Best-Value Procurement Methods for Highway Construction Projects (2006)

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11.1 Background: Problem Statement and Research Objective Legislation in most states requires that construction con- tracts for public works projects be procured using a compet- itive sealed bidding process and awarded to the responsible bidder submitting the lowest bid. The majority of public sector construction contracts continue to be awarded solely based on the lowest price. A long-standing concern expressed by public owners, however, is that low bid, while promoting competition and a fair playing field, may not result in the best value for dollars expended or the best performance during and after construction. As noted in the research problem statement for NCHRP Project 10-61, the low-bid system encourages contractors to implement cost-cutting measures instead of quality enhancing measures, which makes it less likely that contracts will be awarded to the best-performing contractors who will deliver the highest quality projects. The primary tool available to owners to counteract the cost- cutting incentives inherent in a low-bid system is through the process of determining bidder responsibility. This determina- tion may simply involve an evaluation of pricing and financial ability, but many public owners have broadly interpreted responsibility as encompassing other factors as well. Recent surveys of the highway industry gathered from previous research indicate that prequalification is used widely by state and federal agencies in their construction programs to deter- mine responsibility in conjunction with a traditional sealed bidding process. Prequalification in its simplest form is an assessment of financial responsibility, which often mirrors what sureties look for in making their underwriting decisions relating to issuance of bonds for public works projects. It also may include other factors such as demonstrated ability to per- form a certain type of work. Whether by prequalification or other methods, public owners are increasingly exploring ways to include non-price factors, both qualitative and quantitative, in the procurement process to motivate contractors not only to improve their performance during construction, but equally as important, to build value into the end products of construction. 1.2 Best-Value Contracting Definitions The term best value has many competing definitions from numerous procurement sectors. There are even competing definitions within the highway sector itself. The federal government uses the term best value in reference to the purchasing of almost every piece of merchandise from com- puters to military weapons, as well as highway and building construction. The Army Source Selection Guide (Army 2001) defines best value as “The expected outcome of an acquisition that, in the Government’s estimation, provides the greatest overall benefit in response to the requirement.” The research team has chosen to use a broad definition of best-value procurement for highway construction as follows: A procurement process where price and other key factors are considered in the evaluation and selection process to minimize impacts and enhance the long-term performance and value of construction. While this definition can be applied to all current best- value procurement systems, it overlaps with other innovative contracting methods. In a broad sense, best value may encompass the concepts from and variations of current high- way procurement methods, including prequalification, post- qualification, A+B bidding, multi-parameter bidding, bid alternates, and extended warranties. Best-value procurement methods have been employed under traditional design-bid- build contracting, although on a very limited basis at this date. Additionally, best-value procurement concepts are com- monly used in conjunction with design-build contracting, C H A P T E R 1 Introduction and Research Approach

but design-build contracting comprises only a small portion of the U.S. highway industry. Concepts falling within the general definition of best-value procurement found in the highway industry are further described in Chapter 2. 1.3 Scope of Study Best-value procurement is increasingly being recognized in the highway construction industry as a way to incorporate quality and other important factors in the procurement process and enhance the long-term performance and eco- nomic value of the work. The researchers have developed the following products as part of this research project: • Recommended best-value procurement strategies for use in awarding competitively bid highway construction projects, • Screening criteria for selecting projects that would be appropriate for best-value procurement, and • Strategies for overcoming barriers to implementation. The first phase of this research effort clarified what best- value procurement means for the industry and evaluated the effectiveness of the various approaches used or proposed for use. In the final phase, the research team developed practical, fair, and flexible criteria/procedures to implement the most practical best-value procurement approach in the context of the traditional low-bid system. The findings of this effort are described in detail in Chapters 2 and 3. 1.4 Research Approach The approach taken for this project, apart from report preparation under Tasks 3 and 8, encompassed six tasks and several subtasks as follows: Task 1—Identify best-value procurement methods that have been considered, developed, or used for awarding construction contracts. Consider methods in the United States and internationally. As a first step, the team reviewed its existing database and survey information and conducted a literature review of existing research databases, project-specific bidding and request for proposal (RFP) documents, and other sources of information related to contracting and project delivery approaches that incorporate best-value concepts. To supple- ment current information regarding best-value procurement, the research team gathered data from other construction industry sectors, and procurement practices from other coun- tries studied during the most recent Contract Administration and Asphalt Pavement Warranties European Study Tours. A rigorous literature review has been conducted specifically for best-value procurement (see Appendix A). With this information, the research team developed initial definitions of best-value procurement that encompassed the concepts and variations currently used in the industry and any new or innovative approaches considered. Using these defini- tions and concepts,an electronic survey was developed to gather additional information regarding the state of practice in the highway industry and related industry sectors and as a second phase to obtain additional case study project information. The next step was to conduct a survey to collect data that was specifically targeted to the objectives of this research. To accomplish this step, the team developed a two-phase survey. The first survey, shown in Appendix C, was essentially a filter- ing tool to identify those agencies or construction owners that are using or considering the use of a best-value procurement process in the highway sector consistent with the definitions in the survey form. The survey also identified any potentially new best-value concepts that were not reflected in the litera- ture or the existing database. The second phase consisted of a more focused data collec- tion survey concerning best-value project results. This survey, also included in Appendix C, was targeted to the respondents that have experience with various forms of best-value procure- ment based on the results of the initial survey. The survey asked respondents for detailed information regarding the evaluation and selection process and the criteria used for screening and selection. Respondents were also asked to provide performance outcomes for projects using best-value procurement, in some cases compared with traditional low-bid selection. The products of the Task 1 identification of best-value procurement methods included a common definition and conceptual framework for best value; identification of the universe of parameters, evaluation criteria, award algorithms, and rating systems used for best value; and a baseline of projects and compendium of case studies from which to eval- uate the effectiveness of the various methods. The best-value procurement definitions and conceptual framework are discussed in Chapter 2. The literature review and case studies can be found in Appendix A and Appendix D, respectively. Task 2—Critically evaluate the effectiveness of the best-value procurement methods identified in Task 1. The critical evaluation task initially analyzed concepts that have been used on actual best-value projects to develop the necessary background to recommend a best-value selection methodology. Based on the examination of the literature, case studies, survey, and performance results, the critical analysis addressed the advantages and disadvantages of each major 2

