Legal Aspects of Performance-Based Specifications for Highway Construction and Maintenance Contracts (2013)

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14 There is substantial literature on what others in the construction industry have used to develop performance specifications. For example, the Manual of Practice de- veloped by the Design-Build Institute of America (DBIA) has a section entitled, “Developing Perform- ance-Based Requirements for Design-Build Projects,” that provides a comprehensive approach to using and developing performance specifications on an architec- turally-driven project. It identifies the key steps as 1) starting with establishing functional requirements (e.g., the project’s key goals, challenges, and constraints); and 2) moving to the development of performance require- ments that describe a necessary result but not the solu- tion (e.g., a requirement for a light fixture that would express the number of foot-candles, but not the make or model of the device).43 Importantly, it cautions specifi- cation writers to look at each performance specification and answer the following questions:44 • Is each requirement attainable and feasible? Is it possible to construct a facility that meets the require- ment? • Is each requirement necessary? What would/could happen if this requirement is not included? • Is the requirement unambiguous? Will readers give the same interpretation? • Is the requirement traceable from a higher-level functional requirement? If not, why is it included? • Does the requirement have an objective, measur- able standard and a means of substantiation? As noted in later sections of this digest, these questions form some of the major legal issues associated with per- formance specifications. The reality is that these speci- fications frequently are ambiguous and do not contain measurable standards of substantiation. While there are many examples from industry litera- ture that describe approaches to developing PBS and contracts, one that FHWA recently highlighted is the Michigan Department of Transportation’s (MDOT) M- 115 pilot project. This $3.8-million design-bid-build pro- ject is extensively discussed in FHWA’s Performance Contracting for Construction Guide.45 It involved a ru- ral 5.56-mi, two-lane highway project with pavement in poor condition and two bridges that needed reconstruc- tion. MDOT used a series of techniques to gain stake- holder support and feedback on performance measures and outcomes, and used a best-value procurement proc- ess to select a contractor. The performance goals ulti- 43 Developing Performance-Based Requirements for Design- Build Projects 13, in DESIGN-BUILD INSTITUTE OF AMERICA, DESIGN-BUILD MANUAL OF PRACTICE. Obtainable through sub- scription at http://www.dbia.org/pubs/manualofpractice/. 44 Id. at 29. 45 This was an FHWA Special Experimental Project No. 14 (SEP-14) project, and the “Final Evaluation Report of Contrac- tor Selection Using Best Value Practices” is available at http://www.fhwa.dot.gov/programadmin/contracts/sep14mifinal 2009.cfm. mately used were 1) date open to traffic, 2) construction and cleanup completion, 3) pavement performance, 4) worker safety during construction, 5) work zone crashes, and 6) motorist delay. Each goal had a series of incentives and disincentives, and the RFP allowed con- tractors to propose more aggressive goals to raise their best value scores.46 For example, the baseline pavement warranty on the project was 5 years. Proposers who offered an additional year received 15 extra points in the scoring process; those who offered an additional 2 years received 30 points; and those proposers who of- fered 3 additional years received 50 points. FHWA con- cluded, in its “What We Have Learned” section of the Performance Contracting for Construction Guide, that this pilot project was highly successful and resulted in significant innovation and quantified benefits.47 V. THE EFFECT OF PROJECT DELIVERY AND PROCUREMENT STRATEGIES ON PERFORMANCE SPECIFICATIONS Performance specifications are project delivery and procurement “neutral”—an owner can use some form of performance specifications on any type of project deliv- ery approach and procurement system. For example, design-bid-build projects can use performance specifica- tions that focus on material properties and construction practices that will have the most effect on long-term performance. Design-bid-build projects also can use incentives and disincentives and pay-factor adjustments to promote enhanced quality and “enforce” the perform- ance specification. However, the structure of design-bid-build limits how far an owner can go in using performance specifica- tions. The relationship of the parties under design-bid- build (i.e., the fact that the design is being done by someone other than the construction contractor) and the associated procurement approach (i.e., the low bid- der is awarded the contract and a bidder’s technical concepts are not scored) constrain how much influence the contractor can have on the finished product, par- ticularly over a period of time. Consequently, owners who are interested in expanding the breadth and effec- tiveness of performance specifications to optimize inno- vation, value engineering, and transfer of performance risk will often turn to more creative delivery and pro- curement approaches than those offered by design-bid- build. A. Project Delivery Options that Optimize the Use of Performance Specifications From a project delivery perspective, design-build is an excellent way to implement performance specifica- tions. As noted in the 200-MW power plant discussed above, this delivery system enables an owner to get the benefit of a design and construction team’s collaboration 46 FHWA’s Performance Contracting for Construction Guide, supra note 10, at 27–29. 47 Id. at viii.

