2012 TBM Roundtable: Alternative Contract Delivery

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Chris Allen, Assistant Director-Clean Rivers Project, DC Water

Marc Jensen, Director of Engineering, Southern Nevada Water Authority

Nasri Munfah, Chairman of Tunnel Services/Senior Vice President, HNTB Corp.

Bryan Pennington, Executive Officer, Project Management, Transit Project Delivery, Los Angeles County Metropolitan Transportation Authority

Matt Preedy, Deputy Program Administrator, WSDOT – Alaskan Way Viaduct & Seawall Replacement Program

One of the emerging trends in the tunneling industry has been the use of design-build and other forms of non-traditional contracting methods. As the we continue to see more acceptance of these methods, TBM invited several industry professionals engaged in design-build to meet and discuss its benefits, its limitations and its role in the industry going forward.

Please tell us about your project. What kind of non-traditional contract method are you using? Why did you decide to use alternative contracting methods?

JENSEN: In Nevada, until about 10 years ago public agencies were only allowed to use design-bid-build contracting methods. When the state legislature allowed the use of design-build, it was right at the time we were undertaking our Intake No. 3 project in Lake Mead. Because it was the largest and most difficult of our intake projects, we decided that the design-build model would be more beneficial than design-bid-build for two reasons. The first was that it gave the builder the opportunity to have more latitude in choosing the construction methods that best suited his resources and capabilities. The second was that it would allow much more interaction with prospective builders in defining a project approach that might be more suitable for the construction industry. Our engineering team faced a lot of decisions during preliminary design that caused us to realize that we had many different opportunities for how the project might be built, and rather than force a builder into any one approach, it seemed best to our engineering team to encourage more creativity in finding innovative construction solutions. We weren’t so disengaged as to leave all the design decisions to the builder, so we did include specifications to define baseline design requirements, but we were anxious not to interfere too much in the creative process by defining everything in a constrained, restricted way. We were also concerned about how to deal with the risk issues in a way that would attract quality builders to the selection process. We hoped to use the design-build, qualification-based selection process to invite frank and open discussions with the prospective builders to make sure their concerns were addressed.

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PREEDY: We used a lump sum design-build procurement for our SR 99 bored tunnel project under downtown Seattle with a couple of important modifications. The overall reason we chose design-build was speed of delivery. We have a viaduct that is in pretty rough shape. It has been through two fairly significant earthquakes in the last 60 years and one more shake may bring it down. One of our main public trusts, of course, is safety, so the more rapidly we can get the structure replaced, the better we achieve that goal. We looked at the timeline on how we would be able to deliver the project via conventional means vs. design-build, and we figured that we will save at least two years using design-build.

ALLEN: As part of DC Water’s Clean Rivers Program we are using a modified form of design-build procurement. We used a two-part process in which we whittled the prospective bidders down to three based on qualifications. We then entered into a best-and-final bid in which 65 percent of the weight is based on bid price and 35 percent on qualifications. The decision to use design-build was driven by a consent decree to reduce sewer overflows. In developing the contract, our hope was to avoid litigation and to involve the contractor heavily in the process. We have quite a few contingencies and we are covering the cost for interventions. Like the Nevada program, we are trying to get the contractors involved, partner with them and avoid the litigation that can create havoc.

PENNINGTON: LA Metro has a large number of contracts under way. In terms of tunneling we have three projects either in procurement or just about to go into procurement. The first one is the Crenshaw/LAX LRT project, which is a $1.75 billion project. We are using a design-build contract. We just completed the RFQ process and the RFP came out in June. The second project is the Regional Connector in downtown Los Angeles, which is a $1.37 billion project, again LRT. That is also a design-build procurement with the RFQ process starting this summer, and with the RFP following this fall. The third project is the Westside Extension – otherwise called the Subway to the Sea – which is around $6 billion. We are in the process now of selecting the project delivery method for Westside, and will probably make a decision by the fall. One of the drivers behind our program is the Measure R funding, which takes allocated sales tax and turns that into $40 billion worth of projects in the Los Angeles area over 30 years. In fact, Mayor Antonio Villaraigosa is looking to accelerate that even further and has come up with a 30-10 plan, which is to do the 30 years work in only 10 years. So really we are looking at speed of delivery. We are looking to do more and we’re looking to do it sooner.

