDCL 5-18-9.2, not contractual. They could not lock in a year-long preferred-vendor status with adjustable pricing.
Common questions
Q: Could the district have done a series of short firm-price contracts (e.g., monthly)?
A: Probably yes, if a supplier was willing to commit to a firm price for one month at a time. That would have been a series of firm bids, each at a fixed price. The problem was no supplier would commit at all.
Q: What about indexed pricing tied to a published commodity index?
A: The opinion did not address indexed pricing. The variable-price proposal in this case was tied to the supplier's own documented cost changes, which is closer to cost-plus contracting than to indexed pricing. An index tied to a public, verifiable benchmark might be argued differently, but the opinion's reasoning suggests the AG would have viewed any post-bid price adjustment with skepticism for local units.
Q: Did the state's authority under SDCL 5-23-19.1 really matter to this question?
A: Yes. The presence of that explicit authority for the state, and the absence of any parallel for local units, was the heart of the AG's structural argument. The legislature had thought about market-fluctuation flexibility and granted it only to the state. The negative inference was deliberate.
Q: How fast did the SDCL 5-18-9.2 quotation process need to be?
A: The opinion did not specify a timeline. The statute required quotations from at least three suppliers, documentation, and minute entry. That can be done in a single board meeting if needed, or by an authorized purchasing agent acting under board delegation.
Q: Did this open up disputes about whether a supplier's "no firm bid" was real or strategic?
A: The opinion did not address that. In practice, a district that wanted to use SDCL 5-18-9.2 had to be able to point to the fact that no firm bids were received. If suppliers had offered firm bids and the district preferred a renegotiable arrangement, the district could not skip to the quotation procedure.
Background and statutory framework
South Dakota's public bidding regime (SDCL ch. 5-18) imposed firm-price discipline on local procurement. Local governments could not award contracts at flexible prices; the legislature considered firm bids essential to fair competition and accountability.
The 1970s oil shocks broke that framework for energy commodities. Suppliers stopped offering firm long-term prices. Local governments faced a real risk that no bids would be received at all. The 1979 legislature responded with SDCL 5-18-9.2, allowing reject-and-quote procurement. That preserved competition (through the three-supplier quotation requirement) while abandoning the firm-bid form.
SDCL 5-23-19.1 was the state-level analog, giving the Bureau of Administration explicit authority to cancel or adjust state contracts in light of market shifts. The state could do mid-contract price renegotiation; local units could not. The asymmetry reflected a legislative judgment that the state had centralized purchasing capacity to manage the complexity, while local units needed the cleaner sale-by-sale framework.
Citations and references
Statutes:
- SDCL ch. 5-18 (Public Bidding by Local Governmental Units)
- SDCL 5-18-3 (advertising for bids)
- SDCL 5-18-8 (bid modification before opening)
- SDCL 5-18-9.2 (procedure when firm competitive bids not received)
- SDCL 5-23-19.1 (state contract price adjustment)
Source
Original opinion text
November 15, 1982
Mr. Robert E. Hayes
Davenport, Evans, Hurwitz & Smith
National Reserve Building
Sioux Falls, South Dakota 57102
Official Opinion No. 82-51
RE: Firm Bid Requirement
Dear Mr. Hayes:
Acting pursuant to instructions of the Sioux Falls School Board, you have requested an official opinion concerning the following facts:
FACTS:
The District intends to seek bids for the provision of fuel oil for the coming school year. These bids are necessitated by the fact that the District is on an interruptible natural gas service. The bids will be requested on a price per gallon basis, inasmuch as it is not possible to determine the amount which must be purchased, or the time at which it must be purchased. Past experience reveals that no bids will be received which quote a firm price for the school term.
SDCL 5-18-19.2 provides that, if 'firm competitive bids' are not received the school board may 'reject all bids and negotiate a contract for the purchase of the materials, supplies, or equipment at the most advantageous price . . .'
Based upon those facts you have asked the following question:
QUESTION:
Pursuant to this statute [SDCL 5-18-9.2] and in the event no firm bids are received, may the District negotiate a contract for the provision of fuel oil throughout the school term, which contract includes a provision whereby the price to be paid by the District from time to time is increased or decreased based upon documented increases or decreases in the supplier's costs?
The problem presented by the question you ask has been extremely troubling to local governmental units since the first oil embargo made the prices of oil and oil-related products subject to enormous and erratic fluctuations. Clearly, the overall import of SDCL ch. 5-18 relating to public bidding contemplates a firm bid at a set and stated price. For example, raising or lowering the bid price of fuel oil would have to be seen as modification of the bid and according to SDCL 5-18-8 modification of bids must be done prior to the time the bid is publicly opened and read. Similar comments could be made about bond requirements since they are inevitably stated in a percentage figure of a stated price. Most telling, however, is the legislative action set out in SDCL 5-23-19.1. The statute provides:
In the event that a contract price for goods entered into by the state of South Dakota becomes unreasonable in view of changing market conditions, the bureau of administration shall have the authority to cancel the contract or to adjust the contract price to meet such changing market conditions if it is necessary to obtain necessary materials at the required time. Any such contract price adjustment shall be justified in writing by the contractor to the bureau of administration and a copy of such adjustment and the written justification therefor by the contractor and the bureau shall be filed with the auditor-general. No such contract price adjustment shall allow for increased management costs or for an increase in the dollar amount of profit for the contractor having such contract. No contract price adjustment may be made for or during the first ninety days of an annual contract.
Clearly, the Legislature in the statute set out above granted authority to the State in its purchases to alter contracts to reflect changing market conditions. No similar authority has been given to units of local government.
An alternative method of dealing with the problem was enacted by the Legislature in 1979. SDCL 5-18-9.2 provides:
If after advertising for bids pursuant to § 5-18-3 for the purchase of materials, supplies or equipment, firm competitive bids are not received, the governing board of a unit of local government may reject all bids and negotiate a contract for the purchase of materials, supplies or equipment at the most advantageous price, provided that such materials, supplies or equipment meet the specifications of the original advertisement for bids. The governing body shall contact and attempt to obtain competitive quotations from at least three suppliers. A record of the names of the suppliers, the quotations received shall be documented, spread upon the minutes, and retained on file by the governing board.
In my opinion this statute gives local governmental units a substantial amount of flexibility when faced with situations in which no firm or fixed price bids are received; however, it does not allow the local governing body to enter into a continuing contract where the governmental agency and the contract provider engage in periodic negotiations regarding the price of the material or commodity. Rather, the statute contemplates a procedure whereby when the governmental entity does not receive any firm or fixed price bids, it may call for new bids or may make specific purchases of the commodity or material on the open market through the procedure of obtaining competitive quotations from at least three suppliers, spreading the names of the suppliers and the quotations received upon the board minutes, and making specific purchases from the supplier providing the lowest price at the time the quotations are sought. Since this process does not require advertising for bids each time a purchase is made, the purchasing agent for the governmental entity should have little or no difficulty in receiving quotations on the present price of any particular commodity from suppliers willing to do business with the purchasing entity.
The answer to your question is 'No' in that the District may not enter into continuing contracts whereby the buyer and seller periodically negotiate the price but may make purchases of specific materials on a sale-by-sale basis through following the procedure in SDCL 5-18-9.2.
Respectfully submitted,
Mark V. Meierhenry
Attorney General