15 to identify the optimum way to meet the owner’s stated objectives, while at the same time shifting the risk of performance to that design-build team. Public owners in the water and wastewater sector have increasingly turned to design-build. This method not only facilitates speedier project delivery, but also creates the single point of responsibility that enables owners to obtain performance guarantees on their facilities. In short, design-build is the best way to structure the delivery of design and construction services to obtain required re- sults with a contractual enforcement vehicle to ensure that the results will be met. For example, design-build would allow an agency to eliminate or relax several of the lower-level material and construction requirements to give the design-builder more flexibility to meet stated performance needs. While merging design and construction into a single contract enhances the opportunity to use effective per- formance specifications, the design-build system has a natural limitation. Compliance with the performance specification is evaluated at the conclusion of the con- struction process and does not reward or penalize longer-term performance.48 While it is possible for an owner to require long-term warranties, this has some practical challenges, as discussed in Section VI. The biggest commercial challenge is that the design-builder does not control operations and maintenance. As a re- sult, there will always be the potential for the design- builder to argue that supervening events outside of its control created the variance in performance, giving it an actual (or potential) contractual excuse from being responsible. Perhaps more important, many design- builders are not interested in the long-term liability that flows from performance guarantees and will either refuse to provide longer-term warranties or require limitations of liability on these obligations. The delivery systems that give the owner the best opportunity to use performance specifications measured over the long-term are design-build-operate-maintain (DBOM) and design-build-finance-operate-maintain (DBFOM). DBOM and DBFOM, which are types of PPP projects, have become increasingly popular in the U.S. transportation industry as a result of the large number of states that have enacted PPP legislation.49 Performance specifications are routinely used on PPP contracts, not only from a design and construction perspective, but also from an operations and mainte- nance one. The private party under a PPP is generally taking on significant financial and performance risk and needs to have the flexibility to manage this risk by using approaches it believes can best accomplish its 48 Id. 49 An abundance of material addresses the diversity of PPP projects. FHWA established its Innovative Program Delivery office in Oct. 2008 to provide a comprehensive set of tools and resources to assist the transportation community in exploring and implementing innovative strategies to deliver programs and projects. Readers should refer to its Web site at http://www.fhwa.dot.gov/ipd for more information on these projects. goals. By using a performance specification, the agency can specify what it wants and leave the precise solution to the private party. It can also use post-construction measurement strategies to evaluate the facility’s per- formance, as opposed to end-result processes that are measured after construction is completed. Likewise, FHWA’s 2011 publication on PPP delivery, Challenges and Opportunities Series: Public Private Partnerships in Transportation Delivery, noted as fol- lows: P3 agreements can create efficiencies through establish- ing long-term design-build-finance-operate-maintain (DBFOM) contracts that include outcome-based perform- ance specifications. Outcome-based performance specifi- cations focus on what a facility is intended to achieve rather than prescribing methods and materials for achieving facility goals. The goal of using outcome-based performance specifications is to make service delivery more efficient by allowing the concessionaire to decide how best to achieve the intended results. Defining, meas- uring, and monitoring outcome-based performance speci- fications can be challenging and costly, so outcome-based performance measures may be more appropriate for long- term contracts that span multiple phases of a facility’s lifecycle (e.g., design, construction, operations and main- tenance) or for large, complex projects where there are po- tential efficiencies to be gained from innovation. P3 pro- jects typically meet both of these conditions. As a result, public agencies using P3 agreements normally employ performance-based contracts. This shifts the public agency’s primary role in the project from oversight of de- sign and construction to management of a performance- based contract. In this role, the challenge for the public agency is to find ways to monitor and manage contract performance without reclaiming transferred risks or im- pinging on the efficiencies gained from allowing the con- cessionaire to choose the best way to meet performance specifications.50 In short, little is to be gained when an agency places unnecessary design or construction constraints on a PPP concessionaire that is required, by virtue of a long- term PPP arrangement, to assume the risk of whole-life performance. While a PPP is highly conducive to the use of per- formance specifications, an agency needs to consider some sensitive issues when it establishes its desired levels of service on such a project. While it can decide to set very high performance standards for the facility, it may have to pay more to the concessionaire to achieve these very high standards. Nothing is free, and the price for very high standards can jeopardize the finan- cial viability of the project. Perhaps as important, set- ting very high performance standards on PPP projects reflects an O&M approach that is different from what is seen on non-PPP projects. Accordingly, the FHWA has noted: 50 FHWA, CHALLENGES AND OPPORTUNITIES SERIES: PUBLIC PRIVATE PARTNERSHIPS IN TRANSPORTATION DELIVERY, PERFORMANCE MANAGEMENT 68–79 (May 11, 2012), https://www.fhwa.dot.gov/ipd/pdfs/feedback_forum/challenges_ and_opportunities.pdf.