MUNFAH: I have been on both sides of the aisle working on design-bid-build and on design-build projects, and I have found several elements that favor the design-build process: Firstly is construction schedule improvement, this is especially true in tunneling projects where the construction is linear and requires long-lead items, such as a TBM or the power source for the TBM, which can take as long as a year or 18 months to procure depending on the size and type of the machine. Second is the fact that tunnel design depends greatly on the means and methods of construction. When we do a design as a part of a design-bid-build, we assume certain means and methods, but when a contractor comes on board he may have different approaches, resulting in redesigning during construction. This impacts the project schedule and cost. While in the design-build process the contractor’s engineer would prepare the design to meet the contractor’s means and methods. Third, in the design-build process, owners are in a better position to allocate risks to the party that has better control and ability to manage that risk. This is very critical for the success of an underground project.

Laws in many cases have been amended to allow the use of design-build. Is this still an impediment to the use of design-build?

PENNINGTON: I have worked in different states and a number of countries. Not surprisingly, one common theme is that differing legal constraints in various jurisdictions can have a significant influence on how delivery methods for projects are developed. Our industry is usually fairly conservative and the legislation is often relatively new and relatively untried, so that often poses a challenge to both client and contractor.

PREEDY: Several years ago we were not able to use design-build at WSDOT until a legislative change allowed it. Other state agencies are allowed to do even more, such as the General Contractor/Construction Manager (GC/CM) approach. At WSDOT we cannot use GC/CM but we can use public-private partnerships in some cases. Our current legislature has seen quite a bit of success in design-build delivery across the border in Vancouver, and has amended laws to lower the limit on how large of a project can be done design-build, which would expand its use to smaller, routine projects. There seems like there is a lot of political interest in using design-build right now as an effective delivery tool.

JENSEN: In the roundtable from last year (TBM, August 2011), the contractors complained that working in the United States was like working in 50 different foreign countries because every state has its own laws, and I think that is very true. It is a challenge for the contractors to figure out what the rules are in each locality. As the states have struggled to update their rules for public works contracting, they have looked at other states where design-build laws have been successfully implemented. Recently the Nevada legislature also adopted laws allowing the construction manager at risk contracting approach. All of this has been very positive, and I think over time the laws nationwide will become more consistent. The ultimate goal for underground construction is that public agencies will be allowed to adopt an approach that will allow true alliance contracting where the public owner and the contractor can become partners in developing a project from early conception in a way that allows the fair sharing of risk, the proper compensation to a contractor for unexpected conditions, and adjustments for design approaches that will be innovative, creative and specific to the conditions of that project.

MUNFAH: Looking at records from the Design-Build Institute of America, it is worth noting that between 1999 and 2011 the states (including Puerto Rico), that have legislation allowing design-build grew from 12 to 47. The trend is clearly moving toward the acceptance of design-build as an alternative delivery method. I believe eventually all states will allow some form of alternative delivery method.

PENNINGTON: And in the transit business we regularly deal with three levels of government, of course, so it’s sometimes worse than just dealing with variations across the 50 states. You’ve got federal, state and quite often local or organizational legislation, some of which may not always be entirely consistent. So that is an added complication. But I think that there is a driving force in the industry now to go further toward alternative delivery and I think that, with the lessons learned as an increasing number of projects are completed, we’ll see the legislation sort itself out. Design-build is a growth area for sure.

JENSEN: As we have seen a trend for more openness in public works construction for different contracting methods, we have all been identifying the benefits that accrue as a result of that trend, and those benefits are really undeniable. But because of the more subjective process associated with qualifications-based selection, we need to be aware that there is a risk that if these subjective processes are abused – or just even badly managed – we could see an adverse reaction resulting from accusations of unethical behavior or corruption that might affect this positive trend.

What projects are well-suited to design-build? What special considerations factored into the decision-making process in selecting the contracting method?

ALLEN: Design-build is growing but there are projects for which it is not well suited. In general, I think heavy civil works are ideally suited for design-build. Heavy civil works are relatively simple and you can identify prescriptive elements as needed in your bridging or tender documents. Projects like schools or office buildings have strict prescriptive requirements, so if you try to force fit those types of projects into a design-build arrangement, you lose all the advantages.

