Procuring and Managing Professional Services for Airports (2013)

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39 The negotiating and contracting phase establishes the basis and tone for a successful project. It is the time when expectations are established between the agency and PSP, the terms of engagement are framed, desired outcomes are outlined, and the tone is set for a successful relationship (see Figure 4-1). A poorly conceived and executed process for negotiating and contracting is a precursor to misunderstandings, scope creep, and budget erosion, and yields products that fall short in content and schedule, no matter how capable the technical team. Conversely, a well-conceived contracting process enables technical work to proceed with confidence and clarity. Clear and forthright communication is critical for setting expectations and defining deliverables in managing professional services. Negotiating is focused on cost and conditions of service while contracting establishes the legal roadmap for executing and delivering that service. The contracting process at its best ensures that a contract does not impede the ability of the parties to fulfill their contractual obligations. The negotiating and contracting phase is the time when decisions are made regarding how much control is exercised, how much risk is maintained or transferred, and the extent to which innovation can be encouraged and rewarded. Negotiations Pre-Negotiation Plans Many agencies, as well as their PSP counterparts, maintain formal or informal written pre- negotiation plans prior to commencing negotiated procurement situations. Significant advantages to using this kind of document include the following: • A reasoned analysis of the proposed scope, schedule, and budget ensures clarity and valida- tion of the original solicitation and proposal, which leads to the establishment of negotiation objectives and parameters acceptable to each party. • A pre-negotiation plan facilitates clarity of purpose for the agency, stakeholders, and PSP prior to representatives convening for a formal negotiation. In this way, internal differences can be resolved before negotiations begin, producing negotiation objectives that everyone can support. An example of a pre-negotiation checklist is included in Appendix D, Sample Forms. Approach and Strategies The basic foundational purpose of negotiations is to define services to be provided in a way that minimizes risk, improves project performance, and leads to desired and dependable outcomes. Both parties to the negotiation may attach different attributes and metrics to these facets, but the C H A P T E R 4 Negotiating and Contracting for Professional Services

40 Procuring and Managing Professional Services for Airports desired end should be substantially the same. A good contract serves the interests of both parties in a manner that is fair and consistent with industry best practices and contains clear, fair, and reasonable terms. Universal attributes of honesty, clarity, and professionalism all contribute to a successful contract and successful effort. Negotiation Team The agency project manager should lead a team in preparing for negotiations with the PSP. The project manager should involve contract experts and be prepared with scope, proposed fee, IFE, and the schedule for the project before commencing negotiations. Negotiation is not a task that should be undertaken alone; the agency project manager should enlist assistance wherever possible, including legal and audit staff, both as witness and for perspective. Smaller airports may pool resources, hire an outside firm, or seek technical support from their state DOT, if such functions exist, to aid in the process. For projects funded by AIP grants or TSA agreements, the applicable reference documents (e.g., FAA Order 5100.38 and AC 150/5100-14) should be reviewed and the FAA Regional Office or TSA representative should be consulted for guidance and assistance. A successful negotiator has good listening and excellent verbal communication skills, maintains objectivity and stability under pressure, and is neither confrontational nor conflict- avoidant. Figure 4-1. Critical path—negotiating and contracting.

