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priations Committees of its plans to acquire a building by purchase contract. The project can then be funded from the public building fund.

PURCHASE CONTRACTS

In lieu of having public buildings built under direct Federal contract, the Administrator of GSA is authorized to contract with private entities who will construct buildings and lease them to the Government for periods of up to 30 years. At or before the end of the lease period, the building becomes the property of the United States. In the interim, the buildings are subject to State and local property taxes, unlike buildings belonging to the Government. The lease charges will take into account the fair market value of the site, cost of construction, interest charges, and other costs.

Public Law 92-313 is expected to expedite the provision of needed building space for Federal activities and reduce overall costs by greatly simplifying the construction process. We urge continuing review to assure that these new procedures fulfill their apparent promise.

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The rate of construction industry inflation from 1969 through 1971 ran roughly one percent per month or 12 percent per year. During this period, in the typical case, beginning with an agency decision to include a project in its budget, the cost of the project would increase approximately 24 percent by the time Congress appropriated funds and nearly 37 percent by the time construction began. As of July

5 As noted above, Public Law 92-313, Public Building Amendments of 1972, is designed in part to reduce delays caused by these steps in the budget process.

Calculated by the Commission.

30, 1972, the estimated current rate of inflation in the construction industry, using the Department of Commerce Composite Cost Index for construction, appears to lie between three percent and four percent per year."

In practice, the Federal Government has often not adjusted its construction cost estimates to reflect the fact that these cost increases may be expected to occur. A directive of the Office of Management and Budget (OMB) requires Federal agencies to estimate the cost of a construction project at current prices, not at the price expected to be in effect during actual construction. In other words, agencies are told to estimate the cost at "today's" prices, even though the cost will probably be higher at the time construction begins. With certain exceptions, this estimate— not including inflation-is the one shown in the President's budget, the one announced to the public, and the one submitted to Congress for approval of the project.

The pertinent section of OMB Circular A-11 reads as follows:

It will be assumed that, on the average, the general level of prices will be the same during the budget year as at the time the estimates are prepared, except where increases will result directly from laws already enacted (such as increases in FICA tax rates effective at future dates).

Recently, OMB has begun to modify its policy in certain cases, but it has not done so uniformly. The Department of Defense (DOD) now includes in its budget anticipated increases due to inflation by estimating costs on the basis of projected conditions at the date when contracts may reasonably be expected to be awarded." GSA follows the same general practice. But other agencies are still required by OMB to make their estimates in terms of current prices. The practice of permitting some agencies to include varying rates of escalation is experimental and apparently is being used only in controlled and monitored situations.

Ibid.

OMB Circular A-11 (rev. June 1971), Subject: Instructions for the Preparation and Submission of Annual Budget Estimates, sect. 13.5, p. 11.

'U.S. Congress, House, Committee on Armed Services, Military Construction Authorization, fiscal 1971. Report by the Committee on Armed Services, House, H. Rept. 91-1098, 91st Cong., 2d sess., 1970, pp. 3-4.

The rationale for not permitting escalation to be included in construction program requests includes the difficulty in accurately predicting the rate of escalation, or of increased productivity, and the anticipated beneficial effects of fostering economy by holding estimates to low levels.

This situation poses a dilemma. From the standpoint of the procuring agency, the use of estimates which ignore the realities of inflation can have several bad effects. It can mean that agencies, during construction, must go back to Congress for more money, physically trim a construction project to fit the unrealistic estimate, cancel a project, or face costly, stop-and-go construction. From a broader perspective, Government-wide projection of inflation in preparing and executing budgets could obviously spur inflation rather than curtail it.

There is no simple answer to this problem. It is, nevertheless, important that it be recognized in considering construction procurement.

In the second method, agencies run some risk of designing projects which may not be authorized and appropriated in the current year's program, or possibly ever. They will carry construction project designs to 15 percent, 30 percent, 75 percent, or 100 percent of completion and stop at any of these or other points deemed reasonable based on the project's progress through the authorization and appropriation reviews. Failure of a project to receive favorable consideration during congressional review will generally cause design of the project to stop; if the project is later revived, then design will be completed. This start, stop, start routine is costly, and so is abandoned design; however, the rewards are potentially larger than costs if the agency is skilled in predicting which projects are likely to be authorized and funded by Congress.

Early design can considerably shorten the leadtime of the entire construction program, thereby reducing total cost and providing required facilities earlier. Federal agencies with construction programs should consider requesting funds for this advance planning and design.

Design Prior to Authorization

One way to shorten the timespan for completion of a construction project is to begin designing it before congressional approval of the project through use of design funds previously approved by Congress as a budget item. Some agencies do little advance planning and design work. They normally await funding by Congress for both design and construction. Design is initiated after receipt of construction funds, and when the design is completed, the project is advertised and a contract awarded. The major construction agencies design prior to approval of construction by Congress, so that construction can begin soon after funds are apportioned. The advantage of the first method is that if Congress does not approve the project, no design expenses have been wasted. The disadvantage is that, since design can take up to a year, the timespan of the project is prolonged, during which time inflation is at work and the project is denied to the user.

