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3 COMPETITION REQUIREMENTS OF THE DESIGN/BUILD, CONSTRUCTION MANAGER AT RISK, AND PUBLIC-PRIVATE PARTNERSHIP CONTRACTS--SEVEN CASE STUDIES By Anthony D. Songer, Ph.D., Boise State University; Michael J. Garvin, Ph.D., P.E., Virginia Polytechnic Institute and State University; and Michael C. Loulakis, Esq., Capital Project Strategies, LLC I. THE REGULATORY AND STATUTORY uation of Project Delivery Methods.2 The examination of FRAMEWORK FOR ALTERNATIVE PROJECT the seven projects that are included in this digest dem- DELIVERY onstrates how the private contractors and the govern- ment agencies involved in each project were successful, to varying degrees, in utilizing a wide variety of pro- Introduction curement and delivery methods, to meet the problems In the post­World War II era, the delivery mecha- encountered in each situation. nisms that drove the nation's early infrastructure de- This section provides a broad discussion of the pro- velopment lay dormant as the country's method of pro- curement issues associated with alternative project de- curing infrastructure evolved to rely upon a single livery on DB, CMAR, and PPP projects. It will consider system, design-bid-build (DBB).1 Over roughly the last historical issues associated with these delivery systems 20 years, however, many public owners have rediscov- and examine some of the approaches states have taken ered the potential value of other delivery systems such to implement these programs. as design-build (DB), construction-manager-at-risk (CMAR), and a variety of options that are considered Design-Build public-private partnerships (PPP), such as design-build- operate-maintain (DBOM) and build-operate-transfer Historical Review (BOT). Arguments for these choices include opportuni- While the origins of the DB method of project deliv- ties to leverage private-sector expertise and capital, to ery are traced back to ancient Mesopotamia, the process predict operational funding requirements, and to real- was thought to be virtually abandoned by modern de- ize life-cycle cost reductions through the integration of signers and constructors.3 For years, the design and delivery activities and private-sector efficiencies that construction industry in North America functioned un- are honed in competitive markets. der the traditional method, DBB. However, with the Many within the engineering, procurement, and con- advent of the post­World War II building boom in struction community in the United States have recog- North America, construction owners sought alterna- nized the limitations of a strategy designed to support a tives to the fragmented responsibilities, cost issues, and single delivery method, and shifts are underway across limited flexibility of DBB. This was particularly the all infrastructure sectors. Those searching for real solu- case during the inflationary periods of the 1970s, where tions to their infrastructure problems have employed a both public- and private-sector owners found the DBB variety of means to fulfill the demand for vital infra- process to provide less than satisfactory results because structure services. Still, public-sector experience in the of extended project delays and a growing "cottage" in- use of such delivery systems remains immature, and dustry of construction claims litigation. By the late public agencies are generally unprepared to execute 1980s and early 1990s, another trend emerged--both workable arrangements with the private sector. Despite private-sector firms and public agencies began restruc- the recent resurgence of alternative project delivery turing their organizations to reduce or eliminate staff methods, many within the construction industry con- not directly associated with their core goals. All of this tinue to misunderstand the characteristics and implica- led to procurement policies that not only helped intro- tions of each system. The intent of this digest is not to duce different forms of construction management, but provide guidance with respect to the choice of one deliv- also reintroduced DB as a viable delivery system.4 ery method over another for transit projects. Instead, As the use of DB began accelerating in the 1990s, the digest primarily investigates the statutory basis for many believed that it could be effectively used only in the use of alternative delivery methods and how transit agencies have legally procured and priced the services 2 A. TOURAN ET AL., A GUIDEBOOK FOR THE EVALUATION OF associated with alternative delivery methods. Readers PROJECT DELIVERY METHODS (Transit Cooperative Research interested in guidance on delivery method selection are Program Report 131, 2009). referred to TCRP Report 131: A Guidebook for the Eval- 3 DBIA, www.dbia.org/about/designbuild/default.htm? PF= 1. 1 4 J. B. Miller et al., Towards a New Paradigm: Simultane- JEFFREY L. BEARD, MICHAEL C. LOULAKIS & EDWARD C. ous Use of Multiple Project Delivery Methods, JOURNAL OF WUNDRAM, DESIGN BUILD: PLANNING THROUGH DEVELOPMENT MANAGEMENT IN ENGINEERING 16 (3), at 58 (2000). 2 (2003).

