The following is Part 2 of a three part article by Perry Been, Public Sector Services Director.
In Lewis Carroll’s (Charles Lutwidge Dodgson) sequel to Alice’s Adventures in Wonderland (1865), Through the looking Glass, and What Alice Found There (1871), we find young Alice pondering what the world is like on the other side of a mirror's reflection. Climbing up on the fireplace mantel, she pokes at the wall-hung mirror behind the fireplace and discovers, to her surprise, that she is able to step through it to an alternative world, the Looking-Glass Land.
After spending 18 ½ years in the public service arena, with the last 9 ½ of those years serving as the Deputy Director of the State Energy Conservation Office (SECO), I now find myself in Looking-Glass Land working in the private sector for DMI Entegral Solutions. I enjoy telling folks that I am doing the same thing I did for the State: I’m dealing with the same end-users, but now I can tell them what I really think. While said tongue-in-cheek, there is a lot of truth in that statement and I would like to share just a few things that I have learned and observed during the past 18 months of my life in Looking-Glass land.
Click here for Looking Glass Land - Part 1
Lesson 2 – The best decisions are based on adequate information.
While on the surface this is merely stating the obvious, I am constantly surprised by the decisions I see being made without all of the facts. I suppose I shouldn't be surprised anymore, but nonetheless I am. It happens every time a home buyer selects a title company based on the recommendation of their Realtor, or a consumer walks into Best Buy and purchases a TV without looking up the ratings online.
And, sadly enough, it has been happening with various forms of construction and renovation contracting since the dawn of time. During my years at SECO, we had the opportunity to review dozens of project proposals by Energy Service Companies (ESCOs), engineers, and other types of firms to State Agencies in Texas. As a taxpayer and employee of the State, it was my duty to try to help my clients (the Agencies) gather all of the right information before making a decision. Most of the time, our efforts were successful in terms of helping our clients make solid decisions. One major exception, however, was our lack of ability to help in any significant way with Performance Contracts. Unfortunately, there wasn't anything we could do about it.
For those not familiar with the term "Performance Contract", it is a contract with one entity to provide energy savings renovations with some sort of guarantee of energy savings tied to it. Performance Contracting law in Texas requires that selection of a contractor be based solely on qualifications, just as an owner would select an architect or engineer. In fact, it is the only construction method available that must be procured as a professional service. Using this methodology, owners are prohibited from asking or talking about costs, profits, overhead, or any other pricing methodologies until after a company has been formally selected and notified. (If this sounds odd to you, imagine how odd it is to those of us tasked with making sense out of it...)
What all of this means is that by the time a project made it to SECO for review, all we could do is advise our clients what to do in the (invariably tough) situation they were in. Many times, we were seeing prices at roughly the same time our clients were - 9 to 12 months after their contractor was selected. By that point, our clients negotiating position was very weak.
Our approach with those situations was to push the contractors to "open their books" and give detailed information on the prices in lieu of the "lump sum" price that often was provided. At that point in the process, all we could hope for was that a litany of questions (and the anticipation of them) would force the contractors to be honest and reasonable. This was not a perfect solution, but it was necessary.
If I had known then what I know now, I could have been much more effective at helping my clients with their information gathering and decision making. The first way I would help is in the interpretation and navigation of the Performance Contracting law. Even though a contractor is selected based on qualifications, negotiations on pricing for engineering, overhead and profit, and project management can and should be conducted prior to any work being done. Though this is possible, most owners do not realize it and do not know the correct variables to negotiate. I would have kept an eye on the RFQs published by my clients, and advised them not to sign anything (including a detailed audit contract) until they had negotiated all of the construction markups and fees.
The second way I would have helped is by encouraging the use of the Design Build statute as their procurement model, as it is much more apropos for energy conservation type of work. Like Performance Contracting, an RFQ is issued requesting contractors to submit their qualifications. Unlike Performance Contracting, however, the end-user may then short-list up to five (5) companies and ask additional questions about pricing, schedule, bandwidth, and anything else relevant to the specific project.
There are other differences, such as the lack of a guarantee mandate in the Design Build law, and no limits on the type of scope (energy savings only) that are in the PC law. But fundamentally, the Design Build statute is more flexible and gives the owner more of the right kind of information to make a decision based on the economic value that each contractor is offering.
One final thought: Since joining DMI Entegral, we have given all of our clients their options on procurement in a straightforward manner, describing the pros and cons of PC and DB methods in an unbiased manner. Without exception, our clients have selected the Design Build method because it provides them the ability to make the most informed selection. What does that tell you?