16 In setting performance standards, public agencies may want to carefully consider the tradeoffs associated with committing to certain standards and levels of funding. In this regard, P3 agreements are less flexible than tradi- tional methods of publicly maintaining and operating in- frastructure, where the public agency retains year-to-year flexibility in the allowable performance standards. Public sector agencies sometimes relax these standards by de- laying or reducing investments, or by lowering mainte- nance standards, in order to conform to financial reali- ties. By specifying performance standards contractually, a P3 agreement lessens the flexibility of public agencies to make such compromises, including those that save money in the short term but are more costly from a life- cycle perspective. On the other hand, during periods when agency budgets are strained, the loss of flexibility to relax performance standards on a P3 facility will increase the pressure on public agencies to reduce spending on non-P3 facilities.51 Given this, it would be logical for the agency to adopt a pragmatic view in setting performance standards for O&M, and evaluate how it would behave if it was per- forming the O&M work. B. Procurement Approaches that Optimize the Use of Performance Specifications Just as some project delivery systems enhance the use of performance specifications, so, too, do some pro- curement approaches. Optimally, an agency would like to use the procurement approach to evaluate how a bid- der proposes to meet the performance specification, and then factor that proposal into which bidder is awarded the contract. If an agency’s objective in using perform- ance specifications is to enhance quality, promote inno- vation, or shift performance risk to the industry, the traditional fixed-price, sealed-bid procurement process has some major limitations. This process does not read- ily enable an agency to consider a bidder’s ideas on in- novation and quality enhancements, nor does it facili- tate an agency’s ability to compare life-cycle costs. Fortunately, the growth in alternative project deliv- ery systems has given many public agencies an oppor- tunity to use procurement approaches other than low bid. Design-builders are frequently procured through a best-value selection process. On DBOM and DBFOM projects, agencies not only use best value, but some- times have the flexibility to select their concessionaires on a qualifications basis and negotiate with the best- qualified concessionaire to reach agreement on the tech- nical scope and price. The term “best-value selection” generally refers to a competitive selection process in which proposals are evaluated based upon both price and nonprice (i.e., qualitative/technical) factors. Awards can be made on a variety of bases, including using the following: • Weighted criteria (strict formula) (e.g., 70 percent price, 30 percent nonprice), where the offeror with the highest total score is awarded the contract. 51 Id. at 70. • Adjusted bid, where each offeror’s bid price is di- vided by the technical proposal score (in essence, creat- ing a price per quality point), and the offeror with the lowest composite price is awarded the contract. • Pass-fail to evaluate technical proposals and, for those offerors who pass, award the contract to the of- feror with the lowest price. • A price-technical tradeoff process to determine if the value received from the technical proposal justifies paying a higher price. Many DOTs have used best-value procurement for their design-build projects. VDOT has long used a strict formula approach to implement its best-value procure- ments. VDOT’s design-build procurement manual notes that the RFP will identify the formula for this process, but VDOT generally has used a 70–30 split between price and technical factors.52 The Texas Department of Transportation (TxDOT) used best value for the DFW Connector project that was procured in late 2009.53 There are many reasons an agency will use best value in its selection processes. The ability to use per- formance specifications effectively can certainly be one of them. FHWA specifically notes this in its Perform- ance Contracting for Construction Guide, where it pro- vides specific advice on how to successfully implement best-value processes.54 While most discussion about best value is in the con- text of design-build or PPP projects, best value can also be used under a design-bid-build approach. MDOT’s M- 115 pilot project, discussed earlier in this digest, used a best value procurement process on a performance-based contract. MDOT recently let a $71 million construction project on M-39 (Southfield Freeway), which included reconstruction and rehabilitation of a portion of the project corridor, rehabilitation of 28 bridges, freeway lighting, freeway signing, intelligent transportation system infrastructure, sanitary sewer replacement, and screen wall replacement. It applied for and was given recognition as an FHWA SEP-14 project, based on the use of best value to achieve performance-based con- tracting. MDOT used best value to address the results of public outreach, which revealed several “quality of life” concerns about the project, including air quality, noise, restricting construction truck traffic on neighborhood streets, maintaining utilities to homes during construction, avoiding damage to adjacent prop- erty from vibration, local contractor and workforce par- ticipation concerns, safety and mobility concerns, and schedule concerns. MDOT used an adjusted low-bid 52 See VDOT’s DESIGN BUILD: ALTERNATIVE PROJECT DELIVERY OFFICE DESIGN-BUILD PROCUREMENT MANUAL (Oct. 2011), available at http://www.virginiadot.org/business/ resources/ipd/DB_Manual_FinalCopy20111011.pdf. 53 Information on this project is available at http://www.txdot.gov/government/partnerships/current- cda/dfw-connector.html. 54 FHWA’s Performance Contracting for Construction Guide, supra note 10, at 62–86.

17 process in selecting the contractor. Its SEP-14 Interim Report to FHWA expressed high praise for the use of best value, which enabled MDOT to obtain creative so- lutions from the offerors in not only meeting the re- quirements of the specifications, but in understanding the quality of life concerns and proposing additional measures to make the project a success.55 One point from the MDOT report is particularly instructive: For example, for the general construction concerns of noise, both Contractor teams identified construction ac- tivities that have the highest potential for creating noise levels that may exceed the thresholds dictated in the specifications. Both teams then identified means of inde- pendent monitoring and tracking noise data, and mitiga- tion measures to be taken should measurements exceed the thresholds. The proposed mitigation measures, and responses to measurements exceeding thresholds were developed by the Contractor teams, and in some cases, the mitigation measures exceed MDOT’s expectations.56 The Florida Department of Transportation (FDOT) is an agency with a robust design-build program that uses best value (among other) procurement processes. FDOT’s August 8, 2012, “Design-Build Guidelines” identify a number of technical factors