[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
           ASSESSING GOVERNMENT USE OF DESIGN-BUILD CONTRACTS

=======================================================================


                                HEARING

                               before the

                   SUBCOMMITTEE ON FEDERAL WORKFORCE,

                    US POSTAL SERVICE AND THE CENSUS

                                 of the

                         COMMITTEE ON OVERSIGHT

                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 3, 2013

                               __________

                           Serial No. 113-73

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida                ELIJAH E. CUMMINGS, Maryland, 
MICHAEL R. TURNER, Ohio                  Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee       CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania         JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee          MATTHEW A. CARTWRIGHT, 
TREY GOWDY, South Carolina               Pennsylvania
BLAKE FARENTHOLD, Texas              TAMMY DUCKWORTH, Illinois
DOC HASTINGS, Washington             ROBIN L. KELLY, Illinois
CYNTHIA M. LUMMIS, Wyoming           DANNY K. DAVIS, Illinois
ROB WOODALL, Georgia                 TONY CARDENAS, California
THOMAS MASSIE, Kentucky              STEVEN A. HORSFORD, Nevada
DOUG COLLINS, Georgia                MICHELLE LUJAN GRISHAM, New Mexico
MARK MEADOWS, North Carolina         Vacancy
KERRY L. BENTIVOLIO, Michigan
RON DeSANTIS, Florida

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                    Stephen Castor, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

 Subcommittee on Federal Workforce, U.S. Postal Service and the Census

                   BLAKE FARENTHOLD, Texas, Chairman
TIM WALBERG, Michigan                STEPHEN F. LYNCH, Massachusetts, 
TREY GOWDY, South Carolina               Ranking Minority Member
DOUG COLLINS, Georgia                ELEANOR HOLMES NORTON, District of 
RON DeSANTIS, Florida                    Columbia
                                     WM. LACY CLAY, Missouri



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on December 3, 2013.................................     1

                               WITNESSES

Mr. James Dalton, Chief, Engineering and Construction Division, 
  Directorate of Civil Works, U.S. Army Corps of Engineers
    Oral Statement...............................................     5
    Written Statement............................................     7
Mr. Charles Dalluge, Executive Vice President, Leo A. Daly 
  Company, On Behalf of the American Institute of Architects
    Oral Statement...............................................    10
    Written Statement............................................    12
Mr. Randall Gibson President Whitesell-Green, Inc, On Behalf of 
  the Associated General Contractors of America
    Oral Statement...............................................    18
    Written Statement............................................    20

                                APPENDIX

Statement of Rep. Blake Farenthold...............................    36
Statement of Rep. Stephen Lynch..................................    38


