Public-Private Partnerships – Definitely an Alternative Way to Construct

The National Council for Public-Private Partnerships (NCPPP) defines Public-Private Partnerships as: ‘Contractual agreement between a public agency (federal, state or local) and a private sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.’

I think this does fall under an alternative way to construct.

The NCPPP identifies 18 different partnerships ranging from construction, leasing and maintenance. One commonality with several of the partnership types is Design-Build. Makes sense, as they define under the DB: Design-Build method – ‘This type of partnership can reduce time, save money, provide stronger guarantees and allocate additional project risk to the private sector. It also reduces conflict by having a single entity responsible to the public owner for the design and construction.’ Wow, what government agency wouldn’t want to reduce time, same money and place more of the risk on the private sector? Also, can’t forget that it reduces conflict and who wouldn’t want that? I guess those agencies that stick with the mentality of ‘We have to use design-bid-build, it’s the way we’ve always done it and it provides the lowest price’, (please, don’t make me laugh).

PPPs aren’t something new, per NCPPP they have been around for over 200 years and the number are increasing each year, ‘The use of partnerships is increasing because they provide an effective tool in meeting public needs, maintaining a high level of public control, improving the quality of services, and are more cost effective than traditional delivery methods’ and ‘Governments themselves are the biggest supporters of public-private partnerships.’

Lastly, NCPPP identifies as one of the top keys to success with PPPS is to ‘Pick Your Partner Carefully: The "lowest bid" is not always the best choice for selecting a partner. The "best value" in a partner is critical in a long-term relationship that is central to a successful partnership. A candidate's experience in the specific area of partnerships being considered is an important factor in identifying the right partner.’

I think that Job Order Contracting may have a future as well with PPPs under their Lease-Develop-Operate or Build-Develop-Operate partnerships, only time will tell.

Alternative Delivery Methods Require Alternative Mind Set

Lisa Washington, Executive Director of DBIA is quoted in a November 2009, Electrical Contractor article saying, “The key in design/build that we found is getting through the mental shift”, adding that participants must adjust to different roles, often hiring new staff, changing their business model and learning to work with a very different set of contracts.

Constructing, the way it has been done, is changing with Design-Build and other alternative delivery methods. With changes in how projects are being designed, planned and executed so must the contractor change how they conduct business. With more and federal agencies moving toward these methods, contractors must decide if they want to move forward with the industry or stay with the status quo, realizing their piece of the pie is getting smaller and smaller.

Owners are becoming more educated to the better ways of construction and are looking for more than the lowest price. Quoting John Coon, chief engineer at NAVFAC Southwest, “In these cases, we really need the subs to help design the automated systems”, adding “we like to see an experienced team. The stronger they show their relationship with each other, the better”, the author points out that owners are looking more at the make up and the relationships contractors have with the entire team. Do they have the experience, knowledge, resources and capabilities to complete the job?

Contractors need to realize, especially in the federal sector, just showing up for a bid solicitation and providing a number isn’t going to be enough. As more and more agencies, federal, state or local, begin to realize the benefits of alternative delivery methods that provide best value, whether for new construction or renovation, the market for low-bid now, change order later will shrink even further.

How Does It Make You Feel?

In the 1998 movie, Armageddon, Rockhound, (Steve Buscemi), had a great line: “You know we're sitting on four million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn't it?”

Does it make you feel good, when reviewing bid proposals for a new multi-million dollar building or a major renovation project, knowing that the project, the one that will have your name on it is going to be completed by the contractor that provided the lowest bid and not necessarily the one that is best qualified or can provide the best service?

Well, does it?

Kashiwagi on Best Value Practices

Just as I thougth, Chapter 7 of Dr. Kashiwagi's book, Best Value Procurement (see Blog Post - 11/24/09), was right on target and echoed much of what I've been writing. The opening sentence sums it up, 'Best Value practices are procedures or techniques that lead to efficiency and effectiveness'. Efficiency and effectivenss; are we seeing this an many of the construction projects being completed by government agencies? Based on the articles and posts I've read concerning how local agencies are frustrated over change orders and the lengthe of time to complete projects, I would say it's probably not the norm.

