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6 CHAPTER 2 Findings 2.1 State of Practice legislation or when determined to be in the best interests of the agency under both traditional and alternative contracts. This chapter examines and analyzes the state of practice NCHRP Report 451, "Guidelines for Warranty, Multi- of best-value procurement methods in the construction Parameter, and Best Value Contracting," provided an intro- industry found in the literature, project procurement docu- ductory framework for best-value procurement in highway ments, domestic and international interviews, and survey construction, and the initial framework set forth in that data. It includes regulatory trends, concepts found in the document has been incorporated into the comprehensive literature and project data, parameters used in the process, study within this report (Anderson and Russell 2001). a summary of results from a highway sector survey, a com- Although legislative requirements have traditionally required parison of performance for best-value contracting versus low bid for construction, more and more state legislatures have design-bid-build, and case study information to illustrate passed legislation that allows best-value procurement. The next how best-value procurement has been implemented. section highlights some of the recent legislative revisions. A literature review of procurement methods used in the construction industry within the past 15 years is presented in Appendix A. Many of the findings highlight issues and short- 2.2 Legislative and Regulatory comings in the traditional low-bid system and address trends in Trends public sector construction toward the increased use of various Legislation and regulations for public sector construction best-value procurement methods to improve project perform- at the federal and state levels are moving toward greater use ance and enhance end-product quality. The literature draws of contracting approaches to achieve the best value for dollars from all facets of the construction industry in the United States, expended. The Federal Acquisition Regulation (FAR) Part 9, Europe, Canada, and other countries. It includes perspectives Contractor Qualifications, includes commentary regarding from federal and state contracting agencies, vertical and hori- the reasons for this trend, explaining that the low-bid method zontal construction, and analysis of project outcomes correlated fails to serve the public interest by creating the false impres- to various procurement systems incorporating non-cost factors sion that this will automatically result in the least cost to the in the selection process. owner (FAR 2004). FAR Section 9.103, Policy, describes the The development of best-value procurement concepts in importance of setting appropriate responsibility standards the public sector has to some extent borrowed ideas and whenever a low-bid methodology is used: approaches used to procure products and services in the private sector. Private sector construction owners have long The award of a contract to a supplier based on lowest evalu- sought to get the best value for dollars expended. For example, ated price alone can be false economy if there is subsequent a major U.S. corporation with an annual construction budget default, late deliveries, or other unsatisfactory performance of $1.5 billion has often used best-value selection with a nego- resulting in additional contractual or administrative costs. tiated procurement for industrial projects. Contractor selec- While it is important that Government purchases be made at the lowest price, this does not require an award to a supplier solely tion is typically based on multiple factors that include cost, because that supplier submits the lowest offer. A prospective schedule, quality management, safety, and technical ability contractor must affirmatively demonstrate its responsibility, (Dorsey 1995). Best-value procurement practices are increas- including, when necessary, the responsibility of its proposed ingly being transferred to the public sector where permitted by subcontractors.

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7 FAR Part 15, Contracting by Negotiation, establishes a Model Code is that it does not provide a model process for best-value "source selection" process for federal contracts procurement of innovative contracts where the nature of the (FAR 2004). This process is also known as "competitive nego- contract does not allow a price competition (although it does tiation" because negotiations (discussions) are conducted allow for the possibility of negotiated contracts for items and with multiple offerors simultaneously, instead of selecting a services available only from a single source). As a result, agen- single offeror and negotiating with that entity. The source cies proposing legislation based on the Model Code may wish selection process might entail the selection of the lowest- to consider including an alternative process for such con- priced technically acceptable proposals or it may consist of a tracts. The Model Code does however provide an excellent tradeoff between price and other factors--resulting in an prototype for legislation to allow best value to be considered award that may not be to the lowest-priced offeror or the high- in awarding traditional construction contracts. A copy of est technically rated offeror. Regardless of which approach is Article 3 of the Model Code is included in Appendix B. used, the federal agency's source selection decision must be The Model Code provides for construction contracts to be made based on a determination that the selected proposer has procured using competitive sealed bidding unless deemed to offered the best value to the government. be impracticable or not advantageous to the owner. The com- Many federal and state agencies have implemented various petitive sealed bidding process is established by Section 3-202 source selection methods and have developed instructions or of the Model Code. Section 3-202(5) requires bids to be eval- procedures for development and implementation of these uated based on requirements set forth in the Invitations for methods. At the federal level, the U.S. Postal Service, the Bid, and those criteria shall be "objectively measurable, such Army, the Navy, the Department of Veterans Affairs, and as discounts, transportation costs and total or life-cycle costs." the Federal Bureau of Prisons have developed procedures and The process thus permits the traditional low-bidding process guidelines for source selection contracting applicable to their where the owner awards to the responsible bidder that has construction programs (U.S. Postal Service Handbook 2000, provided the lowest responsive bid, and also permits agencies Army 2001). to implement a process addressing items that have a cost Federally imposed procurement requirements are appli- impact to the owner outside of the contract price. The com- cable to state and local transportation agencies wishing to petitive sealed bidding process cannot, however, be the basis use federal-aid funds for highway projects. For many years for selecting one proposer over another simply because the 23 U.S.C. Section 112(b)(3) mandated use of a low-bid pro- owner believes the first proposer has offered a better product. curement methodology for most construction contracts, If such a result is desired, the owner has the ability to use the allowing alternative procurement procedures to be used only competitive sealed proposal process, provided that the owner with special permission from the FHWA through its Special is able to justify use of such process. Experimental Project (SEP-14) initiative. Many of the projects The competitive sealed proposal process is described in authorized under SEP-14 involved use of best-value concepts, Section 3-203 of the Model Code. The Model Code intends for and the lessons learned from this program have added to the this process to be used for design-build projects and for other body of knowledge for best-value procurement in the highway projects for which competitive sealed bidding is determined sector (FHWA 1998). In 1998, Congress acknowledged the to be impracticable or not advantageous to the owner. The need to allow an alternative procurement process for design- competitive sealed proposal process may involve multiple steps, build projects by enacting revisions to 43 U.S.C. Section including prequalification, receipt and review of initial propos- 112(b)(3), allowing a best-value process to be used for award als, discussions to ensure that the proposer is fully aware of of such contracts. FHWA adopted implementing regulations the owner's requirements and to advise the proposer of any that permit such projects to use a procurement procedure necessary clarifications regarding its proposal, and receipt and similar to the FAR 15 source selection process and continue to review of final proposals. Award is based on evaluation of final allow agencies to use other procurement processes through the proposals in accordance with the criteria specified in the request SEP-14 program. for proposals. A number of states have adopted legislation allowing best- At the state level, various statutes allow use of best-value value procurements, often in the context of design-build procurement for public works construction contracts. Refer to projects but also allowing best value to be incorporated into Appendix B for a list of various statutes that may allow DOTs construction contract procurements. The ABA has published in various states to incorporate best-value elements into model legislation and implementing regulations that, if procurement of construction contracts. Appendix B also adopted by a state legislature, would allow state and local includes excerpts from the FAR and from best-value statutes agencies to incorporate best-value concepts into a competi- passed in Colorado, Delaware, and Kentucky. It should be tive bidding process and to use competitive negotiations noted that the Colorado and Kentucky laws do not appear under specified circumstances. Note that one flaw to the applicable to DOT projects, but they may nevertheless be of