           ASSESSING GOVERNMENT USE OF DESIGN-BUILD CONTRACTS

                              ----------                              


                       Tuesday, December 3, 2013,

                  House of Representatives,
    Subcommittee on Federal Workforce, U.S. Postal 
                            Service and the Census,
              Committee on Oversight and Government Reform,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:00 a.m. in 
room 2154, Rayburn House Office Building, the Honorable Blake 
Farenthold [chairman of the subcommittee], presiding.
    Present: Representatives Farenthold, Walberg, Collins and 
Lynch.
    Staff Present: Molly Boyl, Majority Deputy General Counsel 
and Parliamentarian; Daniel Bucheli, Majority Assistant Clerk; 
John Cuaderes, Majority Deputy Staff Director; Adam P. Fromm, 
Majority Director of Member Services and Committee Operations; 
Jennifer Hemingway, Majority Deputy Policy Director; Laura L. 
Rush, Majority Deputy Chief Clerk; Eric Cho, Majority Detailee; 
Jaron Bourke, Minority Director of Administration; Devon Hill, 
Minority Research Assistant; Juan McCullum, Minority Clerk; and 
Bruce Fernandez, Minority Staff Member.
    Mr. Farenthold. The committee will come to order.
    I would like to begin this committee as we begin all 
Government Oversight Committee hearings with the committee 
mission statement.
    We exist to secure two fundamental principles. First, 
Americans have the right to know that the money Washington 
takes from them is well spent. Second, Americans deserve an 
efficient and effective government that works for them.
    Our duty on the Government Oversight and Reform Committee 
is to protect these rights. Our solemn responsibility is to 
hold the government accountable to taxpayers because taxpayers 
have a right to know what they get from their government. We 
will work tirelessly in partnership with citizen watchdogs to 
deliver the facts to the American people and bring genuine 
reform to the federal bureaucracy.
    This is the mission of the Government Oversight and Reform 
Committee.
    At this point, I will start with my opening statement. Then 
will give Mr. Lynch a chance to give his opening statement. We 
will move on then to our panel of witnesses.
    In fiscal year 2012, the Federal Government spent over $41 
billion on construction and engineering contracts. That is 
eight percent of the roughly $500 billion the government spends 
annually on goods and services. Of the $41 billion spent each 
year on construction and A&E contracting, $17 billion goes to 
small business prime contractors.
    As government watchdogs, it is our job to make sure these 
construction and A&E contracts are managed efficiently and 
effectively and the taxpayers' money is well spent. This 
hearing will focus on government award of contracts to those 
companies who do the best job and not the companies who are the 
best at competing for government contracts.
    Right now when choosing, we use a two step process in most 
design-build contracts. In others, sometimes we will use a 
single step or turn key process which requires all construction 
and design teams to submit a full proposal up front. Sometimes 
these full proposals cost more than three percent of the entire 
project cost while the contractors have no idea how many 
competitors they are up against and what realistic chance they 
have of getting the job.
    More commonly, there is a two phase process. Phase one 
requires companies to submit limited information, usually 
related to experience and past performance. Based on this 
information, a small number of the most qualified offers--
usually three to five--are selected for phase two of the 
competition. Those selected then each submit a more detailed 
price proposal and technical specifications.
    The problem is in many cases now we are getting above that 
three to five number and in some cases getting into the 10 to 
15 numbers. All of a sudden when you are spending three percent 
of the cost just to prepare the proposal with a 1 in 10 or 1 in 
15 chance, this is incredibly difficult for small businesses.
    A quick analysis of economics would say how will we this 
money back? If there are ten people, are we seeing a 30 percent 
increase in the cost of jobs bid to the government to recover 
for those not gotten and those lost opportunities?
    To help solve this problem, we have come up with a 
solution. Several members of this committee are co-sponsors of 
Mr. Graves' bill. Mr. Meadows, Mr. Connolly and I are all co-
sponsors of H.R. 2750. H.R. 2750 mandates the use of the two-
phase selection procedure for any design-build projects costing 
more than $750 million.
    The bill also requires any contracting officer, who selects 
more than five finalists, needs to explain why that is being 
done and get a higher level approval.
    I want to take a second to talk about why this is so 
important and why government contracting is so important. We 
sometimes lose sight in Washington that there are millions of 
Americans out there living and fighting to attain the American 
dream. You start off as a small contracting company and look 
for opportunities to move into government contracting.
    We set the bar so high with potential hundreds of thousands 
of dollars in costs just to prepare a proposal for the 
government. It makes the American dream out of reach, drives up 
the cost for government and to me is a lose-lose situation.
    There is a balancing act. We want to give everyone who 
wants to participate the opportunity to participate, but are we 
setting that bar so high with the costs to get involved? Is 
this another form of government regulation, bureaucracy and red 
tape that is making the American dream harder to achieve for 
those in the architecture industry, the construction industry 
and for anyone interested in participating in the design-build 
program or, for that matter, in government contracting overall?
    We are trying to make the American dream more achievable 
for everyone. One of the ways we can do that is how we choose 
to spend our federal dollars, how we choose to spend them 
wisely and who and how we set the bars to entry.
    I look forward to receiving a lot of information from this 
hearing today. My best friend through high school was a general 
contractor. I have grown up around folks in the industry. When 
I had my computer company, I shared an office with architects. 
Believe me, my phone has been ringing about this hearing. My 
brother-in-law is a government contracting lawyer.
    We look forward to your input. Whether this bill we have so 
many co-sponsors of or a version of the bill that is modified 
with amendments based on this testimony, we have a unique 
opportunity to make the American dream available to more people 
today. I look forward to the hearing.
    Mr. Farenthold. At this point, I will yield to Mr. Lynch 
for his opening statement.
    Mr. Lynch. Thank you very much, Mr. Chairman. Thanks for 
holding this hearing.
    I want to thank the witnesses for their willingness to 
participate and help the committee with this work.
    Just yesterday, the U.S. Census Bureau reported that total 
spending on public and private construction for October 2013 
was on pace for an annual rate of $908.4 billion, an increase 
of about 5 percent over the estimate from the same reporting 
period last year. However, I would note the total annual 
construction spending is still approximately 25 percent less 
than it was in 2007 when the global financial crisis began.
    These figures suggest that the construction and 
architectural services industries are still slowly recovering. 
In addition, the construction and design sectors are bracing 
for a planned second round of sequestration cuts in 2014 that 
will inevitably affect construction.
    This hearing specifically seeks to address industry reports 
that agency implementation of design-build contracting is 
hindering competition and efficiency. As evidenced by today's 
witness testimony and the hearing held in the Small Business 
Committee back in May, design-build stakeholders have expressed 
concern that smaller firms are regularly faced with the dilemma 
of whether to spend significant time, effort and scarce 
resources to compete for projects they may have little chance 
of winning or alternatively, refrain from competitive bidding 
altogether.
    This concern relates to the primary selection methods that 
are available for the design-build contracting process. Under 
the so-called on-step selection process which the Chairman 
described, an agency will require all bidders to submit 
extensive proposals up front. This includes site plans, design 
calculations, code analysis, basis of design narratives, 
renderings and detailed construction cost estimates.
    The first one-step process favors large firms that have the 
ability to make those expenditures to support their one step 
bid. The alternative method, the two-step selection process 
includes a preliminary evaluation of team qualifications in 
order to narrow down a short list. That provides opportunities 
for smaller firms.
    I agree with the Chairman that in many cases the awarding 
agency is allowing 8 to 10 bidders into that final round, the 
second round, which diminishes the opportunity of one of the 
finalist getting that final bid and also presents a cost factor 
for smaller firms that they simply cannot withstand. They are 
eventually forced out of the process.
    That is what we are trying to get at. We certainly welcome 
your thoughts on the legislation the Chairman has put forward, 
the Design-Build Efficiency and Jobs Act of 2013.
    I do want to note I think the Chairman misspoke. He said 
that the line would be $750 million. It is actually $750,000.
    Mr. Farenthold. The curse of Washington is the number of 
zeroes.
    Mr. Lynch. I could not let that one go. That is a whopper.
    Mr. Farenthold. Yes, it is.
    Mr. Lynch. So that is $750,000. I want to say at the outset 
I agree with the spirit of this bill. I know the Chairman and 
Mr. Graves put it forward. I think they are getting right at 
the problem.
    My issue going forward will be where the line is drawn, the 
$750,000. In my district, we have small restaurants, 100 seats, 
that are $750,000. I have condos in my neighborhood, three 
deckers, where one floor will be $750,000. A $750,000 contract 
will be four guys and two pickup trucks. It is a very, very low 
bar. That will create a problem.
    I am just wondering where that line should be drawn if not 
at $750,000. That is where I think I will spend the bulk of my 
time.
    Also, on some of our larger projects, we have seen great 
success in my district, in my area, with the use of project 
labor agreements which has really forced contractors to use the 
benefit of smart design and design-build processes rather than 
trying to beat down the wages of workers on those medium and 
large sized projects. We see some success using the PLA model. 
I might ask some questions about that as well.
    Mr. Chairman, I think your legislation is largely right on. 
I hope we can figure out where the good line is. I do not think 
it is $750,000 but we can talk about that. Obviously we will 
greatly benefit from the witnesses' testimony.
    Thank you. I yield back.
    Mr. Farenthold. Thank you, Mr. Lynch. You are going to save 
some of my precious questioning time because that was one of 
the lines of questioning I had, whether that $750,000 number is 
the right number.
    Pursuant to committee rules, all witnesses will be sworn 
before they testify. Please rise and raise your right hand.
    Do you solemnly swear or affirm that the testimony you are 
about to give will be the truth, the whole truth, and nothing 
but the truth?
    [Witnesses responded in the affirmative.]
    Mr. Farenthold. Thank you. You may be seated.
    Let the record reflect that both witnesses answered in the 
affirmative.
    We have your prepared testimony. Time is short always in 
life and even more so in Washington, D.C. as we have a very 
crowded agenda. We ask that you take the opportunity to 
summarize the key points. We will give each of you five minutes 
to summarize your testimony and the key points to allow time 
for those members of the subcommittee to ask questions.
    Let me introduce the panel and then we will get going. Mr. 
James Dalton is the Chief of Engineering and Construction, U.S. 
Army Corps of Engineers. Mr. Charles Dalluge is Executive Vice 
President, Leo A. Daly, an architectural and engineering firm. 
He is testifying today on behalf of the American Institute of 
Architects. Mr. Randall Gibson is President of Whitesell-Green, 
Inc. He is testifying on behalf of the Associated General 
Contractors of America.
    We will start today with Mr. Dalton. Mr. Dalton, you are 
recognized for about five minutes or until the red light in 
front of you comes on.

