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35 Figure 2.7. Weighting of price and technical factors. applicable. Fifteen of 27 respondents gave relative weightings 2.6 Baseline Project Performance of price and technical factors. The following list summarizes Results and Figure 2.7 depicts the distribution: As part of the investigation into the state of practice of best- value procurement, the research team identified factors that may 1 of 15 used 1/100 and 10/90 (7%) be included in a best-value procurement that appear to have the 1 of 15 used 11/89 and 20/80 (7%) greatest measurable impact on actual project performance. This 2 of 15 used 21/79 and 30/70 (13%) effort started by first adding an additional 500+ projects to the 8 of 15 used No Relative Weightings of Price vs. Technical research team's original 600+ project database to craft a study Used (53%) 9 of 15 listed other combinations (60%) database of more than 1,100 projects with an aggregate contract value of more than $5 billion. The next step involved separating those projects in the study population into two major groups: The majority of respondents chose the "Other Combina- those delivered by traditional design-bid-build, low bid, tions" category. Under this category, the responses ranged and those delivered using a best-value award method. Next, each from variable (project-specific weightings) to 25/75 price and major group was divided by type into horizontal projects (high- technical to not applicable (for prequalification). ways, bridges, runways, etc.) and vertical projects (buildings, Finally, 16 of 27 (59%) respondents supplied projects using water treatment plants, transit stations, etc.) to give the best-value procurement that the research team could follow researchers a basis to compare best-value procurement and up with a case study. Twenty-five projects were identified as design-bid-build within the two major types of projects. This candidates for further study. was also done to develop a foundation on which to gauge the Based on these responses, a second questionnaire, also performance of those vertical projects that were used for the case included in Appendix C, was developed and sent out in Phase studies that are a part of the research. In addition to vertical and 2 to obtain more detailed information and performance horizontal design-bid-build projects, the sample contained three results for highway projects using best-value procurement. At types of projects awarded using best-value methods: the time of publication of this report, the additional data gathered was minimal and inconclusive in terms of perform- ance results for traditional design-bid-build projects. This A+B bidding confirmed that highway agency experience with best-value Design-Bid-Build/RFP with award based on bid price and procurement was limited, and that it was primarily used in at least one other parameter conjunction with design-build projects. Design-Build

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36 Table 2.17. Sample populations. Category Horizontal Vertical Delivery DBB Best-Value A+B DBB/RFP DB Projects DBB/RFP DBB Method Projects Projects* Projects Projects Projects Projects Projects in 708 119 77 10 32 20 394 Database Aggregate $273 $3.4 billion $1.1 billion $824 million $140 million $166 million $131 million Value million * Includes all non-low-bid projects Table 2.17 shows the breakdown of the types and numbers and border to border. Additionally, the preponderance of of projects in each category. It should be noted that a sizable projects came from state agencies, which helps make the study sample of vertical design-build projects was also available. results more specifically aligned with the highway construc- However, they were not included in the analysis because of tion focus of this study. A short explanation of the various this project's emphasis on best-value delivery of design-bid- project delivery methods follows. build projects. Therefore, only the vertical design-bid-build RFP projects were included in the sample population. As show in Figure 2.8, the projects came from 20 different Best-Value Contracting agencies made up of 16 state DOTs, a state turnpike authority, The Utah Technology Transfer Center published Best Prac- a state port authority, a state transit authority, and a federal tices Guide for Innovative Contracting Procedures (UTTC military department. The projects were located in 19 different 2001). This guide established an elegant definition for alter- states across the country. The A+B projects were primarily native project delivery methods (i.e., innovative contracting). highway construction or rehabilitation jobs. The design-bid- The following statement is from the guide: build RFP projects were airfield and marine upgrade and expansion projects. The design-bid-build projects were Traditional contracting requires that the selection of a con- mainly resurfacing, upgrade, and bridge projects. The geo- tractor be based solely on the low bid of a responsive bidder. graphic dispersion of sample projects is from coast to coast The equation below identifies the factors that go into a bid for MassDOT Mass Turnpike NAVFAC MPA WSDOT MTA NDDOT MnDOT NYDOT IDOT MiDOT IDOT NAVFAC IDOT MDOT UDOT VDOT NAVFAC NCDOT CALTRANS NAVFAC TxDOT FDOT Figure 2.8. Locations of public agencies with projects in the database population.

