[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
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/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
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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
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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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Material Submitted for the Hearing Record
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