Procurement Object Types: Special Considerations

6.1 Construction (10/98)

6.1.1 The Traditional Construction Process Design/Bid/Build (10/98)
6.1.2 Construction Management ("CM") (10/98)
6.1.3 "Fast Tracking"-- Phased Design, Award and Construction (10/98)
6.1.4 "Turnkey" -- Design/Build Contracting (10/98)
6.1.5 Value Engineering (6/03)
6.1.6 Facilities Maintenance -- Job Order Contracts (10/98)
6.1.7 Partnering (4/05)
6.1.8 Competitive Proposals vs. Sealed Bids (10/98)
6.1.9 Incentives to Reduce Project Completion Time (10/98)
6.1.10 Special Contract Provisions (10/98)

6.2 Equipment and Supplies (2/00)

6.2.1 Lease/Maintain (2/00)
6.2.1.1 Lease and Maintenance of Vehicles (2/00)
6.2.1.2 Lease of Heavy Equipment with Operators (2/00)

6.3 Rolling Stock (10/98)

6.3.1 Buses (10/98)
6.3.1.1 Competitive Proposals vs. Sealed Bids (10/98)
6.3.1.2 APTA Standard Bus Procurement Guidelines (10/98)
6.3.2 Rail Cars (10/98)
6.3.3 Joint Procurements of Rolling Stock and "Piggybacking" (6/03)
6.3.4 Pre-Award and Post Delivery Reviews for Buy America Act Compliance" (10/00)
6.3.5 Warranties (6/03)

6.4 Professional Services (5/96)
6.5 Architect-Engineering Services (3/04)
6.6 Insurance (11/03)
6.7 Artwork (6/03)

6.1 CONSTRUCTION

Construction contracting presents a unique set of problems for the procurement specialist, and this section of the BPPM will attempt to identify some of these issues. A number of factors tend to make construction contracting an area where problems abound. The first is the uniqueness of the projects themselves; i.e., they are usually performed with drawings and specifications which are developed for the first, and only time, for that project. Because the documents are one of a kind, there has been no prior experience which would have identified errors and clarified ambiguities. Another factor is the highly competitive nature of the bidding process, producing prices which have no leeway for solving design problems which arise during performance of the contract or for accommodating changes. Add to these factors the legal complexities arising from Federal, State and local statutes, regulations and codes, and the process becomes one unlike any other in the procurement field.

There is a high degree of specialization in the construction industry among firms. The major areas being excavation and foundations, masonry, steel work, roofing, plumbing, electrical, and heating and air conditioning. Given this degree of specialization, the role of the general contractor is to manage other specialty contractors, scheduling and coordinating their work. In this role general contractors assume a high degree of risk when they bid firm- fixed prices, thus guaranteeing performance for the bid price. It should also be noted that a number of States require that the various trades be bid as separate primes, which adds to the complexity of project management and contracting; e.g., who controls the various contractors? If the general trades contractor is given this responsibility, how will it be compensated and what enforcement authority does it have against the other primes?

Another party in this process is the surety, who issues a bond assuring performance of the contract, including the payment of suppliers and mechanics in accordance with the terms of their contracts with the construction contractor.

A number of different construction contracting strategies are discussed below. Some of the material presented has been excerpted from the American Bar Association (ABA) Model Procurement Code, Chapter 5, which grantees are encouraged to read. Grantees are also encouraged to obtain the FTA construction management manual entitled Project and Construction Management Guidelines 1996 Update. 1 These Guidelines were developed by FTA "to assist local Transit agencies in developing management structures and work programs to effectively plan and implement the various phases of FTA-funded transit capital improvement projects." The Guidelines contain useful procurement information and guidance related to construction projects.

6.1.1 The Traditional Construction Process - Design/Bid/Build

It has been traditional in the construction industry to employ an architect/engineer (A/E) to complete a detailed design of the entire project before soliciting bids from construction contractors. This traditional approach is known as sequential design and construction. This sequential design/construction approach requires that a detailed design package of the entire project be complete before bids are solicited from construction contractors. Following award of the construction contract, the A/E is often retained by the owner for the construction phase, and acts as the owner's agent, to inspect the construction work to ensure that the structures are built according to the designs and specifications.

Advantages - A major advantage of the sequential design and construction approach is that complex or one- of- a- kind projects can be thoroughly planned and thought through before construction begins. The traditional approach thus produces, in the design phase of the project, the most accurate estimate of final project costs, and this is an advantage of the traditional technique. If problems are encountered with design aspects for the latter stages of the project, the earlier design features or phases can be modified before any construction work has been done, thus avoiding construction contractor claims and delays. Another advantage is that the Agency is given a fixed price for completion of the entire project before construction begins. There may also be advantages in obtaining the necessary financing and project approvals. Overall management of the project should also be simplified by this approach.

Disadvantages - Sequential design and construction requires a longer time to complete the project than phased design and construction ("fast tracking"). And since time pressures are often the most intense issues confronting the Agency, the sequential method may not be feasible. Alternative contracting approaches have arisen to shorten the project completion time. These include phased design and construction ("fast tracking"), which often involves the use of a construction manager, and turnkey (design-build) contracting.

6.1.2 Construction Management

In recent years a construction technique known as construction management has come into practice. In this scheme the owner employs a construction manager who acts as the owner's agent during the design phase and as overseer during the construction phase. During the design phase the construction manager works closely with the A/E, monitoring the A/E's efforts to ensure that the design will be within the owner's budget, will accomplish the owner's purposes, etc. One of the critical tasks a CM can perform during the design phase is a constructability review, ensuring that the design can actually be built. 2 The specific role of construction managers in this phase will vary greatly from project to project. Their duties may include cost estimating, cost evaluating, project scheduling, review or preparation of contract documents, receiving bids, and advising the owner of bidder qualifications and the acceptability of bids.

Multiple prime contractors - During the construction phase, the construction management role can also take a variety of forms. Under one scheme the construction manager will coordinate the work of the various specialty contractors, who contract directly with the owner as multiple prime contractors. The specialty contractors, who would normally have been subcontractors to a general contractor in the traditional construction arrangement, now contract directly with the owner, and the coordination normally done by the general contractor is performed by the construction manager. The construction manager may also assist the A/E with inspections of the work. In this scheme the construction manager has no financial liability for successful completion of the work--there is no contract with the owner to complete the project for a contract price.

Advantages - The construction manager will bring construction expertise to the project team at an early design stage of the project, enabling design decisions to be made with an appreciation of their impact on construction. A construction manager may be indispensable if the Agency lacks the personnel resources to adequately and aggressively manage the project. Phased design and construction may be used much more easily because the construction manager can perform the vital functions of coordinating the work of the A/E contractor and the specialty construction contractors.

Disadvantages - The construction manager's fee will add to the overall cost of the project, and the cost of employing an independent construction manager may not be feasible on smaller construction projects.

