Memorandum to Public Officials

The truth about risk management

• By John P. Bachner
• May 01, 2006

I am an officer of an organization largely composed of civil engineers. I've written this memo on their behalf to address the important issue of promoting top-quality work in the procurement process.

This memo is long overdue. It's part confession and part rant, and I suppose there's a lot about it you're not going to like, but -- I swear to you -- it's all true and you need to give it some consideration. You may even want to have it read by "the powers that be." Here goes.

First of all, your goal of getting things done in a manner that protects the "public purse" is admirable, and the most important thing you can do in that regard is invest in quality. While quality almost always costs more up front, it's far less costly over the long haul, because it performs better, lasts longer, and operates with less maintenance and fewer repairs. This is hardly rocket science.

What's the likelihood that the top five firms in your area can all do a pretty good job at designing the high-quality system you want? Pretty good, actually. While some firms do stand out head-and-shoulders above all the others in a given market, that's far more the exception than the rule. So, if you have five good firms, no matter which one you select, you'll get quality, right?

Nope.

Just because a firm is really good at something doesn't mean it's going to do a good job for you. What counts is attitude, and you -- you -- set the firm's attitude from the get-go, based on how you select it to handle your project. How do you do it? Do you encourage the candidates to describe how well they can do something, or do you ask them to focus on how little they can do it for? Look: If you ask them -- us -- to talk about fee before we talk about quality, or to talk about fee and quality together, all you do is encourage us to do cheap work. If there are five of us who can deliver what you want, and you're going to select one of us based on fee, not one of us will propose doing the quality work we're known for, because proposing top quality will result in a fee that won't be "competitive." In other words, when you select based on fee, you encourage us to propose the skimpiest approach we can live with.

What happens if you use the double-envelope system? That's where you require the interested firms to put a technical proposal in one envelope and a price proposal in the other. That doesn't work either. Why not? Because the top five firms are going to propose doing it just about the same way, using the same types of expertise, thus requiring the same kinds of people who get paid about the same. In other words, when you ask five well-qualified firms to get involved in a double-envelope procurement, each one of us knows we'll be rated just about the same based on the "technical envelope." What will make all the difference? That's right: The price envelope. In other words, we're back to bidding.

And while we're on the subject of bidding, let me note something important: For close to a dozen years, the state of Maryland used a double-envelope bidding approach for the selection of all its design professionals. It did this to bring "sunshine" to a corrupt design professional procurement system that had been rocked to its foundations by the scandal involving former U.S. Vice President Spiro Agnew. However, in all but two or three of the some 200 bid procurements made by the state, the selected design professional got a change order that upped its fee. In other words, the number that was used to make the selection designed to protect the public's purse was a fiction; it was almost never the number paid. As such, the state selected the firms that were the best -- at bidding.

The state of Maryland made the point that it almost always selected the firm that was ranked most qualified, but -- coincidence of coincidences -- the most talented firm was almost always the one that proposed to spend the least amount of time and therefore was able to submit the lowest bid -- errr, lowest fee proposal. And that was for implementing a "program" developed independently by the state; i.e., a program -- a comprehensive scope of service -- prepared by a separate firm on a separate contract. How good were those programs? Everyone agreed they were well put together, but, nonetheless, two highly qualified firms would commonly submit fee proposals that varied by as much as 200 percent or more.

FYI, the state of Maryland now uses the same system that the federal government and most state government use: qualifications-based selection or QBS. Relying on a small committee of qualified folks, the client/owner identifies the firm it believes is most qualified and then works with representatives of that firm to develop a unique scope. Once the scope is set, the firm can establish a fee for implementing it, with quality held foremost.

Maryland conducts its selection processes the way all public entities should: in the open, with plenty of sunshine. The state and its citizens are wise enough to realize that bidding does not work when the quality of what you are buying is variable. When what you're after is high quality, it's necessary to develop a scope of service that's able to deliver it; a unique scope that reflects the needs of the project, the client, and the service provider. It's the kind of scope that involves the design professional from beginning to end, continually on the lookout for the best interests of the client. (That's unlike design/build, of course, where the design professionals are pledged to protect the best interests of the designer/builder, not the owner.) Those who say that bidding is necessary to save money on design professional procurement are either foolish or attempting to pull the wool over other people's eyes. Bidding discourages the design excellence needed to achieve quality and cost-effectiveness. And the number that wins the bid is almost never a real number.

