The idea of a competitive bid process is that the competition for the awarding of the bidding will create an incentive structure that forces the competing firms to find the best way to construct a project at the most competitive price they can reasonably offer, while still making an acceptable profit.
In order to work properly, such a model requires there to be sufficient competition to drive down the costs and force innovation. But from the start that was a difficult process, because the Woodland-Davis Clean Water Agency wanted to use a Design-Build-Operate process.
The advantage of such a process is that it is said to transfer risk to the firm that is awarded the contract and away from the agency. The disadvantage is that, from the start, the ability to perform all three operations narrowed down the possible competition.
Add in the costs of even doing the work to make a reasonable bid, and the fact that one of the partners has emerged as a dominant force in this niche of the industry, and the handwriting was on the wall. Veolia would drop out in December and CDM would first drop out in January, only to be coaxed back, but dropped out permanently last week.
From the JPA’s point of view, this seemed not only unexpected but preferable.
Dennis Diemer, who is the general manager of the JPA, argued last week the departure will actually save the agency about $500,000 in not having to subsidize the building process costs for one of the firms.
The question, however, is whether this tangible savings is offset through the loss of competition and what that will mean for both the cost and quality of the project.
For their part, management including Dennis Diemer and Steve Pinkerton actually believe that the dropping out of competitive firms is part of the process.
They would argue that the process worked in that the project will come in about 19% below the original estimate. The agency avoids wasting more time and money on the competition. Veolia and CDM dropped out because they knew they would not be able to win.
In that sense, Mr. Diemer and Mr. Pinkerton argue that there was a competition and it saved the agency money, whereas prolonging the process would cost us.
In short, while not all of the bidders would able to make it to the final stage in the process, the process created a narrowed-down effect, whereby the one team that was actually able to carry out the project remained in the bidding.
But that seems to run contrary to most notions of a competitive bid process, where the process of narrowing down occurs by the agency awarding the bid and the competition is between the companies that can build a project. If CH2M Hill was the only company that could build the project, how can this possibly be a competitive situation?
This is exactly the point that Councilmember Brett Lee made recently in telling one paper that he worried that the agency would not be able to be paying the best price for the project.
“I am very concerned about this recent development,” Councilmember Lee said in a statement. “The WDCWA has been very good at setting the criteria that makes sure that whatever firm is selected will be well qualified to carry out the design, construction and initial staffing of the plant. However, I believe that it is the competitive bidding process that would have provided us with an assurance that we are not over-paying for the project. Even a modest 1 percent to 2 percent difference in bids would yield savings of $2 million to $3 million dollars.”
Instead, the councilmember wants the city council to ask that the JPA make a presentation and provide objective information as to why this project will work as currently constituted.
“We need to know that we are spending our community’s money wisely,” he said.
From the standpoint of Dennis Diemer, first he acknowledged that it would be impossible to predict how much savings would occur in a competitive bid situation. But second, he argued, as did City Manager Pinkerton, that the bids coming in will be less than the original estimates by nearly 20 percent.
The Vanguard was also informed in phone conversations that the contract will actually force CH2M Hill to adhere to a set of very strict guidelines in order to get the contract. But what is not clear is what would happen if CH2M Hill refused to make those guidelines. What leverage does the agency now possess?
In a competitive bid situation, the agency would be able to say: meet our guidelines or we will go with someone who will. Absent that, the agency is relying almost on the good will of CH2M Hill. After all, if they have to back out of the bid, given the strict timelines in place because of Woodland’s regulatory bind, the project not only would be set back, but Woodland could risk additional fines.
And that point seems to undercut what a CH2M Hill official told the Enterprise this weekend.
He said, “You’ve got to come up with some decent numbers.” He added, “If (the agency is) not happy the project may go away.”
The problem is that the project cannot go away – it must go forward and it must go forward now.
Mayor Krovoza added that he does not believe that the agency set the bar too high for bidders in their RFP.
His argument is that so long as CH2M Hill stays in the bidding process and submits a qualifying bid, “the bar wasn’t too high.”
It is certainly one way to think about it. Basically, the agency believes they will get an acceptable bid out of this process and get quality work.
They may be right, but they do not have nearly as much leverage as they would with two bidders, or three. In the end, they are now forced to rely on the integrity of CH2M Hill because, if CH2M Hill wants to increase their costs, the agency largely cannot say anything because the project at this point must go forward.
