'Best Value' Procurement: How Federal and State Governments Are Changing the Bidding Process


April 29, 2002

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By John R. Heisse II
Howrey LLP

Public projects are governed by strict statutory and regulatory frameworks intended to reduce the risk of fraud, favoritism and undue influence and to reassure taxpayers that their tax dollars are being spent properly. In recent years, "best value" procurement has begun to encroach upon traditional procurement methods at both the state and federal level. The federal government is increasingly using "best value" procurement for its acquisitions. Approximately half the states have some type of "best value" procurement. 1/  Last year, the ABA Model Procurement Code added design-build procurement as a new project delivery method to assist state and local agencies in implementing "best value" procurement. 2/  The shift to best value models permits government agencies to operate more efficiently. The ultimate goal of best value procurement methods is to combine the twin goals of promoting efficiency of private construction contracting and taxpayer trust in the procurement process.

Historically, public projects used traditional design-bid-build procurement. The design-bid-build method requires separate contracts between the owner and designer on the one hand and the owner and constructor on the other. Contracts are awarded to the lowest responsible bidder. Statutory bond requirements allay concerns about the ability of the low bidder to perform the project. Payment and performance bonds guarantee that subcontractors will be paid and the work will be performed as promised. However, the traditional design-bid-build model does not allow the government to evaluate contractor bids based on factors other than price. Other concerns that could dramatically change the evaluation process include completing the project in the shortest amount of time, incorporating necessary aesthetic or environmental design issues, and producing a facility with the lowest long-term operating and maintenance costs. 3/

Although the programs differ greatly, best value procurement generally permits flexibility not offered by traditional competitive bidding. In a design-build project, the owner contracts with only one entity: the designer-builder. Design-build not only offers single source responsibility, it decreases adversarial communication between the parties working on the project, promises quicker project completion, allows single source responsibility, provides greater ability to consider the past performance records of bidders, and typically reduces administrative costs.

I.  Federal Construction Contracting

Best value procurement was introduced to the federal acquisition system through legislative and regulatory initiatives. The Clinger-Cohen Act of 1996 enacted design-build procurement for the federal government. 4/ The Act describes the two-phase selection procedure and the concept of "efficient competition." 5/ The Act defines "efficient competition" as a balance between the need "to obtain full and open competition" and "the need to efficiently fulfill the Government's requirements." 6/ The statute codifies the design-build construction method popular in the private sector. The Federal Acquisition Regulation (FAR) implements the Clinger-Cohen Act and the two-phase design-build process for federal procurement. 7/

However, the statutes and regulations provide only a procedure to use best value procurement; they do not require an agency to use best value procurement. 8/  The two-phase procedures "are generally appropriate for unusual or complex projects for which technical competence and demonstrated past performance are critical." 9/  If the government agency determines the two-phase design-build procedure is appropriate for its project, it must create a "scope of work" statement that "defines the project and states the Government's requirements." 10/

A.  Two-Phase Procedure

In Phase 1, the government narrows the field of potential bidders to a short list of no more than five of the best qualified design-build contractors without looking at price. During Phase 2, the government selects the design-build contractor who provides the "best value" based on all appropriate factors, including price.

1.  Phase 1

After the agency determines that design-build procedures are appropriate and creates the scope of work statement, it issues a solicitation. 11/  The solicitation incorporates the scope of work statement along with the evaluation factors the agency will consider. 12/  These factors include specialized experience and technical competence, capability to perform, past performance of the offeror's team (including the architect-engineer and construction members), other appropriate factors (excluding cost or price-related factors, which are not permitted in Phase 1). 13/ Importantly, Phase 1 does not include detailed design or pricing information. Nor do the regulations limit the discussions the government may have with offerors during the selection of the short list. 14/