component of best-value procurement and developed a coding structure relating parameters to evaluation criteria. The analysis further assessed the frequency of use of the specific evaluation criteria in the total case study population. In addition to the completed case studies, the research team collected and analyzed objective performance data from the team’s project database. This effort started by sepa- rating the projects currently on-hand in the project database into those procured by traditional low bid and those deliv- ered using some other method like multi-parameter bidding or best-value procurement. A series of project performance metrics were created to measure each dataset and allow com- parison. The typical metrics were • Award growth, • Cost growth, • Time growth, • Construction placement, and • Average contract value. Next, the non-traditional projects were separated and compared by procurement method type using the same set of metrics. This allowed the research team to quantitatively rank the impact of different best-value elements. For example, the performance of A+B bid projects to low-bid projects would allow a comparison of the effect of including time as a factor in the procurement process and permitting the construction contractor rather than the owner to establish the project schedule. The use of warranty provisions on projects would provide an indication of the effect of including quality criteria in the procurement process on end-product performance. Lastly, interviews were conducted with the expert advisory panel to validate the results of the initial surveys and provide a “reality check” against these preliminary results. The results of the critical evaluation are presented in Chapter 2. Task 4—Develop best-value procurement methods for use in awarding highway construction projects. Task 4 required that the research team further develop best-value procurement method or methods to address the shortcomings of strategies evaluated in Task 2, make final recommendations for development of best-value methods, and if appropriate,explore,develop,and recommend new variations of best value.This task was essentially a continuation of the Task 2 critical evaluation to obtain follow-up information from high- way industry users and refine the recommended best-value sys- tem. The research team distributed the second survey to obtain quantitative and qualitative information from the highway industry regarding performance outcomes of their best-value projects. The research team also presented preliminary research results at several industry conferences and solicited feedback from participants.Using the combined results of data collection efforts and feedback from stakeholders, the research team com- pleted the critical analysis of those systems currently in use by state agencies, federal agencies, and the international highway construction organizations. The initial performance results and survey information were not conclusive in terms of ranking the effectiveness of the different best-value procurement methods. In fact, the pre- liminary results indicated that all of the best-value methods will potentially achieve favorable results in terms of project performance compared with design-bid-build projects, partic- ularly for those performance measures that directly relate to the specific best-value selection parameters. Though the existing meets technical criteria—low bid appears to be the simplest and most compatible with the traditional low-bid, design-bid-build process—the preference for a more flexible approach to com- bining best-value parameters in an award system required that the team explore variations on the other existing algorithms or potentially new algorithms for award. Task 4 thus further refined the best-value model, assessing whether it was possible to reduce the number of variables in the best-value procurement system or develop and evaluate a new approach or approaches to a best-value procurement system. Task 5—Develop practical, objective criteria and processes (including a scoring system) to be used in quantifying best-value elements of a construction bid. The results of Tasks 2 and 4, project performance bench- marking and the case study project content analysis, were used to develop a proposed best-value procurement frame- work from which the remainder of the study was completed, and through which the practical, objective criteria and processes (including a scoring system) were developed. The results of the national transportation agency survey were used to validate the proposed framework. The first step in deriving a proposed best-value procure- ment framework was to map the final results of the best-value project case study content analysis to the best-value parame- ters and evaluation criteria. To do this, the research team determined that the best measure of potential success for a given generic evaluation criterion was repetitive use by those agencies that have experimented with best-value procure- ment. Accordingly, the following standard was developed for selecting a given best-value evaluation criterion to be recom- mended for use in the proposed framework: To be recommended, a criterion must appear in 50% of the sample population solicitations, or, if none are 50%, the single highest occurrence will be used. 3

