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How Do We Get The Best Outcomes for Our Aging Infrastructure: Low Fee Versus Qualifications Based Selection (QBS)

05.05.16   Mark K. Kramer, PE | More by this Author

How Do We Get The Best Outcomes for Our Aging Infrastructure: Low Fee Versus Qualifications Based Selection (QBS)

Imagine you have just been diagnosed with cancer and you are selecting a doctor(s) to help cure you. Do you send out an RFP prescribing the treatment you think is most appropriate and ask for doctors to submit a proposal? And do you then select the doctor based on the lowest price?

Or you have a difficult lawsuit you want to resolve. Again, do you put together an RFP and then seek out the lawyer with the lowest price?

Usually not, but this is what we do when solving our nation's infrastructure challenges. Why is this? I think in the case of your life or your person it is clear you are seeking the best specialist in the area (that you can afford) who has a reputation for solving similar problems and achieving the desired outcome. After all, your life is on the line. While cost is still a concern, it is not the primary selection method. You select based on the best possible outcome.

Measure for Success – What’s the Right Measurement?
In the world of design and construction there are two primary methods of procurement – low bid/fee and qualifications-based selection. Why do we select on “low fee” rather than focusing on the best possible outcome?

Understand the design fee on infrastructure and development projects is typically less than 10% of the overall project construction costs. This is only for the original design and construction. In many cases the design fee can be much lower depending on the size and complexity of the project. Also, if you include the maintenance and on-going operating costs, design fees become a much lower percentage of the overall costs during the lifecycle of a project. This means the cost to design a project is only a few percent or smaller of the overall lifecycle costs of a building, or road, or infrastructure asset.

Logically it would seem that selecting a professional engineer or architect who will provide the best overall outcome (e.g., lowest lifecycle cost) for a development project would be most appropriate. However, to really make the appropriate decision, one must understand two things:

  1. savings on the project design fee may have very little impact on the total invested in the project because the real costs are in the construction and operation, and
  2. changes made during the design phase, based solely on cost, have proven time and again to have a significant impact on the overall lifecycle cost of the project.

 

For decision makers, the only easy thing to measure is the design fee, yet is this the right measure for success?

In our world, our fee schedules are accessible to all our competitors. When we work on state or federally funded projects, we have to provide audited overhead rates approved by the State or Federal entity we are working with, and we charge our employees' time at an approved multiplier and profitability rate time. So, our fees and costs are fairly well known and transparent to our clients and our competitors.

Solving the Dilemma – Comparing Apples to Oranges
Recently I received a phone call from the Executive Director of ACEC-Michigan asking for my thoughts on a situation, as I am winding down my term as President of ACEC-Michigan. A local municipality had requested proposals for engineering services for a couple infrastructure projects. The city engineering staff did a very thorough evaluation of the firms and selected two firms based on best qualifications (i.e., approach to the project, past experience, staff personnel assigned, etc.). The two firms' fees (which were submitted at the same time as the qualifications but were not used for evaluation) were in the middle of the pack (e.g., there were proposals that ranged higher and lower than the firms judged best qualified).

At the end of the process, a City official decided to select a different firm based on low fees rather than the recommended “best qualified.” The fees were substantially different; on the order of $150,000 for the best qualified firm and around $80,000 for the lowest fee firm. There were numerous proposals and the fees ranged from $80,000 to more than $200,000 which to me indicates a wide difference in scope of services proposed. The significant difference in fees is likely associated with a significant difference in scope or level of effort proposed. To understand what you are getting in terms of service requires more than simply looking at the total fee for that service. We often hear that prospects want to compare “apples to apples” in terms of the scope. But look closely; sometimes you end up comparing apples to oranges.

Did the City Official do the prudent thing by selecting the lowest fee proposed? If the City has a proposal from a competent engineer to do the work for less, should they be selected over a firm identified as best qualified? I don’t know the right answer to this question. It is possible the low fee firm could have provided a suitable design and the City would have the savings of the fees. It is also possible the firm excluded certain items from the scope that another firm included, or they put in less hours to meet and solve problems resulting in either change orders to the client or the firm struggling on the project which can manifest itself in a variety of ways. The answer is gray and could be decided either way, but based on my experience one decision has a higher risk than the other. It has also been my experience that we don’t do well in accounting for the risk or understanding the gray part of this decision.