He doesn’t challenge only the procurement agencies to change but also contractors in how they operate, - ‘In order to become efficient, both the client and contractor must be efficient’ and ‘The proposition that the low bid is the best value and provides the greatest efficiency in a risk oriented industry has no proven documentation, is illogical, and is used by management based firms and individuals to push their personal agenda and interests.’ Strong statements, but throughout his book, he provides research and data that support his findings. Several of these include, ‘The industry encourages the employment of expertise and risk minimization after problems have occurred on a project, rather than before.’ and ‘The buyer’s representatives (who have no technical expertise) and lawyers have become the center of the universe, or technical expert, and absorb risk for the client/buyer.’

He stresses that the solution can only be found once the owner and contractor start working together and that the owner allow the contractor to do what they do best – construct, ‘In order to receive the best value service, the owner must first be able to objectively identify and select the best value contractor, and then provide an environment that will permit them to be efficient and succeed. Simple put, if the contractor is working in an environment that does not allow them to use their skill and maximize their profit, the contractor is forced to think of their own best interests ahead of the client’s best interest.’

By putting more of the risk (quality control and preplanning) on to the contractor, the owner is allowing the contractor to perform based on best value, since the contractor is then obligated to provide the best results, while at the same time maximizing their profits in an efficient way.

Toward the end of the chapter, Kashiwagi discussed the various Best Value construction methods, such as Design-Build, Job Order Contracting, IDIQ and CM at Risk, but I’ll let you get the book to read about those.

Kashiwagi stresses that to have Best Value practices an owner must ‘minimize the number of participants in the delivery process, hire the best value groups and individuals who can minimize risk and create an environment which is structured by performance information’. He finally writes that ‘Instead of hiring another expert to manage and control the outsourced function, the user needs a process to determine the requirement, identify performing vendor (expert), and communicate the requirement to the vendor’. ‘Instead of paying a managing “expert” 10% to manage the contractor, the owner can pay a performing contractor (performing expert) 5% more upfront and receive high-performance results at a savings of 5% of the delivery cost.’

An Educator's View on Best Value Procurement

I would encourage everyone, if you have not done so, to read ‘Best Value Procurement – How to use information systems to minimize risk, increase performance, and increase efficiency” by Dr. Dean Kashiwagi, Ph.D., Director of The Performance Based Studies Research Group at Arizona State University, and I’ve only read through chapter 4.

It is in this chapter that the benefits of “Best Value” construction are impressed upon the reader and identifies key problems in the world of public agency construction procurement. I’m not going to quote the entire chapter (it is better to obtain the book and read for yourself), but there are several significant references that need to be pointed out.

‘According to the Engineering News Record, “Although owners were satisfied with their construction quality, many would not hire the contractor again.” (Nadine M. Post, May 11, 1998. Building Teams Get High Marks. Engineering News Record, 240 [19]. pg 32-39)’. This statement says a lot. If you were happy with the end product, why wouldn’t you want to use the same contractor again?

Kashiwagi illustrates that minimum standards are set by the owner’s representative (design professional) to ensure that the performance of contractors are at the minimum level. This is because most design professionals and owners view construction as a commodity and not a service. The lowest standards are provided so that the contractor will provide the lowest possible bid and not the best performance or end result. You can’t fault the design professional or owner with this way of thinking because it is difficult for them to identify the differences in performance levels between contractors.

Per Kashiwagi, these standards ‘cause risk’. Further, ‘standards penalize high performance manufactures and contractors, and create an environment of confusion.’ I think the best statement of the chapter is: ‘Confusion requires two major players: consultants and litigation lawyers.’ The second best statement is: “The designers and consultants have convinced owners that the procurement of construction is a risky and difficult process that requires their technical expertise. What the owner didn’t realize is that if they hired performing contractors, the process is simplistic.” (Krizan, W.G., Winston, S. (January 26, 1998). Scarcity of Skilled Workers Will Put Brakes on Growth. Engineering News Record (ENR), 240 [4], pp. 95, 98,101)

Who really wins in this situation? The consultants, who more than likely don’t have a procurement, design or construction background, who are able to convince the owners that they need their services to monitor the contractors (at an additional cost to the owner, either a large up-front fee or a percentage of the construction dollars spent) and the litigation attorney who more than likely will receive a significant percentage of the award.