Contract provisions - It is critical that the construction manager's contract clearly define the authority and the duties of the construction manager with respect to the other contractors on the project; e.g., how much authority does the construction manager have over the work of the A/E and the specialty construction contractors? If the construction manager fails to properly coordinate the work of the specialty construction contractors, will the construction contractor or the Agency be liable? It will also be necessary to define the CM's authority in the design and construction contracts, so that these contractors will know the degree to which they are to accept direction from the CM.

6.1.3 "Fast Tracking" -- Phased Design, Award and Construction

Fast tracking is a procedure designed to shorten the overall time for project completion by phasing the design and construction activities so that they can be performed together. In this scheme each phase of the project is placed under contract once the design for that phase is completed. Unlike the traditional approach, where the entire project is first designed and then contracted for with one construction contract, the fast track scheme will complete the design work in phases, and then award construction contracts for the various subsystems or phases once the design for that phase is finished. Thus there will be a number of specialty construction contracts awarded by the owner, and a construction manager will normally, though not necessarily, be retained to assist in packaging the various specialty contracts and to manage the work of these specialty contractors. This work of defining and managing the specialty contracts can also be done by in-house project management or by the A/E.

Advantages - Phased design and construction can reduce the overall completion time of the project. It can also allow the Agency to reduce the scope of the later phases if the cost of the earlier phases exceed the budget. It also allows the Agency greater flexibility in the timing of the construction contract awards, thus taking advantage of market conditions, or managing the available funding.

Disadvantages - There is a risk inherent in phased design and construction because portions of the project are begun before the later portions are designed. If major changes occur in the later phases, they may cause costly changes in the earlier work and delays to the specialty contractors. These are risks which will be borne by the Agency.

This contracting technique has seen increasing use in recent years. Between 1987 and 1992 there was a 300 percent increase in design-build projects, which indicates a growing importance of turnkey projects in the construction industry. According to statistics provided by the Engineering News Record, by 1995, 30 percent of all non-residential construction was using the turnkey method. The growing importance of turnkey methods was attributed to its benefits in saving time and costs with no reduction of quality relative to conventional project approaches. It must be noted, however, that not all States permit design-build contracting by State agencies.

In this scheme, a transit agency contracts with a single private entity, the turnkey contractor, for the design, construction and delivery of a complete and operational project. In some instances, the contractor is required to operate and maintain the system for a defined period of time. The private contractor is typically a consortium of private companies offering engineering and design, construction, manufacture of vehicles, finance and related support services. The developer-contractor will be selected competitively based on "performance-type" (non-detailed) specifications which describe the owner's objectives and requirements. Developers will submit proposed designs with their competitive proposals, and owners must select between competing design approaches and prices.

It should be noted that one of the drawbacks of design-build is that the owner does not have an independent source (the A/E in traditional construction) overseeing design implementation and verifying conformance with the drawings and specifications.

Workshop on International Transit Turnkey and Joint Development - The Transportation Research Board has published a very informative Research Circular entitled Proceedings of the Workshop on International Transit Turnkey and Joint Development. 3 This Workshop was held on October 15-19, 1996 and its purpose was " to explore current international experience in the development of turnkey transit projects, to discuss effective turnkey practices, and to identify those aspects that warrant further consideration." The Research Circular summarizes each of the presentations made at the workshop, and presents the "lessons learned" by those organizations using various turnkey approaches. The names of the presenters and their organizations are also given, which provides a reference tool for contacting others who are involved with turnkey projects. Grantees are encouraged to obtain this Transportation Research Circular--it is a valuable source of information. Some of the more important observations made at the Workshop include the following:

• The Federal government and most States, but not all, allow turnkey for some agencies and/or projects. In fact, the recently enacted Federal statute--Transportation Equity Act For The 21st Century (TEA-21)--permits grantees to use turnkey contracting to design and build a mass transportation system or an operable segment of a mass transportation system. Some States have recently expanded their regulations to permit design-build contracts, and this trend is likely to continue. Many of the current transit turnkey projects had to enact legislation or receive waivers to permit the turnkey process.
  
  
• A negotiated procurement process is strongly recommended for selection of a turnkey contractor. Discussions between the owner and offerors facilitates a true "meeting of the minds"; allows crafting of tailored solutions for contractor concerns; and achieves the optimum balance of risk and price. Negotiations can lead to optimum decisions. If a negotiated procurement cannot be done, then a two-step bidding process is recommended as the next best approach. Some States which allow design-build contracting require a bid process rather than a negotiated procurement.
  
  
• Industry input on documents should be sought prior to solicitation.
  
  
• Agencies should develop and follow a detailed selection procedure that includes a multi-disciplined and knowledgeable evaluation committee.
  
  
• Design-build requires a new generation of contract documents that incorporate the needs of three distinct elements: design, construction and operation. Melding the required pricing and procedures into one contract is a complex endeavor.
  
  
• Typical post-award concerns with design-build contracts include the interpretation of commercial terms and the pricing of changes (including the obtaining of adequate cost data to support change orders). Specific recommendations include: requirements for contractor job-cost systems; pricing change orders based on the job-cost system; and detailed audit provisions.
  
  
• The turnkey approach may result in lower capital costs and fewer change orders and contract difficulties.
  
  
• The turnkey approach may have an adverse impact on small and medium-sized firms, including DBE firms. Agencies may want to consider using incentive clauses in their solicitations to encourage DBE participation, as well as requiring offerors to identify small and minority owned businesses in their proposals during the prequalification/RFP stages of the procurement. It was reported that BART had been very successful with this prequalification requirement in the San Francisco Airport Extension turnkey demonstration project. 4
  
  
• Environmental approvals, intergovernmental coordination, and finance should be in place prior to the turnkey procurement. It is critically important that project participants develop a teaming perspective. A formal partnering agreement with the contractor team and tangential agencies has been used with success. See Section 6.1.7 Partnering.

FTA Circular 4220.1E does not require value engineering clauses but it does encourage them in construction contracts. Value engineering is a procedure designed to incentivize contractors to submit change proposals which reduce the cost of contract performance by promising the contractor a share of the savings. Contractors can often find less expensive ways to perform their contracts than the methods prescribed in their contract specifications. They will be reluctant, however, to propose changes which will reduce their contract price and have the effect of reducing their profit on the contract. Value engineering is a technique designed to overcome this disincentive by offering them a share of the savings resulting from their change proposals.

FTA’s Project and Construction Management Guidelines 1996 Update, Section 4.2.3 Value Engineering and Peer Review, presents a discussion of the value engineering process during the design phase of the project. 5

Value engineering clauses in use by Transit Agencies tend to limit the type of savings which the Agency will share with the Contractor to those expected on the contract being performed. These are commonly known as "instant savings." The Contractor would not share in "collateral savings" or "future savings" resulting from his change proposal. "Collateral savings" are those savings anticipated by the Agency outside the contract, such as operations, maintenance, logistical support, etc. "Future savings" would be those resulting from the Contractor's value engineering proposals on future contracts for the same deliverable items. The typical share ratio is 50 percent for the Agency and 50 percent for the Contractor of any "net savings" resulting from the Contractor's change proposal. "Net savings" are defined as "gross savings" less the Contractor's costs for developing and implementing the proposal as well as any Agency costs resulting from the change, such as review, implementation, inspection, etc. Estimated "gross savings" would include the Contractor's labor, material, equipment, overhead, profit and bond. At the conclusion of negotiations for the change proposal, a contract modification is issued reducing the contract price by the Agency's share.