Supplemental Views*

The basic text points out that serious shortcomings have been prevalent regarding Federal policy and procedures governing the financing and actual conduct of construction projects. Recent improvement attempts, also discussed in the basic text, hopefully will prove worthwhile, as as experience is gained in their application. Generally such improvements, if forthcoming, will result from the adoption of proven commercial/industrial techniques to the field of Government construction contracting. As discussed in the concluding paragraphs of the introductory chapter to this part, private industry in general makes wider use of alternative techniques than does the Government, frequently using to advantage such construction procedures as concurrent design and construction and various combinations of owner/ designer/builder/operator interests to achieve beneficial and desired results.

*Commissioners Horner, McGuire, Sanders, and Staats.

It is becoming increasingly apparent that procedures traditionally in use by the Federal Government require further continuous critical examination. Concerted steps should be taken by the various concerned agencies to explore and apply all techniques which offer potential improvement to to the Federal construction process.

In our view, concerted effort should specifically be directed toward the increased use of design/construction (commonly referred to by many as turnkey) procedures. Such procedures rely on the use of a performance specification to describe facility requirements in gross terms, rather than through the use of detailed definitive plans and specifications generated either by the Government itself or by an A-E firm employed specifically for that purpose.

In the Department of Defense, the turnkey concept has been employed either by use of one-step competitive negotiation or two-step formal advertising procedures. Both procedures have been utilized in somewhat limited fashion for the acquisition of family housing, recreation facilities, and certain other facilities which are commonly provided in the commercial marketplace. The advantage of the procedure is that, with proper selection of projects, the contractors may under competitive conditions directly apply their production, manufacturing, and/or specialized construction expertise to the design and construction of a facility. In many cases, direct application of such contractor expertise and existing systems for construction produce savings in construction costs and in construction time.

Under the turnkey procedures customary control of significant details of the design are passed from the owner to the contractor. For example, finite details which affect the longterm maintenance and operation costs of the facility are left to the general discretion of the design/build contractor. Turnkey procedures are thus very attractive and offer significant potential savings when it can be established that existing industry standards and designs in use by design/build contractors will adequately provide for the Government's facility requirements in terms of both initial acquisition and life-cycle cost considerations.

In view of the advantages obtainable, Federal

agencies should carefully evaluate the alternative use of turnkey for facility acquisition and increasingly utilize the technique where circumstances so warrant.

CONTRACTING PROCEDURES

In Part A of this report, we make a number of recommendations for overall improvements in the procurement process. Many of the recommendations in that part and elsewhere in this report 10 would be of considerable benefit in facilitating economical, efficient, and effective construction contracting. The most significant of these general recommendations are discussed below.

Contracting Methods

Existing statutes require that contracts for construction shall be formally advertised whenever the sealed-bid method of procurement is feasible under existing conditions, even though such conditions would also make competitive negotiation an acceptable contracting method."1 Thus, the contracting officer must justify the use of other competitive methods on the basis that formal advertising was not feasible. This justification requires a great deal of time, effort, and paperwork.

Representatives of the construction industry take the position that because of the Government's reliance on formal advertising and its preference in most situations for the use of fixed-price contracts, the Government construction process has become an adversary procedure between the Government and the contractor. In their opinion the inflexibility of Government contract administration places a strong emphasis on litigation-rather than on

10 Of particular importance to construction are the recommendations in Part G, on Legal and Administrative Remedies. A sample of over 2,000 Board of Contract Appeals cases indicated that about one-half of all contract disputes arise under construction contracts, although construction is only 9 percent of the dollar value of Federal procurement (calculated by the Commission).

11 In addition to the preference for formal advertising in all Government procurement expressed in 10 U.S.C. 2304 (a) and 41 U.S.C. 252(a), special treatment is given construction. See, for example, 10 U.S.C. 2304 (c) (1) and 41 U.S.C. 252 (e) which limit exceptions available for construction; and annual military construction appropriation acts.

a cooperative and expeditious performance of the job. The use of competitive negotiation rather than formal advertising would permit the greater use of cost-type contracts, which might be more appropriate in some circumstances, especially on complex, long-range construction projects.

Our studies show that more than 95 percent of disputes under construction contracts arise under fixed-price contracts. 12 The contract vehicle should permit risk to be reasonably allocated and provide the flexibility for necessary changes.

Some construction projects present the same problems as other large procurements where definitive design or performance specifications are not available, accurate cost estimates cannot be made, and the risk involved in complying with the specifications cannot be determined. Under these conditions formal advertising and fixed-price contracts should be avoided. There is no compelling reason for distinguishing construction contracts as a class from other types of procurement, such as production contracts, commercial product purchases, or major system acquisitions. The contract process should clearly be tailored to the nature of the work. Under present rules there is a potential for overdependence on formal advertising procedures and on fixed-price contracting to the exclusion of other methods. If the Commission's general recommendations on statutory revisions are approved and implemented, these problems in construction procurement would be greatly reduced.

Statutes and Regulations

Construction contractors who contract with two or more Federal agencies find that although their contracts are all with the Government, differing policies, procedures, and interpretations are applied by the agencies.

