oversight

Surface Transportation: States Are Experimenting With Design-Build Contracting

Published by the Government Accountability Office on 1997-04-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Offke
      Washington, D.C. 20548

       Resources, Community,   and
       Economic Development    Division


      B-275886


      April 29, 1997


      The Honorable John H. Chafee
      Chairman, Committee on Environment
       and Public Works
      United States Senate

      Subject:   Surface ‘Transuortation: States Are Exoerimentig      With Design-Build
                 Contracting

      Dear Mr. Chairman:

      This report responds to your request for information on design-build contracting
      and supplements information presented in our testimony of March 6, 1997-l As
      we testified, the Federal Highway Adrninistiation (FHWA) has established a
      pilot project to test and evaluate this new approach to procurement, which
      combines the responsibilities for designing and constructing a project in a single
      contract instead of separating these responsibihties, as is traditionally done.
      The report provides information on (1) the extent to which states have used
      design-build contracting under FHWA’s pilot project; (2) the advantages, cited
      by proponents, of this approach over traditional contracting and the conditions
      under which the approach can be applied to highway projects, and (3) the
      obstacles to using the approach for highway projects.

      In summary, we found the following:

           Under FHWA’s pilot program, the states are experimenting with design-
           build contracting. As of January 1997, 13 states had initiated over 50
           design-build projects that vary widely in cost. Although some of these



      %rface Transnortation: Prosnects for Innovation Through Research, Intelligent
      Transnortation Svstems. State Infrastructure Banks, and Design-Build
      Contracting (GAO/T-RCED-97-83).
                                                 GAO/RCEJI-97-138R   Design-Build Contracting
B-275886
     states have approved a second round of projects, only three states have
     completed one or more design-build projects.

     According to proponents, design-build contractig improves coordination
     between the designer and the builder, requires less monitoring by the
     sponsor or owner, and reduces the potential for legal disputes.
     Additionally, proponents maintain, the approach can save time and reduce
     costs. However, design-build contracting may not be applicable to some
     types of highway projects, such as a simple resurfacing. FHWA has
     concluded that the states’ experience is still too limited to assess the
     broad benefits, costs, and applicability of the approach.

     Several obstacles limit the use of design-build contracting for highway
     projects: Laws in 17 states, as well as federal laws, do not permit the use
     of design-build contracts for most highway projects; the construction
     industry has been cautious about the approach because of liability and
     costs concerns; and funding may not keep pace with construction for
     larger projects.

BACKGROUND

FHWA is experimenting with design-build procurement for highway projects as
part of a pilot program designed to test and evaluate various innovative
contracting practices. The design-build approach, while becoming more
common in the private sector for facilities such as industrial plants and
refineries, does not yet have an established track record for highway or transit
projects in the United States. FHWA’s pilot program, called the Special
Experimental Project 14 (SEP 14), grew out of a 1991 Transportation Research
Board task force report that identified innovative procurement practices, such
as design-build. Additionally, the Federal Transit Administration, also withm
the Department of Transportation, is funding demonstration projects to test the
efficacy of design-build procurement.

Under a design-build contract, according to FHWA, a state highway agency
identifies a project’s desired end results and establishes minimum design
criteria. Prospective offerors prepare proposals encompassing both the design
and construction of the project, and the state highway agency subsequently
selects the successful proposal on the basis of a combination of factors,
including the quality of the design, the delivery time, and the cost. Under the
traditional procurement approach, design and construction services must be
 separated and a construction contract, which generally goes to the lowest
bidder, can be awarded only after the design is complete.

 2                                         GAO/RCED-97-13%   Design-Build Contracting
B-275886
STATES ARE EXPERIMENTING WITB DESIGN-BUILD CONTRACTING

There is considerable interest in design-build contracting, according to FX’WA
officials, who cited the Substantial number of relatively new projects proposed
under SEP 14 as evidence of states’ increasing interest in the approach.
According to FHWA, as of January 1997, 13 states2 had initiated over 50 design-
build projects under the program, and additional projects are expected. For
example, Florida has had positive experiences with a state-funded design-build
program, having completed 13 projects totaling $40 million. In 1996, the Florida
legislature approved an additional $60 million per year for design-build
contracts. The Ohio legislature has also authorized a pilot program of new
design-build projects. The cost of projects under the federal program ranges
from $1.4 billion for the reconstruction of I-15 in Utah to a few million dollars
for various bridge projects.

