Low bid alternatives

Historically, cities and counties have awarded construction contracts for public works projects to the lowest responsible bidder. The successful contractor typically prepares its bid based on a complete set of plans and specifications that precisely defines the facilities to be built.
This time-honored procedure has long been considered the best way to prevent favoritism, collusion and other problems. While by no means a perfect system, until fairly recently it was deemed to be the best way to assure taxpayers that their money was being spent wisely.

In recent years, however, more and more localities have grown frustrated with this traditional approach to procurement. Some have found that completed projects were not fully responsive to their needs, while others found that their new facilities were difficult to operate and expensive to maintain. Some local agencies have had trouble controlling the escalating costs of public works projects, including change orders and claims, at a time when jurisdictions are trying to stabilize or reduce taxes.

To combat the problems inherent with traditional low-bid procurement, many states are following the example of the federal government by enacting procurement options to allow – and encourage – alternative methods. Such options are now thought to be more cost-effective in many cases, as well as more conducive to creative problem-solving.

In recent months, two states took steps to increase procurement flexibility by deciding to allow local agencies to award contracts for reasons other than low price (in the case of the Rhode Island Supreme Court); and enacting legislation to expand use of an alternative method of procurement (construction manager/general contractor) originally restricted to the building of prisons (state of Washington).

With the selection determined solely on price, the owner has little ability to balance quality and cost factors, including ease of operation, in making a decision. With an alternative technique such as competitive negotiation, owners can make decisions based on qualifications, technical approach and price. Using performance-based contracting, they can set the standards that the constructed facility must meet and allow the contractor and its team members to develop the method of achieving those standards.

Seeking the best value Seattle’s award of a $101 million contract for the design-build-operation (DBO) of the city’s first water treatment plant (Tolt River) was structured around performance standards that the DBO team must meet throughout the life of the contract. Construction cost was only one element of the decision-making process; in addition, the lifecycle cost of the facility, including the cost of operations for up to 25 years, was considered key. Seattle Mayor Norm Rice predicts that ratepayers will save $70 million over the life of the contract thanks to this alternative procurement process.

Although the Tolt River project is the first municipal water treatment plant of its size in the U.S. to be procured and delivered in this way, it represents another example of the trend toward competitive negotiation/best value and away from selection based solely on low construction cost.

The Federal Acquisitions Reform Act of 1995 permits a two-phase process whereby a limited group of proposers is selected based onqualifications and their general approach to a project, then detailed proposals from these shortlisted proposers are considered according to “best value,” not just lowest price. Best value calls for ranking proposals based on a weighted average of scores on all criteria stated in a solicitation. The agency may award the contract after this evaluation, or it may discuss proposals with those considered in the competitive range and then permit all shortlisted proposers to submit best and final offers.

Best value has been called “a policy or philosophy but not a procedure” by Adjunct Professor Vernon Edwards of George Washington University’s Government Contracts Program. Another expert, Ralph Nash, founder of the GWU program, describes best value procurement as “an art rather than a science.”

Despite the difficulty of making a best value decision compared with the ease of selecting the lowest bid, both these experts acknowledge that best value allows government agencies to fully assess their options and select the firm proposing the best alternative. But best value procurement is only one option.

The Office of Federal Procurement Policy has advocated performance-based contracting, under which contracts define the required performance standards of the project but do not dictate how the contractor should do the work. Ida Ustad, deputy associate administrator for acquisition policy at the General Services Administration (GSA), notes that performance-based contracting results in lower costs, better service and shorter delivery times.

Imperial, Calif., took advantage of performance-based contracting when it needed to quickly double the capacity of its water and wastewater facilities to meet projected population growth and to comply with environmental regulations. A design-build team won the project with an unsolicited proposal that included $15 million in certificates of participation from an investment banking firm. The city did not begin payment until the upgraded facilities had been successfully on-line for six months.

Increasing flexibility The design-build project delivery process can be procured with competitive negotiation, performance-based standards and best value selection criteria. Compared to the traditional method, design-build generally can offer shorter schedules, less litigation and lower costs because designers and contractors work together as one contractual entity, are held jointly responsible for deficiencies and delays and are able to eliminate the often adversarial relationship that exists between the two functions in a project constructed under traditional methods.

