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62 an extra $90,000 (less than a 1% increase), whereas the in federal procurements), Firm C becomes the best value. This enhanced proposals offered by Firms A and B (22% and 12% is because the weighted value of the technical evaluation cri- increases over low bid, respectively) are not worth the addi- teria became greater with respect to price. Finally, if one were tional quality indicated by the technical evaluation score. to reverse the TTA specified weighting and give technical 85% Thus, Firm C would be declared the best value and be of the total, Firm A, the high bidder, is awarded the contract. awarded the contract. It must be noted that the use of this In this case, the agency is deciding that the value of the evalu- rationale would preclude awarding to the proposer submit- ated technical criteria justifies the increased cost. ting the higher priced proposals if the evaluation panel agreed This example illustrates two very important points about that the additional factors in each proposal beyond the min- best-value procurement. First, the determination of the imum were not worth the additional incremental cost. weights assigned to the various portions of the best-value parameters must be made carefully, with great thought as to the ultimate impact of those weightings in the final award Value Unit Price Example decision. Secondly, discrete point values assigned to each eval- A number of formulae are in use throughout the country uation criterion must take into consideration the actual value for calculating a value unit price. For this example, the team that the criterion brings to the project after award. In this uses the weighted criteria formula used by the Texas Turnpike case, where one point is worth $100,000, the agency should Authority (TTA) in a recent best-value award (TTA 2001). In review the scoring system point by point and ensure that each that evaluation plan, the following formulae was used: point reflects a commensurate return on investment. Total Score = (Adjusted Technical Score 0.15) + (Contract Bid Price Score 0.85 3.5 Screening Criteria for Best- Value Procurement Proposal Technical Score 100 Adjusted Technical Score = Best-value procurement has obvious advantages, and some Lowest Bid Price Score federal agencies employ it for 100% of their procurements. 100 - (Pr oposal Bid Price Score 100) While some form of best-value procurement can theoretically Contract Bid Price Score = Lowest Bid Price Score be used on every project, certain projects will benefit more from its application. Conversely, there are instances when the In this system, the price carries an effective weight of 85% benefits of the best-value system are outweighed by the ben- and the technical score carries a corresponding weight of 15%. efits of open low-bid competition. It is possible to use weights other than these values in the best- Establishing a process for selecting the most appropriate value award algorithm to compute the value unit price. projects for best-value procurement has two distinct Table 3.11 shows the results of the value unit price calcula- advantages. First, projects that are more appropriate will tion using the weighted criteria formula for three different perform better, saving the taxpayers money while deliver- weights. The first used the TTA specified weighting of 85% ing higher quality projects. Second, as highway agencies price and 15% technical. In this case, Firm D, the second low begin to use best-value procurement, there will unques- bidder, would be determined to be the best value because it tionably be a learning curve for the agency and its industry had the highest adjusted total score. It can be seen in this sys- partners. By selecting the most appropriate project for a tem that one point of technical score was worth approximately best-value procurement, the agency can "flatten the learn- $100,000. If the weighting was modified so that price was ing curve" and help make the transition to a best-value cul- equal to all other factors combined (a very common practice ture smoother. Table 3.11. Value unit price best-value selection on example using weighted criteria formula. Adjusted Values 50% Price/ 15% Price/ Evaluated Values 85% Price/15% Technical 50% Technical 85% Technical Price Tech. Adjusted Adjusted Total Firm Time Total Score Total Score Proposal Score Score Price Score A 450 $11,880,000 92 100 78 80.90 88.76 96.63 B 460 10,950,000 86 93 87 88.07 90.30 92.52 C 500 9,850,000 76 83 98 96.08 90.53 84.99 D 500 9,760,000 74 80 99 96.54 89.91 83.28 E 500 9,700,000 68 74 100 96.09 86.96 77.83

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63 The process of selecting projects for best-value procure- of the best-value system. Users are strongly recommended to ment is intertwined with the process of selecting best-value refer to NCHRP Report 451 concerning the implementation parameters and evaluation criteria. Any project can use best- and evaluation of this second recommendation. value selection, but the project's complexity, specialization, quality requirements, opportunities for innovation, and pro- Cost versus Benefit curement risk will determine whether a best-value selection process is appropriate. Additionally, the agency's project Best-value procurement is not currently the highway goals and performance measures must be considered in the industry's standard way of doing business. The decision to use decision to select a project for a best-value procurement a non-traditional procurement for a particular project should approach. For example, the use of a past experience/past per- be based on an analysis of the value to be added to the proj- formance evaluation criterion is appropriate when high pre- ect, recognizing that the system may create additional costs cision or quality is considered critical, and the use of a project such as increased agency staff time and industry proposal schedule evaluation is appropriate when user delay costs are preparation time, as well as the possibility of higher initial a significant concern. construction prices (due to costs incurred by the contractor While significant project benefits may be generated to achieve the best value) compared with traditional design- through time savings, cost savings, and quality enhance- bid-build procurements. Best-value procurement can add ments, agencies considering whether to use a best-value pro- significant value through cost savings, time savings or quality curement methodology should keep in mind that such enhancement directly. Although best-value procurement procurements may generate additional costs in the form of allows the contracting agency to take the contractor's experi- higher procurement costs or higher administrative costs. ence and reputation into account in the selection process, that Agencies must determine