The explicit exclusion of cost or price data from Phase 1 sets the design-build procedure apart from the traditional competitive process. By excluding cost or price data, the design-build method permits agencies to focus on other important aspects of bid proposals. The offeror is able to focus on the design quality and technical requirements of a complex project without regard to price. 15/  During this phase, the government may evaluate the proposals without fear that the competitors simply are trying to under-bid each other regardless of the impact on the project. 16/ Furthermore, the offeror benefits from the reduced proposal preparation expenses because it does not have to produce a detailed cost analysis unless it is selected to enter Phase 2. 17/

The FAR defines past performance information as:

relevant information for future source selection purposes, regarding a contractor's action under previously awarded contracts. It includes, for example, the contractor's record of conforming to contract requirements and to standards of good workmanship; the contractor's record of forecasting and controlling costs; the contractor's adherence to contract schedules, including the administrative aspects of performance; the contractor's history of reasonable and cooperative behavior and commitment to customer satisfaction; and generally, the contractor's business-like concern for the interest of the customer. 18/

The FAR definition is subjective and permits the government agency to exercise broad discretion. 19/  Thus, " 'the government has wide latitude in establishing a contractor's performance rating.' " 20/  The burden is on the government agency to maintain information on contractor past performance and prepare a past performance evaluation report for each competing contractor. 21/  However, contractors are permitted to "submit comments, rebutting statements, or additional information" relating to the evaluation. 22/  In the event of a disagreement, discrepancies are resolved "at a level above the contracting officer." 23/  Ultimately, the contracting agency retains the final decision regarding content of the past performance evaluation. 24/  Finally, the solicitations must describe the approach for evaluating past performance information, including how the agency will evaluate offers when no past performance information is available. 25/  General Accounting Office decisions indicate that when there is a lack of past performance information, "the offeror may not be evaluated favorably or unfavorably on past performance." 26/

Phase 1 narrows the field of offerors based primarily on technical competence and past performance. The result is a short list of contractors best qualified to compete in Phase 2. 27/  Generally, this short list is limited to five contractors. 28/  The list may include more than five contractors only if the greater number of competitors is in "the Government's interest and is consistent with the purposes and objectives of two-phase design-build contracting." 29/  This short list will thus include only those competitors likely to provide "best value" to the government.

2.  Phase 2

After the agency creates the short list, the competitors must comply with the solicitation requirements for Phase 2. The solicitation may be issued concurrently with the Phase 1 solicitation or after creation of the short list. 30/  The Phase 2 solicitation "shall require submission of technical and price proposals, which shall be evaluated separately, in accordance with Part 15." 31/  The agency must indicate in the solicitation all factors to be considered and their relative importance. 32/  After the 1997 revisions to FAR Part 15, the government has significant discretion and flexibility during the two-phase process. The regulations require that competitors "shall be treated fairly and impartially but need not be treated the same." 33/  One recent analysis of the current FAR regulations for Phase 2 noted "[t]he rewrite encourages presolicitation conferences, one-on-one meetings, and even draft requests for proposals concerning future contracting opportunities." 34/

FAR Part 15 also permits the government to negotiate with competitors to achieve "best value." 35/  FAR §15.306 (d) defines negotiation or bargaining as "persuasion, alteration of assumptions and positions, give and take, and may apply to price, schedule, technical requirements, type of contract, or other terms of a proposed contract." 36/  The government may also:

[N]egotiate with offerors for increased performance beyond any mandatory minimums, and the Government may suggest to offerors that have exceeded any mandatory minimums (in ways that are not integral to the design), that their proposals would be more competitive if the excesses were removed and the offered price decreased. 37/

Finally, each offeror has the opportunity to revise its proposal during the negotiations and to submit a "final proposal revision." 38/  However, the regulations prohibit conduct that favors one offeror over another, that reveals an offeror's technical solution, or that reveals an offeror's price without that offeror's permission. 39/  These regulations give government agencies "considerable discretion" in the procurement process. 40/

During Phase 2, the evaluating agency may consider cost information. 41/  The best value procurement method permits the agency to "conduct a price/technical trade-off analysis of an offeror's technical proposal and prices in order to determine which proposal is most advantageous to the government" and, thus, "make an award to a higher priced offeror that has submitted a technically superior offer." 42/

