Copyright 2012 by Michael E. Purdy Associates, LLC

Transcription

1 Copyright 2012 by Michael E. Purdy Associates, LLC

2 2 The United States is still struggling to find its way out of the Great Recession. State and local governments have not been immune to the economic woes. They have been directly impacted and have been forced to try new and different strategies to keep essential functions of government operating. In this white paper, we ll look at some of the changes occurring in public procurement and contracting, and what the future may hold for you. And we ll identify ways your business can take advantage of these changes in how the government purchases goods and services. First, we ll examine how more and more procurements are not being publicly advertised, and what you can do to tap into these hidden markets. Second, we ll identify emerging trends, ranging from non-traditional selection and award processes to sustainability issues to the increasing role that technology is playing, and will continue to play, in procurement. Finally, we ll explore how the government is turning to the private sector to deliver what have previously been considered governmental functions. FIND HIDDEN GOVERNMENT MARKETS Government agencies are increasingly consolidating their procurement activities. Impacted by staff layoffs, agencies are, out of necessity, seeking to reduce costs and their workload. To be more efficient, they are developing creative tools to procure goods and services in ways that are different from the traditional model of advertising each procurement and awarding the contract to the lowest bidder. In many cases agencies are pushing to obtain the best value for goods and services, and not just the lowest price. Let s take a look at six key trends that increasingly define the hidden government markets; these trends are important for you to understand if you are to compete successfully in this changing environment. One of the most important tools that agencies are now using to reduce their workload is piggybacking, in which they rely on the solicitation, pricing, and contracts of another agency rather than conducting their own advertisement. PIGGYBACKING is more common with goods, supplies, equipment, and materials than it is with services. The result is that you may never see an advertisement in the newspaper by agencies you are interested in doing business with. As you re developing relationships with agencies, be sure to mention to them existing contracts you have been awarded by other agencies, and suggest they consider piggybacking these contracts rather than conducting a separate solicitation.

3 3 Some agencies take the concept of piggybacking to a larger scale by using the procurements established not just by one agency, but by a PURCHASING COOPERATIVE. There are really two different models of purchasing cooperatives. Some, like U.S. Communities or the National Intergovernmental Purchasing Alliance, rely on the solicitation of one agency for a particular product and then make that contract available nationally to members of the cooperative. Others, like the National Joint Powers Alliance, actually perform the solicitation and award themselves, again making the pricing available to their members. It s important for you to identify key purchasing cooperatives and attempt to compete in that arena. State and local agencies are governed either by state law or by local regulations and policies. Often, there are SELECTION THRESHOLDS below which the agency is not required to competitively solicit for goods and services. In other words, they may award the contract to a company with which have done business before without obtaining competitive quotes. For example, in the State of Washington, some cities are not required to obtain competitive bids for public works projects of less than $45,000 if only a single trade or craft is involved, or $65,000 if multiple trades or crafts are involved. The purpose of these thresholds is to reduce the costs associated with small dollar-value procurements. As agencies continue to lay off employees, some agencies are increasing these selection thresholds, making it easier for the remaining employees to quickly and efficiently obtain goods and services. You should identify the applicable thresholds, as well as the decision makers in specific agencies, in order to not lose out on this key market. Some agencies have established ROSTERS for the selection of construction contractors, consultants, and vendors. Rosters streamline the selection process by not requiring that each bid be advertised. They re simply an alternative notification process for contracting opportunities. Companies interested in doing business with the government submit an application to be placed on the roster. Some agencies put all applicants on the roster, while others conduct a prequalification process. When a specific need arises, the agency only solicits bids or proposals from firms on the roster, sometimes from all firms on the roster while at other times from a select group. Thus, competition for each project is limited. A separate contract with the successful firm is then executed. Because so many agencies use rosters and because of the administrative staff time necessary to manage the rosters, some agencies have begun to use cooperative rosters, either through a coalition of agencies in a specific geographic area, or through an independent organization. In addition to the benefits of cooperative rosters for agencies, they are beneficial to you as well. They reduce the number of separate roster applications that you must submit in order to do business with certain agencies. Cooperative rosters also increase your chances of obtaining government work because the competition is limited to only firms on the roster. Finally, cooperative rosters enable you to express interest in doing business with agencies you might otherwise not submit a separate roster application for. Like rosters, ON-CALL OR BLANKET CONTRACTS are used for goods, services, and construction. They are a form of contracting known as IDIQ (Indefinite Delivery / Indefinite Quantity). But unlike rosters, these on-call contracts actually reduce the number of individual procurements by consolidating needs into a limited number of contracts that are awarded ahead of time to just one or a few firms for each type of work, based on a competitive selection process. When a specific need arises, rather than conducting either an advertised or a roster selection process, the agency simply negotiates and executes a work order or amendment to the existing contract, making it an efficient and quick process. For most types of on-call contracts, the dollar amount is based on prices that were established during the selection process (unless the service is subject to Qualifications Based Selection, as are most services for architectural and engineering work). Most on-call contracts do not have any minimum amount of work promised by the agency.