Again, while this seems likely it will not be a huge problem, who knows how such deals will turn out in the future.
—David M. Greenwald reporting
I support Councilman Lee’s request that the JPA explain how this turn of events, i.e.-a failed competitive bidding process, will somehow still give us a cost effective project.
I voted for the project even though I had misgivings about some of the proponents claims. But after negotiations
whittled down some of Davis’ costs it seemed like we would get a project that provided us with a more reliable source of water at a lower cost. Now I am not so sure.
[i]. . . meet our guidelines or we will go with someone who will.[/i]
There are *always* options, including a re-bid. And answering your title, the “DBO” process was doomed to failure from the beginning. Design-build, yes. But operate? Laughable.
“The Vanguard was also informed in phone conversations that the contract will actually force CH2M Hill to adhere to a set of very strict guidelines in order to get the contract. But what is not clear is what would happen if CH2M Hill refused to make those guidelines. What leverage does the agency now possess?”
With whom were these phone conversations? Attribution, please. The same people should be able to answer your excellent, straight forward questions.
My guess is that the contract itself would provide motivation for following the guidelines, making deadlines, etc. Usually, cash penalties are the leverage for proper contract performance.
Competitive bidding down to the finish obviously could provide the best outcome. But, getting down to a single bidder this way eliminates bid protests and allows for negotiations that could improve the project and reduce costs.
I’m not sure why you insist “the project must go forward and it must go forward now” as though it’s out of our hands and we’d have to accept a bad single bid, knowing it would be the wrong thing to do. A test of the accuracy of this speculation is to consider what would happen if CH2M Hill dropped out.
Why does it have to go forward now? Presumably because of Woodland’s timeline….but I doubt that many other projects would go forward with just one bidder. Seems less than smart. What leverage do we have if we go forward? What leverage does Davis have now? Seems our two reps to JPA are divided on the issue?
David Greenwald said . . .
[i]”But that seems to run contrary to most notions of a competitive bid process, where the process of narrowing down occurs by the agency awarding the bid and the competition is between the companies that can build a project. If CH2M Hill was the only company that could build the project, how can this possibly be a competitive situation?”[/i]
As I said on Friday, I don’t like the idea of a single bidder at all. Maintaining as much competitive incentive right to the end of the process would indeed be desirable.
With that said, I’m not sure that the conclusion that David has come to in the quoted part of the article above are correct. On September 27th the WAC spent the whole night digging into the question of DBO (see [url]http://city-council.cityofdavis.org/on-going-committees/water-advisory-committee/agenda—september-27-2012[/url] During that meeting WAC members were provided a list of thirty-one (31) WTP and WWTP DBO Projects Within the Last 10 Years (see [url]http://city-council.cityofdavis.org/Media/Default/Documents/PDF/CityCouncil/Water-Advisory-Committee/Agendas/20120927/05-List-of-DBO-Projects-in-Last-10-Years.pdf[/url]
That list of projects was compiled from the knowledge-base of Jerry Gilbert, West Yost Associates, and Hawkins Delafield Wood LLC and was labeled as “not exhaustive” by the authors. One thing that is very clear as you read through the list is that there are problems with the statement that “only one company could build the project.”
The problem isn’t with the DBO process itself. Rather, in the process of taking the necessary steps to ensure that we get a water treatment plant that will be reliable and meet the needs of our community, the WDCWA has developed performance criteria that it expects all the DBO bidders to meet. So for me, if there is a question, it isn’t about the DBO process, but rather a question about whether the WDCWA has been too prescriptive in establishing its performance criteria.
Ultimately it comes down to a question of value for money . . . are we spending the right amount to reliably meet the needs of our community?
Neutral said . . .
[i]”There are *always* options, including a re-bid. And answering your title, the “DBO” process was doomed to failure from the beginning. Design-build, yes. But operate? Laughable.”[/i]
Neutral, what is your basis for making that assertion? Laughable?
The City of Seattle employee who oversees the two Seattle DBO facilities is a UCD grad. As part of my due diligence as a WAC member I spoke to him at length in September 2012 about the workmanship, professionalism and cost-effectiveness of CH2MHill’s involvement with Seattle’s two projects. He informed me that Seattle was quite pleased with the work that CH2MHill had done for, and continued to do for Seattle. He also indicated that the City had conducted an exhaustive analysis in the recent past of whether it was cost effective for the City to convert either of the plants to public operation. Their analysis was that such a conversion would not be cost effective, because the costs of operation would be virtually identical, but public operation would effectively void the long-term design and build warrantees that exist under the terms of the current DBO contract.