that are to be scored, including some that relate to performance-based outcomes.57 For example, among the criteria the guide- lines suggest be considered are 1) maintainability, where credit is given for a design that minimizes peri- odic and routine maintenance;58 2) value added, where credit is given for exceeding the minimum value added requirements to enhance durability, and reduce main- tenance; 3) schedule, where credit is due for a compre- hensive and logical schedule that minimizes contract duration; 4) design and geotechnical services investiga- tion, where credit is to given for the quality of, among other things, the quality and quantity of design re- sources and the utility relocation plan; and 5) mainte- nance of traffic, where credit is due for a scheme that minimizes disruption of roadway traffic, including minimization of lane closures, lane widths, visual ob- structions, and drastic reductions in speed limits. While best-value procurement can also be used on PPP projects, the current practice is that the procure- ment is either 1) competitive, based on a pass–fail tech- 55 Innovative Contracting Practices Special Experimental Project No. 14, Best Value—Performance Based Contracting, M-39 (Southfield Freeway), Michigan Department of Transpor- tation, Metro Region, Interim Report, Apr. 27, 2011, http://www.fhwa.dot.gov/programadmin/contracts/sep14mi2011 interim.pdf. 56 Id. at 5. 57 Available at http://www.dot.state.fl.us/construction/ DesignBuild/DBRules/DesignBuildGuidelines.pdf. 58 The Guidelines mention that the following elements should be considered: access to provide adequate inspections and maintenance, maintenance of navigational system light- ing, access to structure’s lighting system, and quality of con- struction materials. The Guidelines also indicate that credit will be assigned for exceeding minimum material requirements to enhance durability of structural components. Id. at 48. nical, low price (e.g., lowest public subsidy, lowest toll rate, etc.) offer from shortlisted proposers; or 2) negoti- ated, where the proposer-concessionaire and agency work together for a period of time to arrive at a mutu- ally agreeable commercial and technical framework. This negotiated process was used by VDOT in entering into comprehensive agreements with Transurban-Fluor for long-term concessions on the 495 Express Lanes project and the I-95 High Occupancy Vehicle/High Oc- cupancy Toll Lanes project. Each of these comprehen- sive agreements contains a variety of performance- driven O&M requirements, with the design and con- struction specifications having enough flexibility to en- able the Transurban-Fluor team to meet them. Private sector owners using design-build, DBOM, or DBFOM have long used negotiated procurement proc- esses. These enable contractors to advance the design, thereby creating a more robust risk transfer if there is a problem with the baseline design. They also allow the parties to discuss issues like performance specifications without having to do so in the context of a competitive environment, which can often be challenging. There are fewer opportunities to do this in the public sector, al- though some states (e.g., Arizona and Florida) allow “qualifications-based” selection for some construction projects and ultimately negotiate with the most- qualified proposer. Agencies have faced a number of procurement chal- lenges relative to alternative project delivery systems like design-build. Some of these challenges, like the ones that are discussed in the sections below, go to the heart of performance specifying. C. The Ability of an Owner to “Let Go” of Prescriptive Specifications One of the biggest procurement challenges results from an issue discussed earlier in this digest—the in- ability of an agency to “let go” of its prescriptive tenden- cies, while still wanting to shift the risk of performance to the design-build contractor or the concessionaire. The solicitation documents for a typical design-build or PPP project often contain technical specifications derived from the same prescriptive design and construction re- quirements used on traditional design-bid-build pro- jects. If the solicitation documents also contain per- formance specifications, and these specifications conflict with the prescriptive requirements, the agency will face liability for the consequences of this conflict under the Spearin doctrine, as discussed in more detail in Section VIII. Agencies that think about this issue attempt to draft their technical requirements for design-build and PPP in ways that allow proposers to have some discretion in how to achieve the stated results. They find the drafting difficult, as it is frequently easier to use time-tested prescriptive specifications than to create concepts that are less than fully designed to be used as a basis for performance specifications.

18 D. The Ability of an Owner to Establish Supportable Best-Value Processes Several state DOTs, like VDOT, FDOT, and TxDOT, have substantial design-build and PPP experience. As a result, they have not only well-established protocols for using design-build, but also experience asking for, evaluating, and scoring technical proposals. For agen- cies that do not have established protocols, using best- value procurement can be problematic. Consider a recent case in Pennsylvania, Brayman Construction Corp. v. Department of Transportation.59 It involved a contractor who mounted a successful chal- lenge to a two-step, design-build best-value (DBBV) procurement by the Pennsylvania Department of Transportation (PennDOT). The project arose out of PennDOT’s desire to rebuild two bridges whose struc- tural integrity had been compromised by cracks, corro- sion, and other defects. PennDOT sought to reduce the overall time from the start of design to completion of the project by using a relatively new internal PennDOT publication, entitled Publication 448, Innovative Build- ing Toolkit (Publication 448), which established meth- ods for innovative procurements, including design- build. In reliance on Publication 448, PennDOT issued an advertisement seeking statements of interest from de- sign-build teams wishing to enter into a DBBV contract for the project. The advertisement requested, among other things, each team’s qualifications, resumes of key personnel, and organization charts. The advertisement notified respondents that PennDOT would shortlist three firms based on weightings for the selection crite- ria. The shortlisted firms would each receive an RFP and be asked to submit a technical approach with a price. Seven teams submitted timely statements of in- terest, including a venture between Brayman Construc- tion and its designer, Dewberry-Goodkind. The Bray- man team was not one of the shortlisted teams. Brayman eventually sought an injunction in State court, asking that PennDOT’s handling of the procure- ment be declared illegal and in violation of the State’s procurement code. Specifically, Brayman argued that the State statute required competitive sealed bidding for this project and thus PennDOT was not authorized to utilize the DBBV method. Following a hearing at the preliminary injunction, the State court ruled that the DBBV procurement was overly subjective and Penn- DOT’s reliance on Publication 448 was not authorized under State law. It preliminarily enjoined PennDOT from seeking and evaluating two-step DBBV “or any other ‘innovative method’ that does not award the bid based on sealed competitive bids” for its procurements. Despite this, however, the court ruled that, “in the in- terest of public safety,” PennDOT was permitted to con- tinue with its procurement of the two bridges through DBBV so as not to face delays and potential safety is- sues. PennDOT and Brayman both appealed to the Pennsylvania Supreme Court. 