                   STATEMENT OF JAMES DALTON

    Mr. Dalton. Thank you, Mr. Chairman.
    Mr. Chairman and members of the subcommittee, my name again 
is James Dalton. I am the Chief of Engineering and Construction 
for the U.S. Army Corps of Engineers' Headquarters Office here 
in Washington.
    I provide engineering and construction leadership to nine 
divisions, 45 districts and guide development of engineering 
and construction policy for our worldwide civil works and 
military program missions.
    I thank you for the opportunity to testify today to discuss 
construction contracting. My testimony will address the Corps' 
policy regarding two step design-build contracts.
    The Corps employs various acquisition strategies and 
contract types to perform its mission whether the effort is for 
construction, engineering, environmental services or operation 
and maintenance of facilities.
    During the last ten years, the design-build delivery system 
has been used for many of the Corps' construction requirements. 
The FAR Part 36.102 definition of design-build is ``the 
combination of design and construction in a single contract 
with one contractor responsible for design and construction.''
    The FAR further defines two-phase design-build, also known 
as two-step design-build, as ``a source selection procedure in 
which a limited number of offerors''--normally in the range of 
five or less--``are selected during Phase 1 to submit detailed 
proposals for Phase II.''
    The Corps utilizes the two-phase design-build process and 
has developed policy implementing the FAR. The Corps also uses 
a one-step design-build or turn key process as authorized by 
Statute 10 U.S. Code 2862. The Corps policy discourages the use 
of one-step design-build procedures for most construction 
requirements.
    The two-phase selection procedure allows offerors to submit 
relatively inexpensively information related to experience and 
past performance in step one. Based on this information, the 
source selection authority selects a limited number of the most 
qualified offerors to advance to phase two of the competition 
where the down-selected offerors--again in the range of between 
three and five generally is what we look for--submit much 
resource intensive price and technical proposals for 
evaluation.
    The offerors advancing to phase two have a much more 
favorable chance of winning the competition and are therefore 
incentivized to submit superior technical and price proposals 
which reduces overall costs to the government and to the 
industry.
    Mr. Chairman, this concludes my statement. Once again, 
thank you for allowing me to be here today to discuss the 
Corps' construction contracting. I would be happy to answer any 
questions you or other members may have.
    [Prepared statement of Mr. Dalton follows:]

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    Mr. Farenthold. Thank you very much, Mr. Dalton. He gave 
back 1 minute and 34 seconds.
    Mr. Dalluge, you are up.

