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How NDAA Design-Build Bidding Reform Helps Contractors

Did you know that bidders on federal design-build contracts spend, on average, roughly $260,000 just to participate in the procurement process? Concerned that the high price of admission is dissuading qualified contractors from bidding, legislators recently enacted several reforms intended to make the bidding process more efficient. Among them is Design-Build Bidding Reform Section 814, enacted on Dec. 19, 2014, as part of the National Defense Authorization Act for Fiscal Year 2015.[1]

The design-build method of project delivery has for years accounted for a large portion of the approximately $40 billion spent annually by the federal government on design and construction related services.[2] By consolidating responsibility for two otherwise disparate functions into a single prime contractor, the government is able to benefit from increased accountability for delivery and performance, greater efficiency and integration between the design and construction phases of a project, and greatly reduced litigation exposure. Industry groups claim that compared to the design-bid-build process, the design-build methodology can cut project costs by 6.1 percent and increase project delivery speed by up to 33.5 percent.[3]

A natural but unfortunate consequence of this increased scope of work, however, is a corresponding increase in the cost of bidding design-build projects. For example, developing accurate construction costs for a proposal often requires a contractor to complete up to 80 percent of the required design work and to prepare detailed forecasts for space and material needs. In certain industries, the cost of this and other work can exceed 3 percent of the value of the entire project.

Given that only a winning bidder will recoup its costs, contractors face significant financial exposure for failed efforts. Imagine a hypothetical contractor who bids on 10 projects valued at $20 million each over the course of one year. Even at a 20 percent success rate, that contractor can expect to absorb $4.8 million in unrecoverable costs. Naturally, this has produced a chilling effect on participation in the procurement process. Smaller construction outfits are simply unable to bear the financial burden associated with failed bids, and larger contractors are discouraged from investing their funds where the perceived chances of success are low. The result is that certain qualified contractors never even enter the process due to cost disincentives.

One method employed by federal agencies to help ameliorate this undesirable effect is the two-phase selection procedure. Two-phase selection involves bidders first submitting information regarding their experience, qualifications and past performance. The procuring agency then selects a limited number of bidders to advance to phase two. A proposal is required only after the field has been narrowed to those contractors who possess the necessary prerequisites to be awarded the work. The federal agency then engages in a “best value” analysis, selecting a winner based on factors such as cost, design, risk, past performance, and the experience of the contractor.

The U.S. Department of Defense, responsible for approximately 70 percent of the governmental contracts awarded each year,[4] has increasingly relied on two-phase selection for its procurement efforts. Recognizing that an unlimited number of second-phase entrants would undermine the purpose of the procedure, legislation was passed in 1996 that limited the number of allowable second-phase bidders on DOD projects to five. Contracting agencies were allowed to exceed this number only where it was determined that permitting more bidders would be in the “[g]overnment’s interest” and “consistent with the purposes and objectives of the two-phase selection process.”

In practice, however, these amorphous criteria proved largely ineffective. Often, as many as 15-20 contractors were selected by contracting agencies for the second phase, in order to increase the chances of receiving a lower bid.[5] The result, prior to December 2014, was more contractors with failed proposals and a decreased likelihood of success for each DOD contract bidder.

Design-Build Bidding Reform Section 814 was enacted as a direct response to this problem. The reform places stricter limits on the number of bids that may be considered for the second phase of two-phase requests for competitive proposals on DOD contracts valued at $4 million or more. Contracting officers are now required to limit the field to five finalists and may exceed this limit only if they (1) provide written documentation showing how doing so would be consistent with the objectives of the two-phase selection procedures, and (2) obtain approval from the head of the agency contracting the work, e.g., the commanding rear admiral of the Naval Facilities Engineering Command. These requirements are narrowly designed to limit the application of the “expanded list” exception.

The reform simultaneously encourages participation in the bidding process while conserving costs for bidders and the government. By culling underqualified candidates at an earlier, less expensive stage of the proposal process, cost disincentives are minimized for potential bidders, who will be more inclined to participate under reduced financial exposure. Contractors who are selected in the first phase can also proceed with the knowledge that they have significantly higher chances of succeeding before committing the resources required to compete effectively. For its part, the government saves time and money as well, as it no longer is required to evaluate as many proposals, including those with no real chance of success.

The reform will likely be celebrated by smaller firms for lowering barriers to entry and allowing initial participation in an increased number of requests for proposals. Larger contractors should be wary of an increase in competition and a “bidder cap” that could prevent participation in circumstances where more than five qualified contractors exist. Although making the “best five” will depend to some extent on the discretion of the contracting officer, bidders might avoid being left on the outside looking in by placing greater emphasis on their technical qualifications during the first phase of selection, including their experience, technical competence, overall capabilities and past performance. Such factors will also be considered in awarding the project at the conclusion of phase two. In any event, although the procurement of DOD work will remain fiercely competitive, the reform will help contractors avoid spending hundreds of thousands of dollars until there is a substantial prospect of success.

—By Chad J. Caplan, Hinckley Allen

Chad Caplan is an associate in Hinckley Allen’s Albany, New York, office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The reform is now codified at 10 U.S.C. § 2305a(d).

[2] H.R. Rep. No. 113-668 (2014).

[3] U.S. Department of Transportation, Federal Highway Administration, Design-Build Effectiveness Study (January 2006), http://www.fhwa.dot.gov/reports/designbuild/designbuild2.htm.

[4] House Committee on Small Business, Committee Small Business Contracting Reform Included in Final NDAA (Dec. 3, 2014), http://smallbusiness.house.gov/news/documentsingle.aspx?DocumentID=397838.

[5] Jessica Salmoiraghi, House Passes Design Build Legislation; Eases Bidding Process, The American Institute of Architects (2015), http://www.aia.org/advocacy/federal/AIAB103874.

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