Look Before You Leap

A guide to architect/engineer procurement for local jurisdictions

You're not in a comfortable position: Your agency needs to upgrade an existing system or replace it altogether. You need to retain a reliable engineering firm to help you decide which course to take and, once that decision is made, to develop design and construction documents. But you've never retained an engineering firm before. How do you go about doing it?

Before getting into the particulars, let me give you two words that might send shivers down your spine: No bid.

That term has been in the news a lot lately and you may just be of the opinion (as most journalists evidently are) that a no-bid selection process cannot possibly be in the public interest. And that is just so much poppycock, especially when it comes to design...and even when it comes to construction.

Consider this: Your agency needs a new vehicle. Let's say you've decided on a certain model Chevrolet, with a specific set of options. Should you solicit bids from various dealers? Of course, because no matter who wins the bid, you will get the same result; the only variable is what you pay.

New scenario: Your agency can't use a Chevy. In fact, it needs something unique; something that will have to be custom designed and custom built. You can provide some general specifications, but whatever performance elements you do not specify will be up to the designer's discretion. Three questions: 1) If you ask five separate engineering teams to develop the design, how many will produce the same design? 2) How many of the designs will cost the same amount to build? 3) And how many of those finished vehicles will perform the same, cost as much to operate and maintain, and last as long?

Three answers: None. None. None. Meaning that, when the results of design are significantly variable, selecting designers based on fee makes no sense, because one team's proposing apples while the other four are proposing oranges, grapefruits, lemons (ouch), and limes. But it gets worse.

Knowing that each team's chances of being awarded the commission are inversely proportional to its fee, which team would offer to provide its best service, even though its best service would cost the most and thus significantly reduce the likelihood of its securing the engagement? Answer: None. ("But we're only inviting top-notch teams to bid," you say. Which means, to those firms, that all will be regarded as equals insofar as competence and experience are concerned. As such, fee will be the only significant selection criterion, thus giving each even more reason to offer the lowest possible fee it can live with. It does that by offering the skimpiest possible scope of service it can live with.)

The most significant architect/engineer (A/E) firm-bidding "experiment" was conducted over a 12-year span in the state of Maryland, initiated as a response to the "Agnew affair." Spiro T. Agnew, then Vice President of the United States, continued to accept paper bags filled with cash from grateful consulting engineering firm executives who were awarded "no-bid" design contracts while Agnew served as Governor of Maryland. The problem was not the no-bid aspect of the state's A/E procurement system, but rather the behind-closed-doors aspect of the system -- its lack of transparency. Nonetheless, the state legislature decided that, thenceforth, the state would select all its A/E firms by bid. To do so, the state prepared a highly detailed "program" for each project, specifying just about everything an agency could think of, and invited firms to bid. Despite the programs, highly qualified (and highly similar) firms submitted bids that varied from one another by as much as 200 percent and more, because even the most detailed "programs" left questions unanswered, paving the way for assumptions. Perhaps more to the point: In all but five or six of some 125 A/E procurements, the firm that was awarded the engagement received a change order, meaning that the scope and fee that won the competition were not the scope and fee that were ultimately implemented; i.e., the factors on which the state based selection were a fiction. Why? Because the firms learned how to "play the bidding game." When a question arose about the state's intent, a firm would assume whatever would lower its bid the most. (FYI: In every case, the contractor that was selected to implement the A/E firm's design was ultimately paid more than it bid to win the assignment. So much for the integrity and sanctity of bidding!)

Quality Over Cost
Frankly, I've never understood why so many agencies ascribe such importance to getting a rock-bottom design fee. It's as though they take unlimited pride in being penny-wise and pound-foolish. As no less an authority than the U.S. General Accounting Office (GAO) has held, the cost of design tends to be 1 percent or less of a project's life-cycle costs, yet the quality of design "fixes and freezes" what all other costs will be: the cost of construction and the life-cycle cost of operation and maintenance (O&M). In short, what really counts is the quality of design, not its cost. To do anything to cheapen design quality is, in a word, stupid. Some folks don't see it that way, however, and so encourage designers to move forward with the lowest fee possible (no matter what type of procurement). Forgetting for the moment what doing that does to the scope of service applied to the project, consider what it does to the attitude of the design team. Pretend your name is Mr. Smith.

Good morning, Mr. Smith. Welcome to our agency. We believe you're extremely qualified to head this project for us. We want to bring you on staff. What type of salary do you want?