4 4 You may notice a decrease in individual procurements as agencies consolidate the number of contracts they must manage by using on-call or blanket contracts. Don t skip over responding to on-call solicitations while waiting for project specific advertisements. Finally, as budget reductions result in fewer procurement staff, some agencies are loosening up their requirements and moving to less-formal solicitation practices. Managing procurements is then pushed down to operational staff, who often have no experience in these matters. One form of DECENTRALIZED PROCUREMENT is the increased use of government credit cards by operational staff. It s always important for you to know the decision makers, but as more procurements are decentralized, that becomes even more important. You may experience scopes of work and selection processes that are less than clear because they are written by inexperienced government employees. 1. Suggest agencies piggyback off of existing contracts you ve been awarded 2. Compete for work through purchasing cooperatives 3. Apply for placement on rosters 4. Submit bids or proposals for On-Call contracts 5. Cultivate relationships with agency decision makers

5 5 IDENTIFY EMERGING TRENDS In order to remain competitive in 2012, you need to understand four emerging trends that are changing what is important to agencies DESIGN BUILD STATE PUBLIC PROCUREMENT LAWS Traditionally, agencies have made most contracting decisions based on cost, awarding to the low bidder. Increasingly, however, we are seeing a gradual shift to a best value model that evaluates price and qualifications. We are also seeing more and more interest in various types of preferences in award decisions, ranging from preference for use of local businesses and workers to furthering social equity objectives, such as by requiring the use of minorityowned businesses. These changing regulations and practices are moving us into what I call a post low-bid environment, where agencies are willing to pay more money to meet other objectives. Perhaps nowhere has the low-bid model been sidelined more than with public-works construction projects. Two alternative public-works contracting models are gaining increasing popularity: Design- Build and Construction Manager at Risk. Under the DESIGN-BUILD model, the agency selects just one company to both design and build a project. This model reduces risks for both the agency and the contractor by establishing a more cooperative set of relationships between the key parties. In construction contracting, there are frequently project-deficiency disputes between the designer and the contractor, with each side blaming the other a concern that is eliminated with Design-Build. With design and construction under one umbrella, there is more control over the quality of design and construction. Design-Build is now recognized as an option for many state and local agencies. In fact, in December of 2011, New York State adopted an expanded Design- Source: Design-Build Institute of America Design-build is permitted by all agencies for all types of design and construction Design-build is widely permitted Design-build is a limited option Build law that authorizes more agencies to use this alternative over the next three years. Ohio also took a major step forward last year by expanding the use of Design-Build for its Department of Transportation, now permitting Design-Build for up to $1 billion of projects annually, an increase from the previous $250 million cap. Ohio also shifted to a best-value selection methodology for its Design-Build projects, away from the lowest-bid model. Under the CONSTRUCTION MANAGER AT RISK category, the agency typically selects the contractor early in the design process based on qualifications and sometimes on limited prices for overhead, profit, and general conditions work. Early selection of a contractor enables the contractor to work collaboratively with the designer by offering value-engineering suggestions, constructability analysis, scheduling and sequencing, and cost-estimating. Typically, the actual cost of construction is then negotiated between the agency and the contractor. Agencies like this model because it enables them IN 2011, 770 construction manager at risk projects were published in Onvia s database. Source: Onvia