An important feature of all value engineering clauses is that the Agency's decision to accept or reject the contractor's proposal is final and conclusive, and not subject to appeal.

Another important feature of the usual Agency clauses is that the Contractor's value engineering change proposal (VECP) must not "impair any essential function or characteristic of the Work, such as safety, service life, reliability, economy of operation, ease of maintenance, and necessary standardization of features." 6 Another Agency's clause reads that the Contractor's VECP "shall not alter any item's characteristics such as functionality, service life, reliability, economy of operation, ease of maintenance, and necessary standardized features and appearance." 7

The Metropolitan Atlanta Rapid Transit Authority (MARTA) has made use of a very cost-effective procurement approach known as Job Order Contracting (JOC) for its facilities maintenance requirements. These requirements would include the repair, alteration, modernization, maintenance and rehabilitation of buildings, structures, or other real property. The JOC is a competitively bid, firm fixed price indefinite quantity contract, against which MARTA issues Work Orders as specific needs arise.

The unusual feature of the JOC is that the Invitation For Bid (IFB) includes all of the conceivable line items of work, with specifications/definitions for each line item, and unit prices for each item. These specifications and line item prices were developed by MARTA with the assistance of a consulting engineering firm. The line item unit prices were furnished to prospective bidders in a "Unit Price Book," which was developed by the consultant. The Unit Price Book has over 90,000 items which detail specific repair and construction tasks and specifications. The Book covers a wide range of areas such as concrete, air distribution, plumbing, electrical, and hazardous and toxic waste. The Unit Price Book is work-segment based. Each job is detailed and broken down by task. The prices are based on the use of experienced labor and high quality materials. The Book also incorporates prevailing market area cost data and wages.

When bids are solicited, the objective is to obtain bids on "adjustment factors." No specific projects are bid. Award is based on the lowest proposed adjustment factor. The two price adjustment factors are for normal and overtime work. These two adjustment factors are applied to all items in the Unit Price Book. Adjustment factors are required to be bid to four decimal places. The best way for a bidder to develop its adjustment factor is to price out several types of projects and take an average. For example, if the price book states that the cost to replace a window is $100, and a prospective bidder develops an estimate of $75, then the bidder's adjustment factor is .7500. Likewise, if the bidder estimates a price of $110 to replace the window, then the bidder's adjustment factor would be 1.1000. On the most recent award, the winning low bid offered an "adjustment factor" of 0.7700.

Following award of the JOC, the process for issuing Work Orders would be as follows:

• A meeting is held with the contractor to discuss the scope of the work to be done.
  
  
• A Work Order Proposal is then requested from the Contractor. The Contractor's price is computed by:
  
  
  • Selecting various pre-priced construction tasks from the Unit Price Book.
    
    
  • Multiplying the pre-established prices from the Unit Price Book by quantities and then by the Contractor's adjustment factor.
    
    
• The Contractor's proposal is compared to an independent Authority estimate.
  
  
• If the price is reasonable, a Work Order is issued.
  
  
• If the price is not reasonable, the job is solicited under normal procurement procedures.

The JOC process offers the opportunity to save significant time and administrative effort because there is only one competitive bid process, and that is when the adjustment factors are solicited. Thereafter, individual jobs do not have to be competed, so there is no lengthy advertising or solicitation time, or complex solicitation documents to prepare, approve and issue. The JOC can be a multi year contract, thereby reducing the number of times the program must be competed. MARTA' contract is for one base year plus two one year options, and its value is approximately $9 million.

Partnering is a concept/technique designed to foster a team-building, or "partnering" frame of mind toward the accomplishment of the construction project. Partnering was originally developed by the Army Corp of Engineers for use on major construction projects with large project staffs on the work site and where effective communications are essential. The parties involved in the performance of the project, including the Agency, the A-E firm, the prime Contractor, and all subcontractors would meet together on a regular basis (at least monthly) to establish and maintain open lines of communication, with the goal of ensuring relationships of trust and cooperation.

The partnering process usually employs a professional Facilitator who conducts the sessions so as to promote trust and reach mutual agreements on how the project is to proceed. The Facilitator’s fee and associated costs are paid for by the Contractor who is in turn reimbursed by the owner (50%) from a line item in the contract Price Schedule. The partnering process does not change or alter the contract agreement. It is not just a one-time meeting at the start of the project, but is an on-going process. It is usually accomplished in five distinct phases:

• Phase I is a joint session of top executives designed to arrive at a clear agreement on the project’s business goals and establish a clear issue resolution process. Issues generally focus on safety, budget, communications, quality, schedule, teamwork, impact on the community and a commitment to work together for a successful project. MARTA developed a Partnering Charter for its North Springs Station Project, signed by all the team members, which reads as follows:

  We, the team members of the North Springs Station (CF-520) Project Team, are committed to continuing the tradition of effective partnering among our organizations and to delivering a facility in which all team members take pride. We will measure our collective success through the following project objectives:

  • Complete the project on schedule and meet all milestones
  • Provide a safe worksite to minimize lost time accidents
  • Complete the project within budget
  • Fair profit earned by contractor
  • Quickly resolve claims without litigation
  • Deliver a quality product within specified standards
  • Serve as responsible neighbors and provide a positive impact to the surrounding community
    

  We will promote teamwork based on the following principles and attitudes:

  • Timely inputs, responses and decisions
  • Open, effective communications
  • Honesty and trust
  • Solving problems at the lowest possible level
  • Working together against the job - not each other
  • Full team commitment and participation in partnering

Note that the Partnering Charter identifies its goals as the best interests of all the parties. These interests include the earning of a fair profit by the Contractor. It is critical for the Agency's personnel to see the Contractor as a team member whose interest in earning a fair profit is equally important to the interests of the Agency.

• Phase II consists of a workshop where all stakeholders participate in developing a project charter defining team goals, conduct and risks. Washington Metropolitan Area Transit Authority (WMATA) project members developed the following Project Charter for the Metro Georgia Avenue-Petworth Station:

• Phase III provides for monthly evaluations by those managing the job for both parties. The objective is to solve problems at the lowest level, and all members should be evaluating the team’s progress, or lack thereof, in meeting the established goals. Monthly meetings are held at the executive level to review and discuss areas of concern or interest. Problems are identified and solutions are agreed to. Organizational impediments to solutions are resolved. If necessary, unresolved issues are escalated to higher managers. Many issues are resolved before they become major problems and these successes are also discussed at the monthly meeting.
  
  
• Phase IV is an executive session, supplemented by key project personnel from both parties. This is normally a quarterly meeting. The purpose is to address the main issues that require resolution, and to ensure that the Partnering process remains on track.
  
