Project Delivery Method

Title: Project Delivery Method
Phase: Procurement
Category: Management
Date: August 2023

1.Background

Description of Central Subway Project – The Central Subway Project (CSP) involved construction of a 1.7-mile extension of the San Francisco Municipal Transportation Agency (SFMTA) (the Project Sponsor) T Third Line along 4th Street and beneath Stockton Street in downtown San Francisco. The CSP is Phase 2 of SFMTA’s T Third Line Light Rail Transit Project. The CSP extended the T Third Line from the 4th Street Caltrain Station to Chinatown, providing a direct rapid transit link from the Bayshore and Mission Bay areas to South of Market, Union Square, and downtown. The project included construction of four new stations: an at-grade station at 4th and Brannan streets and three underground stations at Yerba Buena/Moscone Center Station, Union Square/Market Street Station, and Chinatown Station. Four light rail vehicles (LRVs) were included in the budget for the CSP as part of a larger procurement that expanded the LRV fleet and includes options for replacement of the entire fleet. Average weekday ridership is projected to be 43,521 in 2030. The Full Funding Grant Agreement project cost is $1.578 billion.

Project Delivery Method – The CSP contractor was procured through a design-bid-build (DBB) delivery—a low-bid selection approach—which has been the common practice for public infrastructure projects in California. Although DBB contractor selection through a low-bid approach might have been effective in the past for some projects, it is no longer an effective method for complicated infrastructure projects such as the CSP. Low-bid contractor selection sets projects up for an adversarial relationship between the contractor and the owner (i.e., Project Sponsor) starting with the construction Notice to Proceed. The Project Sponsor generally believes that it has a degree of cost certainty, but most, if not all, contractors look at the second-lowest bid and decide that the money they “left on the table” (the difference between the low bid and the second-lowest bid) is money that is owed to them and that must be recovered. Low-bid contractor selection offers little incentive for the contractor to be a good partner because, no matter how caustic the contractor’s relationship with the owner is, when it is time for a new contract, the owner is practically obligated to select the same contractor again, as long as it is the lowest bidder.

2.Lessons Learned

Frequently, the DBB (low-bid) selection dynamic encourages unscrupulous contractors to underbid a project to get the award, with the full intention of making the money back, and then some, through change orders. There is much discussion about the reasons for large cost overruns in public infrastructure projects; however, in fact, one of the leading causes for overruns is baked into the “low-bid” system, and bad actors take advantage of it. Public infrastructure projects should move away from low-bid contractor selection to a qualifications-based process in which the principal considerations are the contractor’s qualifications and previous performance, and price has a more reduced role.

In the private sector, one very seldom hears of projects going significantly over budget or of an adversarial relationship between developer/owner and contractor because, in the world of negotiated contracting, bad behavior is punished—the contractors know that if they make the owner unhappy, they may never be invited to propose on future projects. In the private sector, a contractor’s good reputation for working cooperatively with owners is critical, if not existential. Oftentimes, contractors that have contentious relationships with public sector owners are very cooperative with private sector owners.

Public agencies (i.e., Project Sponsors) should move away from low-bid contracting and move to a qualifications-based selection in which a contractor’s reputation of working cooperatively with the owners is a major criterion for selection and cost is a secondary consideration. Open book cost estimating by the contractor, with the owner receiving the support of an Independent Cost Estimator (an estimator that is not part of the project team), will lead to realistic cost expectations. Ideally, this contracting approach would mean moving away from the DBB method of procurement to a Progressive Design-Build, Design-Build, or Construction Manager/General Contractor method that hinges on early contractor involvement and cooperation, thus leading to a fair price. In some jurisdictions, such a change could require legislative actions to change contracting laws. Current evidence shows, however, that such an effort would be well worth the benefits of qualifications-based contractor selection.

3.Applicability

This lesson is applicable to all transit projects, especially large capital infrastructure projects.

4.References

• San Francisco Municipal Transportation Agency
  Nadeem Tahir – Deputy Director
   
• David Evans and Associates, Inc., Project Management Oversight Contractor
  Eric Chang –Task Order Manager