6 35 STATES PERMIT CM AT RISK IN SOME FORM 6 Source: Associated General Contactors of America to select a qualified contractor and not just the low bidder. This is especially important for large and complex projects that will substantially benefit from the contractor s early involvement with the project. According to Onvia s database, there were 770 Construction Manager at Risk projects published in 2011, with this keyword specifically called out in the titles and descriptions. A total of 35 states permit some form of CM at Risk, but there are no national standards for its use, which has evolved separately by state. As Design-Build and CM at Risk become used more and more in the public sector, you will have to adapt to these different paradigms in order to remain competitive. It s not enough for you to just rely on your skills and experience of submitting low bids. There is a growing national trend for applying various SELECTION PREFERENCES and requirements on the procurement process. Interestingly, the current federal prevailing wage law, known as the Davis- Bacon Act of 1931, was originally championed as a local preference law. Though the Davis-Bacon Act sought to ensure that local contractors would get the work by requiring them to pay the local prevailing wages, the local preference laws that are sprouting up across the nation today provide a direct price advantage to local businesses. These LOCAL BID PREFERENCE laws are not restricted to just public works projects, but also apply to the procurement of goods and services. Some agencies will provide a percentage preference for local businesses. In other words, if the bid of a local business is within a certain percentage of the low bid from a non-local business, the local firm would nevertheless be awarded the contract even though their bid was not the lowest price. For example, the City of Berkeley, Calif., provides a 5% preference on bids to local businesses for supplies, equipment, and non-professional services up to $25,000. In the interest of keeping work with local businesses, some agencies have been willing to pay a premium to ensure local businesses get work over non-local businesses. Some agencies provide local businesses that are not the low bidder the opportunity to match the low bid and be awarded the contract. Other agencies provide a preference to local businesses in the unlikely event that bids are tied. Some, like the State of Washington, provide the option for local governments to consider the tax revenue it would receive from purchasing supplies, materials, or equipment from a supplier located within its boundaries.

7 7 Finally, some agencies apply a reciprocal preference. In other words, if the low bid is from an out-of-state business whose state has a bid preference law, that bidder s bid would be increased by the amount of their home state s percentage preference. The State of Washington recently adopted such a reciprocal preference for public works projects. (Example) (If bidder 1 submitted the low bid of $100,000 and came from a state with a 5% bid preference, for bid evaluation purposes its bid would be $105,000. Bidder 2, an in-state contractor, submitted a bid for $103,000. For bid evaluation purposes, bidder 2 is the low bidder and would be awarded the project at $103,000. Bidder 3 also came from out-of-state but from a state without a bid preference law, so its $104,000 bid would not be adjusted for bid evaluation purposes.) One of the challenges faced by agencies adopting some form of a local bid preference is how to fairly and equitably administer the requirements. What constitutes a local or in-state business versus a business from out of the area? Agencies have different standards to define local, most of which have significant built-in loopholes that may give local status to a company that is generally considered to be from out of the area. For many agencies, the standard of what constitutes local is that the company must have a local or physical office within the agency s boundaries. In addition to local bid preferences, many agencies are beginning to impose requirements on companies they contract with relating to various types of WORKER PREFERENCES. Three examples help illustrate this trend. Similar to the motivation for awarding contracts to local businesses is the motivation of some agencies like the City of San Francisco. The city recently approved a law requiring employment of 20% of city residents on projects of $400,000 or more. Other agencies, like the state of North Carolina, have voluntarily adopted the federal Department of Homeland Security s E-Verify program requiring verification by businesses that all of its employees are in the United States legally. Finally, labor unions and public agencies often enter into what is called a Project Labor Agreement for publicworks construction projects, in which the agency agrees it will only award a contract to a union contractor a form of a preference in exchange for the union s promise that there will be no labor slowdowns or strikes. With the use of union contractors comes the requirement that all of the workers must be union members. More and more, public contracting is shifting away from a process to ensure the lowest price, and is being used by government agencies as a tool to promote various social equity objectives. You may find your company at a competitive disadvantage if you do not take these SOCIAL EQUITY PREFERENCES and requirements seriously. In some cases, an agency may limit competition to businesses meeting certain characteristics. For example, the State of Washington s largest county, King County, is instituting a Small Business Accelerator Program that will, for certain types of goods and services for certain departments, restrict competition to only small businesses registered with the county. Other agencies have established set-aside programs requiring the use of a certain percentage of minorityand/or women-owned businesses as subcontractors or sub-consultants on a project. The City of Seattle recently

