Building Innovation

More Progressive Public Procurement

"New York City government agencies are responsible for a large capital construction program that has a significant impact on the local economy and on the 'state of good repair' of the local infrastructure," said Mark Blumkin, Director - Capital Projects Consulting for Deloitte Financial Advisory Services and Co-Chairman of the Government Procurement and Procedures Committee. "Often the means by which these agencies procure and manage this capital portfolio are hampered by outdated and cumbersome regulations and methods that delay projects and increase the cost of work to the taxpayer."

New NY Bridge: Tappan Zee Bridge Replacement, Credit: New York State Thruway Authority

Based on various studies performed by Deloitte and others over the past decade, the Task Force identified key drivers of construction costs and delays on public works projects, including the lack of adequate capital planning and preparation; controls that are designed to prevent corruption but effectively create adversarial relationships between agencies and contractors, such as the City's divided management of public works projects and approval processes for payments and change orders; and outdated project delivery methods.

The Task Force drew from best practices in the public and private sectors as well as experience in using alternative project delivery methods to create proposals for realistic, achievable reforms that would improve the public sector's procurement and capital planning processes so that projects can be delivered faster and more cost effectively.

CAPITAL PLANNING AND PREPARATION

Most capital projects procured by government agencies lack adequate preliminary scoping, design, and estimating, largely due to resource constraints within government agencies and the lack of funds available for consulting services until the project is funded.

As a result, project funding levels are established based on limited information, leading to major cost increases when the appropriate consulting work is done and the true cost of the project revealed.

"The problem starts at the capital planning phase, because bond financing regulations prohibit the use of capital funds to pay for design until the overall project is included in the capital plan," said Milo E. Riverso, President and Chief Executive Officer of STV Group, Inc. and Co-Chairman of the Government Procurement and Procedures Committee. "But asking for the funding for construction before putting pen to paper on a concept dooms the budget. Construction managers should be invited to participate during the design period to get the best collaboration possible from the outset so that the design can be completed and the budget formed before going to get the construction funds."

In recent years, the City has taken steps, including appropriating funds, to address this problem with a program administered by the Office of Management and Budget (OMB) for Capital Project Scope Development (CPSD) services, intensive scope development and cost estimating services, that may be requested by City agencies for certain capital projects. These preliminary assessments enable the City to accurately estimate the true costs of selected projects and, if necessary, investigate less expensive alternatives prior to capital commitment.

Number 1 Subway Line Rebuild Following 9/11, Credit: Patrick Cashin/Metropolitan Transportation Authority

The Task Force recommends that the City expand the CPSD program to require all agencies in charge of major capital projects (e.g., any project with a preliminary budget estimate exceeding $50 million) to use CPSD services. By facilitating the development of more accurate scopes, estimates, and timelines, this "Phase 0" would improve project planning and help ensure that projects are approved with appropriate budgets and schedules.

PROJECT MANAGEMENT

Too often, public sector management of capital projects is divided among more than one government agency, slowing approval processes, compromising accountability, and delaying project completion. Perhaps nowhere are these impacts more keenly felt by contractors than in the change order and payment approval processes. Uncertainties and delays in these processes have led contractors to increase their bids on public projects to cover their costs and risk exposure.

"Multiple agencies may be necessary in the lead-up phases to establishing a capital project," said Jay Badame, President and Chief Operating Officer of Tishman Construction - An AECOM Company and Co-Chairman of the Government Procurement and Procedures Committee. "But once the capital project is funded and launched, it would be far more efficient and improve accountability to have the responsibility and authority for delivering the project rest with a single agency."

The Task Force recommends that the City adopt a more streamlined approach to project management that assigns oversight responsibility and authority to the agency managing the project once the budget and contingency have been set. As part of this streamlined approach, the Task Force recommends the following additional reforms:

• The managing agency's oversight responsibility should include budget control, with a 10 percent contingency - the industry standard - to cover change orders. In the event the managing agency needs to exceed the 10 percent contingency, then additional oversight by OMB and the New York City Comptroller's Office should be introduced.
• The managing agency should establish a contingency management plan that includes monitoring of expenditures as the project progresses. Any expenditure that exceeds the plan should trigger review by the agency's Engineering Audit Officers, OMB, and the Comptroller's Office.
• Each agency should develop a project management plan that establishes mandatory review cycle times for processing change orders and payments as well as quarterly reviews of project costs, schedules, and safety.

ALTERNATIVE PROJECT DELIVERY METHODS

Various New York statutes generally require State and local agencies to use the traditional design-bidbuild approach to public works procurement. Unless an exception to the general requirement applies, alternate methods of procurement are prohibited, placing major public works projects outside of current mainstream construction practices that often produce better value in shorter timeframes.

Alternative project delivery methods have largely superseded design-bidbuild in the private sector, and they are increasingly being authorized and used by the federal government and many states. This growing trend can be attributed, in part, to the process improvements that have characterized alternative project delivery - such as early collaboration and improved coordination between design and construction disciplines, which translate into accelerated project delivery and cost savings. Such alternative project delivery methods include design-build, design-buildfinance- operate, Construction Management (CM) at Risk with a Guaranteed Maximum Price (GMP), and integrated project delivery (IPD).

While these and other methods of alternative project delivery have a record of success in New York and other jurisdictions, they have had relatively limited use in New York - particularly prior to passage of the New York State Infrastructure Investment Act in 2011. That legislation authorized five State agencies - the Department of Transportation; Thruway Authority; Office of Parks, Recreation and Historic Preservation; Department of Environment Conservation; and Bridge Authority - to manage the delivery of construction projects using design-build through the end of 2014.

In 2014, Governor Cuomo proposed that design-build be made permanent and extended to other State agencies, but the State Legislature did not act on that recommendation. Instead, in 2015, lawmakers approved an extension of the five agencies' design-build authority through March 2017, without expanding that authority to other State agencies or local governments.

Since the Infrastructure Investment Act became law in 2011, construction has begun on the replacement of both the Tappan Zee and Kosciuszko Bridges. Using design-build, the cost and time to complete both critical infrastructure projects are estimated to fall well below initial government estimates that envisioned the use of designbid- build. "A one-size-fits-all approach to project delivery should be a thing of the past," said Mysore L. Nagaraja, Partner/Co-Founder of Spartan Solutions and Co-Chairman of the Government Procurement and Procedures Committee. "Experience has shown us the benefits of using alternative project delivery strategies. For example, when I led the MTA Capital Construction Company, we used an IPD-like process to rebuild the Number 1 subway line after 9/11, which was completed in just nine months. That simply would not have been possible using design-bid-build. The problem is, public agencies are not using these alternative strategies nearly enough."

The Task Force recommends that the State and City take the necessary steps to modernize their procurement laws and practices to allow greater use of alternative methods of project delivery. Among these steps:

• The Cuomo administration and the State Legislature should pass legislation to make permanent design-build authority and extend it to all State agencies and local governments.
• The City should give more routine consideration to using CM at Risk with a GMP as another way to improve coordination between contractors while reducing change orders and delays.
• The City should implement an IPD pilot program, with the goal of adopting it as a standard option in delivering major public works projects.