  
• Phase V is a closure session to provide feedback on the value of the Partnering process. This session is not always held.

Projects Involving Technology - Generally such projects are either part of a larger construction project, in which case they may fall under competitive bidding requirements, or technology acquisition projects involving professional services and possibly an installation component, which takes them outside the construction field with its sealed bid requirements. Where the work to be performed under contract is to a dominant extent other than construction, some Transit Agencies have experienced situations where a competitive proposal has proven to be a better method of contracting for the project than the typical sealed bid approach. This has been true for projects which entailed technology, such as software and systems integration work. In these situations you may want to evaluate alternative technical approaches or alternative ways of construction. These conditions lend themselves to an RFP type of solicitation, where you will have the flexibility to hold discussions with the offerors and select the "best value" for your Agency, considering not only price but the value of the products being offered, including their expected reliability and maintainability. One such project involving technology was a contract for a Public Address/Customer Information Screen. This project is being constructed over a number of phases. The first phase contract was handled as a sealed bid. The problem with this approach was that the lowest responsible bidder was a construction contractor and not a systems integrator. There was a considerable amount of software involved and the solicitation documents did not mention who retained software rights. A project such as this should be solicited as an RFP so that negotiations can take place and prospective contractors can be evaluated on the basis of their suitability for the work. 9

Critical Projects Involving Schedule Incentives - If state law permits, it may be advantageous to consider a negotiated method of procurement instead of sealed bids when the project involves a critical completion schedule and where you have chosen to use incentive provisions in the contract or a bid/proposal evaluation method such as those described in Section 6.1.9 Incentives to Reduce Project Completion Times. Where the methodology being used to evaluate bids is unconventional, and where it may be advantageous to have the flexibility to hold discussions with the prospective contractors, an RFP approach may be preferable to a sealed bid method because it will give you the ability to discuss the contractors' proposed approaches to schedule improvement and the realism of those proposals. It must be recognized, however, that a negotiated procurement will require more time to award, and this may be counter-productive when the project is a time-critical one.

Transit agencies have had success in reducing project completion times by using a technique wherein bids are solicited and evaluated in terms of the prices offered and the best achievable completion schedule. 10 The contract award is determined by the lowest evaluated bid, using both the bid price and the proposed completion schedule. In this procurement scenario:

• The Agency specifies the maximum duration of the project in the bid documents.
  
  
• The Agency determines the value of a "day" during the contract period and specifies this value in the bid documents.
  
  
• Bidders must propose the project duration (best achievable schedule) in their bids.
  
  
• The bid documents would define the damages for failure to achieve the proposed completion schedule, and the bonuses for early completion, if the Agency should choose to use them with the damages provisions. The use of damages for failure to meet the proposed completion schedule is important in order to keep the bidders "honest" in their proposed completion schedules. The use of bonuses will provide an even stronger incentive for the bidders to successfully make their proposed schedules after contract award.
  
  
• Price + Duration (# of Days) = Evaluated Bid

Advantages to Price Plus Schedule Bidding - This technique is likely to encourage efficient contractors to bid, and it offers the likelihood of shorter construction project durations because of the strong financial incentives for achieving the best completion schedule.

Concerns with Price Plus Schedule Bidding - It is extremely important that the construction contractor have control over the work site, and that the Agency's responsibilities at the work site be minimal or, preferably, nonexistent. If the contractor is dependent upon the Agency to furnish support at the work site, or if the contractor's work is dependent upon the activities of other contractors, the Agency can expect claims regarding the issue of delays, which in turn affect the incentive provisions of the construction contract. In view of the probabilities of claims and litigation, Agencies should avoid incentive contracts such as this unless they can turn a work site over to a construction contractor and allow the contractor to control that site and the scheduling of all work required to complete the project. Where contractors lack the necessary control over the work site, Agencies may well have to pay higher prices, based on the contract bonuses and the contractor's successful claims for delays, and still have a project that is late in completion.

Completion incentives may work to discourage prime contractors from subcontracting with small or disadvantaged business firms. Primes will probably seek partners who are large businesses with proven track records, and which have substantial resources available to perform the work as expeditiously as possible.

The quality of construction work may suffer due to the schedule pressures, and Agencies will need to exert close surveillance over the contractor.

Construction contracts require certain provisions which are unique to that activity. These provisions are discussed in detail in other sections of the BPPM. Following is a summary of the special provisions and the BPPM sections where they are discussed.

Labor - The three wage and hour laws governing construction in the Federal realm are the Davis-Bacon Act, the Contract Work-Hours and Safety Standards Act, and the Copeland Anti-Kickback Act. The applicable contract clauses are discussed in Appendix A.1, clauses 16, 17 and 18. Section 8.1.2 Davis Bacon Act contains more detailed guidance with respect to administering the requirements of this Act.

Bonding - Construction contracts require contractors to furnish three types of bonds--bid bonds, payment bonds and performance bonds--which are discussed in Appendix A.1, clause 13, with more detailed guidance on each type of bond in Section 8.2.1 Performance Bonds.

Liquidated damages - Section 8.2.3 Liquidated Damages contains guidance on the use of liquidated damages clauses.

Differing Site Conditions - Section 9.2.3.1 contains guidance on administering the Differing Site Conditions clause.

Specifications for construction - Section 3.4 Specifications for Construction discusses requirements within FTA Circular 4220.1E and the Master Agreement (MA) which may affect your construction specifications.

Insurance - Section 6.6 Insurance discusses an approach to insuring construction project contractors known as Owner Controlled Insurance Programs (OCIP), which has proven to be an effective method of insuring the contractor teams involved in construction projects.

Warranties - Obtaining acceptable warranty documents in a timely manner from contractors has been historically difficult. No contractual incentive has existed to motivate contractors to supply the required warranties. Grantees may wish to consider making the submission of an acceptable warranty form a condition of product or system acceptance in order to motivate contractors to furnish the required form. Grantees might also include the warranty forms as a fixed-price line item in the contract for payment purposes, thus giving the contractors a strong motivation to supply the required forms.

Contract Close-out - Close-out of construction contracts will require certain documentation unique to these contracts, such as lien waivers, as-built drawings, etc. These requirements are discussed in Chapter 10, Close Out.

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DISCUSSION

Since equipment leases are considered "third party contracts' within the meaning of FTA Circular 4220.1E, the requirements of that Circular apply to such procurements. The Circular requires a lease versus purchase analysis to determine the most economical approach to any given procurement. The Master Agreement, Section 16, concerns capital leases, in accordance with 49 CFR, part 639.

Lease vs. purchase alternatives - Whenever an agency is considering the leasing of equipment, a lease vs. purchase analysis should be made. The analysis should be appropriate to the size and complexity of the procurement. It is usually more economical to purchase equipment than to lease it. This is not always true, however, especially when highly complex equipment is involved and there are issues of maintaining the equipment or having trained personnel who are competent to operate the equipment. In determining whether the lease of equipment is feasible, the following factors must be considered:

Best Practices

Leases with options to purchase - When a lease is justified, a lease with option to purchase may be appropriate.

