Contractor Prequalification Can Be an Effective Risk Management Tool – If Properly Applied

When a contractor has been prequalified for a project, it increases the chances of success on many fronts, making it an effective risk management tool. In fact, if the request for qualification is well-conceived and the prequalification process conducted strategically, it can be argued that contractor prequalification is the industry’s most effective risk management tool.

Unfortunately, the full benefit of contractor prequalification is often not realized because the prequalification process is a victim of misadministration and with an evaluation process that is highly subjective. Specifically, prequalification documents are commonly ambiguous, too qualitative and subjective, and without clarity on how the shortlist of contractors will be developed. As a result, constructors walk away from the prequalification process believing that process bias in some form was involved, there was inequality in the prequalification criteria, too many contractors were shortlisted, and they were generally not given a fair shake.

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Ultimately, an owner wants healthy competition among a pool of capable bidders. To ensure that that happens, it is important to keep the following points in mind in developing the prequalification development process (PDP).

Project Awareness

This step in a prequalification development process (PDP) may seem unnecessary to the unsophisticated or inexperienced, but there are good reasons for project promotion in today’s market. Like never before, owners are in competition with other owners to attract the best contractors, and few contractors are local to major tunnel projects. Additionally, there is a strong trend for European and other international contractors entering North American. To address this, project awareness and contractor outreach programs are recommended. Outreach should include notification of the project in as many industry media outlets and forums as possible to foster awareness.

Outreach should be started no later than the 30 percent design stage of a typical design-bid-build project and preferably three months before the RFQ for design-build delivery. The ultimate goal of a project awareness campaign and outreach program is to attract qualified, responsive and responsible contractors. Contractor interest in pursuing a project will be gaged by many factors, and owners should be aware of what can undermine the level of confidence a constructor has in an individual owner.

Typically, constructors will “walk” (not bid) if one or more of the following factors exist:

• Multiple bids are due in the same timeframe,
• Time to prepare qualification too short,
• Overall marketplace saturation exists,
• Unaccounted for risk in bid proposal,
• Unbalanced risk management program (i.e., risk shedding and not risk sharing),
• Use of non-standard front-end clauses,
• No geotechnical baseline report or other contractual risk tools (i.e.. escrow bid documents, dispute review board, differing site condition clause, value engineering change proposal, etc.),
• Use of non-standard technical specifications,
• Owner has a bad reputation and/or is typically slow to pay,
• Too much emphasis on subcontractor qualifications,
• Highly prescriptive specifications that include too much engineer-derived means and methods,
• Poorly written, highly subjective, and ambiguous prequalification process,
• Project funding not secured,
• Use of a non-proven contract delivery vehicle, and
• The owner has never constructed a major tunnel project.

Key Early Decisions

The number of contractors to shortlist is one of the most important of all decisions to be made in the PDP. Constructors can spend $50,000 or more to prepare a complex qualification package. Additionally, it is normal for a constructor to spend $100,000 or more in preparing a proposal for a major tunnel project. If the shortlist contains more than four to six constructors, it is likely some of the constructors will choose to decline bidding or simply “throw a number at it.” This is often a cause for wide bid scatter on a project.

The author recommends five constructors be shortlisted such that if two drop-out, there are still three, giving many jurisdictions enough of a pool to award the work. The decision on the number of constructors to shortlist is even more important on a design-build project. The design-build team will spend upwards of $1 million or more to prepare a proposal for a major tunnel project. If more than five teams are shortlisted, then there is inequity as the chances for award to anyone one team diminishes. If more than five teams are shortlisted, the owner should seriously consider a stipend for proposal preparation to foster fairness in the process. The other key early decision is to develop questions that can help assess the validity of criteria used to compare constructor qualifications. Many agencies struggle with how to select the correct criteria to differentiate between prequalifications.

The following questions will help in this regard.

• Are the criteria fair, concise, complete, and unambiguous?
• Are the criteria onerous for the constructor to address?
• Are the criteria relevant to the decision process?
• Are the criteria too subjective?
• Can the criteria be manipulated in the prequalification package?
• Will the criteria conflict with the Quality Assurance article contained in most thee-part technical specifications?

It is not unusual for an owner to send out a draft of the RFQ for contractors for review and comment. This will engender confidence in the contractors that the owner is fair and balanced and likely translate into lower bid prices. If owners give contractors a “fair shake” in the RFQ process, they will likely find a level of interest beyond what they might expect otherwise.