                  STATEMENT OF CHARLES DALLUGE

    Mr. Dalluge. Thank you.
    Chairman Farenthold, Ranking Member Lynch and members of 
the subcommittee, I am Charles Dalluge, Associate AIA and 
Executive Vice President of Leo Daly, an architecture-
engineering-interior design and planning firm ranked in the top 
ten of all firms in the United States and top 25 in the world. 
Thank you for allowing me to testify on behalf of the American 
Institute of Architects.
    My written testimony covers a number of issues related to 
federal design-build, but I would like to spend my time now 
discussing an issue of major concern to architects, namely the 
impact on architects, engineers, contractors and taxpayers of 
having too many finalists in design-build competitions.
    As you stated before, there are two different methods for 
the government to procure design-build teams, the one step and 
the two step, I would like to focus on the two step approach 
for a moment.
    When agencies choose design-build, any interested teams may 
submit their qualifications to the pre-selection board which 
creates a short list. The short list of teams then develop a 
more in-depth proposal to derive a design and construction 
cost.
    Teams must complete up to approximately 80 percent of the 
design work in advance. They must determine space needs, 
mechanical, electrical, structural, HVAC and other systems, 
building supplies and materials and, of course, the cost of 
construction. As federal buildings become more complex, this 
work requires a considerable investment of time from the 
professionals on each of the design-build teams.
    A 2012 survey published by the AIA Large Firm Roundtable 
found that between 2007 and 2011 architecture firms spent a 
median of $260,000 per project when competing for both public 
and private sector design-build projects. If the team wins, 
they can hopefully make up the cost. If they lose, those 
competition costs are gone for good.
    In the past, agencies would typically short list three to 
five design-build teams for a design-build project. Now, there 
are reports that some agencies are short listing as many as 
eight to ten teams for some projects. In these cases, the odds 
of being selected drop significantly, even as the cost to 
compete continues to rise.
    Design firms face the dilemma of betting it all on a 
contract they may not get or self selecting out of the federal 
design-build market altogether. The government also loses out 
when contacting officers need to spend more and more of their 
time reviewing larger numbers of proposals which can include 
design drawings, specifications, complex construction documents 
and the construction guaranteed maximum price.
    This is a serious challenge to the ability of federal 
agencies to deliver results for taxpayers. Fortunately, there 
is a way Congress can address the problem.
    H.R. 2750, the Design-Build Efficiency and Jobs Act of 
2013, requires contracting officers to provide a written 
justification to the head of their agency for requiring more 
than five finalists in the second stage of a design-build 
solicitation. It requires agency approval of such an increase.
    H.R. 2750 will provide more certainty and opportunities for 
design and construction firms of all sizes. It will help ensure 
that agencies select the most qualified design-build teams who 
will deliver the best buildings. It will also limit agencies' 
burdens in reviewing a large number of very complex proposals. 
In short, it is a win-win for everyone.
    That is why the AIA and a large coalition of organizations 
have endorsed the bill. I am pleased to note that Chairman 
Farenthold is a co-sponsor of this bill along with members of 
Congress from both parties. The AIA commends him for his 
steadfast support.
    In conclusion, I would like to thank the subcommittee for 
giving me the opportunity to testify today. The AIA looks 
forward to working with you to advance H.R. 2750.
    Thank you.

    [Prepared statement of Mr. Dalluge follows:]

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    Mr. Farenthold. Thank you very much.

    We will now recognize Mr. Gibson.