Long term leases - Generally, a long-term lease should be avoided, but may be appropriate if an option to purchase or other favorable terms are included.

6.2.1.1 Lease and Maintenance of Vehicles

Lease vs Buy Analysis - When comparing the costs of leasing vs. ownership, maintenance costs will usually be a major economic factor. Indeed the primary advantage of leasing is the avoidance of maintenance costs for items such as brakes, batteries, etc. Grantees must carefully estimate the maintenance costs over the anticipated life of the vehicle. The costs of ownership will be increased by these maintenance costs and decreased by the anticipated resale value (salvage value) of the vehicle when it is sold.

Using a Request for Proposal vs. Invitation for Bid - PACE Suburban Bus Service's experience with competitive procurements using an RFP has been positive. 11 There is much more flexibility for the grantee when an RFP is used instead of an IFB. The RFP approach gives the grantee an opportunity to establish evaluation criteria for important factors of performance, including such items as preventative maintenance, emergency roadside assistance, repairs, fuel card management services, and accident services. Proposals can be evaluated with the objective of selecting the best overall combination of service quality and price. Negotiations can be held with the offerors in order to secure the best possible proposal and contract terms. The PACE Suburban Bus RFP issued for leasing and maintaining their fleet vehicles may be found in Appendix B.15.

Joint Procurements with State DOT's - Grantees should inquire with their State Departments of Transportation as to whether it would be feasible to lease vehicles from contracts awarded by the State. These State contracts frequently represent the best possible terms available for vehicle leasing. When pursuing this "piggybacking" approach, grantee personnel must determine if the State contract contains all the required Federal clauses and certifications required by Federal regulations. Grantees may wish to take the initiative with their State DOT's to plan ahead for joint procurements of vehicles in order to assure that their needs are addressed and that the Federal requirements are included when the procurements are initiated. For additional guidance, see Section 6.3.3 - Joint Procurements of Rolling Stock and "Piggybacking."

6.2.1.2 Lease of Heavy Equipment with Operators

Some agencies have found it beneficial to lease, rather than purchase, heavy equipment, such as cranes, with operators. 12 The more important considerations here tend to be operational rather than economic. Advantages to leasing would include such factors as:

• the availability of fully trained and licensed equipment operators;
  
  
• the convenience of having the lessor provide the very specialized maintenance services and housing structures for the equipment; and
  
  
• the lessor's assumption of liability in case of accidents.
  

Joint Agency Procurements - Heavy equipment may be very difficult to obtain on short notice, and longer-term leases, such as three years, may be advisable. In addition, competition may be virtually non-existent. Under these circumstances, agencies might be advised to seek out other agencies in their geographical region in order to conduct a joint procurement for their common needs so as to obtain a more favorable contract than either could procure by themselves.

Labor Laws - Agencies will need to be aware of local or State labor laws, as well as Federal laws if construction is involved (e.g., Davis-Bacon Act), when developing their solicitation document and contract.

Insurance - Insurance requirements will be an important part of the contract terms. Agency procurement personnel should carefully coordinate the insurance provisions with their insurance department or legal specialists. Requirements might include coverage for commercial general liability, auto vehicle insurance, workers compensation, and perhaps, a special railway protective policy. The agency's insurance specialists should determine specific coverage requirements and amounts.

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Grantee experiences with competitive Requests for Proposals (RFP's) for bus procurements indicates that this method may be preferable to the use of sealed bids. When RFP's are used, the grantee has the flexibility to hold discussions with the offerors and to evaluate the proposals and conduct negotiations for the best delivery schedules, warranties, quality/reliability, aftermarket support in terms of parts availability, and prices. In other words, grantees can award their contracts on the basis of the best value, with all important factors considered. Some State laws, however, require the use of sealed bidding procedures for buses, in which case grantees would not be able to use competitive RFP's.

Prequalification of systems/components - The Metropolitan Transit Authority (MTA) of Harris County, Houston, TX, completed a large 243 bus procurement which used a two-step sealed bid process. This entailed a prequalification procedure -- "Request for Approved Equals"-- for major systems and components. In Step one, MTA issued a performance type specification identifying all the systems or components which had to be submitted for approval prior to bids. Examples would include: engines, transmissions, door systems, etc. MTA reviewed the submissions in terms of their characteristics, specifications, etc. and determined what systems and components they would accept. MTA then issued a notice to all bidders identifying what components were acceptable, so that all bidders knew beforehand what items were acceptable to bid on. Sealed bids were then received, and when the low bidder was identified, MTA performed an audit for specification compliance and compliance with Buy America. 13

The American Public Transit Association (APTA) published the Standard Bus Procurement Guidelines (SBPG) in January 1997 as "a model for solicitation of offers and contracts for the supply of transit buses." 14 The SBPG contains suggested terms and conditions regarding the solicitation, the contract document, quality assurance and contractor warranties. A second volume containing technical specifications is under development. Grantees are cautioned, however, that the APTA Guidelines may contain terms and conditions which are not consistent with FTA's policies. For example, the provisions regarding advance payments and warranties in the APTA Guidelines cannot be adopted without prior FTA-waivers.

There are certain realities in the rail car industry which impact the manner in which rail cars are procured. Transit Agencies buying rail cars tend to do so infrequently, with a number of years between procurements. The technology can be expected to change considerably during the intervening years between these procurements. This fact makes it critical that Agencies do considerable advance planning in order to determine the current state of the art before they formulate their specifications to procure rail cars.

Because there is virtually no standardization in the United States in the area of track gauges, station platform heights, tunnel designs, etc., and because new rail cars must be compatible with existing cars, it is not feasible for Transit Agencies to consolidate procurements of rail cars and use common buys or "piggybacking." While joint purchasing of rail cars is difficult, an agency designing a specification should consult with others who have either recently purchased cars or who are in the process of doing so, and attempt to achieve whatever commonality of components is possible. This will facilitate both joint purchases of parts in subsequent years and the ability to second-source. Another aspect of this problem with non-standardized rail cars is that it results in high one-time design costs for each Agency's procurement. This in turn provides an incentive to buy as many cars as feasible under each solicitation so that the design costs can be amortized over a greater number of vehicles, with a corresponding reduction in unit prices. On a recent MARTA procurement, for example, the unit price was reduced by $400,000 by increasing the quantity of cars to be procured from 30 (the initially planned number) to 100. This savings was due to amortizing the non-recurring design costs over a larger number of units. Agencies should carefully consider the multi-year contracting strategies discussed in Section 2.2 Long Term Planning.

MARTA's experience with a recent major rail car procurement offers a number of helpful insights. 15

Competitive proposals - The procurement specifications were subjected to a peer review by other Transit Agencies and independent consultants prior to release in the RFP. This gave MARTA the benefit of other Transit Agencies' experiences with more recent rail car procurements. MARTA elected to use a competitive Request for Proposal (RFP) approach instead of a sealed bid method, which had been their earlier practice. They were pleased with this decision because it gave them the needed flexibility to discuss various technical approaches for complex items with each of the offerors, and to achieve the "best value," given the different technical approaches offered and the prices proposed for these approaches. "Best value" included expected reliability and maintainability features, such as on-board diagnostics.