It’s a Risky Business – Qualifications Based Selection Can Help
SME was not involved in the projects or the process. We work on more than 4,000 projects a year of varying size and our fees are typically less than 1% of total construction costs, which means annually we are involved in more than $3 to $4 billion worth of construction projects in the Great Lakes Region. We work with a large variety of owners, contractors, engineers and architects on a range of projects, so we see all different types of procurement and project outcomes. We also do a significant amount of forensic work on failures both during construction and operations. Finally, we help many of our clients, especially large construction managers who are experts at understanding risk, with value engineering which provides us with an opportunity to see many different construction situations.

Selecting low bid, whether the contractor or the designer, always comes with increased risk compared to a qualification based selection with a properly negotiated scope and budget. The benefit of low fee is you get a lower initial fee. And if managed properly, the client can save initial costs on the project. This is the key – the ability to manage the process and the risk properly and make sure you really understand what you are getting. Unfortunately, this is not as easy as it looks.

Based on SME's 50-plus years in the industry, the risks of using low fee selection of professional services are many, and they are significant. For example:

  • change orders for design (i.e. the designer limited the scope to limit the fee),
  • good design but not necessarily the best value (i.e. the designer provided a reasonable solution, but did not have the time to optimize the design or provide a more effective design)
  • insufficient time to detail or specify the project, so the designer leans on performance specifications (this passes the time and expense to the next phase of work and may expose the project to change orders), or
  • coordination time with the project team is limited (again, this could result in conflicts showing up later in the project).

 

We often hear from clients that they are frustrated with change orders for design services because to be the lowest fee and limit their risk on scope issues, the engineer qualified or excluded certain scope items in their proposal. We find many times when an engineer is unsure of certain scope items one firm will exclude the item from the work which will lower their fee, while another firm will include it because they have a philosophy of being upfront with the client about the appropriate cost of the project (e.g., they don’t want to surprise the client). Neither approach is right or wrong but, if not clearly understood by the client, can create problems.

We also find low fee typically means the designer most often will provide a straightforward design (e.g., the design that is easiest to put on paper to solve the problem). However, it may or may not be the best overall outcome for the client. In foundation engineering, we can provide many examples where professionals who are selected based on low fee provide a suitable solution that works but is not necessarily the best value solution for the client. It takes more time to evaluate higher risk solutions, such as alternative foundation methods, that still may be acceptable to the owner and may save them money but won’t be offered in a low fee proposal or scope.

True Story - Invest a Few Extra Design Dollars & Save Multiples of the Added Fee in the Long Run
It’s easy to provide a suitable solution at a lower cost with a higher risk profile. But it takes more time to educate an owner and work with the architect and contractor to manage the risk and implement the solution appropriately. Time and time again we’ve found that the extra time, which usually translates to only 10 or 20% of additional design fee, saves our clients multiples of the added fees. True story; we have many examples of investing an additional $10,000 in design fees and saving the client more than $100,000 in construction costs alone.

A Hard Lesson Learned – Good News is You Can Learn from Other’s Mistakes

Our best, most sophisticated clients understand this and have experienced serious issues when selecting based on low fees. They’ve learned the lesson the hard way, but you don’t have to. All the best architects, structural and civil engineers and even construction managers I know understand that if you want the best outcomes, you need the best people. You have to pay them more and you have to have the appropriate amount of time and the right people in the room to provide the best outcomes to our clients’ problems.

Our professional liability carrier, Terra Insurance, and others continually report that design projects selected on a low fee basis carry a higher risk than other forms of procurement. While there are many variables involved in projects that “fail” and lead to claims, not meeting expectations of the client and poor communication or understanding of the risks are listed as common causes. By their nature the process of selecting a professional based on low fee when they are designing a unique project is risky.

Been Around the Block to Answer The Procurement Question
Our clients who have been developing and constructing projects for years understand the types of procurement and the risks involved, and recognize when it is appropriate to use low fee. They’ve been around the block and learned the lessons the hard way.

In the end, there is not a right answer as to the best method of procurement. However, there is a significant body of knowledge and experience that says selecting professional services based on low fee is done at your own risk.

It has been my experience, the longer someone has been in the construction or development business, the more they’ve been around the block, and the more successful they are, the more they tend toward selecting based on qualifications and experience rather than lowest fee. Wonder why?

For more information, contact Mark Kramer.


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