                  STATEMENT OF RANDALL GIBSON

    Mr. Gibson. Good morning, Chairman Farenthold and Ranking 
Member Lynch.
    Thank you for inviting the Associated General Contractors 
of America, of which I am a member, to testify before the 
subcommittee on this important topic.
    My name is Randy Gibson. I am President of Whitesell-Green, 
Inc., a small business construction contracting firm founded in 
1970 and based in Pensacola, Florida. My firm focuses on 
federal contracts in the eastern United States.
    My company has participated in many federal design-build 
procurements and has successfully performed more than 50 of 
these projects after the good fortune of receiving an award. I 
hope to address today those design build-procurements that many 
AGC members like myself decide not to compete for, some of the 
reasons why and how H.R. 2750 can help overcome the impediments 
to full competition for the benefit of taxpayers as well as our 
industry.
    During the first step of the two step design-build option, 
the federal agency generally limits the proposal requirements 
to the qualifications of the offering design-build teams. This 
information necessary to respond to these questions is 
generally kept on file by most contractors so gathering it for 
a response is relatively easy and inexpensive.
    Any contractor with good qualifications should be inclined 
to offer a step one proposal. When this happens, the federal 
agency can also easily choose the best three or more candidates 
from a good quantity of offerors to move on to step two.
    Step two generally requires submission of extensive and 
expensive technical and design information. The short-listed 
three or more design-build teams can generally justify this 
expense as an acceptable risk when compared to the reward of 
possibly winning the contract in competition with that 
reasonable number of similarly qualified design-build teams.
    In contrast, in the single step design-build option there 
is no first round evaluation of qualifications. Instead, all 
teams must submit full proposals requiring the high cost 
described earlier. Design-build teams considering pursuit of 
single step proposals have no way to judge their prospects for 
success as no team can be sure how many other teams are 
pursuing the project.
    Many qualified teams, especially small businesses like 
mine, cannot afford to chance these large costs when perhaps 20 
or more teams might also be blindly competing thus limiting 
options for the government. In today's budget constraints, 
agencies must evaluate the one step proposals of all such 
offerors and are expending much effort and resources analyzing 
these technical proposals, an added expense they could avoid by 
using the two step option.
    In AGC's written testimony we provide anecdotal examples of 
problems that my firm and other AGC members have experienced 
with federal agency single step design-build procurements. I 
would be happy to address those in questions if you like.
    H.R. 2750 would address AGC's main concerns expressed today 
by reasonably limiting the single step design-build 
procurements and reasonably limiting the second step of the two 
step design-build process to three to five finalists.
    First, the bill would prohibit one step procurements valued 
at or above $750,000 which AGC suggests may need to be adjusted 
to provide the contracting officer necessary flexibility for 
the demands of unusual or special projects.
    Second, the bill effectively limits the federal two step 
design-build procurement to no more than five finalists while 
also allowing a reasonable degree of agency flexibility.
    In conclusion, AGC supports federal agency use of the two 
step design-build procurement method and recommends that 
Congress reasonably limit one step design-build procurements. 
AGC has long held for and continues to support the reasonable 
limitation of the second step selection to three to five 
finalists design-build teams.
    For these reasons, AGC is generally supportive of H.R. 2750 
as a means to improve competition and eliminate waste in 
federal design construction procurements.
    Again, thank you for this opportunity to provide the views 
of the construction industry in this important matter.
    [Prepared statement of Mr. Gibson follows:]
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    Mr. Farenthold. Thank you very much, Mr. Gibson.
    Let be say before we get started, if any member has an 
opening statement, we will give them five days to submit that 
for the record. Without objection, we will do that.
    I will now recognize myself for five minutes for 
questioning.
    Mr. Gibson, you said you got about 50 of your contracts in 
the two step process. How many did you not get? Without trying 
to be proprietary, give me a ballpark.
    Mr. Gibson. Probably 300 or more.
    Mr. Farenthold. You could spend as much as three percent of 
the cost in the design-build. Where do you make up that money?
    Mr. Gibson. You have to receive awards enough to have a 
profit margin that supports the general overhead of pursuing.
    Mr. Farenthold. Would it be a fair statement that if you 
were not competing against so many people you would have a 
higher chance of getting them? You would actually be able to 
offer these projects to the government at a lower cost?
    Mr. Gibson. That is true.
    Mr. Farenthold. Why does it cost so much to compete for 
these projects?
    Mr. Gibson. In the one step option, the technical 
submission requirements generally involve a percentage of 
design. My firm uses out-of-house designers. I have a lot of 
good design partners who are members of AIA. I get a lot of 
feedback from these partners. Their expenditures are 
significant, not only their firms' expenditures but the 
subconsultants they bring--mechanical designers, electrical 
designers. Everybody incurs costs answering the questions 
necessary to respond to the technical qualifications.
    Mr. Farenthold. Is there additional reform that could be 
had in how that is done that would save money in either the one 
or two step process?
    Mr. Gibson. I think the real savings would be in minimizing 
the one step. I do sympathize with the agencies. They have to 
get a feel for what the design-build team's proposal requires 
technically. We do see a lot of streamlining in the agencies in 
what they do require.
    For example, when I first got into design-build 
competition, there were a lot of drawings required for 
submission. When most agencies can accept a narrative to 
explain design, they now are taking that option rather than 
requiring a lot of drawings. That always helps our design 
partners minimize their expense.
    Mr. Farenthold. Mr. Gibson touched on the expenses that go 
into that. Mr. Dalluge, one of the concerns I have is, are you 
able to do anything creative or innovative in any of this? Are 
we getting cookie cutter stuff that doesn't necessarily take 
advantage of the latest design technology? Are we sacrificing 
aesthetics? Are there any other losses in there?
    Mr. Dalluge. I think every procurement method has its pros 
and cons, but the limitation to design-build is typically there 
isn't as much engagement between the architect and engineer 
with the ultimate client. There is the builder partner and it 
is a subprime relationship. I believe there is some stifling in 
that process.
    Also if you look at the economics of a design-build 
project, referring back to the AIA Large Forum Roundtable 
survey of its members, the average fee to the architect for a 
federal design-build opportunity was $1.4 million.
    Mr. Farenthold. What percentage of overall construction 
costs is that? How does that compare to private sector jobs?
    Mr. Dalluge. Mr. Dalton may know better, but there are 
stipulations for the fee range which I believe is up to six 
percent for federal work for basic services.
    Mr. Farenthold. So we got you guys down?
    Mr. Dalluge. I think rightfully so but if you look at the 
cost to compete, anywhere on average or median of $260,000, 
your expected fee to be $1.4 million, you can see that with 
more competition, you win fewer projects, and it becomes very 