With the traditional method, an architect/engineer is hired and completes the design, then the procurement and construction are competitively bid and awarded based on the lowest bid. Because these steps are sequential, the entire process takes more time than design-build, which allows the procurement of equipment or phases of construction to begin before the entire design is complete. Costs are reduced not only because schedules are shorter, but also because certain precautions and redundancies, taken when a designer has to assume that a low-bid contractor will build the facility, become unnecessary when the designer and contractor collaborate on a project.

Consequently, design-build contracting can add flexibility to the process. The Utah Department of Transportation, for example, added a maintenance requirement to its design-build procurement for the reconstruction of a 17-mile section of Interstate 15 because ensuring quality was the biggest concern of state representatives. As a result, the procurement process and final contract included specific provisions relating to quality with more of a carrot, as opposed to a stick, approach in the relationship with the design-build-maintain team.

While use of alternative procurement methods varies between, and even within, states, the trend is clearly toward increasing flexibility. Kenneth Roberts and Nancy Smith, authors of “Design-Build Contracts Under State and Local Procurement Laws” inthe Public Contract Law Journal (Summer ’96), provided a state-by-state analysis of procurement laws relating to design-build and estimated that two-thirds of the states permit the approach in some form.

Still, they noted, only a handful allow all their agencies to use it. To date, most legislation enabling design-build is specific to the agency requesting the authority or has been enacted to authorize a particular project, according to Roberts and Smith.

In Florida, the Consultants Competitive Negotiation Act permits design-build contracts but requires local government units to develop their own procurement rules. Keith Rice, manager of the Orlando Utilities Commission, has taken advantage of this law by using competitive, negotiated bidding on design-build projects for the past five years. Rice shortlists a minimum of three D-B teams based strictly on their qualifications, then negotiates a guaranteed maximum price or lump sum (depending on the project) with the highest rated team.

“We’re all looking for the best value, not the lowest cost,” he says. “I can ask for bids from the top three teams, but I don’t like to do that because then the low bidder must be awarded the project. The low bidder may not be the best team and might be low with the bid just to get the project and hit you with change orders later.

“Negotiating the price may be difficult, but the people operating our plants 10 years from now are the ones who will really see the benefits of a quality project – the rest of us who design and build the plant go away,” Rice says.

To help him negotiate, decide what costs are reasonable and explain these costs to his executives, Rice always retains an independent consulting engineer who also helps prepare contracts.

The Memphis way Because procurement laws vary so much, agencies are using a broad range of procurement techniques. Among the advantages of traditional contracting methods is that a low bid is simple and unassailably objective; it is difficult to contest a decision based on choosing the lowest number.

However, proponents of more flexible procedures often argue that not only does the lowest bid not ensure quality, but it sometimes does not even result in the least expensive solution.

Tennessee requires competitive bidding, but Jerry Collins, the environmental engineering administrator for Memphis, Tenn., has devised a bid sheet that provides an incentive for creative thinking by design-build proposers. Proposals must include a base price for the project, prices for several alternate solutions described in the RFP as well as prices on alternate solutions the proposer comes up with.

In the case of a recently completed upgrade of the city’s T.E. Maxson wastewater treatment plant, the contract was awarded to a firm whose base bid was not the lowest, but whose creative alternative was $350,000 less than the lowest base bid. Rather than expand a building to accommodate new machinery as the RFP specified, the firm found a way to fit it within the existing structure.

Although Collins concedes that evaluating alternative solutions and complicated bid sheets takes up more of his effort and time, he argues it is worth it.

“Contractors who work on a low bid theory aren’t too concerned about the client being happy with the project,” he says. “They have a very short-term perspective. A design-build team led by an engineering firm is looking to build a long-term relationship and get future work from a satisfied client.”

Finding the right mix Alternative procurement methods offer opportunities for creativity and cost-savings, but they are certainly not perfect. Any system has its limitations, and any particular project may encounter problems under either the traditional approach or an alternative procurement strategy, with an unhappy owner as the result.