JENSEN: That is true. There is no perfect contract for every situation. You have to look at the specifics of your project and weigh the risks of allowing a contractor to take charge of the design process, but I think for underground construction, design-build can be a very effective approach because generally the objectives are pretty clear-cut. In the case of Nevada’s Intake No. 3, we simply needed a tunnel to extend from the intake location to the water treatment facility, so there was a lot of opportunity for a contractor to define the methods of how he was going to accomplish those objectives.

PREEDY: On the SR 99 tunnel, we decided to construct the main tunnel using design-build, but the portals on both ends are going to be separate contracts using design-bid-build. Some of the reasons for that is the City of Seattle has not done much design-build work, and while they are comfortable with WSDOT building a limited access facility underground that neighbors can’t see, they are very concerned about how the portals look and function and blend into the community. There is no single procurement method that is best suited for all projects as each project has its unique elements and surroundings. For some jobs, such as the SS 99 tunnel, we are using various procurement methods along the alignment for a variety of reasons.

PENNINGTON: LA Metro is generally looking at a single design-builder and a total project approach – not breaking out stations or various portions into different contracts. For transit, particularly when you are building within an existing system, there are certain elements that need to be mandated, so that’s always a bit of a balancing act. But generally, we are trying to adopt one contract model and apply it across the board for each project. Having said that, we are going through that discussion process right now with our Westside Extension project on exactly how we will deal with that – do we go with design-bid-build, design-build, a combination of the two or perhaps another alternative delivery method altogether?

MUNFAH: Developing bridging or tender documents is probably the most critical component in conveying to the design-builder what the owner wants. In my opinion, the tender documents are the way to deal with issues related to appearance, architectural details, and finishes in the public areas. Although this allows less flexibility for the design-builder and might result in higher costs, the owner gets what he wants. Another important aspect of a design-build contract is the development of a comprehensive geotechnical baseline report. This is a critical document for risk management. The GBR would identify the risk assumed by the owner vs. risks allocated to the contractor. A comprehensive geotechnical baseline report should be developed and included in the tender documents. Or alternatively, a modified process of the GBR should be considered.

In the tender process, were you able to find an ample pool of qualified contractors to ensure competition? How did that translate into pricing? What advantages are there in negotiating a qualifications-based contract?

ALLEN: What we are seeing is that the quality proposals come pretty much from the same group of people, not all of whom are totally experienced in design-build. We had a little bit of a learning curve on the first project, and a lot of that had to do with the designer and the contractor being together for the first time. In the underground industry we have these shifting alliances of joint ventures, so one joint venture may interact with the designers in a different manner and there is a sort of feeling out process. Additionally, a lot of the contractors are hard number guys and it’s their first experience, or first few experiences, with design-build.

JENSEN: I am confident these more enlightened risk sharing arrangements will work well as long as both parties act in an ethical and honest way so that no party is taking advantage of each other. That is really an important objective of qualifications-based contractor selection: to encourage a contracting relationship where the parties can treat each other with trust and respect. If we can accomplish that, then the industry is going to see a great deal of progress.

MUNFAH: In design-bid-build, owners award the contract to the lowest “qualified” bidder, so in a sense the determination of qualifications is made after the bids are opened. At that point it becomes very difficult to disqualify the lowest bidder because it results in disputes, challenges and often would require rebidding. However, in design-build, especially if there is a prequalification process, as is usually done, owners will award the contract to the qualified contractor who will provide the best value.

PENNINGTON: Through the procurement process you get an opportunity to meet with the staff whom you are going to be working with so you get an assessment of the contractor in depth – and vice versa – which obviously you don’t get in the low-bid scenario. In that case, often the first time you have a meaningful meeting with the contractor’s key staff is at the kick-off meeting after contract award. Often it comes back to trust and quite often that is driven by the personalities of the key staff on the project. The elongated design-build procurement process, as compared to a design-bid-build procurement, gives a chance to assess not just the financial aspects but the human aspects as well.

PREEDY: You really want to try to establish a pattern too. We really take great pride in developing a reputation that we always treat our contractors fairly. We don’t try to force them to take risk or pay for things that they really shouldn’t be paying for. And if you can establish that reputation of being a good and fair owner regardless of which contract delivery method you choose, you can get good bids and get contractors that know that they are going to be able to work with you.

How is negotiating a qualifications-based contract unique? What are some potential pitfalls?