Negotiating and Contracting for Professional Services 41 Controlling the Negotiations Negotiation responsibilities should be assigned to individuals with the authority to fulfill them. An experienced contract specialist who can control the meeting should lead the negotiation team. Resource personnel (e.g., engineers, architects, lawyers, cost analysts, and auditors) are valuable to the contract specialist for advice, but these personnel should not be the ones making business decisions and committing the agency during the negotiations. Care must be taken that the PSP does not create a situation where the agency’s contract specialists discuss alternatives or possible concessions to the contract during negotiations—the agency team should discuss such issues in private caucuses and not in the presence of the PSP. There should be one spokesperson for the agency—the contract specialist—and a lead negotiator for the PSP. These individuals should control the meeting and be authorized to make decisions on behalf of their respective organizations. Scope and Schedule The project scope of services and associated project schedule are where the mutual roles and responsibilities of the agency and PSP are enumerated in detail. The clarity and specificity of these elements, when associated with project budget, are the principal determinants of project success. Although many key assumptions may have been set out during the procurement phase, once a selection is made, it is always advisable to carefully review any scope that has been developed previously. All parties are placed in peril if a proposal-generated scope is incorporated into a contract by reference or as an exhibit without any intervening negotiation. No matter how clearly and thoroughly the intent may be stated in procurement phase documents by the PSP, any scope contained in a proposal remains essentially a sales document that has not had the benefit of agency feedback and discussion about how even minor modifications or clarifications could aid the subsequent process and product. Depending on the exact scope and complexity of the project, worthwhile steps could include the following: • Revisit the project solicitation and PSP proposal scope to discuss and resolve any ambiguities or areas of concern. • Where appropriate, perform project site visits to enable participants to (1) gain a clearer understanding of particular issues, constraints, and stakeholder concerns, and (2) calibrate the appropriate response, level of effort, and allocation of responsibility between the contracting parties. Generally, contract negotiations should be completed within a month after selection to allow the appropriate commitment and deployment of staff and resources by the agencies and PSP to be scheduled and delivered. A concise and clear process, well communicated in advance, has a positive effect on negotiations. Pricing, Budget Assessment, Contingency The pricing, budget assessment, and contingency for the project should have been established during the procurement phase. In addition, a sample contract, including the standard terms and conditions for the contract, should be provided to the PSP during the procurement phase to ensure that all PSPs are fully informed prior to proposing and to limit any issues during the negotiations. The standard terms and conditions should include any restrictions on overhead, profit, and/or fee, as well as the insurance requirements, at a minimum. During negotiations, the price, budget, and contingency should be constantly reviewed and revised in conjunction with the scope and schedule to ensure that the cost reflects any changes in the scope and schedule.

42 Procuring and Managing Professional Services for Airports If the funding for the project includes an FAA AIP grant, the agency will need to have an independent third-party prepare an IFE of the project prior to beginning the negotiations. The requirement for an IFE may be waived at the discretion of the FAA if the project is below $100,000. It is suggested that the agency incorporate a requirement for an IFE in all negotiations so as to help negotiation teams with complex or unfamiliar projects. Legal and Risk Management Considerations It is best to clarify risks early and understand their sources to manage the process effectively. An assessment of project risk and understanding of vulnerabilities should be initially evaluated during the contracting phase and reviewed again at the beginning of the contract and at key milestones in the project schedule. Each agency will have a good sense of where risk is greater based on historical experience. For example, typical areas include • Public expectations and activism; • Funding sources, unavailability of FAA funding or state budgeting changes; • Requirements of tenants and other internal stakeholders; • Unforeseen site conditions or working in an area where no work has been done previously; • Staging requirements for utilization of space; and • Runway and taxiway requirements for possible night work and emergency operations. Identify, assess, and determine how each risk will be managed and monitored prior to contract execution because this will affect compensation and contract terms and restrictions. The evaluation of each risk should be made and defined as follows: • Avoidance–what is the plan to eliminate risk; • Transference–what is the method to transfer the risk to another party—to whom and under what circumstances; • Mitigation–early action, remediation and primary responsibility for the risk; and • Acceptance–who is responsible for the risk and what are the contingency plans if the risk is not avoided or mitigated. An example of a Risk Questionnaire and Risk Register are included in Appendix D, Sample Forms. Compensation Fee Type The fee type and method of payment should be defined and communicated to the PSP, including any contract restrictions. Agencies should choose the fee type that is most appropriate for the scope of work. The selection of a fee type—typically lump sum vs. cost-plus—should be determined based on the type of services to be performed. Although there is a natural tension and sometimes divergence between PSP and agency perspectives on optimal contract type, the contract should reflect the best sense of common ground. In general, where an assignment is well defined and sufficiently predictable to estimate with a high degree of certainty, a lump-sum contract can be desirable for all parties. In many cases, all-inclusive billing rates on a cost-plus basis can be appropriate where the tasks are more difficult to estimate with precision. Determination of fair and reasonable fees should be based on market research and historical data from past projects. Where the agency does not have a sound basis for these determinations, other knowl- edgeable and reliable sources should be consulted. Both parties should be open to discussing the compensation because all projects/services are not the same in degree of risk and complexity. Contract Restrictions Any contract restrictions (e.g., overhead limits, escalation, and salary caps) should be com- municated to the PSP during the procurement phase of the project. During the negotiation

