A Secret to Success

Careful selection of clients and projects can minimize risk

• By John P. Bachner
• Mar 18, 2008

Elected and appointed government officials with water/wastewater system responsibilities are or soon will be considering various projects requiring civil engineering design, given the state of U.S. infrastructure and population demands. Some jurisdictions obtain that design talent the right way; some don’t. For those in the latter category, listen up: This one’s for you!

In 1969, Terra Insurance Company was an offshore reinsurer. In 1988, the company converted to risk-retention group status and today is considered by A.M. Best Company (the internationally recognized insurance company rating organization) one of the most successful professional liability insurers in the world. Terra's success is, in large part, due to the fact that its insureds – all of which also are owners of the company – seldom have claims.

A few years ago, Terra surveyed its owner/insureds that had not reported one significant claim since 1988 to uncover their secrets. One of the top techniques: Careful selection of clients and projects.

Hearing that, the managers of some firms might say, “Well, that’s easy to do when you’re a small, boutique firm. But when you get to our size….” But that’s not the case. Terra’s owner/insureds earn fees of $500,000 to more than $100 million each year. They're not boutiques. And the people who run them hardly think small. Or short-term. They understand just how huge the cost of claims can be. Assuming an industrywide average net profit of 10 percent, every $1 of loss absorbs $10 of profit, as does every dollar’s worth of time spent dealing with a claim or thinking or talking about it. And don’t forget about opportunity cost and reputational damage, either of which can be the most significant cost of all.

So, what does purposeful selection of a design professional entail? The first step is letting firms know you have a need. You can do this through public announcements of various types, to everyone in the world or, if permitted by jurisdictional rules, to that group of firms you have the most confidence in. Winnow the candidate list to no more than four or five firms, initially using the firm’s experience as a key criterion.

Officials who lack experience to make informed choices should obtain talent to help winnow the list. Some jurisdictions do this by establishing an advisory panel whose members’ firms are ineligible to receive awards while the members serve on the panel, usually on a voluntary, public-service basis.

You should seek more information from the most qualified four or five firms. Ask about the teams they would assemble and the experience of each team member. Ask for references and check with those clients to learn of their satisfaction. Using that approach, you should be able to reduce the list to two or three firms, ranked in preferential order.

The next step is to meet with the team proposed by the one firm you consider most qualified and engage in mutual scope (of service) development. Through this process, the design team can ask questions that will help it identify your needs and preferences, so people on both sides of the table can develop a realistic image of what’s involved and what will be happening.

When mutual scope development is forgone, firms must develop a scope unilaterally, making dozens of assumptions about the client’s needs. Alternatively, the client may prepare its own unilateral scope to “level the playing field.” As the state of Maryland discovered decades ago, this approach still requires firms to interpret and assume, with most such interpretations and assumptions allowing the firm to submit the lowest possible bid. Maryland wound up paying design-firm change-orders on virtually every project it commissioned, and actual fees that bore precious-little resemblance to those that won the awards.

Once you and the "most qualified" firm mutually develop the scope, the firm can put a price on execution. If the price exceeds your budget, you can:

• increase your budget and move forward,

• defer the project to the next cycle and increase the budget,

• discuss what you can do to reduce the cost, or

• terminate negotiations and start over with the second-most qualified firm, under the assumption (usually ridiculous) that the second firm will be able to do something the first could not.

If you opt to reduce the fee, the design team should be able to present alternatives and explain their pros and cons. Will forcing the project into an inadequate budget be worthwhile? “No” is the answer if the most-qualified firm says “Thanks, but no thanks” to the opportunity you’ve offered.

The method I’ve sketched is qualifications-based selection, or QBS. It doesn’t rely on bidding because bidding precludes mutual scope development.  

Some jurisdictions use a double-envelope system, requiring firms to submit their qualifications in one envelope and a bid in the other. A selection panel winnows the list to three or four, ranked in order of preference, and then opens the second envelope, with the award going to the firm offering the best combination of experience and fee. The approach works well on paper, but nowhere else. In practice, the top firms usually garner the maximum points allowed for qualifications. That being the case, it all comes down to price, which is what the firms assume to begin with, causing them to recommend the skimpiest, least-costly-to-implement scope they can live with.

The firms that participate in the double envelope do so because they like playing the game, they believe they have to try for every project available, or their skills and experience are so limited they genuinely need the work. But many firms simply won’t get involved, because they know that, absent mutual scope development, risk escalates. They also know that it takes a lot of time (is money) to develop proposals, and there’s little point to making an investment to secure clients they don’t want or need:

• clients that confuse cheap with good;

• clients that don’t care about effective design-professional procurement;

• clients that want to “spread the work around” under the assumption that you get the same result no matter whom you use;

• clients that believe there is such a thing as free lunch.

As it so happens, the federal government uses QBS for all its engineering procurements, and most state governments use it, too. They understand that our infrastructure is too important for games. They also understand that, in order to interest good firms, they first have to be good clients.