59 608 Pa. 584, 13 A.3d 925 (2011). The Supreme Court rejected PennDOT’s argument that its use of the DBBV method was valid because, among other things, Pennsylvania law expressly al- lowed a two-step process when retaining design profes- sionals. The court concluded that the design-build con- tract ultimately to be awarded by PennDOT was for the design and construction of the bridges—not just the pure design of them. The Supreme Court also agreed with the trial court that the PennDOT DBBV method was overly subjective and should be stricken because it entailed evaluating bids based on factors not enumer- ated in the invitation for bid. The court specifically noted that the agency’s employees at the injunction hearing “were unable to give a clear description of how its best-value analysis works.” Indeed, some PennDOT employees conceded that the process is “kind of nebu- lous” and includes “some subjectivity” on the qualitative assessment of key personnel resumes submitted.60 Brayman points out how challenging it can be to im- plement best value in a state that historically uses low bid for the selection of construction contractors. It also highlights a pragmatic problem with evaluating techni- cal proposals—the subjectivity involved in the process can lead to a procurement challenge. E. The Ability of an Owner to Properly Evaluate Technical Proposals Even DOTs with long-standing design-build pro- grams find that the process of evaluating and scoring technical proposals is difficult. What are the true differ- entiators from one proposal to the next? How many points should be used to quantify the differentiators? What if there are elements of a technical proposal that will meet the performance specification and any related prescriptive specification, but the agency does not like those elements? What will be grounds for a successful protest? Many federal and state legal decisions discuss these issues in the context of bid protests. While it is beyond the scope of this digest to review these cases, suffice it to say that the federal caselaw that addresses whether a bid protest will be successful is based on the answers to two questions: 1) did the agency’s decision have a rational basis; and 2) did the agency’s procurement pro- cedure involve a violation of regulations or proce- dures?61 Courts have historically given substantial deference to an agency’s decision, and disappointed bidders bear 60 While the Pennsylvania Supreme Court affirmed the rul- ing of the lower court as to the DBBV procurement on future projects, it also adopted the lower court’s “carve-out” with re- spect to PennDOT’s current bridge project. The court noted that out of Pennsylvania’s 25,000 state-owned bridges, the bridges in question were ranked to be in the 26th worst condi- tion. Because these bridges carry over 40,000 vehicles per day, the Supreme Court found safety considerations to justify allow- ing PennDOT to use the DBBV method for these particular bridges. 61 See, e.g., Impresa Construzioni Geom. Domenico Garufi v. United States, 238 F.3d 1324 (Fed. Cir. 2001).

19 heavy burdens in showing that the award decision had no rational basis.62 Courts have recognized that con- tracting officers are “entitled to exercise discretion on a broad range of issues confronting them in the procure- ment process.”63 Stated differently, it is not the province of a court to determine whether an agency’s decision is correct, but only to focus on “whether the contracting agency provided a coherent and reasonable explanation of its exercise of discretion.”64 When a bid protest is based on an agency’s violation of a regulation or proce- dure, the protestor must show that it was significantly prejudiced by a clear and prejudicial violation of appli- cable statutes or regulations and that there was a sub- stantial chance that it would have received the contract award if the errors were corrected.65 Two Minnesota cases involving high profile design- build transportation projects help explain these princi- ples. The first case, Siemens Transportation Systems, Inc. v. Metropolitan Council and Bombardier Transit Corporation,66 involved a dispute arising out of the light rail vehicle (LRV) procurement for the Hiawatha Corri- dor Light Rail Transit Project in Minneapolis, Minne- sota. The project’s owner, Metropolitan Council (Coun- cil), requested five companies—Bombardier, Siemens, and three other unnamed companies—to submit their best and final offers (BAFOs). These BAFOs were to include 18 LRVs and related materials and services, and were to give the Council the option to purchase up to 24 more LRVs at the same price as the original 18. The BAFO request stated that the highest-ranked bidder would be selected as the supplier. The RFP also provided that bids would be ranked based on the final score, “with the highest ranking being that with the highest score.” The evaluations were to be conducted using a point scale for the technical aspects as well as the costs. The technical aspects would comprise 60 per- cent of the score and the price 40 percent, for a total of 100 percent. After the scoring was complete, the evalua- tion panel would make its recommendation based on “whose Best and Final Offer yields the highest com- bined score…and, when considered in its entirety, best conforms to the overall long term interests of the Coun- cil.” Although Bombardier’s score was 82.23 and Siemens was 83.14, Bombardier was awarded the contract on the basis that its BAFO “provided the best value, consider- ing score and the overall long-term interests of the Council.” When Siemens lost both its administrative protest and an attempt in the federal district court to 62 Centech Group, Inc. v. United States, 554 F.3d 1029 (Fed. Cir. 2009). 63 Precision Images, LLC v. United States, 79 Fed. Cl. 598, 614 (2007). 64 Id. at 614–15. 65 James F. Nagle & Adam K. Lasky, Federal Bid Protests, in FEDERAL GOVERNMENT CONSTRUCTION CONTRACTS (2d ed.), ch. 6, 157 (American Bar Association 2010). 66 Siemens Transp. Sys., Inc. v. Metro. Council and Bom- bardier Transit. 