Negotiating and Contracting for Professional Services 43 phase, both parties should acknowledge the restrictions and include them in the pricing of the services. Quality Assurance/Quality Control The requirements for QA/QC should be defined and the expectations of the agency commu- nicated to the PSP. Project acceleration and contract restrictions will have a direct impact on the role, function, and method of providing QA/QC. Adequate time and budget must be determined during negotiations for adequate senior-level QA/QC, proactive and periodic review, and project management oversight. In addition to internal checking and QC by the PSP, it is suggested that resources be set aside in the PSP budget for an independent QA/QC peer review from another office or service group of the firm on all significant projects. An example of a QA/QC review process is included in Appendix D, Sample Forms. Communication Strategies Every contract award process should be documented with a Memorandum of Negotiations. This memorandum must describe the most important aspects of the procurement history, which at minimum would include the following information: • The purpose of the procurement; • A history of the procurement, including references to important documents with their dates and identifying numbers (e.g., advertisements of the procurement, RFP, and technical evaluation of proposals); • The names and roles of each person who participated in the negotiations; • An explanation of how the final price was negotiated—this explanation needs to reference the Pre-Negotiation Plan price objective (if a Plan was developed), the independent cost estimate (which should always be developed), and any advisory audits that may have been conducted; and • A discussion of important contract terms and conditions (e.g., insurance requirements, contract restrictions, DBE participation, and Buy America provisions). Contracting No matter the size of the contract or the level of contract support available to the contracting agency, attention to a few early actions will establish expectations and reporting requirements and ease overall administration. From the start, it is essential to document the administration of the contract and to identify what information should be maintained in the contract administration files. Various staff involved in the project (e.g., QA/QC, engineers, inspectors, financial personnel, DBE officers, and safety staff) may possess files of their own as relevant to their involvement with the administration of the contract, but it is advisable for the procurement official (who may also be the contracting officer and agency project manager) to maintain the official contract file. The official contract file should include all official documents relating to the administration of the contract so that the PSP’s adherence to the terms of the contract can be tracked and so that the agency can effectively handle any contractual or administrative issues that may arise throughout the life of the project. Basic Contracting Principles Before examining or discussing best practices and contracting principles for use by avia- tion agencies in retaining PSPs, it is necessary to establish a clear understanding of the basic