ALLEN: Intellectual property is a really sticky issue and you have to be careful and use words like “license.” You have a license to use contractors’ ideas but you don’t own them exclusively. Contractors have what they consider trade secrets, and you have to respect that and tread very carefully. One of my biggest fears in the process that everybody has alluded to is the specter of bid protest. We are all going with a process that speeds things up but is very subjective, so you could get a sour grapes guy who comes in and gums up the whole works for a year.

PENNINGTON: With the so-called best value approach there is more subjectivity so what you have to do is establish your criteria early on. You’ve got to have an internal structure and a process set up way before the proposal goes out and you’ve got to document, document, document. Although you need the subjectivity, if it is done in a visible, organized, controlled, accountable, transparent fashion, then you are better positioned to deal with challenges that may arise.

PREEDY: That was a very big concern for us when we first started doing design-build. We have a headquarters section that just deals with alternative contract delivery, and what we do is bring in a member from headquarters who would not participate in evaluating proposals. His role is simply to listen to the discussion, look at what was being written down and ask the question ‘are you sure you can defend that?’ That was really helpful at times.

PENNINGTON: And confidentiality is important – not just between the owner and prospective design-builders, but also inside the organization. In Los Angeles we’ve had everyone involved with the procurement process sign a confidentiality agreement, and there are only a relatively small number of people who can discuss, for the right and proper reasons, the procurement. Anybody outside that small, chosen, well-identified group is not allowed to have any information at all, or pass that information. That said, we are a public agency and we have an obligation to be transparent – however, it is all about releasing the appropriate information at the appropriate time.

There are many alternative contracting methods and ways to customize each to best suit your needs. How did you determine the right approach for your project?

JENSEN: In Nevada we were really feeling our way along. It was only our second design-build project. The first one was very small and rather straight forward so we were kind of developing the program as we went along. We probably made a lot of mistakes and perhaps confused people at certain steps of the way but I think it must have turned out well because our approach seems to be something that other agencies have been able to use as a guide upon which to proceed along their own project procurement path.

PREEDY: WSDOT had done other design-build projects before the SR 99 tunnel, but the rest of them were heavy civil works above ground that were focused on achieving basically a lump sum contract up front. Once we started looking at how that model would work with the world’s largest diameter bored tunnel under a downtown metropolitan area, it became pretty obvious to us that we couldn’t put all of that cost risk into a lump sum design-build proposal and get anyone to enter into that bargain. So that is why we looked at our standard approach and we modified it with a variety of risk pools. For example, the contract states that the contractor has to account for 1,440 hours of interventions. If they go beyond 1,440 hours of interventions, the cost is covered by WSDOT through a risk fund pool. We did an assessment of what a minimum amount of intervention hours would likely be and we asked them not to bid the cost risk of having to do any more and instead set up a contingency fund for that risk. Changed conditions come out of that same contingency fund. At the end of the day, if there is money left in that contingency fund then the design-builder gets a share, so there is an incentive to not use it all. We came up with a list of items that we thought were the main risk items that would give us trouble from a lump sum standpoint and worked with the industry to figure out how we can take some of the up-front bid risk off of the design-builder and instead deal with that risk in a shared fund pool format.

MUNFAH: The interesting point is that in the traditional design-bid-build procurement process contractors add contingencies in the bids to deal with risks and unknowns. Whether these risks materialize or not, the owner pays the contingency because it is hidden in the bid. And quite often when conditions are different, there will be change orders and claims. On the other hand in the design-build process, owner can specify set aside contingencies to deal with risks and unforeseen conditions. In this case the owner controls the contingency rather than being included in the bid. In my opinion, the bridging or tender documents should be structured in a way to provide owners what they need and desire by defining what is mandatory versus what is discretionary. It is a balancing act because as the mandatory requirements increase the less flexibility and creativity the contractor will have and this would be reflected in his bid.

ALLEN: We have a GBR and we included many allowances on the job. What we are trying to do is raise the threshold for litigation and disputes on the job. We’re saying if you have an intervention, we’ll pay for it. If you have down time at a shaft and it’s justified, we’ll pay for it. We’re trying to short-circuit the claims by having judicious use of allowances. The jury is still out but we think it works for us because we are so schedule-driven. The intent is to really partner with the contractor and share the risk. If you have too many interventions, cutterhead wear, tool wear, whatever, we’ll participate with you. And we found we get very low bid numbers with the idea that the contractor knows he has these allowances and it just takes the risk out of his bid. It’s a pretty bold experiment and we will see in two years how it works.

