The New Era of Best Value Public Procurement

The New Era of Best Value Public Procurement

June 1, 2007

By Dean B. Thomson

Many public agencies have for years been advocating the use of “Best Value” procurement as an alternative to awarding public construction contracts to the lowest, responsible bidder. Several years ago, legislation was passed allowing Best Value methods to be used for the selection of design-builders and construction managers at risk on projects for the State Department of Administration, the University of Minnesota, and MnSCU. Nevertheless, the industry and legislature had been reluctant to extend Best Value procurement to the award of general construction contracts by counties, cities and school districts. That restriction has now been lifted by one of the last bills signed by Governor Pawlenty for the 2007 legislative session.

In a sweeping readjustment of public procurement, the legislature decided to allow state agencies and municipalities to award construction contracts on the basis of Best Value as an alternative to awards based on the lowest, responsible bidder. A change of this magnitude offers many potential rewards as well as risks. The author of this month’s Briefing Paper worked on behalf of the State Bar Association’s Construction Law Section to reduce some of the more subjective aspects of Best Value procurement that can undermine the integrity of the public procurement process.

The unions made passage of this bill their top priority, undoubtedly to advocate that union construction represents the “Best Value” to the public. As a result, the bill was drafted, reviewed, and passed in a mere matter of months, which did not allow time for all stakeholders in the process to provide important input. While the legislation unfortunately bears the marks of its hurried passage, it may still work well for both the public and the industry if all who employ it do so with an eye toward protecting the integrity of the process and not just receiving its occasional benefit. This Briefing Paper will review the scope and provisions of the new law, discuss some of its safeguards, and then conclude with a summary of the risks inherent in the new method and what can be done to limit them.

The Best Value Alternative

The heart of the best value statute is found in the new Minn. Stat. § 16C.02, subd. 4(a), which states:

“Best Value” describes the result determined by a procurement method that considers price and performance criteria.

In other words, low price is not the sole selection criteria; performance criteria can also be used to select the successful bidder. The same subdivision then lists some performance criteria which the public entity may, but is not required, to consider, including:

(1) the contractor’s performance on previous projects;

(2) the timeliness of the vendor’s or the contractor’s performance on previous projects;

(3) the level of customer satisfaction with the contractor’s performance on previous projects;

(4) the contractor’s record of performing previous projects on budget and ability to minimize cost overruns;

(5) the contractor’s ability to minimize change orders;

(6) the contractor’s ability to prepare appropriate project plans;

(7) the contractor’s technical capabilities;

(8) the individual qualifications of the contractor’s key personnel; and

(9) the contractor’s ability to assess and minimize risks.

As stated, these performance criteria are not required to be used in any Best Value evaluation, and given their ambiguity and significant overlap, it is hoped that they will not all be used. As an example, the third performance criterion, the “level of customer satisfaction” appears to be adequately covered by the first two performance criteria because the level of customer satisfaction should be directly related to the quality and timeliness of the contractor’s performance on previous projects.

In addition, while the contractor’s ability to minimize cost overruns appears to be a legitimate selection criteria, the contractor’s ability to minimize change orders does not. After all, a change order is an agreement signed by the owner recognizing that a legitimate change has taken place. If the owner has ordered additional work, or if unforeseen conditions are encountered that the owner agrees justifies a change order, then it seems arbitrary to evaluate bidders on the number of change orders that an owner approved. Recognizing that the new statute does not contain the best possible list of selection criteria, the Associated General Contractors of Minnesota is intending to develop a set of selection criteria to recommend to public entities that it hopes will result in a more meaningful and less redundant set of evaluation factors.

The next most important new provision is found in Minn. Stat. § 16C.28, which allows state agencies to award contracts pursuant to either the lowest, responsible bidder method or the Best Value method set forth in Section 16C.02, subd. 4(a). If a state agency chooses to use the Best Value method, then the solicitation document must state the relative weight of price and other selection criteria, and the award must be made to the contractor offering the Best Value applying the weighted selection criteria listed in the solicitation.

Minnesota Statutes 16C.02 and .28 apply to the Department of Administration and other state agencies, but the new laws also extend the authority to use the Best Value method to municipalities, which include counties, cities, school districts and other public entities. The new laws transfer this authority by identifying various statutes that require municipalities to award contracts to the lowest, responsible bidder and then authorizes them to use the Best Value alternative described in Minn. Stat. § 16C.02 and .28. For example, Minnesota’s municipal contracting statute (applying to all municipalities) is now amended to read:

As an alternative to the procurement method described in subd. 3, municipalities may award a contract for construction, alteration, repair or maintenance work to the vendor or contractor offering the best value under request for proposals as described in 16C.28.