44 Procuring and Managing Professional Services for Airports principles of contracting that frame such activities. For most public-sector organizations, the principles established in the Federal Acquisition Regulations (FAR) provide a sound foundation for this effort. Four basic principles underlie the contracting process detailed by the FAR: 1. Contracts are awarded competitively, whenever possible, to provide for reasonable prices. It is generally held that full and open competition results in fair and reasonable prices. Further, open competition avoids favoritism by assuring that all qualified suppliers can offer their goods and services. 2. Only contractors found to be “responsive” and “responsible” can be awarded contracts. Regardless of the procurement method, before a contract is awarded, the contracting officer should verify that the prospective contractor is “responsive” and “responsible.” To be considered responsive, the contractor must submit a sealed bid or proposal in accordance with the terms and conditions of the quotation or solicitation. To be considered responsible, the contractor must meet the various conditions (e.g., possessing adequate financial resources, being able to meet the performance requirements, have an acceptable record of performance, demonstrate the necessary qualifications and skills, and comply with applicable regulations and laws). 3. An appropriate contract type must be associated with the particular procurement. The FAR allows the use of several different types of contracts and describes the circumstances appropriate for the use of each. The contract type used should be determined by the circumstances of the procurement and the degree of risk associated with performance of the contract. 4. Procurement programs are used to help implement national policies. Some of those policies are implemented by mandatory contract provisions (e.g., those requiring minimum standards for wages, hours, and working conditions in producing supplies or performing services). Other policies are furthered by laws requiring contracts to be awarded to certain contractors or prohibiting their award to others. With this perspective, it is important to establish the elements that are essential to any con- tract: offer, acceptance, contract, and consideration: 1. Offer. There must be a definite, clearly stated offer to do or provide something. This could be a proposal to provide services or a quotation to provide specific goods or materials. An offer can lapse for various reasons (e.g., the time for acceptance expires or the offer is withdrawn before it is accepted). 2. Acceptance. Only that which is offered can be accepted. As such, the offer must be accepted exactly as offered without conditions. If new terms are suggested, this would be considered a counter offer, which can then be accepted or rejected. It is possible to have many offers and counter offers before there is an agreement. The acceptance of the offer brings negotiations to an end by establishing the contract terms and conditions. 3. Contract. A contract is established that serves to legally bind the parties to the terms of the agreement. The parties entering into the contract intend to create legal relations and must understand that the agreement can be enforced by law. Establishing a contract presumes the intent to create a legal relationship. 4. Consideration. Consideration that has tangible value must be exchanged between the parties in order for a contract to be binding. Consideration is what each party exchanges with the other as the agreed price for the promise made by the other. Usually consideration is the payment of money. All of the various actions and strategies discussed and presented in this Handbook seek to use the best practices and lessons learned from the various research participants within the framework of the governmental contracting principles set forth in the FAR as well as the basic contract principles of offer, acceptance, contract, and consideration.

Negotiating and Contracting for Professional Services 45 The Contracting Officer and the Project Manager: Navigating the “Constructive Tension” A core principle of governmental contracting is the distinction between the procurement and project management functions. The procurement/contracting staff seek to obtain the best value, ensure compliance with regulations and procedures, and obtain an agreement which is in the best interests of the agency. Concurrently, the project staff seeks to obtain the “best” firm that meets their requirements both technically and financially. It is not uncommon for these objec- tives to appear to be in competition. Developing a cooperative relationship (using the FACTS guiding principles previously described) will serve to bridge these competing objectives and allow a collaborative working relationship that uses this constructive tension and advances the best interests of the agency. Although a full examination of this working relationship is beyond the scope of this research effort, recognition and acknowledgment of the different roles required of each member of the project team throughout the life of the project are critical to establishing a collaborative and effective working relationship. These project team member roles are summarized in Figure 4-2: The contract administrator leads the procurement phase of the process, assisted by the project manager as a Technical Representative. Once a contract is awarded, the lead shifts to the project manager who is responsible for delivery of the project or contract within the established scope, schedule, and budget. During this phase of the project, the contract administrator seeks to protect the agency’s rights and proactively address any contract issues (e.g., changes) that may arise. In smaller organizations, these roles may be fulfilled by a single individual. In such cases, this individual must recognize the dual responsibilities and expectations and work to fulfill these requirements. General Contract Conditions These conditions should be flexible to address the need and should be provided to the PSP in advance of response. Some typical terms to include • Standard of care, correction of errors; • Compensation, project financing; • Warranties, insurance, legal liabilities; • Dispute resolution; • Documentation—ownership, exclusive property, confidentiality; Figure 4-2. Team member roles.