whether the benefits of using best- capability should not be the sole basis for a decision to use the value procurement outweigh the costs. Each project must be process, and the analysis that is the basis for the decision examined on an individual basis. to use the procurement system should focus on projected The primary objective for best-value procurement project added value. selection can be summarized as follows: The potential costs and benefits projected to result from a best-value process should align with the project goals, and Select projects with characteristics that provide significant those goals must be communicated to the contracting com- benefit from using an alternative form of procurement. Once munity for the procurement to be successful. One important identified, develop the evaluation plan and project scope to con- firm that the benefits are real, the negative impacts are minimal, early step in project planning is to determine the project and the risks are manageable. goals. It should also be noted that changes in agency policies that have the effect of changing the predetermined project- The best-value project screening criteria can be used in con- specific goals will adversely impact the chances of project junction with the planning phase steps presented in NCHRP success. The decision to use best-value procurement should Report 451, Chapter 4, "Guidelines for Warranty, Multi- be based on projected benefits to the project. Again, best- Parameter, and Best Value Contracting." NCHRP Report 451 value procurement is not currently the business paradigm in presents planning phase guidelines that detail the steps an the U.S. highway industry, and for a decision to use this owner should take to begin a best-value program and select a process to gain acceptance, it is advisable for agencies to pilot project. Key steps presented in that report include communicate their reasons for using the system to industry and other interested parties. Similarly, to encourage compe- Determine the agencies current level of experience with tition and also to obtain responsive proposals meeting best value and the agency's needs, the basis for making the best-value Determine the motivation for implementing best value. determination should be clearly stated in the procurement documents. The guidelines presented in NCHRP Report 451 make a few The remaining sections of this chapter elaborate on possi- key recommendations. First, the report recommends that new ble screening criteria for selecting projects for best-value pro- users determine the motivation for implementing best value curement, starting with the potential costs and benefits as well as review and understand best practices for best-value associated with implementing this procurement methodol- contracting. The report specifically addresses these two rec- ogy. Other criteria considered include opportunities for ommendations. Second, NCHRP Report 451 recommends innovation, specialization requirements, and risks in pro- that low-to-moderately experienced users (one to five proj- curement. Appendix F contains a flowchart and a best-value ects) obtain input from industry in deciding how to proceed project selection tool intended to facilitate the decision- and select pilot projects to test and measure the performance making process.

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64 Potential Costs justification for choosing a proposal that is not the low bid, thereby increasing initial construction costs. Initial construc- Agency Staff Time tion costs, potential cost growth after award, and life-cycle Where traditional procurement employs a responsibility costs should all be considered in examining the potential standard for qualification of contractors (addressed through best-value procurement cost savings. Initial construction cost prequalification in some states and in others through review savings will only be realized when there is an opportunity for of qualifications after bids are received) and a project-specific contractors to save money through schedule compression, the evaluation of bids, best-value procurement requires a project- application of innovative means and methods, or more con- specific evaluation of contractor qualifications and price pro- structible designs. Adding best-value selection criterion such posals. Best-value procurement may also involve a technical as an exemplary safety record, past performance, and man- evaluation of proposals when the contractor's scope includes agement plans may in fact add to the initial construction some element of design. These evaluations may require the price. By nature, contractors with better qualifications are agency to assemble a project-specific team to evaluate the likely to spend more on safety and management practices. offeror's proposals. The cost of developing the evaluation However, use of these evaluation factors may ultimately result plan and implementing the evaluation process itself are in lower cost growth as a result of better management and added costs on each project. Staff training may also be an fewer bidding errors. A best-value process may also include additional cost. Best-value procurement is similar to existing evaluation factors encouraging lower life-cycle costs through methods of a qualifications-based consultant selection. The higher quality construction or through the inclusion of a life- staff must have training or experience in qualifications-based cycle analysis in the best-value procurement solicitation. selection for the procurement to be successful. Additionally, when technical proposals are part of the procurement, the Time Savings evaluators must have design review experience. Best-value procurement allows for the evaluation of time in procurement. Traditional procurements ask for prices Industry Preparation Time based on fixed project start and finish dates. Best-value pro- Depending on the nature of the project and process, best- curement can reward the contractor for bidding a shorter value procurements can be costly and burdensome for the construction schedule, thus allowing the contractor to deter- industry. Contractors who participate in traditional procure- mine the optimum schedule with reference to its increased ments typically pay for the costs of annual or periodic costs of accelerating the project. There is a potential for an prequalification and bidding in their general overhead. increase in initial construction costs because of the acceler- Preparation of project-specific qualifications responses and ated schedule--although to some extent the increased costs technical proposals are not typically part of their overhead. of acceleration will be offset by the reduction in overhead. In Highway agencies must be conscious of what their best-value addition, the bidder with a higher initial construction cost procurement