Paul Huston, P.E., Design-Build Coordinator Chuck Gonderinger, HDR Engineering. Minnesota Department of Transportation (the Department)

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1 To: From: Paul Huston, P.E., Design-Build Coordinator Chuck Gonderinger, HDR Engineering Date: March 22, 2001 Subject: Target Group Businesses (TGBs) and Good Faith Requirements Project: TH14/218 Design-Build Project, SP , Owatonna, MN Minnesota Department of Transportation (the Department) Copy: Richard Augustin, P.E., Project Manager Kevin Anderson, P.E., Bridge Project Manager 1? BACKGROUND Good Faith Efforts and Design-Bid-Build. The Department has developed good faith effort requirements for prime contractors bidding on state-funded public projects to evaluate the demonstrated efforts of the apparent successful bidder to meet a specific goal for subcontracting project elements to target group businesses (TGBs). These good faith effort requirements were developed for design-bid-build projects, in which the project requirements and quantities of work and materials are well defined in the contract documents. Prime contractors for such design-bid-build projects, when bidding a project and estimating the necessary levels of work and material to complete specific elements of work, can confidently allocate certain elements to each of the various subcontractors and suppliers on its team. Existing Department Requirements. The Department s existing good faith requirements for state-funded contracts, which are similar to those of many other states, are also founded on the design-bid-build project delivery method. Currently, prime contractors must meet a proposed goal of subcontracting participation by target group businesses (TGBs) or provide good faith effort documentation that verifies that all possible steps have been taken to ensure that TGB firms were given an opportunity to secure a subcontract. The Department s requirements outline the procedures that apparent successful bidders must follow before and after award of the contract. Before contract award, if an apparent successful bidder fails to meet the TGB good faith effort requirements, the bid will be rejected and the proposal guarantee forfeited. After contract award, the prime contractor is required to meet the TGB goal it committed to in its bid. Failure to meet the commitment subjects the contractor to liquidated damages, and the contractor may be declared nonresponsive with respect to future contracts. TGBs and Design-Build. To be competitive, a prime contractor s bidding approach on a design-build project must be different than on a design-bid-build project, and often cannot be based on hard-number bids by the subcontractors and suppliers. Because the specific work and material requirements for a design-build project are not well defined, it is difficult for the TGBs and Good Faith Efforts.doc Page 1 of 5 Printed on 3/23/01

2 TGBs to estimate costs and commit to firm bids, and the prime contractor should not be required to commit an exact dollar amount of the bid to TGBs. Modification of Mn/DOT Approach. This memorandum elaborates on these differences between design-build and design-bid-build projects and recommends that the Department modify its approach to TGB requirements for design-build projects. 2? ISSUE (DESIGN-BID-BUILD VS. DESIGN-BUILD) Lower Level of Design. Design-build contracts require the contractor to estimate the work and materials on the project with only minimal plan and specification information. The design typically is only preliminary and often is provided in the request for proposals (RFP) for general information only. The design-build team is required to review the RFP information and develop the project to a level of design that is sufficient for it to develop a bid. This level of project development is substantially lower than the final design provided for a design-bid-build contract. Contingencies and Risks. Because of the limited amount of design detail that is available, prime contractors bid design-build projects differently then design-bid-build projects. Typically, working with their design engineers, they can estimate only the major work elements and approximate material requirements during the bid phase; they include other elements of the work in the bid as miscellaneous items. To determine a final bid price, the contractors add in contingency costs and risk factors to each of the various elements of the work and materials. Design-Bid-Build TGB Risks. In contrast, on a design-bid-build project, the prime contractor and its subcontractors and suppliers can identify and confidently estimate the work and materials required to complete each particular element of the project. The subcontractors and suppliers work with the prime contractor to determine their particular scope of work. The quantity of work and material are known because they are based upon contract documents that include a complete set of design documents, and the subcontractors and suppliers are bidding on a well-defined scope. TGB subcontractors and suppliers are able to use this well-defined scope of work and materials to prepare a responsive price quotation to the prime contractor. This allows the prime contractor to work with the TGBs to accept their quotes and commit to awarding them a certain percentage of the contract. Design-Build TGB Risks. Design-build projects do not have the level of design detail that is necessary for the TGB subcontractors and suppliers to typically quote a hard number because the amount of work or material is not completely known at the time of the bid. Forcing the TGBs to commit to a firm bid price introduces additional layers of contingency costs and risk factors into the bid process that, when considered together with the prime contractor s contingency costs and risk factors, often inflate the total bid. TGBs and Good Faith Efforts.doc Page 2 of 5 Printed on 3/23/01

3 Vulnerability to Risk. Prime contractors bidding design-build projects understand and are willing to accept the risk associated with limited design information, and are in the best position to accept and manage the risk. However, most TGB subcontractors and suppliers are uncomfortable bidding a hard number for work or materials that are not well defined. They, like the prime contractors, want to build contingency costs and risk factors into their bid, especially when they are bidding on only one element of the project. But bidding too high on the contingency costs and risk factors will render the design-build team s bid noncompetitive. Controlling these contingency costs and risk factors can easily make the difference between a competitive bid and an inflated, nonresponsive bid. Balancing of Risks by Prime. The prime contractor working with the design engineers is in the best position to manage and control the contingencies and risks on a design-build project. The contingency costs and risk factors at the prime contractor level typically cover the entire project and not just discrete elements of work or materials. The prime contractor bids the project assuming that some elements of the work or materials will underrun and others will overrun, and that the underruns and overruns will balance out across the project. But the subcontractors and suppliers often are bidding on only one element of the project; with all their eggs in one basket, their overall risk is much greater. Reducing TGB Risks. One way that prime contractors can manage the contingency costs and risk factors for design-build projects is to provide subcontractors and suppliers with a range of units of work or quantities of material, instead of exact amounts, which reduces the risk. The prime contractors use the subcontractor and supplier quotations to confirm their estimates and refine their total bid price, and so do not require the subcontractors and suppliers to assume the risk of quantity growth. By accepting and managing the risk, the prime contractors can protect the TGBs from risk, avoid adding layers of contingency costs and risk factors on top of each other, and keep their total bids competitive. 3? RECOMMENDATIONS We recommend that the Department modify its good faith effort requirements to reflect the different bidding requirements for a design-build contract. Following are the recommended changes: The prime contractor should be required to list anticipated TGBs and provide an approximate contract value for each. The prime contractor should agree to achieve a certain level of TGB participation, but not be required to provide exact TGB contract values. The prime contractor, if unable to meet the project TGB goal in its bid, should submit with its bid a TGB subcontracting plan that ensures that the good faith effort requirements will be met once the design has progressed to a level of completion where firm quotations for work can be obtained. Determination of the responsiveness of the TGBs and Good Faith Efforts.doc Page 3 of 5 Printed on 3/23/01

4 bidder should be based upon its commitment to achieve the TGB goal or its TGB subcontracting plan to ensure that a good faith effort will be used. The measures to determine whether a good faith effort has been made should be the prime contractor meeting the goal or undertaking a subcontracting and supplier bidding program that meets the Department s good faith effort requirements. Project monitoring and requirements for failure to meet commitments should remain the same. The TGB goal should apply to the entire project and not be allocated by project element (e.g. construction, design, etc.). TGBs and Good Faith Efforts.doc Page 4 of 5 Printed on 3/23/01

5 Insert Attachment: TGB and Good Faith Special Provisions (13 pages, 8 ½ x 11, B/W) TGBs and Good Faith Efforts.doc Page 5 of 5 Printed on 3/23/01