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4 the private sector, where owners enjoyed freedom in ated in the decade following its passage. By the early selecting delivery and acquisition strategies. At that 2000s, several states had enacted legislation that ex- time, the procurement laws for many federal, state, and pressly allowed DB to be used on any project under- municipal agencies made it difficult, if not impossible, taken by the state or its associated agencies. The more to use DB, because of the differing requirements for common experience, however, was to have a state au- selection of designers and contractors. A key problem thorization of DB only for specifically designated pro- was the Federal Brooks Architect-Engineer's Act, jects or agencies--in effect, allowing the state to "test passed in 1972, which mandated that design profes- the waters," implementing it on selected projects to see sionals be selected based on qualifications, with the what kind of results were obtained before broadening best-qualified firm negotiating with the government to its use. It should be noted, however, that by the early reach a fair and reasonable contract price. Contracts for 2000s, many states still expressly forbade the use of DB construction, however, had long been based on a com- for public-sector construction projects.7 petitive, open-bidding, low-bid selection process, with The following chart demonstrates how state pro- qualifications not being factored into the selection proc- curement of DB has changed since 1993. It indicates by ess. Each state had its own version of the Brooks Archi- year the number of states (including the District of Co- tect-Engineer's Act that imposed similar restrictions. lumbia) which fall into each category, with the informa- Therefore, absent special legislation, this dichotomy tion current as of the end of calendar year 2009. between architect/engineer selection and contractor selection complicated the ability of an agency to procure a firm to do both design and construction. By 1994, a group of major trade and professional as- sociations formed the Design and Construction Pro- curement Coalition to promote the adoption of legisla- tion allowing federal agencies to have broader discretion to consider DB. Among the specific goals of the coalition was to codify a shortlist procedure through the use of a two-phase procurement process. In Febru- ary 1996, Congress passed what is now known as the "Clinger-Cohen Act,"5 sometimes informally called the federal "two-phase design-build act." As its informal name suggests, the Act permitted the federal govern- ment to procure DB services using a two-phase selec- tion process. The impact of the Clinger-Cohen Act on public-sector DB has been substantial. In addition to creating a great deal of interest in DB, it provided, for the first time, a way for the federal government to eliminate marginal proposals and teams. The Clinger-Cohen Act also gave comfort to government contractors that they could, at very low expense, submit proposals to become part of the shortlist and, if they made the shortlist, that there would be a limited number of competitors, justifying the more substantial investment in time and money to re- spond to the request for proposals (RFP). The Act not only created a surge of interest by federal agencies in DB, but it also became the catalyst for many state and local governments to adopt similar two-phase legisla- tion, thereby increasing DB use in these sectors as well.6 Use of DB in State Procurement Before the Clinger-Cohen Act was passed, there were no state laws that allowed the use of DB for public- sector procurement. However, with the impetus from the federal sector, state legislative initiatives acceler- 5 Pub. L. No. 103-355, 108 Stat. 3243; Pub. L. No. 104-106, 110 Stat. 642, codified at 40 U.S.C. 1401 et seq. 6 DESIGN-BUILD FOR THE PUBLIC SECTOR 4-7 (Michael C. 7 Loulakis ed., 2003). Id.