Develop List of Project-Specific Criteria

Development of project-specific criteria to apply in the comparison of prequalification packages is one of the more critical steps in the PDP. Criteria can generally fall into technical and non-technical criteria. Specific categories of criteria to be considered include financial, legal, equipment inventory, staffing, safety performance, backlog, and work history (i.e., schedule adherence and total project cost compared to initial bid cost). Considering that successful tunneling is primarily related to staffing and means and methods, the criteria should focus heavily on those areas.

Provided below are tunnel-specific criteria to consider in evaluating how prequalifications will be compared.

• Staffing Capabilities
• Equipment Inventory
• Financial Capacity
• Work/Project History

Various levels of detail are available for each of the above topics, and it is not necessary to delve deeply into each depending on the nature of the project. The prudent thing to do is to evaluate the project schedule, cost, complexity, risk profile, funding, and funding source then compare these factors to help select the most appropriate criteria.

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Select Prequalification Scoring Method

To properly assess the quality and capability of a contractor, some type of scoring or rating system should be applied to the prequalification review process. The key considerations in selecting a scoring method are fairness and objectivity, which is easily said but hard to accomplish. In general, courts have ruled that scoring systems are appropriate as long as they are rational and documented. (The author will let attorneys define rational!)
Discretionary scoring is discouraged but can be used if some framework is applied so the subjective judgements by evaluators are bounded or bookended. Hardly ever is the comparison of contractor prequalifications completed on a purely ordinal ranking (prequalifications ranked 1st, 2nd, 3rd, etc.) without some scoring basis, although this method has held up in courts. The author is not a fan of ordinal rankings with only subjective observations and evaluations as this approach has been fraught with bias and protests. One person views qualifications in a different way that another person might.

The author strongly recommends some form of a scoring system be applied for the comparison of prequalification packages. The primary reason is that scoring systems are an efficient way to aggregate complex information. Although no scoring system is perfect and all scoring systems have some degree of subjectivity in them, they do provide a framework within which rational comparisons can be made. Very often, contractors are in the dark about how the shortlist was developed. One of the key benefits of a scoring system is the reduction in ambiguity in the contractor selection process. The ideal situation is that whatever scoring method is used it provides the selection committee with the tools to make an informed and intelligent decision.
There are many rating or scoring systems that can be applied. Any system can be used as long as it provides meaningful distinctions among prequalifications of various merits.

An example combination method for evaluation and scoring of respondents packages from a major metropolitan agency is reflected below.

• Organizational Management Approach – 20 points
• Past Project Experience and Performance – 40 points
• Key Personnel Qualifications and Experience – 30 points
• Safety Program and Performance – 10 points
• Pass/Fail Criteria

Although this example seems appropriate, it falls short in several areas. For one, equipment inventory is not considered. Means and methods of construction are where a project is won or lost, so not including some evaluation of equipment is not recommended. Also, the point totals for each category were not defined in some framework to establish how the points are assigned. Without that framework, a high level of subjectivity is introduced into the process.

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A scoring system with a small number of gradations (poor, fair, and good) will not provide enough discrimination between various levels of proficiency. Even systems that use adjectival descriptions like excellent, good, fair, and poor are less useful in communicating the differences between prequalifications than systems with far more gradations. A vital requirement for an owner is to document the relative strengths, deficiencies, significant weaknesses, and risks supporting the evaluation of contractor prequalifications. Also, the review process of contractor prequalifications should include the same evaluators for each package submitted.

Conclusions

The author believes contractor prequalification is one of the most significant risk management tools for the tunnel industry, but one that is greatly underutilized. It is often an ineffective risk management tool because the PDP does not receive the critical thinking needed along with the process often involving significant subjectivity. When the PDP is done methodically and strategically, it has numerous benefits. If the recommendations in this paper are followed, it is much more likely our highly esteemed owners, who provide us a living and a career, will be much more satisfied with the outcome of infrastructure development.

Acknowledgement

This paper is condensed from a paper titled “Contractor Prequalification – An (In)Effective Risk Management Tool,” which presented at the 2014 Tunnelling Association of Canada (TAC) conference in Vancouver, British Columbia.

Don Del Nero is a vice president with Stantec and the tunneling and trenchless engineering practice leader.