Some people seem to think that using a procurement system that fails to emphasize and encourage design and project quality is acceptable, because insurance is available to act as a safety net. And it is. But there's a huge difference between a safety net and a trampoline, one of which is that a safety net has holes. Lots of them.

Consider this: Design professionals' professional liability insurance (PLI) policies are written on a "claims-made" basis. In other words, the policy in effect at the time the claim is made is the policy that responds to the claim. Most claims against design professionals are filed two to three years after the design professionals submit their final deliverables. As such, the policy in place at the time a claim would be made almost always is not the policy in place at the time the firm is selected. True: In some cases it may be a renewal of the identical policy. Also true: It may not be. The insurance industry has been going through some major changes in recent years. A firm may be unable to afford the same coverage two or three years from now, or the same coverage might just be unavailable. And even if the new policy provides the same coverage, a prior claim or limited prior acts provision could make the policy useless. Or something in your contract with the design professional -- put there at the suggestion of an attorney who misunderstands what's involved -- could give the insurer the excuse it needs to deny coverage. Perhaps it's an indemnity that the insurer claims makes the design professional responsible for problems actually caused by the client or some other party; i.e., problems that are specifically excluded from coverage. Or perhaps it was the design professional's failure to meet the "highest standard" -- a requirement that is not required by law and which, therefore, is not insured. Or perhaps it was the client's insistence on being a named insured on the design professional's PLI policy, something else that can cloud coverage and give insurers the ability to evade, or at least delay, coverage.

And consider this: Even when everything is in place and the professional liability insurer has no excuse whatsoever to deny or delay coverage, do you honestly believe that it will simply issue a blank check? Absolutely not. The insurer will investigate and, most likely, will find that other parties share in the blame -- the owner, a contractor -- and they need to pay up, too. They won't want to, of course, and thus will begin a protracted litigation that, in three or four or more years will wind up yielding to the damaged party an amount that, with any luck, will exceed the amount that party had to pay to effect collection.

Of course, if a firm doesn't do a good job, there's also the possibility that the client could file a complaint to the state registration board. For fear of that, some may assume, engineers and other licensed professionals wouldn't dare perform anything less than their hardest.

Sure.

If you take a look at the complaints filed with state boards of registration, you learn that very few design professionals are ever stripped of their licenses. When they are, the reason, more often than not, is something like failure to pay child support or some other moral lapse: assuming the identity of a registered professional who died or being involved in child pornography. As for shoddy work, professionals are seldom punished at all unless the quality of the work is disastrously bad. And when that occurs, the "punishment" is often a license suspension for six months or so, and/or the taking of refresher courses of one kind or another. Performing unimaginative, non-innovative work is something that is not punished, because, in fact, unimaginative, non-innovative work defines the standard of care.

What it comes down to is this: Quality design will almost invariably result in systems that perform better and more cost-effectively than those that are not designed as well, and they will last longer, too. Given that the life-cycle cost of system ownership is likely to be 10 times the cost of construction and 100 times the cost of design, a 1- or 2-percent lifecycle cost improvement is worth a modest additional design fee. If you choose some other route, you need to be prepared for all the difficulties that, historically, are associated with less than top quality. Don't look for contract language to bail you out. No matter what an attorney may tell you, a contract cannot require an insurer to pay more than it otherwise would. In fact, the opposite is true. And as for public sanctions via a registration board, bear in mind that the most one can demand is service that is no better than ordinary.

Do I want to do my best? Of course I do. Do I want to be associated with excellence? Of course I do. Do I have to make payroll twice a month? Of course I do, which means that, if you don't do what's necessary -- and commonly done -- to obtain excellence, what you'll get is ordinary. Sure, I may dress it up in a handsome proposal and a magnificent presentation, but I cannot afford to provide steak when you come to me with a check for hamburger. And should you happen to ask more than just some of the top-quality firms to compete, then you may get something less than ordinary and, when you try to make it better, you discover what so many others have learned over so many years: The bitterness of low quality lingers long after the sweetness of low price is forgotten.

Put simply, there is no substitute for quality and, when it comes to the design of water and wastewater systems, quality begins with procurement. And that's the truth.

This article originally appeared in the 05/01/2006 issue of Environmental Protection.