General Manager of the Woodland-Davis Clean Water Agency Dennis Diemer came the the Davis City Council on Tuesday night to discuss the progress of the surface water project. While he discussed in general the entire project, much of the questions from the public and council related to the withdrawal of two of the three DBO (Design-Build-Operate) teams.
Mr. Diemer discussed the delays to the schedule, mostly the result of the Davis vote on the surface water project, while he noted a number of positives from the delays including the acquisition of easement and land and environmental permitting; the state and federal funding for the intake and money from the State Revolving Fund; and project optimization in terms of capacity, the water transmission main, local facility requirements and DBO price ceiling.
At the same time, there are drawbacks to the delay, as the recovering economy has increased both construction and material costs. There is no longer any leeway in the completion schedule, which is required by fall of 2016, with the most drastic event perhaps being the withdrawal of two of the DBO teams.
Mr. Diemer described a 2.5 year competitive process in which five initial submittals turned into three shortlisted teams.
The process, he argued, facilitated competition as the field narrowed to one team from the original shortlist. Two bidders removed themselves from consideration. He argued this was due in part to delays in the procurement schedule, the inability to correct deficiencies in compliance with RFP provisions, and the difficulty meeting price ceiling requirements.
He argued that this development allows negotiations to begin ahead of schedule and produces a savings to the agency of approximately $500,000.
The key to Mr. Diemer’s claims is the provisions put into the procurement process meant to safeguard the process, even in the absence of competition.
The maximum cost ceiling was put into place to ensure competitive pricing both of capital and operation. The maximum capital cost of $151.5 million is 20 percent less than the original engineer’s estimate.
In addition they have open book requirements for competitive pricing for approximately 70% of the work to be completed by subcontract with open book review of all remaining self-performed work.
Among the key questions is how we get a competitive price with only one bidder. If CH2M Hill does not meet the price ceiling, “then we’ll have some decisions to make,” Mr. Diemer said in response to a question from Councilmember Lucas Frerichs.
“At that point we’ll have to decide whether we want to reengage in another Design-Build-Operate procurement process or whether we want to shift to a design-build process,” he said. “Shifting to an alternative bid procurement methodology at this point will take time and will be expensive.”
He estimates the process will take eight to ten months minimum to go through a new process, and will incur huge administrative costs as well.
“It’s something that we hope doesn’t happen, but we will see what we get from CH2M Hill on July 30 and if their bid is successful we hope they continue with the negotiations process,” he continued.
Mr. Diemer went over what the open book competitive pricing system meant. The bottom line, however, is guaranteed pricing. “If they submit a proposal on July 30 that exceeds $151.5 million it’s non-responsive.”
How are cost-overruns then handled, Councilmember Brett Lee asked.
“That is their guaranteed maximum price,” Dennis Diemer explained. “There are essentially no allowances in the contract (for cost overruns). Any issues or problems that they encounter in the design, operation or construction – they’re to bear those costs and those risks.”
There is at least one exception – if they run into unforeseen problems or material costs increase dramatically, things can be adjusted, otherwise any costs changes are their responsibility.
“Those provisions have been in the contract all along, it’s not something that we added recently,” Mr. Diemer. “From our position, it was the best way to take uncertainty out of the project and produce the best price.”
Brett Lee also asked about their incentive to complete the project.
“We have a contract that they must perform. They have requirements that they must provide. They have a reputation that they must preserve,” he said. “We have all of those protections.”
While Dennis Diemer was able to address concerns about the process even in the wake of the loss of a competitive bid environment, there seem to be two key areas where the scenario could fall apart for the agency.
The first is that, while it is true a bid that falls outside of the maximum price ceiling set at $151.5 million would be considered non-responsive, the recourse seems problematic. Setting up a new procurement process would cost 8 to 10 months which, Mr. Diemer said at the outset, the time schedule would not permit.
That would not only mean a huge amount of administrative costs, but it would push Woodland over their deadline which would ensure that they would incur fines for non-compliance with state and federal water discharge regulations.
The bottom line is that, while the agency can claim that the $151.5 million line is the ceiling, realistically, the agency does not have nearly the leverage they once had. Sure they can attempt to hold fast to that line, but what if CH2M Hill comes in at $160 million, would they really go back to bid, risking tens of millions over $8.5 million?
The second problem is the opportunity cost. It may be that C2HM Hill can meet the $151.5 million level. But what is their incentive to get down to say $135 million? They have none.
So, in a competitive bid process maybe there would be incentive to find those last cost-saving ways to get the bid down to $135 million, but that does not exist in a single-bid system.
And while it is true that Mr. Diemer can argue we can get to the goal with a single remaining bidder, that only measures progress at the initial estimate, and not the opportunity cost from lost competition.
All of this will be determined by July 30, 2013.
—David M. Greenwald reporting
David, as I said last night, we can come up with these “what if” scenarios ad infinitum, and we will accomplish nothing. The best thing to do is wait the very short amount of time that remains before the formal bid(s) submission takes place. At that time we will have some concrete information to work with. Once we know that concrete information the next step options will be much, much clearer.
Matt: In a way I agree. In another way, my concern is about process rather than outcome. An acceptable outcome is never a substitute for the proper process. And the problem that we have is that we will never know if this process actually hurt us.
Matt:
[quote]David, as I said last night, we can come up with these “what if” scenarios ad infinitum[/quote]
Like one of those “what if” scenarios of all the bidders dropping out but just one?
“In a way I agree. In another way….”
We’ve gotten a listing of your dislikes over the last few weeks. I’m struggling to understand what you think should be done now or what you want to be done. It would be good to know what are your alternatives.
GI, that is not one scenario, but rather just a single parameter of a whole raft of different scenarios.
Further, the reduction to a single bidder is a very different reality now 30 days from the bid due date than it would have been if we had found ourselves with only a single bidder 18 months from the bid due date.
I disagree David. Just like the classic “form over function” debate in design, there isn’t a clear cut answer to a “process over outcome” debate.
You really need go no further than Proposition 8 to see how a properly executed process can create an outcome that is fatally flawed.
I (and my wife) would argue that the correct answer to the “form vs. function” debate is a balance of form and function. Similarly, I would argue that a solution that balances both process and outcome is likely to be the best solution possible.