Along with the legal authority to use alternative methods, an experienced team covering a range of disciplines is a practical necessity for successfully executing the procurement process. Regardless of whether the procurement team is comprised solely of in-house professionals or supplemented by outside consultants and counsel, all appropriate disciplines (engineering, financial, legal, operational) should be strongly represented.

Al Appleton, who served as commissioner of the department of environmental protection in New York City for four years and is now with the Regional Plan Association in the city, is proposing a radically different approach – using a tunnel – for rebuilding the elevated Gowanus Expressway. Although this approach would cost more in construction than simply rehabilitating the expressway in the same place, Appleton argues that the added value of avoiding massive congestion during the rebuilding process and opening up areas to development, increasing property values and therefore tax receipts would far outweigh the additional expense.

“The problem with government procurement,” says Appleton, “is that it is traditionally uni-dimensional, organized around vertical expertise and separate budgets – the transportation department only thinks about roads, the sanitation department only thinks about garbage – rather than looking at a particular problem and potential solutions from all perspectives to get the maximum benefit for the community and taxpayers out of our infrastructure dollars.”

Although his tunnel concept was initially dismissed as being inconsistent with an established plan, it is now receiving increased attention.

So the future looks promising for such alternative methods of delivering infrastructure projects. When used in the proper situations, these methods can make projects’ public owners the winners in the long run.

The following are good sources of information on alternative procurement methods:

* “Recommended Guidelines for Procurement of Design-Build Projects in the Public Sector,” from the American Institute of Architects/ Associated General Contractors;

* “Report on Design-Build as an Alternative Construction Delivery Method for Public Owners” and attached Guidelines for Model Design-Build Procurement Act, from the Building Futures Council; and

* The Manual of Practice for Design-Build Project, from the Design-Build Institute of America.

At the discount store that federal cooperative purchasing programs represent, the lights are on but the doors are still closed to city and county agencies.

Local governments as well as states can only window shop as Congress reconsiders legislation that would give them access to a wide range of products through General Services Administration (GSA) schedules.

This was supposed to be pretty much a done deal. Beginning this month, Section 1555 of the Federal Acquisition Streamlining Act (FASA) of 1994 was set to take effect, authorizing GSA to give local and state agencies access to its catalogue of products and services currently available only to federal agencies (GSA has about 140 schedules listing products from furniture to computers to vehicles).

But now the deal is off, at least for the moment. In response to strong opposition from local dealers and distributors who stand to be cut out of the purchasing loop, Congress is taking another look at this issue.

To give committee members time to do so, a moratorium has put implementation of Section 1555 on hold until the 105th Congress’s first session ends, according to Betsy Phillips, staff assistant for the Treasury, Postal Service and General Government subcommittee that has GSA in its jurisdiction.

By that time, if opponents have their way, the provision could be repealed altogether. The word among some tracking the issue is that the appropriations process is the likely channel for any repeal efforts. Rather than pushing for stand-alone legislation repealing Section 1555, the strategy would be to include language in a larger appropriations bill from a subcommittee like Treasury/Postal.

Major associations of public officials, led by the National Association of Public Hospitals and Health Systems (NAPH) and the National Association of Counties, have countered with a lobbying effort against a repeal. In mid-June, these groups – along with the U.S. Conference of Mayors, the National League of Cities and others – argued in a letter to Rep. Anne Northup (R-Ky.) that pursuing a repeal through appropriations violated established congressional procedure.

The groups contended that allowing access to GSA schedules could “potentially save state and local taxpayers across the country hundreds of millions of dollars every year at a time when federal reforms and budget reductions are increasingly squeezing state and local budgets.”

NAPH members, for example, would like the chance to buy pharmaceutical supplies at GSA prices, since hospitals spend a significant chunk of their budgets on these supplies, according to NAPH spokesperson Ted Slafsky.