II.  State Construction Contracting

Many states are enacting legislation to explicitly permit best value procurement while statutes in other states are amenable to best value procurement. 43/ State laws generally fall into four categories:

1. "laws that expressly prohibit design-build"

2. "laws that pose obstacles to design-build"

3. "laws that pose no obstacles to design-build"

4. "laws that expressly allow design-build." 44/

In the states the permit or encourage best value procurement, the names used to describe this method include "performance-based procurement," 45/ "innovative procurement," 46/ "competitive best value bidding," 47/ "competitive selection" 48/ and "competitive negotiation." 49/ Like the names, the actual methods vary greatly in evaluation factors and in general procedure. 50/ In some states, the agencies are required to delineate the pertinent factors; other states establish uniform criteria for all best value procurement; still other states combine both approaches. However, like the federal design-build process, most states employ a two-phase procedure for best value procurement. 51/  This section presents the applicable law from selected jurisdictions.

A.  California

California law permits the use of design-build for public projects, but only with specific authorization from the Legislature. 52/ The Legislature found:

[T]hat the design-build process can be an attractive option to the Department of General Services in comparison to the existing three-step (design-bid-build) process. The design-build process can improve the project delivery process by accelerating delivery schedules and saving costs by promoting improved coordination between contractor and architect, shifting management risk from the state to the design-build team, and minimizing change orders through early collaboration between design and construction disciplines. 53/

Design-build has been authorized as an alternative bidding procedure for the several counties 54/ and for transit projects. 55/ The many California design-build procurement statutes give detailed considerations for design-build projects. 56/ For example, in the procedures guiding the procurement of state office facilities, the Legislature requires that bidders meet strict prequalification standards:

There are no published cases either interpreting these sections or regarding disputes arising from the use of the design-build procurement method pursuant to these sections.

B.  Florida

Florida public contracting law permits the use of design-build contracts. 58/ However, each agency must implement its own procedures for awarding design-build contracts within the statutory guidelines. At the very minimum, each agency must:

C.  Massachusetts

Massachusetts law permits state agencies to consider design-build as an alternative to traditional bidding methods. 62/  However, as a recent case indicates, even when design-build is not specified as a possibility, the contracting agency may use best value considerations generally. 63/  In J.F. White Contracting Co. v Massachusetts Port Authority, the court determined that the statute governing the award of construction contracts generally contains no language prohibiting "alternative bidding procedures." 64/  Furthermore, the bid procedures in question did not violate any public policy concerns about fair competition or notice because the bid solicitation documents fully explained and defined the requirements for both alternatives. 65/  However, neither the statute explicitly authorizing the consideration of design-build methods, nor recent case law provide any guidelines for an agency wishing to use this procurement method.

D.  South Carolina

South Carolina explicitly permits "competitive best value bidding." However, cost of the proposal must be a factor in determining the award and cannot be weighted at less than 60 percent of the numerical weighting of all factors. 66/  The statute also provides that the agency may evaluate contracts by using the following subjective factors:

(a) operational costs that the state would incur if the bid is accepted; (b) quality of the product or service or its technical competency; (c) reliability of delivery and implementation schedules; (d) maximum facilitation of data exchange and system integration; (e) warranties, guarantees and return policy; (f) vendor financial stability; (g) consistency of the proposed solution with the state's planning documents and announced strategic program direction; (h) quality and effectiveness of business solution and approach; (i) industry and program experience; (j) prior record of vendor performance; (k) vendor expertise with engagements of similar scope and complexity; (l) extent and quality of the proposed participation and acceptance by all user groups; (m) proven development methodologies and tools; and (n) innovative use of current technologies and quality results. 67/

These requirements have not resulted in any published cases. This leaves room for speculation regarding whether this is a result of the successful functioning of this statute or whether it is due to a lack of use caused by the complexity.

