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INF01 Use of Few Models for Project Delivery Results in Missed Opportunities for Lowering Cost and Speeding Delivery

Summary

Infrastructure project delivery is typically done via the "design-bid-build" process. By using more innovative delivery methods the state will save both time and money.

Background

Most of California's infrastructure projects are delivered by the traditional design-bid-build process, with the selection of the building contractor based upon lowest price. Utilizing this delivery process, the California Department of Transportation(Caltr ans) estimates that delivery of a State Transportation Improvement Program project to reduce traffic congestion takes about seven years. Considering that California has the busiest highways in the nation, new project delivery methods need to be considered.[1]

California has temporarily used a variety of alternative project delivery methods including design-sequencing, design-build, design-build-operate, and public-private partnerships. However, there is no authorization in place to utilize these infrastructure project delivery methods on a permanent basis.

Design-sequencing

Design-sequencing is a method of contracting that enables the sequencing of design activities to permit construction activities to commence when design for that phase is complete. The design-sequencing method is often referred to as "fast track design."

For example, using this method in the construction of a steel-framed building would allow the structural engineering to be completed first so that the steel could be ordered in advance of groundbreaking. The legislature approved a pilot program to evaluate the effectiveness of the design-sequencing delivery process for state transportation projects. Through the program, construction bids were awarded to a single contractor even though the contractor's construction plans were not finalized. This arrangement allowed the contractor to work with Caltrans engineers to incorporate innovative design and construction methods into the final plans.

The advantages of design-sequencing include the following:

  • Quicker delivery of the project;
  • Innovative construction methods get earlier consideration; and
  • Potential for cost savings due to project constructability.

The disadvantages include the following:

  • Owner still assumes significant risk, and
  • Burden placed on owner for timely decisions and products.

According to Caltrans, three projects have been delivered using design-sequencing. These projects were completed, on average, 10 months faster compared to following the traditional design-bid-build process.[2] Even with these successes, design-sequencing remains in pilot program status, with one project remaining to be selected. Existing legislation may extend the pilot program until January 2007.[3]

Design-build and design-build-operate

The design-build process allows the owner or client to select an organization that will complete both the project design and construction under one agreement, and upon completion the owner is responsible for the operation and maintenance of the project. The design-buildoperate method is similar except that the owner selects an organization to not only design and build the project, but also to maintain and operate the finished project under certain parameters. Upon termination of the operational period, the owner would then assume maintenance and operations.

The advantages of design-build or design-build-operate model include the following:

  • Faster delivery because design and construction is assigned to a single party allowing for some construction to begin before design is complete;
  • Reduction of administrative and inspection costs;
  • Single contact and accountability for quality, cost, and schedule;
  • Allows for maximum flexibility and innovation in design, materials and construction methods;
  • Reduction or elimination of change orders and claims due to errors and omissions;
  • Commonly includes a warranty;
  • With design-build-operate, the ability to also have the facility maintained for a period of time under a single contract; and
  • With design-build-operate, maintenance and operations can be more integrated into design and construction.

The disadvantages include the following:

  • Potential to limit competition;
  • Less direct control over the project;
  • Difficult culture change to a performance-based approach; and
  • Owner is required to make quicker decisions.

Use of design-build and design-build-operate has spread throughout the country for a variety of infrastructure development projects with promising results. For example, the City of Seattle expects to save $50 million during the 25-year period of the design-build-operate contract for its new Cedar Treatment Facility.[4] The State of Minnesota was able to shorten project delivery by more than six years, saving taxpayers an estimated $30 million on the reconstruction of State Route 52.[5] In addition, design-build contracts have been the preferred delivery method on federally-funded transit projects for years.[6]

Public-private partnership

Public-private partnerships can be a valuable tool in times of government funding shortages. The partnerships allow the private sector to invest in public works projects. They are also a tool to transfer risk from taxpayers to private firms. The State Commission on Building for the 21st Century notes there is a need for approximately $100 billion in infrastructure improvements during the next decade, and that "government cannot bridge the infrastructure gap alone."[7] In the State of Virginia, the $318 million Pocahontas Parkway-Route 895 project utilized 94 percent private financing through provisions of Virginia's Public-Private Transportation Act of 1995.[8]

California has some experience with public-private partnerships for transportation improvements. In 1989, California enacted legislation, Assembly Bill 680, that called for Caltrans to seek bids from private firms for up to four projects that would be financed, built and operated by the private sector without any state or federal dollars. Although some projects were ultimately delivered under this law, there were flaws and lessons to be learned. Specifically, "non-compete" terms were included to protect bondholders of the private investment. The way these non-compete provisions were written precluded Caltrans from making any capacity-enhancements to the freeway. While the intent is logical, the application proved impossible to administer. Future non-compete provisions need to be defined in functional terms such as "level of service."

Nearly two dozen other states allow public-private partnerships or other innovative project delivery methods to assist in providing much needed infrastructure improvements to their citizens.

Job order contracting

Job order contracting is a firm, fixed-price, competitively bid, indefinite quantity procurement process that has proven successful for small to medium-sized public works projects. Job order contracting was developed by the military in the 1980s to overcome problems with the traditional design-bid-build process. Using design-bid-build, every project, no matter how small, had to be designed and put out to bid with the award going to the lowest bidder.[9] With job order contracting, the owner first develops a catalog of anticipated construction tasks, with unit prices and standard specifications. Contractors then bid the work, with adjustment factors. As the owner has needs for projects, the contractor would break the project down into tasks and prepares a proposal based upon the unit prices, and the adjustment factor. The owner reviews the proposal, and when satisfied, issues a work order. The owner would inspect the work, approve payment and close the project consistent with standard practice.[10]

Typically, job order contracts are written to define the overall relationship between the owner and contractor. Generally, contracts are for a specified term, along with minimum and maximum dollar value for work to be awarded during the term.

