“DELIVERING HEAVY CONSTRUCTION

American Bar Association

Forum on the Construction Industry / TIPS Fidelity & Surety

Law Committee

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Withstanding the Tremors: The Golden Rules for a Rock-Solid Design/Build Project

Delivering Heavy Industrial Projects Through Design-Build: A Focus on Miscellaneous Procurement Issues

Mark A. Menghini, Esq.

Greensfelder, Hemker & Gale, P.C.

St. Louis, Missouri

January 25, 2007

The Westin St. Francis, San Francisco, CA

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A FOCUS ON MISCELLANEOUS PROCUREMENT ISSUES”

By: Mark A. Menghini[i]

Greensfelder, Hemker & Gale, P.C.

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INTRODUCTION

This paper focuses on various procurement-oriented issues associated with “heavy” construction projects constructed through the use of the design-build delivery method. For purposes of this paper,. “heavy” construction is loosely defined as public projects with a construction budget of at least $100 Million. Examples of heavy construction might include large roadway, airport and bridge projects.

Unlike traditional residential or commercial projects, heavy projects tend to offer wider-range and more complex issues for the construction attorney to address during front-end contract negotiation. Note, this is true for attorneys representing both the public and private sector, whose clients may be at a disadvantage if their attorney is not familiar with the peculiarities associated with heavy construction. When considered in the context of the design-build delivery method, issues associated with heavy construction projects take on a whole new flavor, as statutory concerns and the likely involvement (read: impact) of third-parties with the project necessarily arise.

This paper does not pretend to address all of the pitfalls of contracting in the heavy construction arena. Rather, this paper focuses on only a handful of issues that often arise which, at a minimum, should be considered by the construction attorney (and his or her client) during contract negotiation and consideration of the design-build delivery method. The topics touched upon herein include issues related to the following subjects:

· Statutory considerations regarding public use of design-build authorization and selection criteria;

· Public Private Partnering (“3 P”) considerations;

· Utility relocation considerations; and

· Post-award validation period considerations.

Ultimately, while many of the issues addressed in this paper are nearly always associated with heavy construction, they may also have application to smaller, public improvement projects, as well. To that end, it is the hope of this writer that the points raised in this discussion have cross-over appeal to any construction attorney practicing in public contracting[ii].

DISCUSSION

I. Statutory Considerations - Public Use Of Design-Build

A. Can the Public Agency Use Design-Build or Another Type of Innovative Placement Method?

The obvious first question that must be asked when considering an alternative delivery method for a heavy project: Is the public agency legislatively authorized to utilize the desired alternative contracting method? Historically, public contracting has employed the design-bid-build method of construction. However, the use of the design-build process has become increasingly appealing to public agencies over the last ten years, especially in the context of heavy projects. The benefits reaped by public agencies from the use of design-build on smaller projects are only magnified on projects exceeding $100 Million.

As public agencies become increasingly strapped for funding, many have sought out alternative means of project delivery in an effort to reduce project costs. While this paper focuses on design-build as one of those potential methods, there are many other types.

The Design-Build Institute of America succinctly itemizes the following typical benefits of design-build to the public agency: singular responsibility (single point of responsibility for quality, cost and schedule adherence), quality assurance (general performance terms result in the design-builder’s warranty that the actual design documents are free from error), cost savings (value engineering and constructability are utilized more efficiently when the designers and contractors work for the same team), time savings (elimination of bidding and redesign periods reduces total design/construction time), reduced administrative burden (no owner coordination between separate design and construction contracts), early knowledge of cost (simultaneous estimating during design results in earlier cost forecasts), and risk management (risk of increased construction costs due to design errors/omissions is eliminated)[iii].

Based on the foregoing benefits, it is no surprise that more and more state and federal agencies have adopted statutes which (a) address the use of design-build and (b) provide guidance for the procurement and competitive awarding and negotiating of design-build contracts. For example, federal agencies such as the General Services Administration and Corps of Engineers each employ the use of design-build for various portions of their work[iv]. By all indications, the use of design-build by these federal agencies is likely to increase in the coming years. State adoption of design-build legislation which specifically authorizes and/or encourages the use of design-build contracting is far from uniform, as many states have yet to enact laws which clearly promote and guide its use. To further promote the use of design-build, the American College of Construction Lawyers and the Building Futures Council have developed a model Design-Build Procurement Code for consideration of adoption by those state and local agencies that have yet to address the delivery method.