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5 Design-Build State Public Procurement (Design-Build Institute of America 2009) 1993 2003 2004 2005 2006 2007 2008 2009 DB permit- ted by all agen- cies for all 1 - - 17 18 17 20 22 types of design and construc- tion Widely per- - 22 22 13 12 15 12 13 mitted Limited op- - 19 22 15 15 15 16 15 tion Not specifi- cally author- 50 - - 6 6 4 3 1 ized for public agencies State pro- curement laws do not permit - 10 7 - - - - - the use of DB in the public sector These changes are obviously the result of a signifi- types of legislation that were proposed in 2009--only 52 cant amount of legislation being introduced and passed. percent of the bills attempt to expand state authority. In 2001, 49 bills regarding DB were introduced in state The legislation dealing with state DB authority was legislatures; 30 of them, or 61 percent, passed. In 2002, primarily focused on transportation. In January 2009, the number of bills introduced increased significantly, 12 states still did not have authority for Department of to 143, 36 percent of which passed. By 2003, the passing Transportation (DOT) projects. That number fell by half percentage had increased to 52 percent. In 2005, a re- by October 2009, as six states passed new legislation cord 250 bills were introduced, with a record high of 82 allowing DB authority. In contrast, 48 percent of DB passing. legislation in 2009 was focused on granting local DB An arguably historic year for DB was 2009, in that a authority. record high of 62 percent of the 160 DB bills introduced While some bills gave local government agencies pro- were passed. This translates into 100 bills granting or ject-specific DB authority (or authority for a limited expanding DB authorization. Some of the more notable number of projects), other bills were broad in the au- 2009 legislation is discussed in greater detail below.8 thority they granted, allowing localities to use DB on There are several potential explanations for this rise. virtually any type of project they chose. Most of the lo- In the early 2000s, legislative successes could be cal legislation focused on buildings--from schools to chalked up to the fact that many new owners were be- health clinics to stadiums and courthouses. The bills ing introduced to DB and were excited about its poten- also showed a growing trend toward DB use on local tial, particularly at the state level. By 2009, DB had waste/wastewater and transportation projects. A third seemingly matured, with nearly all states having DB of the successful local DB bills were focused on those authority of some kind. This reality is reflected in the areas, as noted below:9 8 Readers interested in learning about the legislation from · Alabama: House Bill (HB) 217 gives the new Ala- 2010 and beyond should consult with the Design-Build Insti- bama Toll Road Bridge and Tunnel Authority full au- tute of America, which regularly publishes tables chronicling thority to enter into DB, DBO, and DBOM contracts. legislative initiatives in the areas of design-build. Likewise, (Alabama Code Sections 23-2-140 to 163.) the National Conference on State Legislatures regularly pub- lishes annual updates of legislation affecting the transporta- tion sector. An update from 2010 can be found at 9 http://www.ncsl.org/documents/transportation/PPPTOOLKIT- Design-Build Institute of America, AppendE.pdf. www.dbia.org/about/designbuild/default.htm?PF=1.

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6 · Arizona: HB 2396 allows PPPs on transportation · Vermont: HB 438 authorizes the DOT to use DB on projects; they can be DB, design-build-maintain (DBM), four projects in FY 2010. (Vermont Statutes Annotated DBOM, or design-build-finance-operate-maintain Title 19, Section 2602.) (DBFOM) agreements. (Arizona Revised Statutes Sec- · Washington: SB 5768 authorizes DB authority for tions 28-7701, 28-7363 to 28-7365.) State Route (SR) 99 (Alaskan Way Viaduct). (Washing- · California: Senate Bill (SB) 4 allows PPPs on ton Revised Code 47.20.780­85.) transportation projects; Assembly Bill (AB) 729 extends · West Virginia: HB 2753 authorized the DOT to ex- the DB repeal date on transit projects from 2011 to pand its DB pilot program from 3 to 13 projects by June 2015. (California Public Contract Code Sections 6800 et 30, 2011, and to spend up to $50 million per year for an seq.) aggregate of $150 million over 3 years. (West Virginia · Colorado: SB 108 authorized PPPs for transporta- Code Section 17-2D.) tion projects on state and local projects; DB is permitted as the project delivery