$60,000 a year is fair, I believe. That's actually a bit less than the going rate.

Sixty seems awfully high. You'll have to take less.

How about $59,500?

Thirty. That's all you're worth.

I need at least 55,000.

We'll give you 35.

But I have years of education, training, and experience. I'm ideally suited to do this well. I'm a professional.

Thirty-five. Take it or leave it.

Assuming you accept the position, will you give it your all? Will you do whatever you possibly can to please the boss? Will you go the extra mile, knowing that no matter how many extra miles you go, you will be underpaid and will receive precious little recognition and no bonus or salary increase? You tell me, Mr. Smith.

The design process is a people process. When you treat accomplished professionals like lots at a livestock auction, and encourage them to do far less than they're capable of, they will not do whatever they can to enhance design quality in order to lower the risk of construction-phase problems or to help minimize life-cycle O&M costs. Given a design cost of $2 million and life-cycle costs of $200 million-plus, trying to save 10 percent on design ($200,000) is a foolish approach if it could lead to life-cycle costs being 2 percent more than necessary ($4 million).

Get Help!
So what do you do instead of bidding? Get help! All too many smaller jurisdictions and agencies do not, with disastrous results. They start with a budget that's unrealistically low, because that's all they can afford. Then, in order to conserve their dollars, they ask designers to submit priced proposals under the baseless assumption that (a) firms headed by professional engineers are per se qualified, and (b) "rules of the marketplace" (a.k.a., some form of bidding) will give them the biggest bang for the buck. Very often their attitude is enabled by the jurisdiction's chief staff attorney who believes that reliance on a "killer contract" will make the agency bulletproof. Why doesn't anyone realize that:

  • Contractual protections do not prevent problems (protections get exercised only after a disaster occurs; they give lawyers something to do);
  • The attempt to exercise contractual protections is almost always contested (giving even more lawyers even more to do);
  • Under the best circumstances, "killer provisions" merely reduce a jurisdiction's losses as opposed to making it whole;
  • The use of "killer provisions" limits the number and quality of firms willing to perform services, given that only foolish firms are willing to accept them; and
  • Most killer provisions are uninsurable.

Face facts: An ounce of prevention is worth a pound of cure, and a jurisdiction's best preventive is a reliable firm engaged to provide high-quality services. Unfortunately, many of the best firms will not invest $10,000, $20,000, or more to develop a priced proposal whose fee would be regarded as "noncompetitive." So, who does respond? In many cases, firms whose specialty is submitting winning priced proposals! They accept the jurisdiction's "killer contract" and go on to submit plans and specifications that appear to be just fine to evaluators who are not in the best position to be evaluators. The jurisdiction sends the plans and specs out to bid, and the general contractor that bids lowest often does so because it is not familiar with local conditions, or because the low bid is a buy-in; the real profit will come later, from change orders. Then, when the change orders start to hit, the agency -- which cannot afford them -- believes it has been damaged. That's when the contract gets pulled out of the drawer, signaling commencement of yet another installment of "Justice Theater," a long-running production characterized by posturing, finger-pointing, threats, charges, counter-charges, claims, and -- the ultimate waste of time and energy -- litigation. Is it any wonder that local jurisdictions are A/E firms' most litigious clients of all?

Want to avoid all that? Get the help you need to emulate what the larger jurisdictions do. Consider the federal government, which procures more A/E services than any other entity in the world. It starts by relying on qualified individuals to detail its needs and who know the "going rates" for the services needed to fulfill those needs. Then it advertises its needs and invites interested firms to submit statements of qualifications (SOQs). A group of agency representatives reviews the SOQs and winnows the list to three to five firms. It requests additional information, as necessary, and contacts past clients to assess their satisfaction. The list is then reduced still more, and the group opens discussions with the firm considered best qualified. They discuss the project in depth, with representatives of the A/E firm asking pertinent questions whose responses give them a much better idea of the services they will need to perform in order to achieve the client's objectives. Compare that approach with what happens when a firm has to submit a priced proposal.