That certainly doesn’t seem to be laughable to me.
JS: Sometimes you think of the perfect question after you talk to the person and while you are doing the follow up write up.
“With that said, I’m not sure that the conclusion that David has come to in the quoted part of the article above are correct.”
Matt, you are now making the same error that you have criticized others for making, assuming a question is a conclusion. In fact, that question was not even a question so much as a segue to introduce the counter point to that of Diemer/ Pinkerton. Nowhere do I reach a conclusion on the question other than my dislike for the process to date.
“He informed me that Seattle was quite pleased with the work that CH2MHill had done for, and continued to do for Seattle…”
Would anyone reasonable expect any other answer by the city employee who “oversees” the facilities?
“Why does it have to go forward now? Presumably because of Woodland’s timeline…”
The deadline argument to avoid penalties is largely bogus. Any reasonable look at the State’s record demonstrates that the clear “good-faith” efforts which may require some additional time before the project can be completed would grant Woodland the additioal time needed without penalty.
would negate any further Woodland penalties.
when is the next JPA meeting? Will Brett bring this up tomorrow night at CC?
[i]So for me, if there is a question, it isn’t about the DBO process, but rather a question about whether the WDCWA has been too prescriptive in establishing its performance criteria[/i]
I have three points to make:
1. With only one bidder, it is clear that there are problems.
2. With respect to being “too prescriptive” I would agree that this is likely. However, it isn’t a one-sided problem. Requirements are requirements. If the performance bar is set really high, as it should be set in this case, there needs to be a corresponding performance management system including proper incentives and penalties for actual performance. The one cool thing about companies is that their motivations are really quite simple. They are like dogs in that a little petting and praise goes a long way… but ultimately it is the “food” of profit that they are most interested in. If you want a contractor to behave and perform a certain way, then spell it out in clear and measurable performance goals, include the expected process for measuring performance, and include the penalties and incentives for the level of success meeting the performance goals.
3. All outsourcing service contracts require an exit strategy/plan. There should be financial incentives for the contractor to assist with a transition to another provider.
[i]the costs of operation would be virtually identical, but public operation would effectively void the long-term design and build warrantees[/i]
Thank you for making my point.
[i]the costs of operation would be virtually identical[/i]
Including the cost of the long-term pension and healthcare benefits provided these new city employees?
Are smud employees city employees?
DG: And sometimes one thinks of the perfect question after reading a Vanguard article! Monday morning quarterbacking at work?
I’d like to know more about the Seattle study of public vs. private operation. If private operation is for-profit what are the comparison points that would make not for-profit public operation about equal in cost?
Frankly said . . .
[i]”Including the cost of the long-term pension and healthcare benefits provided these new city employees?”[/i]
As I recall my conversation with him, the answer would be, “yes, including those costs”
Nancy, the comparison was conducted by a team of City of Seattle employees in which they attempted to identify and quantify any (and all) comparison points that would exist (do exist) as a result of the operation of the two plants. The costs for each scenario were then tallied and compared.
Our discussion did not get into an exhaustive drill down into specific costs, so I personally can not answer your question, but when I asked him if he would be willing to speak to other Davis residents and members of the WAC, he said he would be glad to do so. If you want to talk to him send me an e-mail and I will give you his contact information. When I heard about CDM’s withdrawal on Friday, I called his number and got his voicemail, which said he was on vacation until after the 4th of July. I will be calling him again myself at that time.
Davis Progressive: SMUD employees are Utility District employees and therefore public employees. They are covered by union contracts and are participants in PERS much like city or county employees.
Matt: I have the greatest respect for the work you’ve done on the WAC, but the operate part of DBO is and always has been an engineering industry holy grail of how to tap into the river of public money. Engineering companies are private and the only way to operate at the same cost is to pay their employees much less so that there is a profit for the principals of the firm. Not only that, CH2M Hill was recently fined $16M for allowing un-performed overtime billng by its employees. Of course, it couldn’t happen here. The “O” in DBO contracts is bad public policy.