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37 a construction project. In traditional contracts, motivations to registration or prequalification of bidders. While this takes satisfy the social costs are only met to provide a responsive bid the qualification of contractors one step farther, most for a project. Innovative contracting procedures, however, place requirements merely consist of the submission of a form list- the emphasis on meeting performance criteria for one or more of the social cost variables: ing the contractor's business information and are treated as another responsiveness check rather than a critical look at Contractor's Bid Price = CS + CM + CQ+ CT + CO Eq. 1 contractor qualifications. The State of Oklahoma recently Contract Costs: passed a law authorizing alternative project delivery methods CS = Cost or profit for providing the service for public buildings (Stamper 2001). This law requires con- CM = Cost of providing materials and equipment tractors to attain individual national certification to qualify Social Costs: CQ = Cost of providing a quality service or product for construction management or design-build contracts. The CT =Cost of finishing a project on time law was designed to create a professional requirement for CO =Cost associated with the risk of other social cost constructors that mirrors the qualifications-based selection considerations such as legal/administrative, complexity of for registered professional engineers and architects. To attain design, environmental, and safety certification, the constructor must employ individuals whose combination of professional education, experience, and a A contractor approaches their function in the traditional bid- ding process by determining the cost to meet the owner's respon- national examination qualify them to perform the duties of a sive parameters for CM, CQ, CT, and CO. They also try to minimize construction professional on a construction management or the "Contractor's Bid Price" and maximize profit (CS). The levels design-build project. the owner sets for these parameters could be met or exceeded by Under the design-bid-build approach, the owner has sepa- a responsive bidder (UTTC 2001). rate contracts with the designer and the builder, and therefore assumes constructability risk vis--vis the builder. Thus, if a This approach directly applies to the problem of awarding design error is found and must be corrected, the owner must highway construction contracts on a best-value basis. Using this first pay the contractor for the change and then attempt to terminology, the research seeks ways to quantify the "social collect the added cost from the designer. While in theory this costs" and combine them with the "contract costs" to arrive at should be possible, in practice it is very difficult, because the an objective calculation of best value. Each of the following owner must prove that the designer has liability based on neg- project delivery methods takes on one or more of the social costs ligence or another legal theory. and forms a best-value decision-making algorithm to arrive at an objective determination for a construction contract award. Cost-Plus-Time Bidding The FHWA recognized cost-plus-time bidding (referred to Design-Bid-Build herein by its more commonly used name, A+B bidding) in its Design-bid-build is the traditional method of delivering SEP-14 as one desirable means to break from traditional highway construction projects. Its universal acceptance in design-bid-build award of highway projects (FHWA 1998). public infrastructure project delivery springs from the con- These contracts often include an incentive clause that rewards cern that a construction contractor will not adequately safe- the contractor for completing the project ahead of schedule guard public health and safety and, therefore, needs the close and exacts a disincentive in addition to the requirement to supervision of a design professional. Thus, the owner retains pay a liquidated amount for the owner's administrative costs an engineer on a separate contract to complete the design of for completing the project late. The incentive/disincentive the public facility. Once the design is finished, a set of plans, clause enforces the spirit of the A+B method by discouraging specifications, and contract boilerplate is advertised for bid by bidders from deliberately underbidding the time component the construction industry. Construction contractors submit and by encouraging the selected contractor to finish earlier a price, and the project is awarded to the lowest responsive than the proposed contract time. It rewards the contractor and responsible bidder. that can most efficiently manage a project by allowing it to In design-bid-build, responsive means that the bidder has win the contract with a bid that is higher but accurately properly completed the required bid forms and posted the reflects the cost of faster completion. In the UTTC equation, requisite bid security (Ellicott 1994). Responsible normally A+B brings the social cost of finishing the project on time means that the low bidder can post the required performance (CT) out of the contractor's bid price and lays it on the table bond within the established award timeframe (Konchar and for all to see. Sanvido 1998). By requiring bonds in this method, the A+B contracts are awarded based on a combination of the owner is in effect relying on the surety industry to filter out price for the contract items (A) and the associated cost of time unqualified contractors. Many states have laws requiring the (B) needed to complete the work according to a formula that