MARTA's RFP included a Proposal Data Requirements List (PDRL) which defined the format and content of the required proposal information, thereby creating proposal uniformity, which in turn increased the quality and efficiency of proposal evaluation. The proposal evaluation plan, including the scoring mechanism, was carefully developed and tested using several mock proposals before the RFP was issued. Once proposals were received, the proposal evaluation plan and scoring mechanism were adhered to meticulously in order to avoid any appearance of bias. This kind of rigid adherence to the proposal evaluation plan is a critical requirement for Agencies to observe if they use the RFP methodology. MARTA's use of individuals outside the Agency to participate on the proposal evaluation committee added an element of objectivity and independence to the process, as well as enhancing the overall experience base of the evaluation team.

MARTA kept the technical and price proposal evaluations separate, so as not to influence the technical evaluators. They also established a "competitive range" following initial proposal evaluations, and held discussions with those companies in the competitive range (those that had a reasonable chance for contract award). Offerors eliminated from the competitive range were to be notified quickly after MARTA's decision so that they could release their teams to other opportunities.

The time required to complete the procurement process was longer using the RFP method than it would have been with sealed bids (IFB). Using an IFB was estimated to take between four and six months from advertising to award, whereas the RFP method took about 13 months from release of the RFP to contract award. Agencies planning to use the RFP method will have to allow for more time than if sealed bids are used, but the final results may be worth the added procurement time.

Future purchases of proprietary parts - Efforts should be made in the original acquisition of rail cars (and buses) to include an "advance agreement" with the supplier concerning the future acquisition of proprietary parts. This could be done as a percentage discount of the list price. The best approach might be to have a one-year contract for the proprietary parts, with a series of four one-year options (to be extended subject to FTA approval). This would enable the agency, at the end of each year, to determine whether the marketplace has changed in terms of the competitive availability of parts formerly only available from the vehicle manufacturer.

Recently, there has been a growing trend amongst transit systems to become creative in the acquisition of rolling stock. The most constructive of these techniques involve advance planning and joint procurement by several systems. FTA encourages this technique. In these joint procurements, the needs of the various transit systems are defined in the solicitation and the manufacturers are asked to bid upon the total known needs of the agencies involved. In other situations, transit agencies will identify an existing contract of another agency and "piggyback" that contract by means of an assignment of contract rights such as an assignment of options. Additionally, there is the occasion where an agency awards an Indefinite Delivery/Indefinite Quantity (ID/IQ) contract and allows other agencies to purchase from it. Regardless of the approach used, it is important that grantees be aware of the requirements of FTA Circular 4220.1E with respect to competition, evaluation of options in making the basic contract award, and the existence of a sole-source condition when optional quantities are ordered which were not priced and evaluated as part of the basic contract award process. It is FTA’s policy that the estimated quantities must reflect the immediate or reasonably foreseeable needs of the parties to the solicitation and, in the case of indefinite delivery/indefinite quantity contracts, a minimum and maximum quantity must be stated.

The streamlining of bus purchases can occur when two or more systems join forces using the same specification, solicitation process, terms and conditions, etc. leading to the purchase of vehicles from the same vendor. This can be accomplished using (1) the services of one lead governmental agency, (2) a consortium, or (3) "piggy-backing." While all of these mechanisms require advance planning, the first two occur "pre-award," while the latter occurs "post-award." The advantages of using a consolidated procurement approach include the following:

• Smaller transit systems lack the personnel and the expertise to conduct bus procurements expeditiously, especially in light of Federal requirements. Procurement lead times should be greatly reduced through a consolidated procurement procedure.
  
  
• Staff time at the various transit systems and the vehicle manufacturers will be saved by eliminating the redundancy in conducting multiple bidding processes for the same vehicles.
  
  
• Quality improvements could result from the buses being manufactured in a more standardized fashion.
  
  
• Savings in transit systems' operating costs will be realized from earlier delivery of new buses, as older vehicles with higher operating costs are retired earlier.
  
  
• It is to be hoped that larger quantity buying would result in better prices than a number of smaller individual solicitations.
  
  
• When common vehicles are purchased, it may result in better overall coordination/learning among transit systems in that they will be using the same vehicles.
  
  

Consolidated Procurements - Various governmental agencies may act as a facilitator for the award of multiple contracts. This approach is particularly beneficial when dealing with a large number of grantees. As an example, the New York State Department of Transportation (NYSDOT) has been using the services of its Office of General Services (OGS) for many years to purchase vehicles under FTA's Section 5310 Program. Here, six different types of light duty buses are purchased every year for the 5310 grantees using an OGS bid process based upon specifications developed, in part, by the grantees facilitated by NYSDOT. During the OGS bid process, NYSDOT estimates the number of vehicles to be purchased not only for the 5310 grantees, but also for other public transportation providers in the State. For the 5310 Program, New York State contracts directly with the successful manufacturer. The buses are built and delivered directly to the 5310 grantee along with the title. Other public transportation systems within the state (e.g. 5311 and 5307 grantees) may access these same contracts, contracting directly with the successful manufacturer. By using this contracting process, the efficiencies described previously are maximized.

Consortiums - Consortiums have been used where a number of systems come together to jointly issue a solicitation and immediately award individual contracts with the successful bidder. Given the different types of bus configurations (e.g. diesel/CNG; low floor/ high floor), it may be useful to identify a lead agency for developing a specification for each type of bus configuration. The specifications developed would then be reviewed by the other members of the procuring group, who would provide their comments on the specification to the lead system. The lead system might modify the specification based on the comments received, but if the changes were not in the best interest of the lead system, the changes would be included as options in the bid package. For example, if the lead system wanted roll curtain destination signs, and other systems wanted electronic destination signs, the specification would call for roll curtain destination signs, and electronic destination signs would be included under the options to be priced by bidders as part of the bid package.

The bid advertisement would specifically identify how many buses were being purchased for which transit systems. Differences or options in the specification for each unique system would be identified and prices obtained from the manufacturers for the various options outside of the base specification.

As an example, New York State has a successful history with a CNG consortium involving FTA grants. Six major systems formed a consortium, aided by NYSDOT as a facilitator, to purchase the first CNG buses placed into service in the State. A single solicitation was used, after which each transit system awarded its own contract in accordance with the terms of the solicitation and the winning bid. 19

Piggybacking and Tag-ons- FTA Circular 4220.1E sets forth FTA policy and guidance related to procurements commonly referred to as "piggybacking" and "tag-ons." These terms are defined in the Circular as follows:

Circumstances When Piggybacking Is Permissible - There are a number of issues that should be addressed by a grantee before deciding to piggyback another agency's contract. Grantees must be able to affirmatively determine that the contract to be piggybacked meets Federal requirements. These Federal requirements include compliance with FTA Circular 4220.1E and the Dear Colleague Letter C-98-25. Grantees are advised to pay particular attention to the specific issues identified in the Piggybacking Worksheet paragraph below.