E.  Texas

Changes to Texas statutes effective September 1, 2001, greatly expand best value procurement 68/ and added procedures for design-build contracting. 69/  If a municipality decides to use best value procurement, it must state in the bid specifications that the bid may be awarded to the bidder who provides the best value. 70/  Best value "may" be evaluated by using: the purchase price, the reputation of the bidder and the bidder's goods or services, the quality of the bidder 's goods or services, the extent to which the goods or services meet the governmental entity's needs, the bidder 's past relationship with the governmental entity, the impact on the ability of the governmental entity to comply with laws and rules relating to historically underutilized businesses, the total long-term cost to the governmental entity to acquire the bidder's goods or services, and any other relevant factor that a private business entity would consider in selecting a bidder. 71/  The requirements apply to state agencies, districts, authorities, counties, municipalities, other political subdivision or any entity created by or acting on behalf of a political subdivision. 72/  However, the changes explicitly prohibit the use of best value procurement methods for "highways, roads, streets, bridges, utilities, water supply projects, water plants, wastewater plants, water and wastewater distribution or conveyance facilities, wharves, docks, airport runways and taxiways, drainage projects, or related types of projects associated with civil engineering construction." 73/

The new design-build procedures implement a two-phase process for evaluating bids. In Phase 1 the agency may consider "offeror's experience, technical competence, and capability to perform, the past performance of the offeror's team and members of the team, and other appropriate factors submitted by the team or firm in response to the request for qualifications, except that cost-related or price-related evaluation factors are not permitted." 74/  Phase 2 requires the entity to use the selection criteria stated in the request and based on the results of any interviews. However, the entity "may request additional information regarding demonstrated competence and qualifications, considerations of the safety and long-term durability of the project, the feasibility of implementing the project as proposed, the ability of the offeror to meet schedules, costing methodology, or other factors as appropriate." 75/

F.  Washington

Washington also recently revised its design-build statutes. 76/  Previous design-build statutes were effective only until July 2001. 77/  The Legislature explicitly stated that design-build may be used for public works projects valued at more than $12 million if the construction technology is highly specialized, the project design is repetitive, or regular interaction with facilities users and operators is not critical to effective design. 78/  The process also may be used for pre-engineered or prefabricated buildings or student housing projects valued at more than $5 million. 79/  The evaluation factors "shall" include: "proposal price; ability of professional personnel; past performance on similar projects; ability to meet time and budget requirements; ability to provide a performance and payment bond for the project; recent, current and projected workloads of the firm; location; and the concept of the proposal." 80/  The Washington statute is unusual because it requires that the listed factors "shall" be taken into consideration. 81/  The statute provides that the bids shall be evaluated by committee, and the committee will select three to five proposals for a second phase of evaluation. 82/

III.  Conclusion

Critics of design-build or any type of "best value" procurement in the public sector question whether the discretion required of the government agency violates public policy. Federal laws mandate fair and equal treatment of bid competitors 83/ and require full and open competition. 84/  During congressional debates on "efficient competition," Rep. Cardiss Collins (D. Ill.) argued that "emphasizing subjectivity in awarding contracts creates a breeding ground for prejudice because [contracting officers], given the choice, will usually go with a well-established large firm instead of a small business offering a lower price." 85/  The use of efficient competition to limit the number of competitors in Phase 2 "may exclude smaller or less experienced contractors although they are fully capable of meeting the government's needs and may provide a lower price." 86/

Concerns also exist about the use of best value procurement at the state level. However, the variety and complexity of state best value procurement procedures make it difficult to generalize about the benefits and drawbacks. One recent article noted the process "is more labor intensive for the procuring agency or its designated consultants, can give rise to procedural errors by contracting officers and evaluators, requires more "business judgment" by the evaluators, and can lead to abuse of discretion without the protections normally available with procurement awards based on low price." 87/  Also, despite the benefits of single-point responsibility, one drawback may be that the owner may lose the ability to obtain access to information that it would ordinarily have on the traditional design-bid-build project because of the communication required between designer and builder. 88/  The use of subjective selection criteria could create the possibility for abuse of discretion in determining the meanings of "quality," "value," "past performance" and other requirements. 89/