Protecting the Integrity of the Process

Of course, the inclusion of performance criteria in the selection process introduces a great deal of subjectivity that was not present when the award was based on the lowest, responsible bid. Increased subjectivity offers an opportunity for favoritism and undue influence, which can undermine the integrity of the public procurement process. In order to combat those risks, several protections were added to the new legislation.

First, any state or municipal entity using the Best Value method must state in the solicitation document the relative weight of price and other selection criteria to be used in the award. In addition, the award must be made according to the weighted criteria listed in the solicitation document. If interviews of the contractor’s personnel are part of a selection criterion, the relative weight of the interview must also be stated in the solicitation document and applied accordingly. These requirements should make the process more transparent and accountable, and were designed to prevent public entities from changing the basis for their awards after bids were opened in order to favor one contractor over another. At least bidders will know the criteria upon which they are being evaluated. In addition, contractors should be better able to match what they supply to what is being demanded by the public entity leading to a more economically efficient procurement. For example, if early completion is listed as a selection criterion and given a high relative weight, then a bidder should be able to better assess how much money to allocate in its bid in order to obtain an earlier completion.

Second, the legislation prohibits public entities from penalizing contractors who have made past claims on construction projects. The list of selection criteria in Minn. Stat. § 16C.02 states that, “‘Performance on previous projects’ does not include the exercise or assertion of a person’s legal rights.” This important protection prohibits public entities from punishing contractors who have made claims for additional time or money on previous projects while exercising their “legal rights.”

Third, public entities are required to establish procedures for developing and awarding Best Value requests for proposals for construction projects. The criteria to be used to evaluate the proposals are also required to be included in the solicitation document and must be “evaluated in an open and competitive manner.” The authors of the new legislation recognized that there are not many procurement officials experienced in Best Value procurements, so training for public personnel is required before any entity can use the Best Value method. The statute contemplates that the Department of Administration will develop a training program for both state and municipal personnel.

Fourth, in order to give smaller municipalities the time to acclimate to the new Best Value method and to receive proper training, the new legislation provides for a phased ability to use the method depending on the size of the municipality in question. The following entities are eligible to participate immediately in Best Value procurement: (1) state agencies, (2) counties, (3) cities, and (4) school districts with the highest 25% enrollment of students in the state. After two years, school districts with the highest 50% enrollment of students in the state can also use the method. Finally, after three years from the effective date of the legislation, all other townships, school districts, and political subdivisions in the state can use Best Value procurement. In addition, the legislation prohibits the Commissioner or any municipality allowed to use Best Value from doing so for more than one project annually, or 20% of its projects, whichever is greater, in each of the first three fiscal years in which Best Value construction contracting is used.

Risks and Solutions

Public entities have been looking forward to the benefits of Best Value procurement for many years. The same is true for contractors that emphasize quality and skills rather than low price. Nevertheless, the new method introduces risks that both public entities and private contractors must be vigilant to control and avoid.

First, public entities must establish rational, measurable, and objective Best Value selection criteria. If it appears to any bidder that a public entity has not done so, or if it appears that the selection criteria have been established to effectively sole source a project to one bidder, then the contracting community and trade associations should immediately object in writing to those criteria before bids are opened. All stakeholders in the process must be vigilant so that “Best Value” does not turn into a silent, but understood, code for the selection of favorites.

Second, the selection criteria — and all sub-criteria — should be listed in the solicitation. Sometimes, a public entity’s grounds for award are not clear because it has not announced the weights of the sub-criteria that comprise the few general criteria that the entity has identified. Ambiguity in the basis of the award is not in the public’s or the industry’s benefit. If all the criteria or sub-criteria are not listed and weighted, the industry and its trade associations should insist that they be announced before bid opening.

Third, a contractor’s claims history cannot be used against a bidder as an evaluation factor. On the other hand, this restriction might conflict with the statute’s suggestion that a contractor’s ability to minimize change orders is a valid selection criterion. Both the industry and the public entities will have to appropriately reconcile these competing interests. Bidders should periodically demand copies or notes of any interviews with public entities about that bidder’s past performance to ensure that any score or recommendation was not influenced by the bidder’s past assertion of its legal rights.

Fourth, the new legislation also allows the Minnesota Department of Transportation (“MnDOT”) to use the Best Value method, but either by intention or more likely oversight, the new legislation does not require MnDOT to state or weight the selection criteria and make its award according to the stated criteria. There is no reason to require the Department of Administration and all other municipalities to award pursuant to the safeguards provided in Minn. Stat. § 16C.28 but allow MnDOT to ignore those safeguards. This omission should be discussed by the industry and MnDOT and both should agree to voluntarily adopt the protections required by Minn. Stat. § 16C.28.

Unfortunately, bad behavior by a few can cause scandal and undermine the integrity of how our public tax dollars are spent. All stakeholders in the new Best Value procurement system must be committed to its proper use in order for everyone to enjoy the benefit of its promise.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T

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