2001 Minn. App. LEXIS 671 (2001). enjoin the award, it ultimately appealed to the federal court of appeals. It argued that the terms of the BAFO request required the evaluation panel to recommend the bidder with the highest score and for the Council to award the contract accordingly. Because the Council awarded to Bombardier, Siemens argued that this deci- sion was arbitrary, capricious, and unreasonable and should be overturned. The appellate court rejected Sie- mens’ appeal and affirmed the district court’s findings. First, the appellate court noted that the RFP did not require that the evaluation panel’s recommendation be based “solely” on the highest score and ranking. The Contract Award provision of the RFP specified that award would be made to the bidder with the “highest combined score,” and whose BAFO “best conforms to the overall long-term interests of the Council.” The appel- late court noted that the long-term interests of the Council included the possibility of the 24 additional LRVs. The evaluation panel found that Bombardier’s and Siemens’ technical proposals were technically equivalent; however, 24 additional LRVs would cost the Council approximately $5.2 million more using Sie- mens. Thus, the court agreed with the evaluation panel and the Council that Bombardier’s bid conformed to the overall long-term interests better than the Siemens bid. The court also noted that Siemens was well aware that the evaluation panel would be reviewing the scores assigned by independent committees: The wording of the request was sufficient to alert Sie- mens to the fact that the evaluation panel would be the first to look at price and quality together, and that the evaluation panel would consider whether differences in quality were worth the difference in price when determin- ing which bid represented the best value to the council. Although the council could have set out the role of the evaluation panel more clearly in the request, the request provides notice that the evaluation panel will be evaluat- ing the bids for “value” in light of the long-term best in- terests of the project.67 Siemens argued that it was misled by the Council’s reservation to award the contract to someone other than the highest-scoring bidder. It asserted that be- cause the “long-term interests of the council” were not clearly defined, the Council retained too much discre- tion and the request lacked “transparency.” Siemens claimed that the ambiguity led it to bid a technically superior model, based on the 60-40 weighting criteria, even though the price of the model was somewhat higher than alternative Siemens’ models. The appellate court responded to these arguments by again noting that the bidders were “on notice from the language in the request” that the overall long-term in- terests would be considered in the evaluation process. The evaluation panel never gave up the right to look at the difference in the price versus technical advan- tages/disadvantages, regardless of the scores: “The evaluation panel did not just make an award to the lowest bidder, but rather determined that the difference 67 Id. at 11.

20 in technology did not justify the difference in price.”68 Given all of this, the appellate court concluded that the Council’s action was not arbitrary, capricious, or unrea- sonable, and the award to Bombardier was allowed to stand. The second Minnesota project involved the August 1, 2007, collapse of the I-35W bridge near Minneapolis, which set into motion an expedited procurement proc- ess by the Minnesota Department of Transportation (MnDOT) to replace the bridge. Flatiron-Manson, a joint venture (Flatiron), was awarded a design-build contract on October 8, 2007, and the new bridge opened for traffic on September 18, 2008, less than 14 months after the collapse. While the industry widely praised MnDOT and Flat- iron for this exceptional performance, the procurement of the bridge had some controversy. Shortly after the award to Flatiron, a Minnesota taxpayer filed a lawsuit seeking an injunction and declaratory relief that Flat- iron’s proposal should have been rejected as being non- responsive. The taxpayer was unsuccessful at the trial court, and appealed to the Minnesota Court of Appeals. When this court rejected the taxpayer’s arguments,69 another appeal was filed to the Minnesota Supreme Court, where the case was finally resolved in 2010 in favor of MnDOT. MnDOT had decided to use a DBBV procurement process on this project. The RFP, which was sent to a shortlist of teams, contained detailed, project-specific requirements. The instructions to proposers stated that the contract would be awarded only to a proposal that met the standards established by MnDOT, and de- scribed the weighted criteria by which the proposals would be evaluated. A six-member technical review committee (TRC) evaluated the four proposals that were submitted. Flat- iron’s proposal received the highest technical score, 91.47 out of 100 possible points. The next highest score was 67.88. Although Flatiron had the highest price and tied with another company for submitting the longest delivery time, its high technical score enabled Flatiron to win under MnDOT’s best-value formula. The taxpayer argued that the TRC should have re- jected Flatiron’s proposal for being nonresponsive as it contained two technical components that deviated from the RFP. One component involved Flatiron’s statement that it would work outside of specified ROW limits. The other was that Flatiron proposed a design that used concrete-box girders with only two webs each, contra- dicting the RFP’s requirement that concrete-box de- signs use a minimum of three webs. The taxpayer ar- gued that, under Minnesota law, MnDOT did not have discretion to determine whether a proposal responded to the specifications of the RFP, and had no choice but to reject Flatiron’s proposal as being nonresponsive. 68 Id. at 16. 69 Sayer v. Minn. Dep’t of Transp., 790 N.W.2d 151 (Minn. 2010). The Minnesota Supreme Court noted that in a tradi- tional design-bid-build process, the taxpayer might be right. However, under Minnesota’s 2001 design-build statute, MnDOT was authorized to use a “best value selection process” which, by its nature, allowed the con- sideration of factors other than cost when awarding contracts. The court noted that the design in a design- build RFP is not complete and that the proposers were to submit technical approaches based on these incom- plete designs. As to the ROW issue, the taxpayer relied upon an in- struction in the RFP that stated that proposed work for the project was not to include any additional ROW. Flatiron’s proposal required work outside the ROW de- fined in the RFP for the purpose of lowering Second Street. MnDOT countered by arguing that this instruc- tion was added after it received a request for clarifica- tion from another contractor that was planning to take additional ROW and add traffic capacity in an area of the project that would have required more environ- mental review and more municipal consent. MnDOT claimed that the instruction relied upon by the taxpayer was not intended to be a “project-wide directive” to pro- posers on ROW limitations and that the RFP did not preclude any proposer from obtaining ROW on Second Street. The court agreed with MnDOT and rejected the taxpayer’s argument that Flatiron’s proposal was non- responsive because it involved additional ROW on Sec- ond Street. As to the concrete-box girder issue, the court found that Flatiron’s proposal included eight webs, four in each direction of traffic, but only two webs per concrete- box girder. The court interpreted the RFP to require a minimum of three webs per direction of traffic, not three webs per concrete-box girder. Because Flatiron’s proposal exceeded this minimum requirement, the court rejected the