A fifty state survey of all legislation which addresses design build will quickly demonstrate the wide disparity between how each state, and indeed each intra-state agency, treats the use of design-build. While some states and agencies expressly allow for the use of design-build, others expressly prohibit its use. Some states neither expressly allow nor disallow the use of design-build, but have installed certain statutory ‘roadblocks’ preventing its use. The following sampling of states have enacted legislation which allows for the use of design-build for projects that may fall within the category of “heavy construction” – note, this is not an exhaustive list of states, nor those agencies within each listed state which allow for design-build:

STATE	AGENCY / AUTHORITY	CODE
Alaska	All agencies for projects using public funds	Alaska Stat. §36.30.200
Florida	Department of Transportation	Fla. Stat. Ann. §337.11
Idaho	Department of Administration	Idaho Code §67-5711A
Kansas	Turnpike Authority	Kan. Stat. Ann. §68-2001 et seq.
Maryland	Capital Projects	MD. Code Ann., State Fin. & Proc. §3-602(g)(1)
Montana	Department of Transportation	Mont. Code Ann. §60-2-112
Nevada	State Public Works Board	Nev. Rev. Stat. §341.161
New Hampshire	State Transportation Program	N.H. Rev. Stat. Ann. §228:4(I)(c)
Utah	Highway Projects	Utah Code Ann. §63-56-502
Washington	Department of General Admin	Wash. Rev. Code Ann. §39.10.051

Many states not listed above also allow for the use of design-build, but have enacted statutory provisions which are either less clear, or pose onerous restrictions on its use. Based upon the wide disparity in design-build legislation, it is incumbent upon public and private entities to fully research the applicable statutory provisions before considering the use of design-build.

B. What Selection Criteria Must the Public Agency Consider?

Determining whether the applicable public agency is allowed to consider the use of design-build is only half the battle – the follow-on question of particular concern to both sides of the equation: What selection criteria must the public agency consider in awarding the design-build contract? As in all public contracting, the purpose of selection criteria for the use of design-build is generally to allow the public agency to ascertain which design-builder’s proposal ultimately provides the “best value”. This concept is sometimes referred to as “best value contracting”.

Unlike the traditional design-bid-build approach, design-build competitive bidding is necessarily premised upon a more flexible approach, given the lack of a pre-existing design upon which the bidder can assemble its bid. The added element of design unavoidably provides another layer of complexity for both the bidder and the agency in the evaluation and selection process. The public agency cannot simply compare ‘bottom-line’ numbers in selecting a bid; rather, subjective criteria must be applied to gauge the qualitative aspects of each individual bidder’s proffered design.

To ensure best value, federal and state agencies have enacted a wide variety of selection and evaluation procedures for the appraisal of design-build proposals. These statutory procedures range from rigid, conventional competitive bidding to sole source negotiation based on agency-provided, flexible performance criteria. The design-build bidder must be intimately aware of the governing statutory selection criteria in order to maximize its chances of procuring the contract award. This is especially true for heavy projects, where the dollar value of construction can quickly escalate (or be reduced) by the tens of millions of dollars based on the level of creativity in the design. For instance, where the governing selection criteria is weighted more toward competitive bid cost considerations, the design-build contractor may consider alternative designs or the use of innovative materials in order to further reduce the overall cost of the project[v]. Conversely, where selection criteria are weighted more toward factors other than price (such as aesthetics), the design-build bidder may more comfortably explore creative design options, knowing that the reviewing agency has more flexibility in selecting a bid which meets more than minimal cost considerations.

1. Selection Criteria: Generally

Generally, there are a handful of selection approaches that federal and state public agencies have adopted for the evaluation of design-build bids[vi]. These approaches are summarized as follows:

(a) Cost-Weighted Competitive Bidding. Under this approach, the agency is required to award the contract to the lowest bidder that meets certain ‘responsibility’ standards. To protect the quality of the end product, the agency sets certain prescriptive specifications on the design so that responsible bidders meet baseline quality standards in their proposed design.