With this in mind, the initial population of evaluation criteria was evaluated and revised. Additionally, the same approach used for the evaluation criteria was applied to the problem of distilling the population of best-value award algorithms into a group that is most suitable for highway construction projects. Finally, the use of one- and two-phase procurement processes similar to those portrayed in the case study projects was considered and evaluated for the final best- value system. Task 6—Develop screening criteria for selecting projects for application of best-value procurement methods. One of the three primary objectives of the research was to develop screening criteria for selecting projects for application of best-value procurement methods. Recognizing that best- value procurement has its advantages, although it is certainly not appropriate for every project, there are certain project char- acteristics that correlate to the successful implementation of best-value concepts. In other words, some projects can benefit more from best-value procurement than others. The research team developed a paper-based best-value proj- ect screening tool. The tool involves two steps. Step One is a decision flowchart, and Step Two is a scoring questionnaire. These two items are included in Appendix F. The team has also created an automated web-based decision support system called the “Best-Value Selector”(BVS) Project-Screening Tool, but the final product is not dependent on this computer-based format. Agencies will be able to use either the paper-based or the web-based formats. The University of Colorado is sup- porting the BVS, which can be found at the following website: http://construction.colorado.edu/best-value. The model uses critical project characteristics found through performance data and expert knowledge from past projects to predict the success of best-value procurement on new projects. The output from the model will provide agencies with critical information regarding the decision to apply best-value pro- curement on a given project or series of projects. Task 7—Develop strategies to overcome institutional, legislative, and industry-related barriers to implementing recommended best- value procurement methods. As the transportation industry has gained more experience in the use of best-value selection within traditional low-bid, design-build,and negotiated procurements, concerns and ques- tions have been raised by participants, from both owner and industry perspectives that must be addressed before best-value procurement will be widely supported and implemented. Widespread implementation requires creative and flexible solutions to legal and procurement-related barriers that exist among different states and jurisdictions. Section 3.6 of this report recommends solutions to implementation barriers. These recommendations are based on survey results, the latest trends in state statutes and best-value procurement, and feed- back provided by practitioners at industry meetings in response to the research team’s presentation of preliminary findings. To facilitate the discussion, a matrix of legal, regulatory, social, and business barriers to best-value procurement has been developed that indicates the level at which each barrier must be addressed, possible solutions to each barrier, and the probability that each barrier can be solved without legislative restructuring. The report also makes recommendations that may be used as a basis to develop model legislation and provides a sample guide spec- ification in Section 3.7 that may be adapted for use by agencies implementing best-value procurement. Project Extension—Incorporate International Construction Management Scan Findings An FHWA/AASHTO-sponsored international scanning research project on construction management found a wealth of international knowledge concerning best-value procure- ment. The results of the 2004 Construction Management Scan became available in summer 2004 as this research proj- ect was nearing completion. NCHRP sponsored a project extension to incorporate these international findings; this was the final step in the NCHRP 10-61 research process. The scan conducted in-depth interviews with agencies from Canada, England, Finland, Germany, The Netherlands, and Scotland. The NCHRP research team used information from this scan and additional information from a subsequent inter- national survey to enhance the results of the data collection previously described. Specifically, the data provided more measurable best-value parameters in the area of qualifications, quality, and design alternates. Six international case studies were added to the research and in-depth analysis was added from Ontario’s Registry Appraisal and Quality System (RAQS) and England’s Capability Assessment Toolkit (CAT). The results of this analysis are reflected in the report’s best-value framework. 1.5 Results and Products The final products of the research, as presented in this report, include the following: 1. A common definition and a conceptual framework for the use of best-value procurement methods for highway construction projects. 4

2. A baseline of projects and performance results against which performance outcomes for best-value highway projects will be measured. 3. A best-value procurement system that allows for flexibil- ity in the choice of parameters and award methods. 4. An implementation plan that includes a project screening system for selecting candidate projects, and a step-by-step process for selecting appropriate parameters, criteria, and award algorithms. 5. Recommendations regarding strategies to develop legisla- tion and procurement regulations. 6. A model best-value specification to be used as a template for detailed specifications. 7. A compendium of case studies for best-value procurement in the highway construction industry. A project website has also been developed to share informa- tion, post survey results, and provide access to case studies and literature related to best-value procurement.While this website is not one of the research deliverables, it serves as an additional tool to communicate the results of the research to the industry (http://construction.colorado.edu/Best-Value/Desktop.aspx). 5