taxpayer’s argument that the proposal was nonresponsive. It is noteworthy that the Supreme Court focused on the design-build statute. It believed that the legisla- ture’s intent is to permit the TRC to apply its judgment and to evaluate proposals where no finished design ex- ists. As a result, the court found that the TRC had dis- cretion to decide whether a design-build proposal is responsive, which decision could only be reversed if there was an error of law, or if the TRC’s findings were arbitrary, capricious, or unsupported by substantial evidence. The two issues raised by the taxpayer did not trigger any reason to overturn the TRC’s decision. The fact that agencies have broad discretion and are rarely overturned through bid protests should not be the take-away from these cases. Proposers spend sub- stantial money in developing proposals, particularly when they involve formulating, during the proposal stage, solutions to performance specifications. It is in- cumbent upon a highway agency to have a clear process for selecting a winner, and one can see from Siemens that the agency on the Hiawatha project sent mixed signals (at best) about how an award would be made. It is also critical for an agency using best value to know

21 that, if there are prescriptive elements contained in the RFP documents, the agency cannot disregard those pre- scriptive specifications without issuing an addendum— this can have a prejudicial effect on proposers who fol- low the rules and abide by those prescriptive specifica- tions. While MnDOT did not disregard these require- ments in Sayer, consider the case that is discussed in the next section. F. Procurement Challenges Involving “Brand Name or Equal Clauses” and Performance Specifications Much has been written about the legal issues associ- ated with “brand name or equal” clauses and perform- ance specifications, and Section VIII discusses some caselaw around these concepts. The preferred practice of the Federal Government is to require agencies to use performance specifications rather than a “brand name or equal” clause. If an agency believes that it is benefi- cial to use “brand name or equal” descriptions, the Fed- eral Government requires that the specification de- scribe, in addition to the brand name, the main physical, functional, or performance characteristic of the brand-name item that an “or equal” item must con- tain.70 In 23 C.F.R. § 635.411, “Material or Product Selec- tion,” the expenditure of federal-aid funds on proprie- tary products is prohibited unless specific conditions are met, with the expectation that there will be full compe- tition in the selection of materials, equipment, and processes. As noted in Section II above, while FHWA allows the use of proprietary products (i.e., a “sole source” or “brand name with no equal”), such use is se- verely constrained to meet the requirements of 23 C.F.R. § 635.411. The highway agency is generally re- quired to demonstrate that there is no suitable alterna- tive to the specified product. Relative to “brand name or equal” clauses, FHWA also makes the following point: The use of trade names in specifications can sometimes be avoided by writing requirements in terms of desired results. A generic, end-result specification is preferable to specifying a proprietary product because it can promote competition. However, simply deleting the name of the product while retaining all of the salient characteristics from the manufacturer’s literature or cut sheets would not necessarily create a non-restrictive specification. Without providing some range of quality or performance, it may still be possible that only one manufacturer or vendor could meet the specification. Adding the phrase “or equal” next to a brand name similarly does not make a proprietary specification competitive if the technical re- quirements can only be met by the named brand. To en- sure a specification is competitive, a reasonable number (as determined by the division office) of manufacturers or 70 See Ralph C. Nash & John Cibinic, Procurement Man- agement ¶ 10, NASH & CIBINIC REPORT, Feb. 2008 (citing Off. of Fed. Procurement Policy Memorandum, Dec. 17, 2008, available at http://www.whitehouse.gov/omb/procurement/ memo/2008_brand_name.pdf). vendors should be able to provide or achieve the specified results.71 This highlights one of the major practical issues that confront an agency in drafting a performance specifica- tion. Frequently, the drafters are writing a “brand name or equal” clause around a particular product, cre- ating the “salient characteristics” discussed in federal policy to give an appearance of the equals. However, this can create some procurement challenges on design- build projects using best-value procurement ap- proaches, as evidenced by Strand Hunt Construction, Inc.72 Strand Hunt involved a design-builder’s protest of the termination of its contract with the United States Army Corps of Engineers (Corps) when the Corps de- termined, after awarding the contract to the design- builder, Strand Hunt Construction (Strand), that it had improperly relaxed certain RFP technical requirements. The General Accounting Office (GAO) denied the pro- test, finding that the Corps had broad discretion to take corrective action when it had reasonable concerns that there were errors in the procurement. The RFP sought proposals for the design and con- struction of the central heat and power plant facility upgrades at the Clear Air Force Station in Alaska. The design-build project included the construction of a facil- ity to house three baghouse collection systems, which were designed to remove particulates from the three existing coal-burning boilers. Award was to be made on a best-value basis, with price and nonprice factors con- sidered equally important. The RFP specified that the work must conform to de- tailed performance and prescriptive-based drawings and specifications, including certain baghouse specifica- tions. The design criteria for the baghouse specifica- tions required that 1) the maximum net pressure differ- ential between manifolds of the baghouse should be 6 in., and 2) the minimum spacing between individual bags within the baghouse (bag-to-bag clearance) must be 2.5 in. While the RFP did not specify a brand name, the baghouse specifications, including those set forth above, were written around a specific manufacturer. Strand offered a baghouse system that was not pro- duced by the manufacturer contemplated in the RFP specifications, and its system had a maximum net pres- sure differential of 7 in. and bag-to-bag clearance of 2 in. While the Corps noted these deviations during tech- nical discussions, Strand’s proposal was ultimately ac- cepted. Another bidder protested, arguing that the Corps improperly accepted Strand’s deviations from the RFP and gave Strand an advantage over the other bid- ders. The Corps agreed and admitted that it made a mistake in accepting Strand’s nonconforming proposal. It also believed that its original baghouse specification, 71 More information is available at http://www.fhwa.dot.gov/construction/specrevattach2.cfm. 72 Strand Hunt Constr., Inc., Comp. Gen. No. B-292415, 2003 CPD ¶ 167 (Sept. 9, 2003), http://www.wifcon. com/cgen/292415.pdf.