PENNINGTON: On the basis that LA Metro is probably going to see an upswing in the number of design-build contracts because of the increasing volume of our upcoming work, we did a comprehensive revamp of our front-end documents so that we updated them and also made sure we have internal consistency in the documents, not just for the short-term projects we are working on now, but for the longer-term ones as well. On the backend, on the technical side, we look at each contract on its merits. The Crenshaw LAX project, for instance, is an interesting mix of underground, at grade and above grade, so we see the possibility of a fair amount of contractor innovation and we tried to make that contract more performance-based to try to get as much creativity out of the private sector as we can. The Regional Connector goes right through the center of the city, through the financial district. It connects two lines at each end, so the amount of flexibility there is less than Crenshaw so we adopted a different balance between mandatory and performance requirements on that contract.

What lessons have you learned going through this process? What advice would you give an owner entering into a design-build contract for the first time?

PREEDY: There is one basic takeaway, and that is there is no such thing as a free lunch. You either have enough money to deliver your contract or you don’t, and no amount of massaging your specifications is going to magically produce a bid that is less than what the project is actually worth. If you are getting indications through your procurement process that your budget is too low, you’d better listen to it because if you end up having to re-tender you will miss one of the biggest goals associated design-build, which is schedule advantage.

JENSEN: Another potential pitfall, not that I that I have seen it yet but I have been worried about it, is making a careful evaluation and assessment of the support of your senior management or your elected officials about the procurement process that you are proposing to apply, which may be totally unfamiliar to that group. Because these alternative contracting approaches require more subjective judgment in weighing the relative qualifications and merits of one firm or proposal over another, those senior managers and elected officials need to have a great deal of trust and confidence in staff to administer that process in a responsible and fair way so they can trust those judgments and resulting recommendations of staff. There is a real danger too that senior management or elected officials might feel some pressure or some entitlement to meddle in that process and they have to understand that that is not acceptable.

PREEDY: And because design-build is a best-value procurement, it is conceivable that the entity that wins the procurement is not the low bidder. When money is tight, like it is now, you want to be sure that your management and your elected leadership are bought into the potential that the successful proposer may not be the low bid. If that happens, you need to be able to show the value you are getting for various things like advanced schedule performance or exceptional qualifications of the team, and be sure those items are actually worth the additional money. There was a point in our design-build procurement development that the formulas were more heavily weighted on the side of qualifications, but over time there was some resistance and we adjusted our approach. Among our design-build jobs, we only had a couple instances in which the low bidder did not win, but it does happen. And when it does happen, you will get value related questions and you have to be prepared to answer those points on why that additional expenditure is worthwhile.

PENNINGTON: It depends on the context. If you are in a greenfield site and you’re miles away from anybody else, then obviously price is more important. If you’re going through the center of a city, and you are interfacing with a lot of stakeholders, some of the other aspects will take on greater importance. True best value is more important in that type of a situation. I see the industry getting more sophisticated now regarding design-build, and you need a sophisticated organization that understands the process and is set up appropriately. In the early days a lot of the organizations thought alternative delivery mechanisms presented an opportunity to put a lot of risk onto the contractor. I think those people found out pretty quickly that that costs would come back to them in some shape or form. Sometimes immediately, sometimes over a period of time, but they always end up paying for it. In alternative delivery you really want to try to see what you can do to take out front end risk. In my case, for instance, I have the opportunity to take out much of the utility risk and real estate risk, and that can go a long way toward getting a successful project.

ALLEN: If you move a traditional team into design-build, they tend to carry old habits with them. And if you start meddling with the design-builder’s plans you begin to defeat the purpose of design-build, and you can start bringing some interesting legal issues into play. A lot of it is about trust and letting go of traditional roles and responsibilities. It is very hard for us as owners to let go of the approval process, but you have to let go and let the process work and trust is big element.

MUNFAH: The upfront risk is probably the most challenging beside the political and legal, which obviously have to be taken care of early on. But the upfront risk related to right of way easement, utilities, permits, if that is passed on to the design-builder it affects the relationship as well as the schedule if he gets bogged down in the process. These items need to be addressed upfront to allow the development of the most appropriate solutions. Not necessarily every approval needs to be obtained or every utility needs to be identified, but it least needs to be addressed as to how they will be dealt with.

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