Piggybacking Worksheet- A Piggybacking Worksheet may be found in Appendix B.16. The issues referred to in the worksheet that must be evaluated prior to a decision to piggyback another contract are as follows:

1. Have you obtained a copy of the contract and the solicitation document, including the specifications and any Buy America Pre-Award or Post delivery audits?
   
   
2. Does the contract contain an express assignability clause that provides for the assignment of all or part of the specified deliverables? FTA's policy is that the original solicitation must contain an express notification to all bidders that an assignment would be possible under the terms of the contract. Such a notification would put the bidders on notice that they would likely be called upon to deliver all of the deliverable items, both the base as well as the option quantities. The assignment clause would thus be an important factor in the original competitive bidding. If the contract does not contain an express assignability clause, piggybacking is not permitted.
   
   
3. Did the Contractor submit the "certifications" required by Federal regulations in accordance with the requirements of this solicitation? See the BPPM Section 4.3.3.2. - Federally Required Submissions with Offers. Piggybacking is not permitted when the Contractor has failed to submit the required Federal certifications with its bid.
   
   
4. Does the contract contain the clauses required by Federal regulations? See the BPPM Appendix A - Federally Required and Other Model Contract Clauses. Note that not all clauses in Appendix A will apply to all contracts - review each clause for applicability to the specific contract to be piggybacked. If a required Federal clause is not included in the contract, piggybacking is not permitted.
   
   
5. Were the piggybacking quantities included in the original solicitation; i.e., were they in the original bid and were they evaluated as part of the contract award decision? Tag-ons are not permitted.
   
   
6. If the contract is an indefinite quantity contract, did the original solicitation and resultant contract contain both a minimum and a maximum quantity, which represent the reasonably foreseeable needs of the parties to the solicitation? See BPPM Section 2.4.5.3 - Indefinite-quantity Contracts, and the paragraph below Indefinite Quantity Contracts, Unlimited Options and Piggybacking.
   
   
7. If the piggybacking action represents the exercise of an option provision in the contract, is the option still valid? Options that have expired may not be exercised.
   
   
8. Does your State law allow for the procedures used by the original contracting agency; e.g., negotiations vs. sealed bids?
   
   
9. Was a cost or price analysis performed by the original procuring agency documenting the reasonableness of the contract price? Include a copy in your files.
   
   
10. Does the contract term comply with the five-year term limit established by FTA Circular 4220.1E, paragraph 7.m?
    
    
11. Was there a proper evaluation of the bids or proposals? Include a copy of the analysis in your files.
    
    
12. What types of changes will you require to be made to the vehicles? For an assignment, only "within scope" (non-cardinal) changes are allowed (e.g., seating fabrics and colors, paint schemes, signage, floor coloring, etc.). For further guidance see BPPM Section 9.2.1 - Contract Scope and Cardinal Changes.

• Since the rolling stock manufacturers do not know what the potential orders may be under the contract, they cannot plan their operations nor can they quote prices which reflect the quantities that may be produced.
  
  
• Unspecified quantities result in higher unit prices for the procuring agency because manufacturers must use the minimum quantity specified to calculate prices for material, engineering, etc.
  
  
• For these reasons, open-ended, indefinite quantity/indefinite delivery contracts, or contracts with unlimited options are not permitted. They are not only disruptive to bus manufacturers and their suppliers, who cannot plan their production schedules given the degree of uncertainty that these contracts entail, but they are also counter-productive to the grantee community, which will invariable pay higher prices for items which were not really competed in a "full and open competition."

The FTA Administrator's Dear Colleague Letter C-97-03, dated March 18, 1997, outlines the steps that a grantee must take in performing pre-award and post-delivery reviews of rolling stock procurements to ensure their compliance with Buy America Act requirements. This Dear Colleague Letter Letter may be found in Appendix A.2 of the BPPM. This letter provides guidance to grantees concerning these reviews. It must be stressed that grantees are to document their reviews and include this documentation in their contract files as evidence that they have performed the required reviews. The file documentation must describe the data and information reviewed by the grantee's personnel and the basis for concluding that the manufacturer has complied with the Buy America Act requirements, including domestic content, final assembly location and final assembly activities. Also, where appropriate, copies of certifications of compliance with or inapplicability of Federal Motor Vehicle Safety Standards should be included in the file.

FTA has also published two manuals that provide detailed guidance to grantees concerning which Buy America certifications and documents are needed to support the procurement process -- from issuance of the solicitation to title transfer, as well as the procedures that the grantee may follow when conducting the pre-award and post delivery reviews. There are also examples of Buy America calculations and responses to frequently asked questions. 22

An example of warranty terms is the list developed by APTA in its Standard Bus Procurement Guidelines – Commercial Terms and Conditions (October 10, 1997). 29 Among the issues addressed in APTA’s suggested warranty provisions are:

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Although you may use any of the applicable selection methods described in Chapter 4 and permitted by state law for professional services, the competitive proposal method is the most common for procuring professional services. Special Federal requirements apply to architectural and engineering services. Even though professional services such as legal advice, investment advice, auditing or engineering advice may have been rendered to your agency on a long-standing basis, or without a written contract, or by formal approval at the highest level, such practices do not exempt those services from the requirements for free and open competition, maximum five year terms, and written selection procedures.

You have a requirement to contract for a laboratory to provide testing for your agency's drug and alcohol testing program. You cannot afford to take a chance on getting a contractor who has little experience, a poor history of quality control, and an unreliable performance history in terms of chain of custody. If you have to bid this contract, with low price being the deciding element, that is apt to be what you get. Unfortunately, in a few jurisdictions, that is what you may be faced with. However, in most jurisdictions, the state legislatures have wisely enacted a procurement policy that exempts professional and personal service contracts from the strict requirements of the competitive procurement laws. In those states, competitive sealed proposal statutes, mini-"Brooks Act" statutes for architect/engineering and related services, or exemptions from competitive requirements altogether (or a combination of all of the above) have been enacted. The critical point is that your state, either legislatively or through statutory interpretations by the state attorney general or the courts, will allow you some flexibility in buying professional services because it does not make sense "to buy the services of brain surgeon through a low bidder procurement process."

It is important to distinguish between two types of professional services:

• Statutory Professional Services - These are services that are clearly spelled out in a statute and procurement process is defined for obtaining these services. These are the mini - "Brooks Act" statutes and include architectural and engineering services. The statute may also include some related services or other services the legislature has determined should be bought in a multi-step procurement process.