difficult.
    Mr. Farenthold. I am limited on time. We may have a second 
round of questions. I do want to address new entrants, small 
businesses, new contracting firms, and new architecture firms. 
Does the proposed legislation address that or how can we 
improve it where we lower the bar for new entrants while still 
getting quality work for the taxpayers' dollars?
    Mr. Dalluge. In my opinion, this bill goes a long way to 
providing more clarity and transparency about the system which 
will invite more people and allow small firms to compete 
better.
    The only next step that could be looked at would be quality 
based selection in both the first and second steps of the 
selection process.
    Mr. Farenthold. I see my time has expired. I will now 
recognize Mr. Lynch for his questions.
    Mr. Lynch. Thank you, Mr. Chairman.
    In our offline discussion this morning, I mentioned I spent 
about 20 years in the construction industry as an iron worker. 
I have run work as a foreman and general foreman. My Bachelor's 
Degree is in Construction Management and is an engineering 
degree, so I know just about enough to make myself dangerous in 
this hearing.
    I recently had feedback from some of my local folks. One 
gentleman, Ray Porfillio from West Roxbury, is an architect 
with a small architectural and planning firm, has spent over 15 
years of his 30 year career working on design for federal 
contracts. His experience is design-build teams have often had 
to make the difficult choice of withdrawing from consideration 
when an agency using two step selection has short-listed more 
than three to five finalists, the very situation you described.
    He has been forced to make that choice because the 
significant time, effort and cost that is involved in preparing 
a detailed proposal could not be justified with the decreased 
likelihood of winning the contract that results from a large 
number of finalists.
    Mr. Dalluge and Mr. Gibson, is it true, do small business 
design-build teams often feel pressure to withdraw from 
competition when an agency selects eight or ten finalists?
    Mr. Dalluge. I would certainly agree. The risk versus 
rewards just is not there.
    Mr. Lynch. Mr. Gibson?
    Mr. Gibson. Yes, I agree. I think that the agencies have a 
responsibility when they put their solicitations out to 
identify how many finalists they expect, the maximum number. 
Also, it is very important they identify what the step two 
technical qualification requirement will be. We sometimes see 
solicitations where they only tell you what you have to submit 
for step one and we are always sending RFIs. If they tell us 
what is going to be in step two, we can decide whether to go 
forward.
    Mr. Lynch. Let me also say on behalf of the agency, they 
are trying to get competition. They are not selecting just 
three bidders because if three bidders know pretty much know 
the other firms, you can pump up the price of a contract if 
there is only two or three. You can have collusion--not 
explicit, not illegal but a general sense of what the operating 
overhead is for these other firms so you know a neighborhood of 
prices.
    If you can get some outliers in there--I am sure that is 
what they are trying to do--where someone comes in at a rock 
bottom price, that helps the taxpayer. In the end, it may 
result in a poorer quality project, but I can see the interest 
of the agency to try to get that bid down. You want more 
competition.
    I want to ask, if am a small contractor in round one and I 
am selected to go to round two and I decide this is not for me, 
say I am in Mr. Porfillio's situation where he is backing out, 
is there any backlash or any negative consequences from the 
awarding agency? They are lining up people for bid and all of a 
sudden you back out. It is round two and they only have a 
certain number of people eligible to bid on round two or phase 
two. Is there any backlash or any negative consequences when 
you decide not to go forward in round two? Mr. Dalton, you 
might have some observations on this as well.
    Mr. Dalluge. From our perspective, there are no 
repercussions but I think that would only happen, somebody 
withdrawing, when the number of competitors exceeds five.
    Mr. Dalton. From the agency point of view, I am unaware of 
any backlash from firms withdrawing once they have been down 
selected.
    If you would allow me the opportunity to talk about the 
three to five, the experience we have in the Corps of Engineers 
is that we try to limit that down selected number of firms to 
between three and five. As part of the part one requirements, 
it is expected and actually required of us to identify how many 
of those firms would be identified to down select. We want to 
make sure that companies are aware they are competing with five 
or less and not beyond.
    Mr. Lynch. Where are these examples where there are eight 
and ten finalists in the second round? Where is that coming 
from? Is that GSA or some other awarding agency?
    Mr. Dalton. I do not know about other agencies. In one case 
where we may have more than five but it is not for a single 
design-build contract. It is actually for a multiple award 
contract. In a case like that, we may have up to ten firms 
going into the second round.
    Mr. Lynch. That is a special case though.
    Mr. Dalton. Absolutely. We are going to award five 
contracts and not one.
    Mr. Lynch. I have exhausted my time and I yield back.
    Mr. Farenthold. Thank you very much.
    I will now recognize the gentleman from Georgia, Mr. 
Collins, for five minutes.
    Mr. Collins. Thank you, Mr. Chairman.
    I actually went through design-build from a private 
standpoint and saw benefits both ways. Mr. Dalton, you said 
there was a special circumstance as far as the multiple awards. 
How special is that? Does that mean one out of every ten bids, 
five out of every ten bids? What is special?
    Mr. Dalton. For a multiple award task order contract, we 
will likely award up to five firms. We are trying to have a 
pool of contractors from which we can select. Special means 
there is more than one design-build contract.
    Mr. Collins. I apologize. That was a bad question.
    How many of these types of awards do you make where you 
have multiple projects lumped together? I can see a problem 
here. If you take on multiple contracts, even though they are 
for multiple projects and you lump them together, you are sort 
of skirting a little bit even though you are going to award 
multiple contracts, you are still grouping a lot more people 
together to provide those. I am just asking how many of those 
multiple kind of proposals do you have?
    Mr. Dalton. I do not have a number or even a percentage. I 
would have to get back to you. We actually award more single 
award contracts than multiple award contracts. We use those 
types of contracts for various different services, a lot for ok 
services, for our standardized facilities such as barracks and 
those type things on military installations.
    Mr. Collins. I am not saying they are bad. I am just asking 
how many do you have.
    In both opening statements, $750,000 was the threshold 
number here. There was discussion of whether that was a good or 
bad number. I would open it to the panel. What is your belief?
    Mr. Gibson. I believe that number was generated from a 
Corps of Engineers action. We applaud someone drawing a line in 
the sand and saying let's have a number.
    From a contractor's perspective, we do see a need to allow 
the contracting officer some flexibility in a case where you go 
above a limit like $750,000. As an example, we are seeing a lot 
of design-build jobs these days that are improvements of energy 
efficiency in an existing building.
    Lots of times the government can save expense and time 
going with the one step because they can get the design 
information from the design-build team in the form of a 
narrative--things like upgrading an air conditioning system, 
giving narratives about capacities, scope of work and so forth.
    I would hate to see them lose the opportunity to use a one 
step for something like that when the dollar expenditure was a 