Although the use of job order contracting is relatively new, there have been promising results in the reduction of time, costs and administration. Contra Costa County reports that on nine projects built utilizing this process, the time to issue a project was reduced an average 41 days. Additionally, the county realized an average savings of seven percent on construction costs, and savings of 59 percent administrative costs.[11]

The use of job order contracting in California is extremely rare. This is due, in part, to ambiguity within the Public Contract Code (PCC). The Attorney General has defined the job order method as a form of an annual contract. Annual contracts are limited by the PCC to general law cities and counties, and to the state's college university system. The cities of San Diego and San Luis Obispo, and the City and County of San Francisco have all enacted charter amendments allowing job order contracting. Since the PCC is silent on expressed authorization for state agencies to use job order contracting, there has been reluctance to do so.[12]

Advantages of job order contracting include the following:

  • Simplified procurement process;
  • Quicker response to needs;
  • Flexible scheduling by owner; and
  • Cost savings.

Disadvantages include the following:

  • Owners initial investment in developing unit price book;
  • Difficulty anticipating all required tasks over the contract term; and
  • Learning curve of staff, and contractors.

Recommendations

  1. The Governor should work with the Legislature to permit the use of a suite of contracting methods for infrastructure projects by all public entities. The methods should include, but not be limited to, design-sequencing; design-build; design-buildoperate; public-private partnerships; and job order contracting.

    Any legislation for contracting methods should also include the following:

    • Full public access;
    • Competitive bidding, with qualifications presented under penalty of perjury;
    • Recognition of all labor laws, workplace safety, and other applicable regulations; and
    • Any "non-compete" terms defined in functional terms.
  2. The Governor should direct the Business, Transportation, and Housing Agency, or its successor, to establish criteria for deciding the most appropriate contracting method.

    After the ability to utilize a variety of delivery methods has been established, departments or their successor entities should work with experts, and stakeholders including local governments and the design and construction industry to develop criteria that can be utilized by decision-makers to determine the "best-fit" delivery model. These criteria should be designed to aid, not constrain, flexible decision-making. The criteria and subsequent training would need to be delivered to decision-makers.

Fiscal Impact

Legislation to permit the use of a suite of contracting methods for infrastructure projects by all public entities should lead to cost savings and faster delivery of projects. However, because these actions will depend on the legislation, the projects, and agency actions, the savings resulting from these recommendations cannot be estimated.

Much of the benefit of these project delivery models is the ability to deliver more quickly projects to California taxpayers. Caltrans indicates that design-sequencing projects are delivered 12 percent sooner than traditional design-bid-build projects. Additionally, a survey from the Construction Industry Institute demonstrated an average six percent lower cost and 33 percent faster delivery for infrastructure projects.[13]

The fiscal impact of public-private partnerships cannot be estimated. However, there is potential for significant cost savings to the state. For example, an entity could decide to construct light rail, or build toll roads, and recover the costs over a period of years. In many of these instances, the facility would provide benefits to the taxpayer with little or no up-front investment.

Job order contracting has great potential for reducing costs on the smaller, more routine infrastructure projects completed by the state. Caltrans spends approximately $140 million a year on its maintenance programs, the Department of Parks and Recreation spends about $4 million a year on minor projects, and the Department of Water Resources funds about $10 million per year on smaller projects. These programs match the desired profile for job order contracting.

Endnotes

[1] University of North Carolina, "The Looming Highway Condition Crisis: Performance of State Highway Systems 1984-2002 13th Annual Report," by David T. Hartgen, Ph.D., P.E. (Charlotte, North Carolina, February 9, 2004), p. 26.
[2] California Department of Transportation,"Third Annual Report to the Legislature AB 405 and 2607 Design Sequencing" (Sacramento, California, March 2003), p. 4.
[3] California Legislature, Senate. Senate Bill 1210 (Torlakson), introduced February 10, 2004, current legislative session 2003-2004.
[4] City of Seattle, "Public Utilities," Seattle, Washington, April 2001 (press release).
[5] Minnesota Department of Transportation, "Mn/DOT's First Design-Build, Best Value Highway Project," Minneapolis, Minnesota, November 1, 2002 (news release).
[6] The Transportation Equity Act for the 21st Century, Pub. L. No. 105-178, Section 1307, June 9, 1998.
[7] California Business, Transportation, and Housing Agency, "Invest for California, California Commission on Building for the 21st Century" (Sacramento, California, February 27, 2002).
[8] The National Council for Public-Private Partnerships, "Case Studies Pocahontas Parkway," http://www.ncppp.org/cases/pocahontas.html (last visited June 15, 2004).
[9] The Cooperative Purchasing Network, "Job Order Contracting for Novices," http://www.tcpn.org/JOC/JOCforNovices.pdf (last visited June 15, 2004).
[10] The Gordian Group, "Job Order Contracting Can Cut Costs, Improve Bidding Effectiveness," by Paul R. Schreyer and Harry H. Mellon (New York, New York, 2004).
[11] Contra Costa County Department of General Services, "Job Order Contracting Program Summary Report, July 1, 2003-November 10, 2003" (Contra Costa County, California, November 10, 2003), p. 4.
[12] The Gordian Group, "Job Order Contracting," presentation to the California Performance Review, Sacramento, California (May 25, 2004).
[13] Construction Industry Institute, "Construction Industry Institute Survey on Project Delivery," presented at Design- Build Institute of America Annual Convention, Chicago, Illinois, October 14-16, 1998.