Consolidation of the basic procurement statutes and greater uniformity of implementing regulations, as we recommend in Part A, would facilitate construction procurement. A further aid to those who work in the construction area would be the promulgation, within a single

12 Note 10, supra.

regulatory system, of a self-contained treatment of rules for procurement of construction. Today, construction buyers and sellers must plow through voluminous regulations applicable to other areas, such as research or major system procurement, to isolate specific treatment of construction. Our suggestion for experimentation with separate, self-contained regulatory treatment of differing types of procurement could be beneficial to the procurement of construction.

Under present law, informal, expedited small purchase procedures can be used only for purchases of up to $2,500.13 Our recommendation for for increasing this ceiling to $10,000, with provision for periodic adjustment, would simplify the task of contracting for thousands of small construction and maintenance jobs each year and decrease Government and contractor administrative costs.

Subcontract "Bid Shopping"

There is no general agreement as to what constitutes "bid shopping," but to the construction industry it is an emotional subject which poses many complex management and legal problems. Although bid shopping occurs in areas of Government procurement other than construction, in no other area is it viewed with such concern by the industry. The terms "bid shopping," "bid peddling," and "bid chiseling" have been used interchangeably at times. For purposes of this discussion we use the term "bid shopping" to refer to all efforts by a prime contractor to use the lowest bid received on a subcontract as leverage to gain an even lower bid, whether these efforts occur before or after the award of the prime contract.

Subcontract bid shopping is apparently common in the construction industry. It can create vigorous competition which may provide the general contractor (or a higher-tier subcontractor who "bid shops" the lower tiers) with larger profits at the expense of subcontractors. The problem is whether the Government can take practical steps administratively or by

13 Armed Services Procurement Act of 1947; 10 U.S.C. 2301 et seq. and the Federal Property and Administrative Services Act of 1949; 40 U.S.C. 471 et seq.

legislation to prevent this practice in Federal construction.

Often the time involved prior to the prime contract bid opening simply does not permit full evaluation by prospective prime contractors of the subcontractor's bids to see if (1) the bids relate precisely to their respective scopes of work, (2) the bids are reasonably priced, and (3) there are management and contractual concessions that can be made by the general contractor which would persuade the subcontractor to reduce his price. In such cases, further negotiation between the successful bidder for the prime contract and potential subcontractors may be necessary before subcontracts can be awarded.

The Code of Ethical Conduct of the Associated General Contractors of America declares bid shopping unethical per se by stating a prohibition against "bargaining down" subcontract prices by use of other bid prices.

Difficulties involved in solving the bid shopping problem become apparent upon examining the three preventive methods now in use. Various requirements for the listing of subcontractors are the best known and most widely used method of preventing bid shopping. Here the general contractor must list subcontractors by name in his bid and cannot make a substitution without demonstrated justif ion. When this method is used, subcontractors who have more than a minimum percentage of the total job are generally required to be listed.

A form of subcontractor listing is currently used by GSA and the Department of the Interior for buildings and by several States for State construction projects.

On GSA contracts for new construction estimated to cost more than $150,000, the bidders must list in their bids the names of subcontractors they will engage if awarded the contract. The listing of subcontractors for such elements as plumbing, heating, air conditioning and ventilation, electrical work, and elevators is typically required.1

There are two apparent difficulties with attempts to control bid shopping by the listing method. First, the general contractors often do not have time to evaluate fully and assemble the subcontractor bids. Second, a subcontractor who submits a successful bid can sharply re

14 41 CFR 5B-2,202-70.

strict the general contractor in final negotiation on the scope of work of the subcontract. Under bid listing there is no contract between general contractor and subcontractors prior to the opening of prime contractor bids.

The listing of subcontractors may fail to prevent bid shopping because of subterfuge, both by general contractors and subcontractors. General contractors do not have to list subcontractors for those portions of the job they plan to perform themselves. For those specialty items for which the general contractor has listed no one, he can shop after bid opening until he finds a subcontractor willing to perform at the general contractor's price. Once found, the subcontractor and his employees can be retained to perform the work as employees of the general contractor.

Another approach is for the general contractor to list either a dummy or subsidiary company as his subcontractor. The bid shopping can then occur at a tier below the first-tier subcontractor, since only first-tier subcontractors must be listed. This approach has been attempted on GSA 15 and state jobs alike.

The second system, filing of bids by prospective subcontractors, is used primarily in Massachusetts. The State advertises separately for major portions of a job as well as for the total job. Subcontractor bids for the special portions are received by the State a week or two prior to the time fixed for receipt of general contractor bids. The subcontractor bids are publicly opened and recorded. In filing their bids with the State, the subcontractors may specify which general contractors may or may not use their bids.

This practice is necessary because subcontractors may not give the same price to all general contractors. Because of experience with factors such as compatibility and the general contractor's expertise in a particular specialty, a subcontractor's price may be lower to one general contractor than to another. There may be certain general contractors for whom a subcontractor would not want to work under any circumstances.

The third system used to protect subcontractors is the multiple prime contractor system employed in New York and several other States for State financed construction. Here the job 15 See Comptroller General Decision B-162585, May 14, 1968.

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