Sunday, July 17, 2016

Are contractors cheating the City?

In his Sunday SUN article reporter Luke Broadwater looked deep into the issue of DPW and DOT cost overruns, but after reading the story one remains somehow dissatisfied, uncertain who the really bad guys are. 
Utility repairs

This isn't necessarily Broadwater's fault, but is inherent to the complexity of the matter. In the two sided world of typical construction contracting, in this case the City and the contractor, blame rests hardly one side only.

Councilman Stoke's suggestion that contractors are simply gauging the taxpayer and should "just eat" cost overruns is unrealistic and also often unfair. Especially in cases where overruns ostensibly stem from unforeseen conditions or other additional scope. Typical contract language is very clear on that. Forcing contractors to just pay those extras out of their pockets would never stand in court.

The real question is why there are so many "surprises" or items that are not properly listed in the scope of work.  And for that there are two obvious causes: 

- Poor construction documents either due to sloppy engineering and design (my field of work), which can include incomplete investigations of existing conditions.  In this case the fault rests with whoever prepared the design documents which may be neither the city nor the contractor but a third party. Which opens another set of questions, namely the fact that public agencies are so diminished in their capacity today, that they have to outsource almost everything. (another story)

- Contractors who can count on poor documents, poor investigations or the discovery of additional conditions can gamble and price the known scope low or even under their cost with the hope to recover the loss with inflated change orders. Contractors can also recover loss from dragging out work if they can charge easily for "general conditions"  (the cost for the contractor to keep a job site running). Depending on what other lucrative jobs are out there, this can also be a self defeating strategy.
Sinkhole Mulberry Street, two weeks without visible change

The remedies for these possibilities aren't easy because the fixes usually also entail cost, for example very extensive pre construction investigations. Not selecting the lowest bid qualified contractor obviously also costs money. 

The solution, therefore, most likely lies in a different "project delivery model". 

A very popular but ineffective for cost control procurement method is the "on-call" model.  In it contractors have an upset contract for, say, $10 million and than perform work on a documented "time and expense" basis until the money is used up. The bid is sometimes compared to competitors on the basis of a fictional project for which actual cost will never be known. This system is risk free for the contractor and very hard to monitor. It should be used in emergency situations where there is no time to put documents together or go through a bid process.

The utility contractor Spiniello, for example, is on an on call contract for those sinkholes that opened up on Centre and Mulberry Street. In those case, obviously, the scope of work is created by the hole itself and one can determine what is needed to fix the problem only after the debacle occurred when time is of the essence. In the case of these sinkholes the scope involves extensive detouring of sewer lines above ground. Not an easy task with pumping stations and digging to get the temporary pipes under the pavement at intersections. The rerouting of water and sewer is a time consuming utility project all in itself.

As evident as all that is, there no built-in incentive for the contractor to do things extra efficient or fast. Folks inclined to believe in conspiracy, corruption and evil intent can suspect that there is more reward in keeping people and machinery busy for as long as possible. Oversight from DPW that can reliably detect if and when this may be the case is minimal, because of the decimated man-power few understand the intricacy and complications of these operations where obstacles are encountered at every turn. 

The construction industry has identified a number of project delivery models that create a win-win situation by rewarding contractors with incentives for saving money instead of spending it. One can also assign scoping and design also to the contractor. Although this gives the contractor even more power, the responsibility cannot be pushed around as easily and sloppy design cannot no longer be used as an excuse. The design-build (and operate) model is currently used to build the Purple Line, for example.

Other project delivery models are managed construction contracts where the city would employ a construction manager to hire and oversee design and construction, improving oversight and also creating a system where all sides have skin in the game.

In short, the solution to the problem that the tax payer always gets the short end of the stick, is to tie payment on contracts to performance and outcomes, instead of just counting hours or doing things by the (design) book. 

However, even the best procurement and project delivery practices won't overcome another seemingly inherent problem of Baltimore's utility mess: the fact that the many necessary repairs seem to be executed in a reactive manner and without a clear forward looking strategy. Like in constantly patching the roof and fixing water damage in the house without ever getting around to putting a new roof on. In the end a very costly and ineffective method to get ahead of problems.

In spite of a good flow of money from water use surcharges, the City hasn't gotten anywhere near fulfilling the original deadline of the EPA consent decree. This deadline has now been extended, yet the resources all go towards fixing the latest calamity.

Klaus Philipsen, FAIA