However, the federal regulations strike a balance between full and open competition and the need increase efficiency in government contracting. 90/  Although the competition may inhibit the ability of smaller firms to compete, market forces should compensate as "firms form suitable joint ventures or other partnering arrangements." 91/  In addition, the two-phase process is cost effective both for competitors and for the government agency. 92/  Although the balance may not be perfect, the current federal regulations bring contracting in the public sector closer to the efficiency enjoyed by the private sector. Only time and increased use will show whether the design-build method and the best value procurement generally will meet the goal of reducing litigation in public contracting.

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For more information about the issues covered in this report, please contact John R. Heisse II in our San Francisco office at 415-848-4943 or at heissej@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.

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ENDNOTES

1/ Jesse B. Grove, III, Risk Allocation From the Contractor's Perspective: Philosophies of Risk Allocation, N-467 Real Estate Law and Practice 41, 63 (PLI 2001).

2/ 2000 ABA Model Procurement Code, Article 5, "Procurement of Infrastructure Facilities and Services."

3/ Grove, supra n. 1, at 63-64.

4/ Pub. L. No. 104-106, §4001, 110 Stat. 186, 642.

5/ 10 USC §2304 (j).

6/ Id.

7/ 48 CFR §15.000; 48 CFR §36.000.

8/ 48 CFR §36.3; 10 USC §2305a (b).

9/ Kurt A. Didier, Construction Contracting and the New Two-Phase Design Build Selection Procedures: Balancing Efficiency with a Full and Open Competition, 27 Pub. Cont. L.J. 589, 601 (1998).

10/ 48 CFR §36.302.

11/ 48 CFR §36.303; 48 CFR §36.303-1.

12/ 48 CFR §36.303-1.

13/ 48 CFR §36.303-1.

14/ 48 CFR §36.303-1 (b).

15/ Didier, supra n. 9, at 605.

16/ Id.

17/ Id.

18/ 48 CFR §42.1501.

19/ 48 CFR §42.1503 (a).

20/ Robert S. Brams, Michael J. Schaengold and Rodney A. Grandon, Best Value in Federal Construction Contracting, 19:2 Constr. Law. 25, 27 (April 1999), quoting Adrian L. Bastianelli, III, George W. Stiffler and Lori Ann Lange, New Federal Regulations Affecting the Construction Industry, Construction Briefings, Second Series, No. 98-4 (March 1998).

21/ 48 CFR §§42.1500 to 42.1503.

22/ 48 CFR §42.1503.

23/ 48 CFR §42.1503.

24/ 48 CFR §42.1503.

25/ 48 CFR §15.305 (a) (2) (iv).

26/ Brams, Schaengold and Grandon, supra n. 20, at 27, citing Braswell Services Group, Inc., B-278921.2, 98-2 CPD §10 [agency properly assigned a "satisfactory" past performance rating to offeror for whom no relevant past performance information was available; agency regarded "satisfactory" rating as an average evaluation with no major strengths or weaknesses].

27/ 10 USC §2305a (c) (2).

28/ 10 USC §§2305a (c) (4) to 2305a (d).

29/ 48 CFR §36.303-1 (a) (4).

30/ 48 CFR §36.303.

31/ 48 CFR §36.303-2 (b).

32/ 48 CFR §15.304; 10 USC §2305 (a) (2) (A) (i); 41 USC §253a (b) (1) (A).

33/ 48 CFR §1.102-2 (c) (3).

34/ Brams, Schaengold and Grandon, supra n. 20, at 28; FAR §15.201 (c); FAR §15.201 (f).

35/ 48 CFR §15.306 (d).

36/ Id.

37/ 48 CFR §15.306 (d) (3).

38/ 48 CFR §15.307 (b).

39/ 48 CFR §15.306 (e).