Under this approach, the agency places little (or no) emphasis on factors other than price. While this selection method may be advantageous for heavy projects that naturally place less emphasis on design creativity (e.g., large, flat roadway projects), it may be disastrous from a subjective standpoint for projects where other factors such as athletes or multiple stakeholder considerations are at work and the agency wants to encourage design imagination and inventiveness (e.g., large bridge or mass transit projects).

(b) Higher Qualification Competitive Bidding. Under this approach, the public agency, while still placing an emphasis on end price, also bases its selection on greater pre-qualification standards, such as technical, managerial and financial capabilities, as well as past-performance and industry reputation. This approach involves more subjectivity in the bidder pre-qualification process, rather than the ultimate selection of the design-build proposal. This may result in the selection agency’s inability to consider higher-cost alternative designs, despite the fact that those designs may ultimately correspond with better long-term products. In the context of heavy projects, though, to a certain extent it may be presumed that the range of bidding ‘candidates’ is naturally culled simply by virtue of the magnitude of the project, and the capability of those entities able to realistically consider the project in the first place.

A variation on this selection process involves the submission of alternative proposals which deviate from the public agency’s baseline specifications. This approach allows the agency to consider design alternatives which would otherwise be prevented by its narrow design specifications, thereby leading to varied design alternatives that might result in overall project savings to the public agency.

(c) Weighted Award Based On Several Factors. As the name implies, this approach allows the awarding agency to consider price as but one of several factors in choosing a proposal. Typically, the public agency will assign a valve or weight to various factors in the evaluation process. Because of the sheer size of these projects, there are multiple considerations other than price alone and the weighted award method enables the public agency to consider these factors in the selection process. Federal and state agencies have adopted several variations on this theme, all of which employ various degrees of preliminary design prescriptions and place varying degrees of emphasis on factors other than price. In some instances, the agency may base its award both on the submission of the bidders’ proposal packages, as well as post-submittal discussions with the bidders or a “Best and Final Offer” or “BAFO”. Such post-submittal discussions may serve to (a) identify potential deficiencies in the proposed designs and/or (b) provide the agency with additional information to determine whether it’s technical requirements should be revised. The majority of heavy design-build projects are based on some version of the awarded “Weighted Award” selection process.

According to the United States Department of Transportation (Federal Highway Administration), South Carolina is one example of a state that has utilized design-build on several major highway projects, using a weighted, composite scoring system to select the successful bid. The following weighted criteria were used by the South Carolina Department of Transportation during the selection process for one particular project: cost of project (55%), qualifications of the proposer (25%), and time of completion (20%).

(d) Sole Source Negotiation. The sole source negotiation selection process is predominantly a creature of private sector construction. Under this approach, a sole design-build contractor is selected for direct negotiations with the owner, with no consideration of the competitive bid process. It is rare that this approach is utilized in public works, or that public agencies are even legislatively allowed to consider the use of this approach, as sole source negotiation naturally lends itself to the perception of contractor favoritism and potentially higher costs due to the lack of a competitive atmosphere.

2. Selection Criteria: Specific Examples – California & Florida

California and Florida each have enacted legislation permitting the use of design-build in public contracting, and provide good examples of complex selection criteria. These states are indicative of the above-cited selection approach which weighs several factors, including price, in the overall selection of a design-build proposal. An examination of the following California and Florida design-build statutes demonstrates not only the differences between public agency requirements, but also the fundamental differences between design-build selection criteria and traditional design-bid-build criteria.

California. California authorizes the use of design-build as an alternative bidding procedure for its transit projects. California Public Contract Code §20209.6-8 set forth detailed criteria for the agency’s use of design-build and selection of contractors for transit projects. Prior to entering into a design-build contract, the transit operator must first conduct an evaluation as to whether the use design-build is preferable to the traditional design, bid, and build process of transit construction[vii]. The transit operator must make written findings that use of the design-build process on the specific project under consideration will accomplish one of the following objectives: reduce project costs, expedite the project's completion, or provide design features not achievable through the design-bid-build method[viii].