As of January 1997, the I-15 Corridor Reconstruction in Utah was the largest
design-build project. This 26-kilometer-long project will replace all existing
pavement and will add one high-occupancy-vehicle lane, one general-purpose
lane, and one auxiliary lane in each direction. All but three structures along the
project’s corridor will be replaced, including more than 130 bridges and most of
the existing interchanges. Three new railroad grade separations will also be
built.

Several states are using design-build contracting for a variety of smaller
projects. For example, Alaska is converting a 4kilometerlong railroad tunnel
into a combined railroad-highway facility. Florida has completed 13 design-
build highway projects costing a total of $40 million, and the state legislature
has approved another $60 million per year for use in design-build projects.
Michigan is using the approach to deploy an Intelligent Transportation System
(ITS) traffic management system on I-75 and I-696. Maine and South Carolina
are using design-build contracting to replace bridges. Arizona and California
have each completed a design-build project through FHWA’s Emergency Relief
Program: Arizona replaced a flood-damaged bridge for $3.5 milbon, while
California replaced an earthquake-damaged highway ramp on I-10 for $3.8
million. The design-build approach is well suited to emergency relief work,
which emphasizes the quick reconstruction of damaged facilities. Appendix I
lists the states’ design-build projects under SEP 14.



2Alaska, Arizona, California, Colorado, Florida, Maine, Michigan, Minnesota,
New Jersey, North Carolina, Ohio, South Carolina, and Utah.

3                                          GAOAtCED-97-138R   Design-Build   Contracting
B-275886
While interest in design-build contracting may be increasing, the states are still
experimenting with the approach and their experience is limited. Only three
states-Arizona, California and Colorado-have completed at least one federally
funded design-build project, and these projects are all relatively small?

PROPONENTS CITE ADVANTAGES OF DESIGN-BUILD CONTRACTING FOR
CERTAIN TYPES OF PROJECTS

Proponents suggest that combining the responsibility for a project’s design and
construction has several advantages. First, when one party is responsible for a
project’s cost and schedule, the project’s sponsor or owner does not have to
coordinate the activities of the designer and builder. Instead, this coordination
occurs within the design-build team. Design-build contracting can also reduce
the administrative burden on the sponsor or owner because it requires
monitoring only one contract rather than several different design and
construction contracts. Finally, when the contractor and the designer are
jointly responsible for the quality of the &al product, the potential for disputes
 and litigation between them is diminished.

According to proponents, design-build contracting can also save time and costs.
Time savings can be achieved by overlapping some design and construction
activities, so that some construction can begin before all designs for a project
have been completed. Under traditional contracting, all designs must be
completed before construction can begin. Cost savings may be achieved when
the cooperative relationship between the designer and the contractor allows for ..
building value engineer%& into the project. Finally, earlier information on a
project’s total costs may be available under a design-build contract because the
project’s design and construction costs are determined and guaranteed
simultaueously rather than sequentially.

The Utah Department of Transportation expects to achieve significant time
savings by using design-build contracting for the I-15 Corridor Reconstruction.
Specifically, the department estimates that, by using the design-build approach,

%lifornia is also using design-build contracting for several nonfederally funded
toll roads, including the San Joaquin Hills Corridor, Eastern Transportation
Corridors, and Foothill Transportation Corridors. These three projects will cost
approximately $2.5 billion. Virginia and Colorado have also used design-build
contracting for non-federal-aid toll road projects.
 *Value engineering is a formal technique used by contractors or independent
 teams to identify methods of constructing projects more economically.

 4                                           GAOLRCED-97-138R Design-Build Contracting
B-275886
it can reduce the project’s duration by as much as 3 years. According to the
department, the benefits of using this approach include (1) rapidly correcting
existing problems and bringing the highway up to current Interstate standards,
(2) minimizing disruption to the public and adjacent communities, and (3)
completing the project in time for the Salt Lake City Wmter Olympics in 2002.

According to the Executive Director of the Design-Build Institute of America,
despite the advantages claimed for it, design-build contracting is not appropriate
for all types of projects, and this approach should be applied only to
appropriate projects. As a rule, such projects have a strong creative design
component. Projects that do not involve much design work, such as resurfacing
an existing roadway, are not suitable for design-build contractig because they
would derive little benefit from integrating the work of the designer and the
contractor. The traditional contracting approach would make more sense for
such projects.