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38 calculates an economic cost (the cost to the driving public) value to a given proposal and justify not awarding to the low per day of work. The price portion is not the only considera- bid. In the UTTC equation, CQ (the cost of quality), CO (other tion in the award. The project is awarded to the contractor social costs), or both may be parameters used to identify best with the lowest sum of A+B. The A+B bidding technique is value. designed to shorten the total contract time by allowing each contractor to "bid" the number of days in which the work can Design-Build be accomplished. This method of bidding allows the contrac- tor with the best combination of price and estimated time Design-build RFP development is driven by specific proj- cost per day (time) to attain the bid. This cost-plus-time ect requirements, and award procedures are constrained by method of bidding enables the contractor to determine a rea- both legal and policy restrictions (FHWA 1996). Thus, the sonable contract duration required for project completion. most important piece of the design-build contract is the eval- Awarding agencies believe that the contractor is often best uation process. The definition of success is the creation of a qualified to determine the length of time necessary to com- fair, consistent evaluation system that has a bias to select the plete a project (Bordelon 1998). Various public agencies have design-builder with the highest probability of successfully used A+B along with financial incentives. Different agencies completing the project at a higher level of quality than is use different names and different methods to do this. Florida required by the RFP. By giving design responsibility to the uses the same daily dollar amount of the B portion of the A+B contractor, design-build allows the owner to evaluate the bid as the incentive/disincentive. If the general contractor effectiveness of each proposal and is the only method that completes the job early, the contractor earns the daily B por- combines all of the parameters in the UTTC innovative con- tion for every day that it beats the target. If the contractor tracting equation. exceeds the allotted number of days, the general contractor is The evaluation process for a best-value design-build pro- contractually obligated to pay the excess B portion of the curement typically has three parts (Molenaar et al. 1999). work as a disincentive (WSDOT 1997). First, the qualifications of the design-build contractor team must be checked to ensure that the proposed designer-of- record possesses both the requisite registrations and the nec- Design-Bid-Build Request for Proposals essary past experience to develop a design that will meet the Design-bid-build RFP delivers a project by advertising a project's technical requirements. The design-build process completed design and asking for proposals on other parame- permits something that is not as common in the construction ters as well as a bid price. The award is usually made on a basis industry: a qualifications check on the construction contrac- of some formula where price is given a certain percentage tor. The second part of the evaluation is a technical review of weight and the rest of the parameters make the remaining the design-build contractor's proposed design solution. This portion. In NCHRP Report 451, a best-value case study, Inter- mainly consists of ensuring that the design is fully responsive state 5 Columbia River Bridge in Oregon, was presented as an to the requirements outlined in the RFP and satisfies the proj- example of best-value procurement in the highway sector. ect's functional requirements. This portion of the evaluation The best-value non-price parameters included specialized permits competing technical solutions, such as concrete ver- construction experience, qualifications, and project staffing. sus asphalt pavement, to be compared. In addition, the The award was based on a 50/50 split of technical and price design-builder is allowed to propose a technical solution that using a cost-technical tradeoff evaluation (Anderson and it, as an organization, is particularly well qualified to imple- Russell 2001). The South Carolina DOT uses a formula where ment and for which it has excellent past history to aid in the price counts for 60% and the remaining parameters make up accurate estimation of project price. Evaluating the proposed the remaining 40%. The Naval Facilities Engineering Com- project price for realism and reasonableness is the final step mand's policy is that price will be roughly equal to all other in the process. factors combined (NAVFAC 1996). Because it retains the sep- aration of designer and builder, the design-bid-build RFP cat- Project Performance Metrics egory probably has good potential for immediate acceptance by public owners, consulting engineers, and the highway con- A series of project performance metrics were created to struction industry. The idea of creating project-specific con- measure each dataset and allow comparison. As some of the structor qualifications rather than general financial projects in the database did not have both cost and time infor- qualifications is quite intuitive. This best-value method also mation, a decision was made to calculate each metric sepa- allows great flexibility in the inclusion of other parameters rately for those projects in the database that contained the such as extended warranties, design alternatives, traffic con- relevant input data. Thus, for each metric the actual number trol planning and public outreach programs as means to add of projects that were used in its calculation will be shown to

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39 permit the reader to gauge the depth and significance of the Cost growth is the percentage change in cost between the output. This technique allows the research team to maximize final contract cost and the original contract cost, expressed as the information gleaned from the available data. The follow- a percentage and shown in Equation 3. Cost growth can be ing project performance metrics were calculated: positive or negative. When cost growth is positive, there were change orders or claims increasing the cost of the project dur- Award growth ing its performance. If cost growth is negative, the original Cost growth contract cost was possibly overestimated or the actual scope Time growth of work was reduced. Construction placement Final Contract Original Contract Average contract value Cost - Amount ($) Amount ($) Eq. 3 Growth (CG) = nal Contract Amount ($) Origin Award growth (AG) is an indicator of the feasibility of Time