Prior to submitting an RFP, the transit operator is required to prepare a set of documents that sets forth the scope of the project. The documents may include, but are not limited to, the size, type, and desired design character of the buildings, transit facilities, and site, performance specifications covering the quality of materials, equipment, and workmanship, preliminary plans or building layouts, or any other information deemed necessary to describe adequately the transit operator's needs[ix]. Thereafter, the request for proposal must include a section identifying and describing (a) all significant factors that the agency reasonably expects to consider in evaluating proposals, including cost or price and all non-price related factors, (b) the methodology and rating or weighting scheme that will be used by the agency in evaluating competitive proposals and specifically whether proposals will be rated according to numeric or qualitative values, and (c) the relative importance or weight assigned to each of the factors identified in the RFP[x]. Note, if a non-weighted system is used, the agency shall specifically disclose whether all evaluation factors other than cost or price, when combined, are any of the following: (i) Significantly more important than cost or price; (ii) Approximately equal in importance to cost or price, or (iii) Significantly less important than cost or price[xi].

In addition to the foregoing, the transit operator is required to establish a procedure for prequalifying design-build entities, which must include several factors listed in the statute[xii], including evidence that the members of the design-build entity have completed, or demonstrated the experience, competency, capability, and capacity to complete, projects of similar size, scope, or complexity, and that proposed key personnel have sufficient experience and training to competently manage and complete the design and construction of the project.

The criteria used in the evaluation of proposals may only be that criteria and source selection procedures specifically identified in the RFP[xiii]. However, the following minimum factors shall collectively represent at least 50 percent of the total weight or consideration given to all criteria factors: price, technical expertise, life cycle costs over 15 years or more, skilled labor force availability, and acceptable safety record[xiv].

Florida. Florida also permits the use of design-build in public contracting. Like California, Florida public agencies that elect the use of design-build must specify performance-based criteria for the project, including material quality standards, schematic layouts and conceptual design criteria of the project, cost or budget estimates, design and construction schedules, site development requirements, and provisions for utilities[xv]. Procedures for the use of a competitive design-build proposal selection process must include as a minimum the following:

1. The preparation of a design criteria package for the design and construction of the public construction project.

2. The qualification and selection of no fewer than three design-build firms as the most qualified, based on the qualifications, availability, and past work of the firms, including the partners or members thereof.

3. The criteria, procedures, and standards for the evaluation of design-build contract proposals or bids, based on price, technical, and design aspects of the public construction project, weighted for the project, and

4. The solicitation of competitive proposals, pursuant to a design criteria package, from those qualified design-build firms and the evaluation of the responses or bids submitted by those firms based on the evaluation criteria and procedures established prior to the solicitation of competitive proposals.[xvi]

II. Public-Private Partnering Considerations

Public-private partnerships, where available, are another means of delivering heavy projects in the context of design-build. Public-private partnerships are contractual agreements formed between public and private entities that allow for increased private sector participation that goes beyond the typical requirements of design-build. The concept itself isn’t particularly new with many of the heavy construction projects, relying on increased assumption of risk or responsibilities traditionally shouldered by the public agency. The public entity involved is typically a state or federal department of transportation, a local county public works department or a state-chartered authority that is the ‘owner’ of a major transportation facility (e.g., highway or transit).

Traditionally, private sector participation in heavy projects was limited to separate design and/or constructions contracts, based on the agency’s specifications. However, the emergence of public-private partnerships has expanded the private sector’s role by allowing public agencies to tap private sector resources (such as technical, management and financial resources) for the agency’s achievement of greater cost and schedule certainty, supplementation of in-house staff, application of innovative technology and access to specialized expertise[xvii].

In the public-private partnership scenario, the private entity assumes a greater role in the planning, financing, design, construction, operation, and maintenance of the heavy project, as opposed to the traditional design-bid-build or even design-build scenarios. While the private entity may still have design-build responsibilities, it also takes on the additional roles referenced above so as to supplement the public agency’s needs.

For heavy projects, particularly Federal Department of Transportation projects, public-private partnering has been used to supplement conventional procurement practices by taking additional revenue sources and mixing a variety of funding sources (including private commercial debt) as a means of reducing demands on constrained public budgets. Projects that are likely to benefit from public-private partnerships are those which involve (a) innovative financing (increased access to private investment to augment scarce resources), (b) tight schedules (expedited project completion results from grouping multiple responsibilities in a single contract), and (c) complex design and construction (increased public access to specialized expertise and proprietary technology).