Although the states are becoming more interested in design-build contracting,
FHWA still considers the approach experimental. According to FHWA, an
overall assessment of the broad benefits, costs, and applicability of design-build
remains limited by the small number of completed projects. FHWA has
concluded that it will encourage states to evaluate design-build contracting on a
project-by-project basis under SEP 14.

OBSTACLES LlMlT THE USE OF DESIGN-BUILD CONTRACTING

State procurement laws limit the widespread use of design-build contracting. A
1996 survey conducted by the Design-Build Institute of America identified
procurement laws in 17 states that do not permit the use of combined design
and construction contracts. Laws in 12 of these states also do not allow the
use of design-build contracts by subcontractors. According to a 1995 study by
the Building Futures Council, some state laws generally prohibit design-build
procurement indirectly, rather than directly, by requiring the separation of
design and construction services. Specifically, construction services can be
awarded to the lowest bidder only after the design is complete. The Council
noted that requiring the separation of design and construction services and
selecting the lowest bid is a decades-old practice based on concerns over waste,
fraud, and abuse, not on considerations of efficiency.

While FHWA is experimenting with design-build contracting under its authority
to engage in research activities, current federal law precludes the general use of
this approach for projects conducted under the federal-aid highway program.
Changes in legislation would be required to give FHWA the authority to issue

5                                          GAOIRCED-97-138R   Design-Build   Contmcthg
B-275886
regulations allowing design-build contracting as a procurement option for
federal-aid highway projects. FTIWA has not sought this authority. F’HWA
believes that the current experimental program is appropriate because no
consensus has emerged within the highway construction industry on the
desirability of the design-build approach.

F’HWA identified the lack of consensus on design-build contracting within the
construction industry through a special 1994 government-industry working
group. The group included F’HWA and state officials, along with representatives
of the Associated General Contractors of America, the American Road and
Transportation Builders Association, the American Consulting Engineers
Council, and the National Society of Professional Engineers. None of the
papers submitted by these groups supported the use of design-build contracting
for highway projects. One official from FTIWA’s Office of Engineering told us
that he has asked industry representatives about then- organization’s position on
design-build and the representatives could not respond because their
membership was split on the issue.

As noted in a 1993 report to F’HWA, the highway construction industry has been
cautious about design-build contracting for various reasons. Professional design
&ms fear that, as subcontractors to the builder, they would be caught between
the owner’s demands for quality and the contractor’s concerns about costs.
Design firms are also concerned about bearing the cost of developing
preliminary designs and then losing the competition for the contract. Trade
associations have indicated that small contractors may not be able to compete
with large firms because small firms cannot easily bear the burden of design
costs and warranties. Contractors are concerned about financial risk if long-
term warranties5 are part of a design-build project. Contractors may fmance
performance bonds of limited duration to ensure that the promised work will be
completed as specified, but the bonding industry has been reluctant to issue
longer-term bonds guaranteeing the performance of the highway. Contractors


5When highway contracts include a warranty clause, contractors guarantee to a
highway agency that the feature under warranty will perform as expected over a
specified number of years. F’HWA’s regulations provide that state highway
agencies may include warranty provisions covering specific construction
projects or features, with limited exceptions, in National Highway System
construction contracts and, as allowed under the Intermodal Surface
Transportation Efficiency Act, may follow their own procedures for warranties
in construction contracts for federal-aid highways outside the National Highway
System.

 6                                         GAOIRCED-97-138B Design-Build Contracting
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are also concerned about the difficult of predicting trafEc and weight factors
in giving a warranty. Finally, contractors have been concerned that unknown
environmental, geological, operational, or political risks could be transferred to
them in the warranty of a design-build project.

A final obstacle to the use of design-build contracting, especially for larger
highway projects, is that funding may not stay abreast of construction. When
the design-build approach is applied to expensive “mega-projects,” the tiancing
can be complex, precisely because under a design-build contract, the
construction may be completed more quickly than under a traditional contract.
Faster construction means that funds will be required more quickly, posing
difficulties if the project’s revenue stream does not keep pace. For example, in
our review of a large design-build transit project, the extension of the Bay Area
Rapid Transit System (BART) to San Francisco International Airport, we found
that BART plans to borrow funds to cover cash shortfalls during construction.
With design-build contracting, BART may save construction costs but will incur
additional financing costs. For the I-15 Corridor Reconstruction, FHWA has
required Utah to provide a financing plan to ensure a sound fmancial basis for
the project, given the magnitude of the project relative to Utah’s regular federal-
aid program. As of January 14, 1997, Utah was still developing this plan. In
contrast, for smaller projects with established and adequate revenue streams,
concerns about financing may not limit the use of design-build procurement.