22 which favored a single manufacturer, was proprietary and did not give potential proposers an accurate state- ment of the agency’s minimum requirements. Conse- quently, the Corps decided to terminate Strand’s con- tract, amend the RFP to permit the use of other baghouse manufacturers, and resolicit proposals. Strand’s appeal to the GAO conceded that its bag- house system did not meet specification requirements. Strand argued, however, that the differences between the RFP specifications and what Strand proposed were immaterial because the two systems were identical in functionality. Strand also claimed that even if the Corps did make a mistake in awarding to Strand, the Corps was unwarranted in taking the corrective action of ter- minating the contract, since there was no showing of competitive prejudice. The GAO disagreed with Strand and found that the Corps’ corrective action was appropriate, stating that “a proposal that fails to conform to one or more material requirements of the RFP is technically unacceptable and may not form the basis for award.” The GAO deci- sion held that: Here, the RFP set forth discrete minimum specification requirements for the baghouse system, which were mate- rial terms of the solicitation. The RFP informed offerors that all proposed baghouses must meet the specified de- sign criteria and that the “baghouse arrangement and in- stallation shall be as shown on the drawings and speci- fied.” **** The agency’s acceptance of Strand’s noncompliant pro- posal meant that the agency waived these design criteria for Strand, which resulted in an unfair and unequal evaluation. It is a fundamental principle of federal pro- curement that competition must be conducted on an equal basis; that is, offerors must be treated equally and be provided with a common basis for the preparation of their proposals.73 Because the Corps concluded that several baghouse models could meet the revised RFP requirements, “ac- ceptance of Strand’s non-conforming proposal preju- diced offerors who could have proposed other solutions, potentially at a lower cost, if the competition had not been improperly restricted.” An agency confronted with this situation during the procurement process has several choices to make, none of which are optimal. The first is to recognize that it likely made a mistake in identifying “maximum” and “minimum” requirements that were not, in reality, re- quired. The better practice would have been to use a performance specification that described the expected outcomes, rather than trying to make an educated guess as to what was truly a mandatory criterion. How- ever, by noticing this during the evaluation process, the agency could not waive these requirements without facing a protest—as occurred in Strand. Its choices were to reject Strand’s proposal as being nonresponsive, or to issue an addendum (even at the late stage of the 73 Id. at 4. procurement) and give all proposers the opportunity to change their proposals. One of the ways to avoid this situation from the out- set is to have a procurement process that uses Alterna- tive Technical Concepts (ATCs). ATCs are most com- monly used with design-build project delivery. They are intended to address the situation where an RFP con- tains basic, but prescriptive, project configurations, design, and construction criteria, and the design-build teams have what they believe to be a better idea. Pro- posers can submit ATCs, on a confidential basis, which are reviewed by the agency either before or concurrent with the submission of technical proposals. FHWA has recognized that ATCs foster a best-value solution that allows design-builders to submit innovative, cost- effective solutions equal to or better than the agency’s design or construction criteria.74 If the Strand procure- ment had contained an ATC process, it is highly likely that this issue would have been determined well in ad- vance of the evaluation process, and, one way or the other, the agency could have avoided a bid protest. G. Determining Whether to Incorporate the Technical Proposal into the Contract Private sector owners who use design-build and EPC contracting for performance-based contracts know how important it is to ensure that the technical proposals they receive during the procurement process are prop- erly reflected in the final contract with the successful proposer. Before signing the contract, they will often do a “scope scrub” where teams from both the owner and the proposer meet to merge the contractor’s proposal into the RFP’s technical requirements and attempt to minimize gaps or misunderstandings. Rarely will the entire proposal from the proposer be attached as a con- tract document. Public sector owners do not have the same discipline. They will generally either make the entire proposal a contract document or not include the proposal at all, and rely upon the proposer to meet the owner’s techni- cal requirements. Some owners will incorporate rele- vant parts of the contractor’s proposal, and some will use order of precedence clauses to put the contractor’s proposal at a lower level than other contract docu- ments. While these approaches may be expedient, they create significant risks to the owner, particularly on performance-based contracts. The primary risk comes from the reality that few owners have the time or resources to fully vet and ver- ify the contractor’s approach during the proposal proc- ess. If a contractor proposes something that requires less work than the RFP documents, and that proposal is a contract document, can the owner require the contrac- tor to provide what is in the RFP documents? Is the question resolved by an order of precedence clause that places the RFP documents at a higher order than the proposal? What if the contractor’s overall technical ap- 74 Information can be found at http://www.fhwa.dot.gov/everydaycounts/edctwo/2012/atc.cfm.