I’ve mentioned this before and it is further backed by Kashiwagi (and he definitely has more credentials and background then I) that under the design-bid-build, low-bid method, the only result is an adversarial situation between the owner and the contractor. Profit, via the low-bid delivery method is obtained by the contractor by lowering their performance levels, offering sub-par means and methods (to reduce their cost – by meeting the minimum specifications) and finding those pot-of-gold errors in the bid packages that result in hefty change-orders.

It’s ironic that the very thing owners are trying to obtain using low-bid procurement methods; competition and best price, is the very thing they are okay not obtaining when a change order occurs. There is no competition and you can throw the best price out the window.

I’ll end with these last few statements from Dr. Kashiwagi: “Price Based Construction is Destroying the Construction Industry”, “Performance has no proven relationship with price”, “The source of the majority of problems is the “low bid” award process”, and “Tests have shown that best value construction provides the following results: 98% performance (on time, on budget, meets quality expectations of clients), minimized construction management requirements by 80-90%, allows [owners] to identify contractors who can perform and transfer the risk to those who can minimize risk and best value construction motivates training, performance, continuous improvement, and the maximization of profit in delivering the best value (lowest cost).

As I finish reading, I’m sure I will have additional thoughts to provide, especially after Chapter 7, Best Value Practices.

Three Universities Conclude Design-Build is a Better Delivery Method

A study (Design-Build Vs. Design-Bid-Build Evaluation) completed by the University of New Mexico, Iowa State and the University of Colorado at Boulder and commissioned by the Water Design-Build Council, concluded that Design-Build has significant advantages over the traditional Design-bid-Build delivery method.

Key findings included the fact that Design-Build projects were delivered quicker, have less overall schedule growth. Further more Design-Build projects were completed on time or ahead of schedule and they were complete below or with-in budget 18% more often than Design-Bid-Build.

The study also noted that based on surveys received from owners of public water and wastewater facilities that there wasn’t any significant difference in the quality of the work received under Design-Build and Design-Bid-Build.

My question to facility owners is. Wouldn’t you rather receive the same or better quality while at the same time receiving the projects quicker, with less schedule growth and completed on-time or ahead of schedule?

People vs Profit First

I just finished reading volume eight of Insight Publishing’s 'Mission Possible!'. The book is a compilation of interviews conducted by David E. Wright, President of the International Speakers Network with 12 notable business owners, speakers and entrepreneurs. While the book focuses on leadership there are several statements that I feel directly relate to best value and performance-based construction practices.

In response to Wright’s inquiry about his ‘People First’ presentation, Jack Lannom says, “The whole purpose of People First is to go against the grain of what’s happening in America”. “So, what we have today is profit first, not people first. What we’re actually doing is sacrificing long-term relationships and partnerships on the altar of short-term gain and short-term profit”.

Doesn’t this speak directly to the current procurement methodologies present in most public agencies, where the owner, whether it is their goal or not, is actually promoting a system where the contractors can only put profit ahead of people? Soliciting via design-bid-build and the low-bid philosophy, contractors are forced to buy the bid and look for ways to make their profit through change orders and/or inferior products, processes and service.

Through best value and performance-based construction delivery methods such as Job Order Contracting a contractor looks for the ability to build a long-term-trusting relationship with the owner, which grows over time, knowing that profits will be obtained over time. Since the contractor is submitting responses to the JOC solicitation based on long-term potential, they don’t have to find ways to make a profit on change orders after low-balling to win a bid. The contractor is able to provide the best possible service results at a fair and reasonable price.