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Business Observer Friday, May 20, 2011 9 years ago

Shakedown

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Hillsborough County's request for proposal process for big construction projects may not meet the legal definition for bid shopping. Disputes abound on all sides.
by: Jay Brady Government Editor

REVIEW SUMMARY
What. Hillsborough County bid process questioned.
Issue. Is price negotiation method illegal, unethical or not?
Impact. Taxpayers benefit, but contractors feel squeezed.

A year after the $10.2 million contract for construction of the Hillsborough County East County Courthouse in Plant City was awarded to Manhattan Kraft Construction, controversy reins regarding how the county selects and negotiates to award such contracts.

Leading contractors, including representatives of Tampa-based Manhattan Kraft and EMJAY Constructors, who both represent trade group Associated Builders and Contractors, argue that instead of using one of two methods prescribed by state statutes to choose construction managers, the county is using an unethical hybrid approach.

Florida law outlines two methods to award construction contracts: a qualifications-based selection where contractors are chosen based on their experience and then a price is negotiated; or competitive proposal selection, in which contractors submit bids for a project and the public entity selects the lowest bid that best meets the specifications for the project.

By combining aspects of each method, the county is essentially soliciting contractors for free estimating services, according to EMJAY's vice president, Joe Vislay, the chairman of Associated Builders and Contractors of Florida. That's because, in the example of the courthouse, the county had detailed pricing information from 18 contractors that was used to negotiate the final, and lower, price with Manhattan Kraft.

Stephen Marlowe, an attorney with Marlowe McNabb P.A. in Tampa who works in construction law, agrees. “In effect, instead of only using qualifications, [the county's] using qualifications and pricing as the basis for a selection.” Marlowe's opinion based on his 35 years of experience: “It violates the statute.”

Philip Hammersley, a partner with Norton, Hammersley, Lopez and Skokos P.A. in Sarasota, also thinks Hillsborough County's process doesn't comply with state law. Hammersley says the law allows a choice between competitive bid and competitive negotiation for construction management. “In this case what they've done is they've opened the bid and then done competitive negotiations with the guy they select, and then used the other bids to negotiate the guy down.”

But the county's senior assistant county attorney, Rosemary Perfit, says the county's process is legal because the section of state law that deals with construction management
refers to another section that allows local governments to “competitively award” a project to a construction manager.

Vislay sees where Perfit's coming from, but he says it effectively renders the construction management laws — intended to base selection more so on qualifications and not the lowest bid — meaningless.

Hammersley doesn't buy Perfit's argument. “This is competitive bid followed by competitive negotiation. I don't see where that's authorized.”

Laws and ethics
At issue are three Florida statutes that go together because one references the other two, which creates what Manhattan Kraft's Vice President of Estimating Terry Donathan calls “a gray area.”

The first law simply states that a government entity is allowed to select a construction management firm in accordance with a process outlined in another section of Florida law.

The second law spells out the process in which government entities can negotiate a “fair, competitive and reasonable” price, but not until after they've selected a contractor.

However, the county is negotiating price with its chosen contractor based on others' submitted bids, using the third statute as justification.

The third law states that local governments can use a competitive award process based on requests for proposals. Perfit interprets it to mean the county can use its hybrid approach when outlined in a request for proposal.

This is where Marlowe and Hammersley disagree with Perfit's legal interpretation, saying the process must follow one statute or the other. They argue that just because the hybrid approach is in the request for proposal, that doesn't make it legal.

Donathan takes a lighter tact. “I'm not going to say they're doing anything illegal, but ethical is another question.”

As chairman this year of Associated Builders and Contractors Florida Gulf Coast Chapter based in Tampa, Donathan says he nonetheless had to speak out for his members.

He says: “The selection is supposed to be purely on qualifications.” Only after that selection, he says, should costs be negotiated. As it's being practiced in Hillsborough County, however, prices are getting “mingled” into the selection before formal negotiations of price take place.

The county's not shy about the county's emphasis on low price. “It's heavy on that,” admits Perfit. “That's because price is very important to us. That goes into how we rank them.”

In fact, for the 60,000-square-foot courthouse project, a county committee ranked the 18 firms responding to the county's request for proposals largely on price. Out of the 105 points possible for five evaluation criteria, as many as 60 points could be given for “Guaranteed Maximum Price” plus five bonus points for coming in under the county's $14,675,000 budget.