According to the Federal Highway Administration, as of August 2006, 21 states and one U.S. territory have passed legislation providing the legal authority for private sector participation in transportation projects to varying degrees[xviii]. The following states have some form of transportation public-private partnership authority: Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Indiana, Louisiana, Maryland, Missouri, Minnesota, Nevada, North Carolina, Oregon, South Carolina, Texas, Utah, Virginia and Washington. As federal and state highway funding becomes more constrained and the need for highly efficient surface transportation grows, it is likely that the role of the private sector in the financing of heavy projects will continue to grow.

III. Utility Relocation Considerations

Significant utility relocations and third-party permitting issues are a common denominator to many heavy projects, particularly to transportation construction (roadway and mass transit) where the project alignment passes through populated and/or older developed areas. When bidding heavy construction, the design-build contractor must be aware of how these issues will be addressed for the proposed contract. The design-build contractor’s role with respect to utility relocations and permitting can differ drastically from that of the contractor with no design responsibility, as the added role of designer may provide the contractor with greater flexibility to take a proactive role in coordinating and addressing the concerns of utilities and third-party permitting entities through innovative design methods.

While this section focuses on a utility-related discussion, the same questions posed herein may also apply to other third parties that impact the project; e.g., state and county governments / municipalities, local architectural review boards, concerned citizen groups, etc. The following offers a brief discussion on several issues that merit examination at the time of bid by both the design-build bidder and the public agency owner. In a perfect world, all of the following issues will be resolved prior to the start of physical construction; however, the experienced design-build contractor will undoubtedly confirm that this is not always the case. From a risk analysis standpoint, it is imperative that the design-build contractor factor the answers to the following questions into its bid – failure to do so can be potentially disastrous in the context of a heavy construction project where invariably the design-builder will be faced with taking into consideration the satisfying not just the owner but those of various stakeholders.

A. What statutory authority, if any, is applicable to utility relocations, and how does this authority affect the project?

It is critical that the public agency owner and design-builder are well versed in all applicable statutory or local authority which impacts the relocation of utilities. There is no uniform statutory treatment of utility relocation issues by the states, and the statutory provisions that do address utilities range across the board. While some statutes merely require that “provisions for utilities” must be included in design-build criteria bid packages[xix], others require more advance, affirmative action on the part of the public agency.

For example, under Georgia’s Department of Transportation design-build statute[xx], design-build construction activities may not begin on any portion of the project until title to the necessary rights of way and easements for the construction of that portion of the project have vested in the state or local governmental entity, and all railroad crossing and utility agreements have been executed.

For further example, Colorado’s Transportation design-build statute authorizes the transportation authority to enter into “project specific utility relocation agreements” with impacted utilities which may include provisions for (1) the prompt performance of utility relocation work by either the utility or design-build contractor, (2) the cooperation of the utility with the design-build contractor and (3) the timely repayment of funds advanced to the utility for the relocation cost, including interest that has accrued on those funds[xxi]. Still, in other states there is no distinguishing a public agency’s responsibility for certain type of utilities regardless of the procurement process utilized[xxii].

B. Who bears the responsibility for paying for utility relocation costs?

It is important that all impacted parties have a clear understanding and agreement as to who will bear the responsibility for paying for not only the physical utility relocation costs, but also the associated design of same. Will the public agency pay for all relocation costs, or will this burden be borne by the utility in whole or in part? Will the design-build contractor be responsible for covering utility relocation construction and/or design costs? Will it matter if the utilities are reflected in the drawings furnished by the owner? To the extent possible, the answers to these questions should be clearly set forth in, and coordinated between, the design-build and utility contracts.

C. Who will directly contract with the utilities?

Once responsibility for the costs associated with utility relocations has been addressed, the public agency owner must decide whether the utilities will contract directly with the public agency or the design-build contractor. Many factors may be relevant to this decision, such as past history between the affected utilities and the public agency, the availability of agency personnel to coordinate the effort and budgetary considerations associated with having the design-build contractor ‘hold’ the utility contracts.

A related question: Who bears the responsibility for coordination of utility relocations? Will the public agency devote resources to the coordination of utility relocations, or will the design-build contractor assume this role? If the design-build contractor assumes the role of utility coordinator, what contractual ‘powers’ has it been granted vis-à-vis the utilities to effectively keep relocations on schedule?