46 Procuring and Managing Professional Services for Airports • Termination—convenience, cause; and • As-built drawings. Contract Restrictions The use of restrictions (e.g., salary caps, overhead caps, escalation, overtime limit, and set asides for local or DBE firms) should be applied mindful of funders’ requirements and legal structures. Clarity and flexibility wherever possible will aid in encouraging a robust response from the PSP community and attract qualified DBE firms and quality submittals. At the same time, agencies should understand that contract restrictions can reduce the number of PSPs that will submit proposals and increase the amount of review required by the agency to enforce the restrictions. Accountability Checks Engage legal and audit departments/resources to guide the development and use of contract mechanism and language to better fit the need and resources available. Allow for adequate time for internal partners to review and modify. Contracting Authority Decisions regarding who should approve and manage a contract should be based on the value of the services and delegated appropriately, allowing for sufficient oversight and management. Less-expensive, less-complex services and non-controversial project delivery methods should be delegated to lower levels of authority and management for maximum efficiency and savings in time and cost. Clarity Terms of agreement should create and reinforce mutual and realistic expectations. Ambiguous contract language, however seemingly convenient and understood at the time, will ultimately lead to confusion or disappointment that will, over time, increase the risk of disputes or losses of time or money. Contract Review Process After the contract terms and conditions have been negotiated and finalized, both parties should have the contract reviewed and approved prior to signing. Contracting Standard Operating Procedures Staff Training Any specific training necessary for the PSP to complete the project should be detailed, along with a timeframe for obtaining the training. Contract Kick-off A kick-off conference is always advisable prior to the start of work, to be chaired by the con- tracting officer. The agenda for such conferences may include the following: • Introductions of key staff; • Safety and security considerations, if relevant to scope of work; • Schedule for key milestones; • Payment procedures; • DBE guidance, if applicable; • Standards for drafting, specific software and so forth;

Negotiating and Contracting for Professional Services 47 • Procedures for publicity releases, normally to be approved by the contracting officer prior to release; and • Build-out procedures and restrictions, if appropriate, including inspection procedures and insurance issues. Forms and Agreements The agency should provide to the PSP all required forms and standard agreements to be used during the duration of the project. Some sample forms and agreements may include subcontract agreements, invoice cover sheets, DBE payment records, change order requests, schedule documentation, and cost estimates. Examples of an invoice summary form and cost estimating templates are included in Appendix D, Sample Forms. Special Contract Considerations Discussions and potential modifications to scope, schedule, or cost should always be considered in relation to one another. A change to one will affect the others—scope-schedule-cost should always be referenced as one word. Ideally, an awarded contract is complete and comprehensive and its terms are adequate to define and specify the obligations and rights of the parties. Although modifications of a contract are not contemplated at the time that it is signed, as a practical matter, few contracts are completed without some modification. Complex or alternate contracting methods need to be defined and expectations set during the negotiations. In addition, alternate methods will have specific contracting terms and conditions that should be incorporated into the contract. Examples of alternate contracting methods include DB and CM@R. Contract Modifications Modifications originate primarily from three sources: agency/stakeholder-initiated changes, PSP-requested changes, or unforeseen conditions. Whether initiated by the agency or PSP, a determination needs to be made by the agency’s project manager as to whether or not the request falls within the general scope of the original agreement. Additional services not within the existing contract’s general scope may need to be treated as a new procurement. Examples of contract modifications within the general scope of the contract include • Amplification or clarification of the PSP’s privileges and responsibilities; • Authorization of services contemplated or anticipated in the contract, but not included in the original agreement; • Extension of the contract performance period within the contractual authority of the agency; • Authorization of additional services not originally contemplated but now desired, and the nature of the services is such that they would be a logical extension of the existing contract; and • Elimination or reduction in services that were in the contract but no longer required. Constructive Changes Although all contract changes should be negotiated in advance and put in writing by the agency’s project manager, sometimes the agency’s project manager or other agency employees may take certain actions, verbal or otherwise, which change the contract. Such changes are called “constructive changes.” A constructive change occurs when the PSP acts in response to a directive with apparent authority to commit such actions. Although such changes are sometimes desirable