In order to set a fee, a firm has to develop a scope. It has to do this on its own and thereby make any number of assumptions about the client's needs and preferences. Many, if not most of the assumptions will result in a smaller scope and smaller fee. The absence of mutual scope development also results in the client making assumptions, many, if not most of which are as unrealistic as the A/E firm's. Fact: Failed expectations trigger more claims and lawsuits than any other event. Unrealistic expectations almost always result in failed expectations. Mutual development of the engagement's scope of service helps ensure that both the A/E and the client have realistic expectations, while also helping to ensure that the scope is such that its fulfillment makes problems far less likely.

Once the mutual scope is established, the firm considered most qualified can set a fee for implementing it. If the fee is more than the jurisdiction can afford, three choices exist.

First, it can work closely with the designers to reduce the scope to a mutually acceptable level, bearing in mind that a slimmer scope elevates risks.

Second, if the first alternative cannot achieve an acceptable outcome, the project can be delayed until the jurisdiction can afford to do it properly, to optimize life-cycle performance and costs.

Third, a jurisdiction can decide that the firm it considered the best of the lot doesn't know that much after all, and continue its procurement until it finds a firm that agrees that the jurisdiction's unrealistic budget is actually "right on the money." (This is not a good alternative.)

Once you agree on a scope and fee, it comes time to consider terms and conditions of the contract. Here's where the city, county, or agency attorney gets involved, and that involvement can be a deal-breaker for sophisticated firms that, frankly, know a heckuva lot more than the local Clarence Darrow. Example: Local counsel frequently will insist that an A/E firm perform at the "highest professional standard." The term cannot be defined in such a way to enhance your agency's protection, but a professional liability insurance (PLI) company can define it in such a way that it does not have to pay off on claims, eroding your agency's and your A/E firm's protection! Much the same problem can arise when your counsel insists on a "strong" indemnity provision and/or a requirement that the jurisdiction become a "named insured on the CONSULTANT's professional liability insurance policy." (ASFE/The Best People on Earth has a variety of materials that explain why such provisions are counter-productive and what you can do to achieve the protection you really need.)

"Those provisions are in our standard conditions and they're accepted all the time," your counsel may state. But there's a world of difference between agreeing to do something and doing it in fact. For example, any number of firms agree to make a client a named insured on the firm's PLI policy, even though no PLI provider is known to do it. Are those the kinds of firms you want to deal with? Remember: A firm that doesn't know how to manage its own risk can't help you manage yours. Which gets us to this point: If you do not have on staff the qualified people you need to help you through a no-bid process, how do you get through it?

Before answering that question, let me ask another: If you need qualified people to help you through a no-bid process, why don't you need qualified people to help you through a bid process? In fact, the bid process is actually more perilous than a no-bid process, because it is subject to such gamesmanship and manipulation. You need expert help to assist you with any substantial A/E procurement, no matter what type of procurement mechanism you use.

How do you get expert assistance? By retaining an A/E firm to help you develop and implement an effective, transparent procurement system. Where do you find such firms? Start at www.asfe.org, the Web site of ASFE/The Best People on Earth. ASFE comprises geoprofessional, environmental, and civil engineering firms with one vitally important commonality: They all participate in ASFE to learn how to enhance their management practices, so they can manage their risks in a way that delights their employees and clients.

To those who say bidding is best because "numbers don't lie," you need to explain that all types of numbers need to be considered; that the best, most satisfactory, and cost-effective approach requires the exercise of judgment in a transparent process supported by expert assistance. And by the way, if only as a matter of self-preservation, do not refer to the process as "no-bid." In this case, the "real name" is qualifications-based selection or QBS, and to suggest that it comprises a blank check or somehow ignores fee is absurd.

By applying QBS, and engaging in its mutual scope development process, a jurisdiction can assure itself that it has retained the one firm best qualified to help optimize short- and long-term costs and performance. Be that as it may, the contract will not be finalized unless and until the jurisdiction agrees that the fee proposed for implementation of the scope is reasonable. By taking that approach, the jurisdiction can achieve accountability, not for getting design costs to the smallest possible number, but rather for getting all costs -- design, construction, and life-cycle O&M, together -- to the smallest possible number. Bidding for professional services and construction does not guarantee the lowest overall costs. In fact, bidding doesn't guarantee the lowest cost for anything, given that a bid is the amount proposed to do X, even though Y may be the better alternative by far. (Not that it matters all that much, given that the number proposed for X is probably not the number that ultimately would be paid, and that Z -- not Y -- would be the scope that ultimately gets implemented. There is a better way!)

This article originally appeared in the 03/01/2005 issue of Environmental Protection.

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