8 8 adopted a new program to encourage the use of minority- and women-owned businesses by requiring that certain commitments to use such firms be submitted with the bid. Finally, some federal funding sources require the use of either minority, women, small, or disadvantaged businesses. The U.S. Department of Transportation s regulations have a requirement that subcontractors must be paid withheld retainage in a timely manner, all part of their efforts to ensure the financial sustainability of disadvantaged businesses. Most government solicitations will state the basis of evaluation how the agency intends to make its award decisions and will identify the evaluation criteria. The criteria might relate to qualifications, experience, approach, or to a local bid preferences for companies or workers, or they might be attempts to address various social injustices. But even beyond any stated evaluation criteria are what I call the HIDDEN PREFERENCES that are often applied and are sometimes more influential in the award process than the established criteria. Last year, I was consulting with an agency, helping them with a contractor selection process. Part of my role was to review the proposals received and to provide technical advice to the evaluation committee. After reading the proposals, it was obvious to me that one company s proposal was clearly superior. They had more experience than any of the other firms in this type of work and vastly more experience than any of the competitors with the Construction Manager at Risk project delivery method. However, I was very surprised when the evaluation committee all rated this firm toward the bottom of the pack, well below local firms that the agency s employees knew and had worked with before. Though one of the evaluation criteria related to their knowledge of the local market, it was worth only 5% of the total points available. In practice, however, the evaluation committee s thinking was colored by the fact that this company was not a known quantity and that they were not from the local community. While the firm was selected for an interview, the response of the evaluation committee after the interview was the same very negative, even though, from my perspective, the firm had aced the interview. There was an unwritten and hidden preference for working with a local firm. Because the selection process up to this point was based only on qualifications, the evaluation committee chose to exercise considerable subjectivity in making its decisions and in rating the firms, even though some of the ratings were not objectively consistent with their published evaluation criteria. You must be aware of these hidden preferences and take steps to become known and build relationships with public agencies long before a solicitation is advertised. Many agencies have fully embraced the need to ensure their practices are environmentally sustainable and have built various requirements into the procurement and contracting process. SUSTAINABILITY is increasingly becoming the mainstream expectation as statistics demonstrate it makes good financial sense. For example, the U.S. Department of Energy has noted that sustainably designed federal buildings cost 19% less to maintain. LEED-EBOM Projects Keyword Search - LEED-EBOM in Projects (Existing Building Operations & Maintenance) YEAR OVER YEAR GROWTH % 12% Source: Onvia One of the best-known standards for sustainable buildings comes from the LEADERSHIP IN ENERGY AND ENVIRONMENTAL DESIGN (LEED) program, in which buildings receive a certification level based on the number and type of identified sustainable practices and materials that have been incorporated into the building. LEED projects continue to grow in popularity with many government agencies requiring some or all of their projects to meet various LEED standards. One of the notable recent trends, according to the U.S. Green Building Council, is that for the first time last

9 9 year LEED certifications for renovations to existing buildings are now outpacing LEED certifications for new building construction. In a depressed construction environment, LEED for Existing Buildings: Operations & Maintenance (LEED- EBOM) has been one of the fastest-growing LEED rating systems. According to the Onvia database, from 2009 to 2010, there was a 1,566% increase in LEED-EBOM projects, and from 2010 to 2011, there was a 12% increase. In the ENERGY SERVICES CONTRACTING (ESCO) model, agencies select a contractor to analyze its facilities and to identify energy savings and conservation measures that could be met with updated equipment or systems. After the agency reviews the proposal from the contractor who guarantees the energy savings over a period of time the agency authorizes the work. There are a variety of different models relating to how the contractor s guarantee works, when they are paid, and which parties assume which risks. For years, demolition of public facilities has resulted in the debris going directly to the landfill. However, with the tightening economy and shortages of raw materials, a number of agencies are utilizing DECONSTRUCTION instead of demolition. Deconstruction is the careful dismantling of buildings and structures and reusing or recycling the materials. A whole new industry is actually being created by deconstruction with new jobs for workers skilled and knowledgeable about how to salvage rather than destroy. In some cases, there is a fine line between deconstruction and demolition, and the difference is in what happens with the materials. In Seattle, a 1950s highway viaduct structure is being torn down by traditional demolition methods, but the materials primarily the concrete and rebar will be recycled, or in the case of the concrete, it will be ground into aggregate and incorporated into the tunnel that will replace the viaduct. Among ALTERNATIVE ENERGY SOURCES, solar power is becoming more and more mainstream as both the federal government and businesses invest in this renewable energy source, either through solar farms that will generate electricity or through solar panels on buildings. The federal government recently approved a 300-megawatt solar farm in Arizona on federal lands that will generate enough power for 90,000 homes. Even in the overcast Pacific Northwest, solar energy is gaining in popularity as net-zero energy buildings begin to become a reality. Agencies will increasingly incorporate solar power and net-zero energy standards into their buildings, taking a significant leap from traditional LEED standards. SOLAR FARM POWERED HOMES Another trend that is impacting government procurement and contracting is the use of technology to facilitate ELECTRONIC PROCUREMENT. In an effort to reduce newspaper advertising costs, some public agencies are reducing the size of their advertisements for goods and services and simply referencing a website that contains the complete information. In addition to moving notification to the Internet, most larger and midsized agencies now make the bidding and solicitation documents only available online, either through the agency s own website or through a third-party website that specializes in posting such documents. In any event, the cost for printing these solicitation documents, which are often voluminous, has been shifted from government agencies to companies who are interested in bidding or proposing. A quick review of one agency s solicitation documents shows a 43-page invitation to bid for a simple and small public works project, and a 233-page Request for Qualifications for design services. Only smaller agencies without technological expertise generally make hard copies of the solicitation documents available. Some agencies, such as the City of San Diego, are now utilizing preproposal conferences via webinar through providers such as GreenProposals.com. Electronic bidding will, in the years ahead, become the norm for nearly all public agencies.