little bit higher than $750,000. We do applaud the Corps' step 
forward and putting a line in the sand.
    Mr. Dalluge. In my opinion, it is purposely kept small so 
that you do not have businesses of any size having to risk 
doing a lot of design work, spending hundreds of thousands of 
dollars and not even being qualified in the one step and not to 
put a lot of firms at risk, to purposely keep that small.
    When there is a lot of money at stake, go ahead and take 
the time to do it right. Do the two step and make sure that 
before a firm has to invest a lot of money in doing design that 
the government knows they have the qualifications and 
experience to do it.
    Mr. Collins. I was not questioning the ability of the line. 
There was just some question is that the right number; is 
$750,000 the right number? Should it be higher or lower and 
making sure it is right. I think the bill is a good bill. The 
question is whether that number is the right number. I know it 
may fit the Corps but is it something we can apply in other 
places?
    Mr. Dalton. Let me try to clarify because I think this is a 
major point I need to try to make in this hearing. The 
Engineering Construction Bulletin we issued in August of 2012 
that first identified the number of $750,000 was not intended 
to be a blanket $750,000 line in the sand for all types of 
contracts.
    It actually referred to O&M Army funded construction work. 
The $750,000 is not our limit; that is a statute limit for ok 
funded construction work.
    The other two categories in that same Engineering 
Construction Bulletin were MILCON which does not have a limit 
and unspecified minor MILCON construction Army, UMMCA funding. 
That has a limit of $2 million.
    Mr. Lynch. I want to back you up a bit. I know you love 
acronyms and I do too. So UMMCA is operations maintenance. The 
limit you implied in your bulletin was regarding operations and 
maintenance and not FAR construction?
    Mr. Dalton. It was for construction work funded using ok 
Army money. The dollar limit on that is $750,000.
    Mr. Farenthold. We are back to a second round of questions. 
I am going to recognize myself for five minutes and follow up 
on that a bit.
    I want to get the scope of this because I understand where 
Mr. Lynch is coming from. If this is a contract to go out and 
build a new post office or a new federal courthouse, I cannot 
imagine a federal building coming in much under $750,000, 
anything of any size, as much as I would like it to.
    Can you give me some examples of an O&M? Is that like 
replacing all the air conditioning in a barracks, putting 
Internet access in a facility? I want to get an idea of the 
scope of O&M is and the size of the other types of jobs. Are 
there different limits for different types of jobs we might 
want to look at? Mr. Dalton, we will start with you.
    Mr. Dalton. There are different limits for different types 
of funding.
    Mr. Farenthold. Give me two or three examples.
    Mr. Dalton. If you wanted to do a pavement widening 
project, that would be considered part of your O&M. That is new 
construction but you could spend up to $750,000 with that O&M 
Army funded fund.
    Mr. Farenthold. It could be dredging or something like 
that?
    Mr. Dalton. No, that is totally different.
    Mr. Farenthold. Maybe will go to Mr. Dalluge or Mr. Gibson 
from the private sector who deal with this. I don't think there 
is as much design work for an architect, say I need a road to 
go from here to here. Obviously some engineering needs to be 
done, soil types and so forth. I want to get an idea of the 
size of projects that typically fall under this. I am trying to 
get at where we need to draw that $750,000 line.
    Mr. Dalton. I think it is a great question. The difference 
between the one step and two step procurement methods is the 
one step really does not lend itself to any project where the 
architects and engineers have to invest a lot in doing free 
design at risk. Maintenance, upgrades, paint up, fix up, those 
types of projects work very well for one step which is why the 
limit of $750,000 seemed appropriate.
    For projects like a courthouse, a post office, a project 
that requires some sophisticated design, engineering and 
construction, that really lends itself to the two step process 
which can be any size.
    Mr. Farenthold. Everyone on this panel tends to agree on 
the number five. How do we avoid getting into a situation like 
Mr. Lynch alluded to? I could name the five general contractors 
in the district I represent who will probably get 80 percent of 
the jobs. How do we encourage new applicants and get in new 
people while still protecting the government--the wild card 
applicant, the new startup who just built a school for the 
school district and now wants to build something or who has 
done hundreds of miles of county roads and now wants to build a 
federal road?
    Does anyone have any thoughts on that? Mr. Dalluge?
    Mr. Dalluge. Two points, sir. To begin, the federal 
agencies have very sophisticated and long experience levels of 
looking at projects. From the cost side, the competition know 
what is fair and appropriate based on project types and certain 
geographies, so I do not think there is the chance for unfair 
competition by limiting the number in the second step.
    I think by more clarity and transparency in this bill, you 
will encourage more young startups and small businesses to get 
engaged with federal projects because of that clarity and 
transparency. You will actually encourage that through this 
bill.
    Mr. Farenthold. I am just about out of time but I would 
like to give Mr. Gibson and Mr. Dalton an opportunity to weigh 
in on that question. Mr. Gibson?
    Mr. Gibson. I think the agencies do a good job of trying to 
encourage new people getting involved. I build a lot for the 
military and I do recognize the challenges they have because if 
you step into the military construction arena, you step into a 
whole different regulation of building. A firm coming from 
outside the military arena has a learning curve, so they have 
to deal with that, too.
    I do see a lot of the RFPs where if they are qualifying 
people for a hangar, they would say we will accept an example 
of past hangar experience in the private sector or we will 
accept a dormitory built for a college campus as an example of 
a relevant job for the dormitory we are building on the 
military reservation.
    Mr. Farenthold. Mr. Dalton, did you have anything to add?
    Mr. Dalton. I would echo what Mr. Gibson said. We are 
trying to open up and consider similar type design and 
construction efforts for the federal rather than only look at 
federal construction work. We do still have a focus on bringing 
in more small businesses. We do that with our design-build 
contracts as well as our design-bid build contracts.
    Mr. Farenthold. Thank you very much.
    Mr. Lynch, you are up for six and a half minutes. I want to 
be fair about the time.
    Mr. Lynch. Thank you.
    The legislation the chairman and Mr. Graves have put 
forward has two operative sections. Let me take the one I agree 
with first. One would be that in phase two no more than five 
offerors would be in the mix, so you would have a cap of five. 
I have no problem with that. I think that is a fair number. It 
will induce competition without being overly burdensome and 
give each of those five contractors--presuming they all 
proceed--a fair chance at getting the contract. I have no 
question on that.
    As Mr. Dalton has pointed out, the bulletin he issued was 
not necessarily one that said anything over $750,000 has to be 
two step. That is what I want to get away from, that 
assumption. Mr. Dalton, do you agree with what I just said?
    Mr. Dalton. I absolutely agree with it. The intent was for 
us to describe that we want to encourage everyone to use a two 
step process. We were trying to tie the $750,000 to a specific 
type of funding. That is where the $750,000 came from. It was 
not intended to say that was the threshold everyone should use 
in order to use two step.
    Mr. Lynch. I agree with that. This is somewhat archaic 