growth is the percentage change in time between the awarding a construction project. It is defined by the difference final contract time and the original contract time, expressed between original contract cost and engineer's estimate, as a percentage. Time growth can also be positive or negative divided by the engineer's estimate as shown in Equation 2. depending on the outcome of the project. In fact, time growth Before the advertisement, the engineer's estimate needs to be changes as the scope of the project changes. When time calculated. This estimate is done for the owner and indicates growth is positive, it means that the project was performed how much money the project will require. The owner then using more time than specified in the original contract, and obtains financing in this amount, trusting that the project's therefore, the project finished late. When time growth is neg- actual bid price will be less than the engineer's estimate. A pos- ative the project's time growth was overestimated, that is, the itive award growth indicates that the owner's financing is project was completed ahead of schedule. TG is calculated as insufficient and obtaining additional funds may cause a delay. shown in Equation 4. This is especially true for public projects where agencies typi- cally have to return to legislative bodies for increases in proj- Final Contract Original Contract ect authorization amounts (Gransberg 1999). Negative award Time Time (days) - Time (days) Eq. 4 = growth indicates that the owner may have budgeted money Growth (TG) Originnal Contract Time (days) against project requirements that were not realized. This often Construction placement (CP) is the measure obtained by reduces the annual size of an agency's annual construction dividing the final construction cost by the final construction program by obligating available funding that is not used time as shown in Equation 5. Therefore, construction place- (Gransberg 1999). Award growth is an excellent measure of ment measures the average rate at which the contractor earns how well an owner understands the market in which the facil- the contract value across the period of a construction con- ities are to be constructed. This metric furnishes a view of the tract. A high rate of construction placement indicates an effi- government's ability to forecast the cost of capital improve- cient and effective construction management system. If two ments. As a project proceeds from concept to completion, the contractors performed identical lump sum projects in iden- owner's commitment to actual delivery gets greater and tical environments, the one that finished first would have greater. If the owner underestimates the project's cost in early incurred the least cost, and this would be indicated by a stages, that owner is liable to be more willing to pay an inflated higher rate of construction placement. The U.S. Army Corps price for the project as it draws closer to fruition. It is very of Engineers uses construction placement as one of its fun- important that the owner be able to develop a good cost fore- damental project performance parameters and has more than cast immediately after design is complete so that a project that 30 years of experience with its use (USACE 1994). is marginally feasible is not awarded for construction. A high award growth indicates the potential that a public agency will Construction Final Construction Contract Cost ($) = Eq. 5 build projects that are economically unjustified merely Placement (CP) Final Construction Cont tract Time (days) because a public commitment to project delivery has been made. This metric also measures the efficient use of available Next, the non-traditional projects were separated and com- funding. If the award growth is negative, then it means that the pared by procurement method type using the same set of met- public agency has needlessly tied up available funding that rics. This allows the research team to quantitatively rank the might have been used on other projects. impact of different best-value elements. For instance, com- paring the performance of A+B bidding projects with the per- Original Contract formance of low-bid projects will allow the research team to Award Amount ($) - Engineer's Estimate ($) Eq. 2 measure the impact of permitting the construction contractor = Growth (AG) Engineer's Estimate ($) rather than the owner to establish the project schedule. The

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40 performance of design-bid-build RFP projects will give an probably not adversely affect the efficient use of capital. This indication of the impact of including contractors' qualifica- observation does not consider the possible positive effect of tions. Finally, the performance of design-build projects will incorporating life-cycle costs in the evaluation plan. quantify the impact of allowing the contractor to set the level Looking at the three best-value types in the best-value pop- of quality through the details of the design. The results of this ulation as shown in Figure 2.9, one sees that A+B projects analysis are shown in Figures 2.9 through 2.12. have a slight increase in cost from the engineer's estimate. In Figure 2.9, one can see that award growth is about the This increase is due to the fact that these projects are not gen- same for horizontal best-value and horizontal design-bid- erally awarded to the low bidder, and the engineer's estimates build projects. This shows that an across the board move to are probably formed using traditional design-bid-build bid implement best-value contracting for highway projects will tabulations. One would therefore expect to see award growth 19. 84% 20. 00% 15. 00% 10. 00% (#) = number of projects in individual sample 5. 00% -1 7.62% -2 .4 0% 0. 69% -1 .82% -2 4.83% -2 .19% 0. 00% Ho riz onta l Horizont a l Ho rizonta l Ho rizonta l Ho rizonta l Vertical Vertical DBB Be st V a lue DBB P roje cts A+ B P roje cts DBB /RFP DB P roje cts DBB/ RFP Pr oje cts P roje cts (77) (339) (52) Pr oje cts (7) (18) Pr oje cts (20) (392) -5 .00% -10. 00% -15. 00% -20. 00% -25. 00% Figure 2.9. Results of award growth analysis.