10 10 Another impact of technology, particularly for the design and construction industries comes in the form of 3-D BUILDING INFORMATION MODELING (BIM) software that enables a project to essentially be built electronically before the first physical work begins. BIM enables designers and contractors to find where there are clashes in the design maybe a conduit going through a concrete beam. But the long-term benefit of BIM will be for agencies to effectively monitor and manage their facilities and systems with an as-built 3-D model that will bring up all information about the design and construction. Larger architectural/ engineering firms and contractors are using BIM. Market research indicates that 50% of the building and construction industry in North America is using some form of BIM. As the technology becomes more sophisticated, it will also become more and more mainstream for public agencies to require it. 1. Develop capabilities for competing for Design-Build and Construction Manager at Risk projects 2. Assign staff to address compliance with local bid and social equity preferences in key markets 3. Build agency relationships and make hidden preferences work for you 4. Evaluate sustainability trends and opportunities in your industry

11 LOOK FOR PUBLIC-PRIVATE OPPORTUNITIES In this last section, we ll focus on two areas where there are creative opportunities for your business development: privatization and public-private partnerships. The budget shortfalls of government agencies have prompted debates about the role of the government. Which services should the government continue to provide and which ones should be privatized through a competitive selection process? At the core of PRIVATIZATION is an ongoing debate about cost savings versus the quality of services to be provided by the private sector and how the government can maintain control of the quality. There are many examples of government agencies exploring privatization everything from operation of parking facilities and dormitories in Ohio to the New Jersey state TV and radio network. So what s the difference between privatization and public-private partnerships? Admittedly, it s a blurry line, but generally speaking privatization deals with services, while public-private partnerships are more likely to deal with capital facilities. 11 In PUBLIC-PRIVATE PARTNERSHIPS (P3), the public and private sectors equitably share risks and rewards in order to stretch scarce public resources, capitalizing on the strengths and needs of each party. These partnerships take many different forms depending on the situation and each one is unique. They are more likely to be based on best value than on low bid, and must be in the best interests of both parties. The pie-chart data shows that the vast majority of P3 opportunities are taking place at the local level, based on searches of the Onvia Online Database. References to P3s in 2011 budgets and CIPs by government sector School District 1% Unspecified 4% Special District 5% State 4% Examples include turnkey buildings, federal tax credits for lowincome housing, and variations of Design-Build that have a component of operation as part of the deal. P3s have raised the issue of whether the work should be subject to prevailing wage laws that specify how much various craft workers must be paid per hour. Labor unions have argued that prevailing wages should Source: Onvia City, Town & County 86% apply to these partnerships. However, the deals often don t work out financially if prevailing wages, which often parallel union wages, must be used. In one case a developer in California was required to pay prevailing wages on a P3, while the Washington State legislature turned down a bill in 2010 that would have required prevailing wages on public-private partnerships. 1. Propose or respond to cost-saving privatization opportunities 2. Meet with agency staff to assess possibilities for public-private partnerships

12 SUMMARY Technology and demands for greater efficiency are driving agencies to procure goods and services through different models, resulting in hidden markets for you to tap into. Furthermore, in a post low-bid environment where factors other than price are increasingly being used in the evaluation process, you should position your company to adapt to the changing environment. Finally, privatization and public-private partnerships offer you opportunities for creative, one-off deals with agencies interested in drawing on the financial resources of the private sector. The world of public procurement and contracting is changing rapidly. Understand these trends and implement changes in how your company does business that will competitively position you to be successful in doing business with the government. 12 Mike Purdy has more than 30 years of experience as a manager in public contracting and procurement in the state of Washington. He previously served as the contracts manager for the University of Washington s Capital Projects Office, contracting and procurement manager for the Seattle Housing Authority, and contracting manager for the City of Seattle. His consulting firm, Michael E. Purdy Associates, LLC ( was established in 2005 to guide public agencies and businesses in managing public contracting.