method. (Colorado Revised Stat- DB Procurement and Selection Criteria utes Sections 43-1-1404.) It is beyond the scope of this digest to fully address · Delaware: HB 52B expands the Delaware DOT's all of the legislation that impacts each state's DB pro- DB authority from 7 to 12 projects. (2 Delaware Code gram, or the DB legislation that impacts transportation Annotated, Section 2003; Delaware Laws, Chapter 329.) projects. This information is available from several · Florida: HB 1021 authorized the Florida DOT to sources, including the 50-State Summary Survey of meet a goal of 25 percent of its projects delivered using Transportation Agency Design-Build Authority that is DB by 2014 to add capacity. (Florida Statutes Section published annually by Nossaman LLP.10 Appendix A 337.11.) provides a compilation of some applicable DB legislation · Illinois: HB 372 repeals DB sunset provisions; SB in each state, along with Web site links. Suffice it to say 1609 repeals DB sunset provisions. (30 Illinois Com- that, based on the legislation that existed as of Decem- piled Statutes Section 535/75.) ber 2009, virtually every state gives the agency broad · Louisiana: SB 351 authorizes DB on DOT projects. discretion to decide how to select the DB entity. (Louisiana Revised Statutes Annotated, Sections For example, Arkansas allows the transportation 48:250.2 et seq.) agency to make an award "on a qualifications basis that · Massachusetts: SB 2087 authorizes PPPs for offers the greatest value for the state." (Ark. Code Ann. transportation projects using DBOM and DBFOM pro- Section 27-65-107.) Arizona has one of the most pro- ject delivery methods. (Massachusetts General Laws gressive procurement processes in the country for al- Annotated Chapter 6C, Sections 1 et seq.) ternative project delivery. It allows an agency to use a · Minnesota: HB 1308 provides state DB authority one-step DB selection process, where the design-builder to local governments for 10-project transportation pilot is selected only on qualifications--price is not a factor. program; HB 2086 directs the Minnesota DOT to use Nevada, Missouri, and Colorado are among the states DB on high-speed rail projects. (Minnesota Statutes that use a two-phase selection process and require that Annotated Section 383B.158(3) and Section 473.3993.) price be a factor in selecting among the shortlisted DB · Missouri: HB 359 permits the Missouri DOT to use proposers. Virginia and Minnesota authorize either a DB on up to 2 percent of its projects, up from a total of two-phase selection process, where best value is the three projects. (Missouri Revised Statutes Section basis for selection, or a one-phase selection process, 227.107.) where the agency can use best value or low bid. · Nevada: SB 245 creates regional transportation authorities and permits the use of private partnerships The 2009 California DB Transportation Statute for transportation and related projects. (Nevada Re- Representative of the current influx of legislation af- vised Statutes Sections 277A.170, 277A.280.) fecting the DB transportation sector is California SB · New Mexico: SB 345 grants DB authority for all 4.11 This bill, signed into law on February 20, 2009, al- American Recovery and Reinvestment Act (ARRA) pro- lows DB to be used for up to 15 transportation projects. jects. (New Mexico Statutes Annotated Section 13-1- The statute (California Public Contract Code Sections 119.2.) 6800 et seq.) gives the California Transportation Com- · North Carolina: HB 772 grants the City of Hun- mission (CTC) authority to decide which projects to in- tersville DB authority for buildings, parking, roads, clude in the program. Local transportation entities (de- streets, bridges, or any other type of construction pro- fined to include transportation authorities created by ject. (General Assembly of North Carolina 2009 Session county boards of supervisors, transportation planning Law 298.) agencies, county transportation commissions, and cer- · North Dakota: SB 2147 authorized the North Da- tain other agencies) have authority for up to five pro- kota DOT to complete two DB pilot projects. (2009 North Dakota Session Laws, Chapter 236, or North 10 Dakota Century Code Section 24-02-47 et seq.) http://www.nossaman.com/50state-survey- transportation-agency-designbuild-authority. · Texas: SB 882 authorizes regional toll authorities 11 to give stipends on DB projects over $50 million. (2009 Nancy Smith & Evan Caplicki, California Passes New De- sign-Build Law for Highway Projects, Apr. 1, 2009, Texas General Laws, Chapter 770.) Nossaman E-Alerts.