Contracting for Value, Not Just Cost

Government work usually goes to the lowest bidder. That's not always the smartest way to spend taxpayers' money.
by | October 3, 2012

When public money is involved, it's only right to go the extra mile to ensure that procurement and contracting processes are clear and transparent. Clarity and objectivity are among the reasons why government entities traditionally award projects to the lowest qualified bidder.

But sometimes considerations such as how quickly a project is completed or lifecycle costs are just as important as price, and that's when "best-value contracting," which allows government to consider factors other than price, can deliver better results for taxpayers.

Take Pennfield Apartments, a mixed-use development that, in addition to market-rate housing, will bring downtown Saint Paul, Minn., its first large grocery store. Due to a unique set of circumstances that included the meltdown of the real estate market in the wake of the 2008 financial crisis, it made sense for the city to develop the project, which is insured by the federal Department of Housing and Urban Development.

To qualify for HUD support, Saint Paul officials needed to lock down a hard cost number by December of last year. But when no contractors could meet HUD's requirements in the pre-qualification process, it looked like the project might be substantially delayed or even shelved.

Given the circumstances, best-value contracting seemed like the most sensible way to confront the challenges the project presented. But Saint Paul had never used the procurement method. Luckily, the University of Minnesota, whose flagship campus is in the Twin Cities, had used it extensively. Together with outside counsel, they mentored the city through the process.

When the proposals came in, they were first evaluated based on quality criteria, such as past experience with similar projects, success at meeting construction schedules, safety records and value-engineering ideas. But when the cost proposals were reviewed, all were far above the city's budget for the project.

During the interview process, Saint Paul asked the proposers that had earned the highest quality scores for additional value-engineering ideas to reduce project costs. Once a general contractor was chosen, the company worked with the project's architect and the city to get costs within shouting distance of the $40.7 million budget.

Groundbreaking for Pennfield was in July and completion is scheduled for 2014. Based on its experience with the project, the city is thinking about using the best-value contracting approach again.

Critics argue that best-value contracting introduces a level of subjectivity to the procurement process that invites the awarding of contracts to favored providers. But Saint Paul used clear criteria, including separate evaluation processes for quality and cost, to address that concern. Quality reviewers had no idea how much each contractor had bid.

With Pennfield, best-value contracting was adopted after the project was already underway. In procurements where it's in place from the start, reviewers won't even know the identity of the contractors whose bids they are evaluating.

Best-value contracting has the potential to be particularly beneficial on large infrastructure projects. Over the useful life of roads and bridges, for example, operation and maintenance generally cost 10 times the original construction price. But traditional low-bid procurements only focus on construction costs. Best-value contracting gives governments a tool for choosing options that might cost more up front but will be far cheaper to operate and maintain.

Thinking long-term has never been one of government's strengths. But used wisely, best-value contracting gives the public sector the ability to make procurement decisions in taxpayers' long-term interests, and it gives officials the data to defend those decisions.

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