For their part, opponents of Section 1555 have protested loudly that the provision threatens to do nothing less than put them out of business. Groups like the National Emergency Equipment Dealers Association (NEEDA) argue that in addition to products, their members provide the service and training that government customers cannot get through GSA programs, and that GSA could in the future change rules and concessions it has put forth during the debate.

For example, GSA has proposed a 1 percent “Industrial Funding Fee” that local and state agencies would pay to manufacturers for using the federal schedules. Vendors would in turn remit these fees to the federal government.

FASA authorizes this fee but does not set its rate. Thus, opponents argue, GSA could raise the rate at will down the road. GSA could also change its mind about the schedules it has considered excluding from the Section 1555 program.

Before the current moratorium, for example, GSA proposed exempting firefighting supplies and equipment from state and local government access, largely in response to concerns raised by NEEDA and others. But opponents say GSA could just as easily decide to make these products available later if Section 1555 were to take effect.

The bottom line is that such concerns have been real enough to make Congress take an extended time-out. The provision has actually been on hold since 1996, when Congress delayed implementation for 18 months and required the General Accounting Office (GAO) to report on the possible impact of opening federal schedules. GAO recommended earlier this year that the cooperative purchasing program be green-lighted with some limitations.

Cloudy forecast So when and in what form is the program likely to emerge from the debate? As with much Washington-watching, it’s difficult to call.

“This thing is changing hourly,” says Larry Wellman, purchasing director for Fairfax County,Va., and an active member of the National Institute of Governmental Purchasing (NIGP). “It’s a very fluid situation right now.”

According to Tom Joseph, point person for NACo on this issue, a decision by Congress that some GSA schedules are “non-controversial” and should be opened, while a moratorium should remain for other schedules, is probably the best that Section 1555 proponents can hope for at this point. A complete repeal would be the worst-case scenario, he says.

If the program gets plugged into the appropriations process as part of a larger bill as now expected, Joseph looks for some action on the issue in early fall, when Congress returns from its August recess. Congress will feel pressure to finish dealing with these bills by the October 1 start of the federal fiscal year, Joseph predicts.

At GSA, officials continue to advocate giving state and local agencies access to its schedules, though not necessarily all of them, according to Ida Ustad, deputy associate administrator for acquisition policy.

“We support the ability to open our schedules when we determine it’s appropriate for use by state and local entities,” she says. “That doesn’t mean that every schedule should be opened.”

How GSA would decide which products to make available is not yet clear. Ustad says the agency would probably look at its schedules in groups, industry-by-industry. “But we might make decisions not by industry, but by indiv idual schedules,” she says.

The sense from Joseph and others with local government perspectives is that agencies would not necessarily shop at GSA’s discount store; they’d just like the option.

“I look at it as another tool in our toolbox,” Wellman says. “It gives us an inroad to an area we have not have access to before.”

“My personal belief is that as long as there are public funds [at stake], there is an obligation on the part of the purchasing agent to maximize the power of their purchasing dollars,” says Jim Brinkman, NIGP’s executive vice president. “It (would be) one of the rare things government does that you can do if you want to, if it’s to your advantage, but you don’t have to.

“This is all predicated on volume,” he says. “If you’re going to buy $500,000 worth of stuff, you’re going to get a better deal.”

At the same time, for other types and sizes of purchases, agencies may get the best price from a dealer. And many cities and counties already have access to their state’s cooperative purchasing agreements.

In Cleveland, purchasing commissioner William Moon says using Ohio’s contracts has yielded the best deals in some cases, though he does only a small percentage of his procurement through that channel.

“It works quite well, and we only [use the program] after we’ve tested the water to see if the state’s price is more competitive,” Moon says. “We get better pricing on a lot of commodities than the state does.”

Just as he buys only selectively through the state program, Moon says he does not anticipate using federal contracts across the board if they become an option. Really, he is waiting to see exactly what the Section 1555 program looks like if implemented.

“I don’t know what all of the ramifications will be until we see what the total package contains,” Moon says. “I would prefer not to make any ‘guesstimates’ at this time.”

So Moon, like a lot of folks, is hedging. And since the concerns that have delayed Section 1555 so far are not likely to go away, that looks like a wise approach.