48 Procuring and Managing Professional Services for Airports and necessary, only the contracting officer or his or her designee (agency’s project manager) has the right to contractually commit the agency. Performance Evaluation Reports Most contracts of meaningful scale should be evaluated to provide feedback to the PSP on performance and enable the PSP to correct problems before contract completion. The frequency, content, and format of the reporting should be tailored to the size and complexity of the contract. At a minimum, a performance evaluation should be conducted for every project. Agency project managers should arrange meetings with the PSP, publish minutes, and build a record of documentation. The records should be detailed and reflect ongoing communications with the PSP, both oral and written. Other Provisions Provisions need to be in place to address common circumstances such as • DBE Compliance. Contracting officers are responsible for monitoring the PSP’s DBE compli- ance by requesting evidence of DBE participation as specified by the contract. • Termination for Cause/Default or Termination for Convenience. Default provisions establish the reasons and procedure under which a contract may be terminated for default or convenience, including recourse to performance bonds, ascertaining and collecting liquidated damages, and/or ownership of materials and final payment terms. • Contract Expiration. Prior to the end of the contract, the agency’s project manager should work with all relevant departments and managers to ensure that the PSP has complied with all contract requirements and that the contracting agency has fulfilled its obligations or will do so prior to the end of the contract. Strategies to Encourage Change and Innovation If an agency is seeking innovation, acceleration, or the use of alternative partnerships, then the contract needs to be carefully negotiated and agreed on with PSP and stakeholders. Disputes The first step in preventing disputes is to use clear, unambiguous contracting language and define all terminology in the contract. It can be costly to skip these items before work begins or to allow the urgency of an assignment and/or personal feelings to cloud due diligence. Practical steps to avoid, minimize, or manage disputes are as follows: • Develop a contract template and include it in solicitations to allow early dialog and review of any comments, questions, and potential exceptions to the form of agreement on the part of the PSP so that exceptions may be resolved and to prevent an untimely end to negotiations. • Institute a thoughtful and fair change review process. • Thoroughly document significant events as they occur. This can take the form of correspon- dence, daily diary entries, inspector’s daily reports, photographs, memoranda of telephone conversations and meetings, and so forth. Such documentation establishes a project record that is absolutely essential in discouraging invalid claims and in properly evaluating claims reaching litigation. • In general, negotiations regarding disputed items should be on an item-by-item basis with written arguments or basis for a specific line item or approach which is in dispute.

Negotiating and Contracting for Professional Services 49 Broward County Aviation Department has developed a novel approach to preventing disputes by implementing a Dispute Avoidance Panel, which acts as an independent third party to help the Aviation Department resolve any disputes with PSPs, thereby precluding many issues from escalating to litigation. Tools and Technology Tools Tools useful in preparing for negotiation and developing contracts include Standards of Performance internal to the agency to guide the process; a pre-negotiation plan along with relevant project documents such as scope-schedule-cost; risk questionnaires; historical data on similar projects undertaken by the agency and/or PSP; contract forms, agreements, and boiler- plate contract language; and plans for change management and QA/QC. IFEs are required if using FAA AIP funding, but are also recommended for most other procurements. Examples of a risk questionnaire and cost estimating templates are included in Appendix D, Sample Forms. Technology The optimal method for making mutual decisions and reaching consensus is face-to-face communication. Communication software (e.g., email and document sharing) can aid the trans- mittal of important documents; productivity software (e.g., word processing and spreadsheets) can assist in the pre- and post-negotiation preparation of contract documents; and financial and project management systems can be used to create schedules, milestones, and budgets. Resources Publications • ACRP Report 33: Guidebook for Developing and Managing Airport Contracts, TRB • Airport Owner’s Guide to Project Delivery Systems – 2nd Edition, ACI-NA, ACC, Associated General Contractors of America (AGC) • Federal Acquisition Regulation (FAR) • FAA Advisory Circular (AC) 150/5100-14 Architectural, Engineering, and Planning Consultant Services for Airport Grant Projects • FAA Order 5100.38 Airport Improvement Program Handbook • FTA “Best Practices Procurement Manual” Sample Forms (Appendix D) • Pre-Negotiation Checklist • Risk Questionnaire • Risk Register • Cost Estimating Templates • Quality Assurance/Quality Control Review Process • Invoice Summary Form FAA Forms (Available at the FAA Website) • FAA Order 5100.38 Airport Improvement Program Handbook