OBSERVATIONS

The states’ experience with design-build procurement is &Xl too limited for
FHWA to draw any broad conclusions about the benefits, costs, and
applicability of the approach for highway projects. However, early experience
suggests that when time is at a premium, revenues can quickly cover
construction costs, or a project includes a creative design component, the
design-build approach may be appropriate. Design-build contracting may also
be useful for disaster relief projects, such as those in Arizona and California,
which emphasize the quick reconstruction of damaged facilities.

AGENCY COMMENTS

We provided a draft of this report to DOT for review. We discussed the draft
with the Chief, Highway Operations Division, Office of Engineering, FHWA, who
indicated, in general, that the report was factually correct and that FHWA had
no disagreement with its contents. He noted that since January 1997, two
additional states-Alabama and Pennsylvania-have received FHWA’s approval to


7                                          GAO/TtCED-97-13SB Design-Build Contracting
B-275886
participate in the Special Experimental Project. He also provided editorial
clarifications, which we incorporated into the report.

SCOPE AND METHODOLOGY

We conducted our review from October 1996 to April 1997 in accordance with
generally accepted government auditing standards. To determine the status of
FHWA’s Special Experimental Project, we obtained project documents and
interviewed officials Ii-om FElWA’s Office of Engineering. To determine the
status of design-build contracting in the states, we reviewed surveys by the
Design-Build Institute of America and the Building Futures Council. To
deternxine the efficacy of design-build contracting, we interviewed officials in
FHWA and the Design-Build Institute of America. In addition, we reviewed
reports by FHWA consuhants and the Transportation Research Board.

Major contributors to this report were Joseph Christoff and Robert Ciszewski.
Please call me at (202)-512-3650if you or your staff have any questions.


Sincerely yours,




Phyllis F. Scheinberg
Associate Director,
 Transportation Issues




 8                                          GAOAtCED-97-13SR Design-Build   Contracting
APPENDIX I                                                                                APPENDIX I
                     STATE PROJECTS USING DESIGN-BUILD CONTRACTING
                     UNDER FHWA’S SPECIAL EXPERIMENTAL PROJECT 14,
                                   AS OF JANUARY 1997


    State               I Description   of projects
    Alaska               Construct an ocean class vessel for the Marine Highway System;
                         convert a railroad tunnel to combined rail-highway use near Whittier,
                         Alaska.
    Arizona              Replaced a flood-damaged bridge using $3.5 million in Emergency Relief
                         Program funds;a develop a freeway management system on l-17.
    California           Replaced an earthquake-damaged road/ramp structure on I-10 using a
                         $3.8 million in Emergency Relief Program funds.
    Colorado             Improve pavement/sidewalk/curb/      and gutter in Woodland Park,
                         Colorado.
    Florida              Completed 13 projects totaling $40 million.
    Maine                Build a new four-lane bridae across the Kennebec River.
    Michigan              Deploy a traffic management system on l-75 and l-696; build a new
                          interchange at l-94 and Vining Road in Romulus; begin using design-
                          build contracting in its Bridge Rehabilitation program; rehabilitate 9.8
                          kilometers of pavement on U.S. 23; design and build a ferry boat for the
                        , Beaver Island Transportation Author@.
    Minnesota           I Reconstruct    14 kilometers of pavement on l-35.
    New Jersey           Use design-build     contracting for 17 bridge and roadway projects.
    North Carolina       Deploy a freeway traffic management system on l-77 in Charlotte.
    Ohio                 Replace two bridges.
    South Carolina       Replace bridges on S.C. 418 over the Enoree River and S. 316 over
                         Reedy Creek; replace a bridge on U.S. l/601 over the Wateree River.
    Utah                  Furnish and install a $1.5 million freeway surveillance system in the Salt
                        I Lake City area; reconstruct I-1 5 for an estimated $1.4 billion.

aFHWA did not have cost data available for all projects under its Special Experimental Project 14.


(342927)


9                                                             GAO/RCED-97-13SR Design-Build Contracting
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