40/ Brams, Schaengold and Grandon, supra n. 20, at 29, citing Telos Corp., B-279493.3, 98-2 CPD §1, 8.

41/ 48 CFR §15.305 (a) (4).

42/ Brams, Schaengold and Grandon, supra n. 20, at 29; 48 CFR §15.101-1; 48 CFR §15.305 (a) (4).

43/ For comprehensive analysis of state best value procurement, see generally, The Design/Build Deskbook, 2nd ed. (John R. Heisse, II, editor); Kenneth M. Roberts and Nancy C. Smith, Design-Build Contracts Under State and Local Procurement Laws, 25 Pub. Cont. L.J. 645 (1996).

44/ Roberts and Smith, supra n. 42, at 647.

45/ OFFP Policy Letter 91-2 (April 9, 1991).

46/ Alaska Statute §36.30.308.

47/ South Carolina Code Annotated §11-35-1528.

48/ Florida Statutes Annotated §287.055 (4).

49/ Kentucky Revised Statutes §45A.085; see generally, Dean B. Thomson and Michael J. Kinzer, Best Value in State Construction Contracting, 19:2 Constr. Law. 31 (April 1999).

50/ Thomson and Kinzer, supra n. 48, at 31; Roberts and Smith, supra n. 42, at 646-47.

51/ Thomson and Kinzer, supra n. 48, at 33.

52/ Section 1 (b) of Stats. 1998, ch. 252 §1 (S.B. 776).

53/ Id.

54/ California Public Contract Code §20133 (a) (1).

55/ California Public Contract Code §20209.6.

56/ California Public Contract Code §§14661, 20133, 20209.6 to 20209.8.

57/ California Government Code §14661 (d) (2) (B).

58/ Florida Statutes Annotated §287.055.

59/ Defined as a registered architect or engineer employed by or under contract with the agency to provide architectural or engineering services. Florida Statutes Annotated §287.055 (2) (k).

60/ Id. at §287.055 (2) (j).

61/ Florida Statutes Annotated §§287.055 (10) (b) and 287.055 (10) (c).

62/ Massachusetts General Laws Annotated, ch. 29, 7E; Id. ch. 7, 42B; Id. ch. 149, 44A.

63/ J.F. White Contracting Co. v. Massachusetts Port Authority, 748 N.E. 2d 1020, 1024 (Mass. App. Ct. 2001).

64/ Id.

65/ Id.

66/ South Carolina Code Annotated §11-35-1528 (5).

67/ South Carolina Code Annotated §§11-35-1528 (5) (a) to 11-35-1528 (5) (n).

68/ 2001 Texas Advance Legislative Service 1409 (SB 510).

69/ 2001 Texas Advance Legislative Service 1422 (SB 311).

70/ 2001 Texas Advance Legislative Service 1409 (SB 510).

71/ 2001 Texas Advance Legislative Service 1409 (SB 510).

72/ Id.

73/ Id.

74/ 2001 Texas Advance Legislative Service 1422 (SB 311).

75/ 2001 Texas Advance Legislative Service 1422 (SB 311).

76/ 2001 Washington Advance Legislative Service 328 (SB 5060); 2001 Washington Advance Legislative Service 226 (HB 1680).

77/ Revised Code Wash. §39.10.

78/ 2001 Washington Advance Legislative Service 328 (SB 5060).

79/ Id.

80/ Id.

81/ Thomson and Kinzer, supra n. 48, at 32.

82/ 2001 Washington Advance Legislative Service 328 (SB 5060).

83/ 48 CFR §6.000.

84/ 10 USC §2304; 41 USC §253.

85/ 141 Congressional Record H8852-02, at H8869 (daily ed. Sept. 13, 1995).

86/ Brams, Schaengold and Grandon, supra n. 20, at 26.

87/ Thomson and Kinzer, supra n. 48, at 33.

88/ Id. at 34.

89/ Id. at 34.

90/ Didier, supra n. 9, at 613.

91/ Id.

92/ Id.


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