language so I can see how someone might assume the intent was 
different.
    I do want to point out that under the Engineering and 
Construction Bulletins that were used, 2012-23, a one selection 
procedure may only be used when all of the following conditions 
are met: the planned contract is for an authorized military 
construction project, typically a minor MILCON funded project 
or O&M Army minor new construction projects less than $750,000; 
in those cases where the offerors are not required to submit 
design products as part of their technical proposal; and also 
approval to use a one step selection process shall be obtained 
from the headquarters of the Army Corps of Engineers, Chief of 
Construction.
    I want to avoid painting this with a broad brush that 
everything over $750,000--I think we are in trouble there. I 
think it is well intended.
    I do have a comparable piece of legislation at the State 
level on bids and when to use design-build and when not to use 
it. Their number is $5 million, just to show you where the 
cutoff is. This is Massachusetts general laws, Chapter 149A in 
Massachusetts, which is one example out of 50. It shows the 
marked difference in where they draw the line.
    Hopefully during the legislative process, we can find a 
better number than $750,000 which I think is much too low and 
maybe incorporate some of the complexity we are talking about 
here as well and use some other factors like previous 
experience on similar construction projects. That would make 
sense so you have good hard numbers and we are not out in space 
with a very, very low number or God forbid, a number that is 
off the charts we are forced to accept and someone taking 
advantage of the taxpayer. We do not want that to happen 
either.
    I think that is pretty much it as far as I am concerned. I 
have seen project labor agreements work very, very well on the 
right projects, mostly large projects where speed, quality of 
construction, getting firms in early on, making sure there are 
no interruptions, making sure we have plenty of qualified 
people on the job, and making sure we have apprenticeship 
programs that provide quality workers who are well trained to 
get out on those jobs.
    Mr. Gibson, have you worked on any projects that have had 
project labor agreements?
    Mr. Gibson. No, sir, I have not. The region of the country 
where I work most often is open shop area. Most contractors 
there do not have labor agreements with the unions. The 
competition level would be impeded by that being forced into 
that particular market area.
    Speaking as a member of AGC, we are always for maximizing 
competition. We feel that PLA is limited.
    Mr. Lynch. Mr. Dalluge?
    Mr. Dalluge. I am speaking more from the architecture point 
of view so from our point of view, we don't really get involved 
with that. I may be on the construction side but certainly not 
on the architecture side.
    Mr. Lynch. Thank you. I yield back.
    Mr. Farenthold. Following up on your line of questioning on 
whether the $750,000 is the magic number, I would like to 
invite Mr. Dalluge, Mr. Gibson and Mr. Dalton, if the Corps 
wants to be in there, if your organizations have some ideas 
either for another number or some more flexible language or 
refinements to this, we want to hear them. We would ask you 
submit them to this committee sooner not later and certainly 
not before we get to a potential mark up on this bill so we can 
look at amending the legislation with something we could all 
agree to.
    I see the Vice Chair of the committee, the gentleman from 
Michigan, Mr. Walberg, has arrived and has some questions. I 
would recognize him for five minutes.
    Mr. Walberg. Mr. Chairman, thank you. I apologize for being 
late. I am going from Pell grants to design-build contracts. I 
am interested in both.
    Mr. Dalluge, you testified, according to what I read, that 
having more finalists in competition increasing costs for 
agencies because contracting officers have to spend more time 
reviewing the proposals. Isn't competition beneficial to the 
taxpayer?
    Mr. Dalluge. Absolutely, sir. I think what is wonderful 
about the two step process is it does not stifle competition at 
all. The first step, anyone from anywhere, big or small, is 
able to compete for the work based on their qualifications and 
experience they have--the requirements set out by the agency. 
There could be thousands of people pursuing that.
    The second step merely tries to select the best of the best 
of those many, many firms competing for the work. Whether you 
short list three firms, five firms or eight to ten, as we are 
seeing as the trend, you haven't stifled competition at all. In 
fact, I would argue you are encouraging more competition by 
limiting the number.
    Mr. Walberg. Mr. Gibson?
    Mr. Gibson. Speaking as a small business, I work with small 
business design firms as well. I have a default firm that I 
like to go to most often and they tell me straight out they are 
judging whether to participate in a job by the prospects of how 
many they will have to compete with if they moved on to phase 
two.
    They cannot afford to be spending the multiple tens of 
thousands, upwards of $100,000, to submit a proposal whereas 
maybe some of the larger design firms can have that in their 
budget.
    I personally feel an excellent performing designer, such as 
my default partner, when he steps out of the arena, competition 
is stifled. He does like the fact if you want to pick me on my 
qualifications and I know I am going against five, I will take 
my chances and I will spend the money to turn in that phase two 
proposal.
    He is stepping away at a percentage rate of perhaps half 
the time from opportunities to offer a proposal out of fear of 
having to spend that money and go unrewarded in step two.
    Mr. Walberg. Let me ask a question of each of you beginning 
with Mr. Dalton. Do contracting officers have a reasonable 
understanding of what goes into a design-build project and do 
they have proper expertise to undertake that?
    Mr. Dalton. Our contracting officers work within a team so 
I have people on that team from the technical side of the 
house. The combined team of contracting officer plus the 
engineering and construction knowledge we have I think 
absolutely provides the right level of understanding of what it 
takes to go into a design-build project.
    Mr. Walberg. Mr. Dalluge?
    Mr. Dalluge. I believe in some agencies there is a lack of 
understanding as to the implication of short listing multiple 
firms. While many have the proper training, I think sometimes 
selection groups believe they are making the right decision, 
they believe they are doing the right thing; they just do not 
understand the ramifications.
    Mr. Walberg. What are those ramifications or implications 
you are referring to?
    Mr. Dalluge. By short listing more firms, thinking more 
competition rather than stifling it, the burden in the next 
phase of the review committee having to review more complex 
proposals which takes more of the agency's time as well.
    Mr. Walberg. Mr. Gibson?
    Mr. Gibson. I do think at some of the local levels there is 
a lack of understanding of the benefits of short listing a 
limited number of participants. I think the best example I 
could give you is the one I gave a while ago. We have a lot of 
designers who are stepping out of the arena out of fear of how 
many they will have to compete against. They are going to have 
to put their money up against a very low percentage of possible 
awards. That is the best example I can give as to why 
competition is limited.
    Mr. Walberg. Thank you, Mr. Chairman. I yield back.
    Mr. Farenthold. Thank you very much, Mr. Walberg.
    I would like to thank the witnesses for their participation 
in our hearing. We look forward to moving ahead with this 
legislation.
    Thanks as well to the committee members and staff for 
putting this together.
    With that, we are adjourned.
    [Whereupon, at 11:05 a.m., the subcommittee was adjourned.]


                                APPENDIX

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