requirements will cost the proposers, and they can be selected if the time savings is determined to be more must strive to keep these costs to a minimum to maximize the valuable than the cost increase on the basis of user costs or level of competition. When using best-value procurement on agency overhead costs. However, it is also possible that the complex design-build projects with significant proposal owner will receive both the lowest initial cost and the short- preparation costs, owners often include a proposal prepara- est schedule from the same contractor. In either case, if the tion stipend to offset the industry proposal costs (Smith and agency is interested in accelerating the schedule, it must be Ryan 2004). In some states, these stipends have been used as willing to take steps to remove constraints that are likely to consideration for innovative concepts included in proposals impact the critical path for the project. submitted by the unsuccessful proposers. In best-value design-bid-build or smaller design-build procurements, Quality Enhancements stipends are typically not applied. Quality benefits can be even more difficult to measure than cost or schedule benefits. Agencies should strive to include Potential Benefits those quality enhancements that are easily convertible to a measurable dollar benefit, such as improved design resulting Cost Savings in lower operations and maintenance costs. While there is a Cost savings stemming from best-value procurement can belief that more stringent quality control plans, more com- be difficult to measure and predict at the time of procure- prehensive safety plans, better past performance, better per- ment. By definition, best-value procurement can provide sonnel or better management plans will improve the project's

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65 safety record and result in higher quality construction, those stems from technical complexity or management complexity. In benefits are difficult to correlate to specific performance out- either case, best-value projects can offer opportunities for added comes. This does not mean that these items should not be value because the contractor can bring its knowledge and included in a best-value procurement, it just means that agen- expertise to the project. Complex projects seem to offer more cies must apply these criteria prudently. opportunity for benefit from best-value procurement. Relatively simple projects can also benefit from best-value procurement, but the benefits might not be as significant. Key Project Characteristics to Consider Numerous federal agencies use best-value procurement proj- As previously stated, best-value procurement is not the ects with all levels of complexity, including simple projects. highway industry's standard way of doing business. A whole- Benefits for such projects can be realized in areas such as past sale change to best-value procurement in the highway indus- experience, quality plans, and safety. Drawbacks associated try is not feasible or prudent given the industry's long ties to with use of best-value procurement for a simple project the low-bid method. The choice to use best-value procure- include the decreased opportunity for participation by smaller ment should be made judiciously on a project-by-project and less experienced contractors and the fact that best-value basis. Key project characteristics should be considered when procurement can be administratively burdensome for the making the decision to determine whether best-value pro- highway agency and the industry. Using best-value procure- curement is appropriate for a given project. ment on less complex projects should be tempered with sound judgment concerning its effects on open competition and the administrative burden on the procurement process itself. Agency Staff Capacity and Experience Qualifications and availability of agency staff are a key Quality Requirements project characteristic that must be examined when consider- ing best-value procurement. As previously stated, best-value Where low-bid methods typically only stipulate minimum procurement can require more staff time and a different level quality requirements through contract specifications, best- of training and education than traditional procurements. value procurement allows for quality-related elements to be Staff considerations are particularly important when the pro- included as part of the competition. Quality management curement requires an evaluation team or design review. plans and tighter tolerance on materials or end products are two examples of items that can be factored into the evalua- tions. Through competition, higher quality may be achieved Market Capacity and Experience at the same or even lower costs. Furthermore, even though the Best-value procurement requires contractors to prepare initial costs may be higher, the life-cycle cost may ultimately proposals that include details of schedules, qualifications, be less than the life-cycle cost that would have resulted from management plans, and even designs. Contractors must have a low-bid procurement process. the capacity and skills to develop these proposals. Contractors that have only performed work for the agency based on a low- Opportunities for Innovation bid selection process will not have this experience and, there- fore, will need to make a greater investment in responding Best-value procurement offers a framework for agencies to to a best-value RFP. As contractors gain experience, this take advantage of innovative proposals from the industry. process will become less burdensome, but highway agencies These innovations may result in cost savings, time savings, or must be cognizant of the level of effort required to respond to even higher quality products. In their simplest form, these a best-value RFP when selecting projects for best-value con- innovations may be contractor traffic maintenance plans or tracting. Some best-value procurements, particularly those construction schedules. At the other end of the spectrum, the involving designs, will require that contractors carry different innovations may come in the form of design-build delivery insurance or obtain different surety bonds. Market factors with the industry completing more than 80% of the design. affecting the ability of contractors to obtain such insurance When projects have elements that can be precisely defined and bonds should also be considered when making this deci- through measurable performance outcomes, they may be sion to use best-value procurement. suitable for design-build delivery. Project Complexity Specialization Requirements Project complexity will impact the possible benefits resulting Projects that require specialized equipment, knowledge of from best-value procurement. Project complexity primarily construction, or exclusive technology are ideally suited to