That adds up to 62% of the criteria based on the price. The second highest number of points (25) was for “Approach, Ability and Successful Past Experience” — the qualifications.

Lowest price vs. best value
But it's what happens when the county's negotiating part of the process with the top-ranked firm that draws the ire of contractors like Donathan and Vislay.

Armed with 18 sets of detailed prices on everything from concrete work to plumbing, electrical and mechanical, the county uses those figures as leverage to cut into the first selected firm's price.

Vislay, who did not submit a bid on the courthouse jobs, explains that a contractor in that situation then has to bargain his subcontractor down to the price the county found in another proposal. Or, he's pushed to go with another subcontractor who may not be as reliable or best suited for the particular job.

Subcontractors don't want to work with general contractors who do that, according to Vislay, and it can strain an otherwise good business relationship.

In the case of the courthouse, Kraft Manhattan's proposal price was the fourth lowest of the 18 offered at $10,575,000. But in the end, the price ended up at $10,191,000, or 30.6% less than the county's estimate of $14,675,000. Although how Kraft and the county arrived at the lower price is not a big issue for the firm in this instance, it's the potential for abuse, the problems it can cause with subcontractor relationships, and the thought of knowing that it could be the work that went into their cost estimates being used by a public client the next time out.

“In general,” says Jan Jardieu, a county procurement department manager, “once a contract has been awarded to a bidder or a contractor, if there's a way to get a job done at a lower price that would seem to be in the best interests of the taxpayers.”

Another manager in the department, Lynne Fillmon, echoes Jardieu's sentiments. “Why wouldn't we use every tool we have to negotiate price?” she asks. “The whole purpose is to get a fair price for the taxpayer.”

Vislay says he takes issue with that assessment, and questions the legality of the county's actions. He says that the county using the pricing information of competitors to negotiate a lower price is like saying, “Thank you for your information, we're going to give it this other guy,” he says.

Though Perfit sticks to her argument that the county's request for proposal process for construction management is legal, she says she's open to discussion. The level of detail of that information has grown over the years according to Vislay, something that Perfit acknowledges she was not aware.

“I'm sure staff would take it under advisement,” Perfit says. “Is construction manager at risk working, or is it doing some kind of damage? We're not out to hurt access.”

Still, Vislay says, legislation to sync up the three statutes may be what's needed to preserve the intent of construction management as an efficient contract delivery method and make it clearer to local governments how the process is meant to work. “They bastardized it only so they could pick whom they wanted and beat that person down on the price,” he says.

How the hybrid system works

Joe Vislay, vice president of EMJAY Constructors and chairman of Associated Builders and Contractors of Florida explains how the hybrid of a qualifications-based system and a competitive bid process works, a process he believes may be illegal.

• The owner requires the construction manager or professional to submit qualifications and pricing (a detailed guaranteed maximum price breakdown with subcontractor names in the case of a construction manager) as part of the request for proposal response.

• The owner selects the most qualified firm or the firm he wants. This firm may not be the lowest priced. In most cases it is difficult to analyze because each firm may interpret the general requirements component differently than another firm (i.e., number of management personnel, skill level of personnel, percentage of participation by each personnel, etc.). It is rare that the owner provides enough information to price the work and make and equal comparison. (“Apples to Apples”.)

•  The owner, now armed with the detailed pricing information from all of the construction management proposers, then negotiates with the selected construction manager in an effort to have them match the lowest price. There is no requirement for the public owner to contract for the selected proposer's price.

• This puts the selected construction manager (if he is not the lowest priced) in a difficult position because he now needs the subcontractors he utilized in his originally submitted price to match the low number or utilize different subcontractors or consultants (from another proposer) to meet the low price. However, subcontractors and consultants price work differently for different construction managers or professionals.

• The other construction managers and subcontractors are only being used to provide free pricing information so the owner can leverage his contract negotiations with the selected construction management firm.

This new process for selecting construction managers and professional services circumvents the philosophy and intent of a construction management delivery.

Construction managers, program managers and design professionals should be selected on qualifications and services negotiated for best value. For certain projects construction management services procured and executed properly provide the best value and allow all qualified subcontractors to competitively bid the work to one selected construction manager based upon a comparable detailed scope of work.

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