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41 in A+B projects. The horizontal design-bid-build RFP proj- Awarding vertical projects using best-value procurement is a ects have a large negative award growth. However, the sample relatively new development (Allen et al. 2002). Therefore, it is small and this probably represents a statistical anomaly appears that the owners of public vertical projects have not rather than a trend. Therefore, it is discounted. Horizontal yet "calibrated" their estimating system to account for this design-build projects' award growth is in line with the total delivery method, hence the large negative award growth. As population and the traditional projects. Comparing the hor- for the traditional vertical projects, one must remember that izontal award growth numbers to the vertical ones is also architectural and engineered process plant projects are typi- quite interesting. The vertical best-value projects had a large cally more complex in terms of design detail. Therefore, it is negative award growth while the vertical design-bid-build reasonable that the owners and their designers would have projects had a commensurately large positive award growth. less accurate pre-award estimates than horizontal owners. 25.00% 22% 20.00% 15.00% 12.63% 10.00% 6.44% 5.67% 5.00% 3.70% -5.92% 0.95% 0.00% Horizontal Horizontal Horizontal Horizontal Horizontal Ve rtical Ve rtical Best Value DBB A+B DBB/RFP DB DBB/RFP DBB Projects Projects Projects Projects Projects Projects Projects (47) (1000) (15) (10) (22) (20) (392) -5.00% (#) = number of projects in individual sample -10.00% Figure 2.10. Results of cost growth analysis.

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42 Figure 2.10 shows that horizontal best-value projects have performance of horizontal design-bid-build RFP projects. less average cost growth than similar projects delivered by However, it is interesting to note that while they were awarded design-bid-build. The best performing projects were A+B at about 25% less than the engineer's estimate, they were projects that actually had a negative actual cost growth. This completed at 22% over the original contract price, basically is an interesting phenomenon. It can be argued that A+B breaking even with the original pre-award estimate. Hori- projects are by nature schedule driven. Therefore, it is in the zontal design-build projects had less than 1% cost growth, contractor's best interest to finish the project on time or, if and this result tracks with similar results found in the litera- there is an early completion bonus, ahead of schedule. As a ture (Ellis et al. 1991, Bordelon 1998). result, the incentive to generate change orders may be One can see from Figure 2.11 that the principal reduced. Again, no conclusion can be made with regard to the benefit accrued from implementing best-value contracting is 60.00% 52. 3% 50.00% (#) = number of projects in individual sample 40.00% 30.00% 27% 20.00% 16.51% 14.76% 10.00% -3.70% -9.23% 5.49% 0.00% Horizontal Horizontal Horizontal Horizontal Horizontal Vertical Vertical Best Value DBB A+B DBB/RFP DB Projects DBB/RFP DBB Projects Projects Projects (77) Projects (10) (16) Projects (20) Projects (103) (507) (392) -10.00% -20.00% Figure 2.11. Results of time growth analysis.

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43 a substantial reduction in time growth. This appears to be true when the design responsibility is shifted to the design-build for both horizontal and vertical projects. The A+B projects are contractor. Thus, any time growth that occurs in these projects probably the best example of schedule-driven project delivery is most likely a result of either unforeseen conditions (which and show an average time growth of -9.23%. This validates the neither party can control) or owner-caused increases in proj- previous assertion that creating an incentive to finish early ect scope after award. It can be seen in the vertical projects that drives the contractor to finish early. Horizontal design-build a substantial reduction in time growth is realized by using projects have more than 10% less time growth than traditional best-value award procedures instead of low-bid award. Once projects. This is due to the flexibility and greater control again, the design-bid-build RFP horizontal projects buck allowed the contractor and to the fact that the owner is no the trend and, as before, the small sample size makes it impos- longer liable for delays caused by design errors and omissions sible to infer any trend with regard to these types of projects. $60,000 $51,810 $50,000 $39,635 (#) = number of projects $40,000 in individual sample $30,000 $22,174 $19,339 $20,000 $15,674 $10,000 $8,309 $8,331 $0 Horizontal Horizontal Horizontal Horizontal Horizontal Vertical Vertical DBB Best Value DBB Projects A+B Projects DBB/RFP DB Projects DBB/RFP Projects Projects (78) (480) (52) Projects (10) (16) Projects (20) (392) Figure 2.12. Results of construction placement analysis.