D. Have utility contracts already been executed; and, if so, what contractual provisions are in place to ‘motivate’ the utilities?

For a design-build contractor that is not contracting directly with the affected utilities, it is important to know the status and terms of the public agency’s contract agreements with the utilities, as each may ultimately have an adverse impact on the project schedule. The first question that must be asked: Has the public agency entered into all necessary utility agreements prior to the commencement of project construction? If the answer to this question is “no”, how will this potentially impact the construction schedule?

Second, what provisions have been included in the public agency’s contracts with the utilities to ‘motivate’ timely relocations? Public agencies that fail to include sufficient recourse provisions in their utility contracts to penalize the utilities for late performance (i.e., liquidated damage provisions) are setting the table for project delays. Without such penalty provisions, major metropolitan utility companies are prone to shift relocation priorities over the length of a major project to satisfy other requirements of the utility companies that are unrelated to the subject project.

Additional related questions that must be asked: What oversight and design input will the utility have, has a utility relocation schedule been developed; and, if so, have the utilities contractually agreed to the schedule? Have the utilities begun advance relocation work in conformance with the schedule?

5. Who bears the risk of delayed utility relocations? How does the design-build contract address this risk?

Given the propensity of utility relocation delays on major transportation projects, it is critical that the design-build contractor address this risk in its contract with the owner, particularly in situations where (a) the owner holds the utility contract, and/or (b) the design-build contractor has no ability to exercise any coordination or control over utility relocations.

IV. Post-Award Validation Period

This section of the paper offers suggestions as to how the parties can equitably structure the immediate post-award period to enable the successful design-build contractor to validate certain design assumptions and fill in the ‘gaps’ that may exist between engineering and construction. The public agency owner undoubtedly prefers that bid prices remain firm; however, the very nature of heavy construction lends itself to significant ‘unknowns’ for the design-build contractor that can only be realistically validated during the post-award period. For instance, from the contractor’s perspective, it is unrealistic to expect that all necessary subsurface soil investigations have been performed during the pre-bid and pre-award periods. It is simply impractical to expect bidding contractors to have performed, or even validated, all necessary sub-surface investigations for a project of any relative magnitude. Likewise, on larger projects, there is a higher likelihood that certain gaps exist in the proposed design as a result of scope changes during the bid process, and other engineering assumptions made during the pre-bid period.

The question arises: How can the owner’s desire to irrevocably assign risk during the pre-award period be reconciled with the equities behind allowing design-build bidders sufficient time to validate design ‘unknowns’? Perhaps the answer is for the public agency’s request for proposal to include a planned post-award investigation period, during which the successful bidder will have the opportunity to validate certain scope and design assumptions. During this post-award period, the successful bidder’s price would essentially remain ‘open’ while the contractor (a) performed additional subsurface investigations, (b) analyzed scope changes for design and cost impact, and (c) performed additional necessary engineering to fill in other assumption gaps and address other project unknowns discovered during the post-award period.

At the conclusion of the validation period, the successful bidder would then be provided the opportunity to assign a value to items discovered during its post-award investigations for the owner’s consideration. For all additional proposed costs, the contractor would be required to demonstrate why such items were not reasonably identifiable during the pre-award period. In order to avoid abuse of this process, the owner would be entitled to either accept or reject the design-build contractor’s ‘final’ proposal, or negotiate an acceptable figure. The benefit of this exercise to the contractor would be increased confidence that its bid amount reflected all available information and investigation. Alternatively, the owner would benefit from the ability to more effectively foreclose future change requests for additional compensation arising out of alleged changed conditions that may not have been reasonably foreseeable during the pre-award period, but should have been ‘caught’ during the additional post-award validation period[xxiii].

However, with large heavy projects, arguably there will never be enough investigation that a contractor can do to completely eliminate risk, especially post-award where time becomes a critical factor.

As with a traditional project, the best way for an owner to minimize contractor contingency for unknowns is to minimize unknowns through information and preliminary engineering furnished to bidders pre-bid which may include geotechnical and drainage evaluations, right-of-way maps, inter-agency cooperative agreements, and other information.