In Texas, for instance, the Texas Professional Services Act defines "professional services" as services within the scope of the practice of accounting, architecture, land surveying, medicine, optometry or professional engineering, or are provided in connection with the professional employment or practice of a person who is licensed as a certified public accountant, an architect, a land surveyor, a physician (including a surgeon), an optometrist or a professional engineer. 30 Texas has said, as to these contracts or services, that competitive bidding shall not be used and that the selection and award shall be made on the basis of "demonstrated competence and qualifications to perform the service" and for a fair and reasonable price. 31 For architectural or engineering services, Texas mandates a "Brooks Act" process 32 and concludes this Act with the public policy statement that contracts entered into in violation of these provisions are void. 33 In all likelihood, your state will have adopted a public policy on the procurement of statutorily defined professional services that may be similar to the Texas statute and you should be very knowledgeable of that statute.

• Other Professional Services - Most states offer you other ways to avoid strict compliance with competitive bidding laws (and, in some states, competitive proposal laws as well) by exempting the procurement of professional or personal services from following competitive requirements. Thus, it is important to know what is considered a professional service for the purposes of this exemption under your state's law. This may vary from state to state. The service usually will involve labor and skills that are predominately mental or intellectual rather than physical or manual and the providers of the service are members of disciplines requiring special knowledge or the attainment of a high level of learning, skill and intelligence.

The exemptions are designed to permit the services of the most qualified, competent and experienced individuals to be obtained and a recognition that these services can seldom be measured with objective criteria. In the absence of a statutory definition, these services may include such professions as attorneys, construction management consultants, insurance brokers, physicians, auctioneers, medical laboratory testing, theologians, etc. You must consult your state law on these issues -- unlike the statutory professional services discussed above, most states do not prohibit you from using a competitive process to obtain the services of these other "professionals," they just provide an exemption if you choose to use it.

A&E Services - For the procurement of architectural and engineering services, the FTA and most state laws mandate a qualifications-based procurement process.

Other Professional Services - For the procurement of professional services other than A&E services, you generally have a great deal of flexibility in how you obtain those services. In some cases, you may be able to adequately and objectively define the services required and obtain those services through a competitive bidding process on the basis of low priced bids. In other cases, either because of an inability to adequately and/or objectively define your requirement or because of a limitation of your state's law, the competitive bidding method of procurement may not be possible to be used. In that case, a competitive proposal process may be the best method to use where more subjective requirements can be evaluated and weighed with the price offered to arrive at a properly balanced award decision. Depending upon the statement of work and the estimated dollar value of the procurement, you may be able to effectively and efficiently use the micro-purchase method of procurement (detailed in Section 4.1) or the small purchase method of procurement. As the stewards of public funds, it is always important to remember that you are spending tax dollars and to properly weigh the services you are obtaining against what you are paying for those services.

Finally, it is possible that the professional services you desire may be obtained from only one source and, thus, you will select your professional service provider on the basis of a sole source (noncompetitive) method of procurement. In this case, you must comply with the provisions of the Section 9.e of FTA Circular 4220.1E as well as your state law. Again, even though you are negotiating with only one source for these services, your goal should be to obtain a price that is fair and reasonable.

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1. Grantees must (as a general rule) accept undisputed audits that have been conducted by any Federal or State agency of the consultant’s indirect cost rate if the audit report has been developed in accordance with the cost principles contained in the FAR Part 31. However, if the audit is conducted by another State agency, and the grantee can fully document and justify to FTA why the other State agency’s audit should not be accepted, then FTA may permit the grantee to conduct its own audit.
   
   
2. Undisputed audited rates must be used for the purpose of contract estimation, negotiation, administration, reporting and contract payment. This requirement applies to the undisputed audited rates of A&E subcontractors that are performing under cost-reimbursement subcontracts as well as prime contractors.
   
   
3. If there is more than one audit, the grantee may use whichever audit it wishes. However, as a practical matter, the audits should have virtually identical results if they are conducted in accordance with FAR Part 31. Also, if the audits resulted in different findings, it is likely that someone would be disputing one or more of the audit findings.
   
   
4. If a consultant has not been audited by any Federal or State government agency, the grantee or State government agency should conduct an audit and become the cognizant agency. However, in the case of a consultant contract involving a very small dollar amount, the grantee should be able to rely on its own cost and price analysis in order to negotiate the contract price.
   
   
5. Many consultant firms have multiple indirect cost rates such as a national or corporate-wide rate, a regional or State rate, and a business segment rate. If a consultant proposes a particular rate such as a regional rate or a rate for a particular service (e.g., design services or construction management), that rate must have been audited by a cognizant Federal or State governmental agency before the grantee would be required to accept it. If another governmental agency’s audited rate is not applicable to the contract in question, the grantee may perform its own audit applicable to the unaudited rate. For example, if the consultant has an audited rate for design services but not for construction management services, the grantee does not have to accept the rate proposed for construction management services.
   
   
6. Grantees may not require or impose a cap or ceiling on an A&E consultant’s overhead rates even if the consultant agrees to such a cap by contract. The key words here are require or impose. In its final rule, Section 172.7(b) - Audits for Indirect Cost Rate, FHWA made the following concession in response to a Wisconsin DOT expressed concern that a State may not be able to accept a lower overhead rate freely offered by a consultant firm:
   
   The FHWA agrees there are many reasons why an overhead rate for a firm may be unusually high for a short period of time. In such cases, a firm may believe that it would be in its best interest to offer a lower rate. The FHWA agrees that a consultant should be free to offer a lower overhead rate than the one determined by a cognizant Federal or State government agency, and that the contracting agency should be free to accept it provided such rate is offered voluntarily by the consultant. Under no circumstances, however, shall a contracting agency require a lowering of the overhead rate.
   
7. Grantees may not negotiate an overhead rate that is fixed for the entire contract, or for any particular fiscal year, and not subject to adjustment based on an audit of actual costs incurred. Grantees may, however, use provisional billing rates where a billing rate is established for a particular contract period and is subject to adjustment based on an audit of actual costs incurred for that period.
   
   
8. If the cognizant Federal or State agency for a consultant is behind schedule in finalizing audits and the latest accepted audit of indirect cost rates lags by three or four years, the grantee may use another agency’s audit if it was conducted in accordance with the FAR and its findings were undisputed. If an audit has been performed by a private firm in accordance with FAR Part 31 and is undisputed, that audit could also be used. If there are no audits available under these assumed parameters where the cognizant agency is three or four years behind, the grantee may conduct its own audit in accordance with FAR principles to determine the actual overhead rates. Otherwise, the last audit performed by the “cognizant Federal or State” agency would be used.
   
   
9. Grantees may not use a negotiated overhead rate procedure in lieu of using the actual undisputed and accepted audit by a cognizant Federal or State governmental agency. The reason is that price negotiations on the indirect cost rate or any component thereof can be viewed as an administrative or de facto ceiling prohibited by 49 U.S.C. Section 5325(b). Nevertheless, the State has the right and obligation to negotiate a fair and reasonable total price for the contract. Any component of the price, except the indirect cost rate, may be negotiated.
   
   
10. FTA has elected to follow the provisions of FHWA in its implementation of TEA-21 contracting requirements for architect-engineer services. FTA is not bound by the FHWA rule, however, and may permit exceptions in compelling and unusual circumstances.