There is no doubt that today’s water/wastewater market is booming. The magnitude of the many W/WW projects currently underway in the United States is so great that the marketplace is experiencing craft labor shortages, escalating material and equipment costs, fewer bidders on hard bid projects, and fewer proposers on collaborative-delivery projects. Not surprising, conventional delivery projects are experiencing low bids that are exceeding the owners’ budgets. This is also the case on collaborative-delivery projects where fixed-price and GMP proposals are greater than what an owner has been anticipating.
Cost certainty is a key priority for an owner when undertaking any W/WW capital project, regardless of a rising or falling economy. Most W/WW capital projects are budgeted by their owners well in advance of a collaborative-delivery procurement or competitive bid. Budgetary pricing developed through master planning or preliminary engineering efforts are often based on high-level conceptual estimates using historical data and traditional market projections which are used to reflect construction market conditions on the day the estimate is finalized. Now fast forward 18 or 24 months when the project is being procured in an escalating marketplace like the one we are now experiencing. The value of the low bid price, fixed-price proposal, or GMP proposal has provided “sticker shock” to many owners. One reason for this differential is the conceptual estimate used to establish the budget and funding requirements was simply not recalibrated for today’s unusual pricing pressures.
Based on recent collaborative-delivery procurements, one tool owners are using to obtain improved early cost certainty prior to making a formal selection is to request an “indicative price” from the shortlisted proposers. An indicative price is a proposer’s estimate of the total project cost and can be among the selection criteria used to score the proposals. By requesting an indicative price in a collaborative-delivery procurement, the owner has a chance to evaluate whether they have adequate funding for the project prior to making a proposer selection or contract award. This early cost knowledge provides the owner a lot of flexibility. If the indicative pricing exceeds the owner’s budget, the owner can elect to reformulate the procurement with a reduced scope or cancel the procurement and re-compete it later in more favorable market conditions. Another approach the owner can take when the indicative price exceeds their budget is to seek additional funding or take a different funding approach. This approach to cost certainty works well for an owner whose project is not schedule driven.
There are potential downsides with this. One or more proposers may elect not to propose on a reduced scope project, be reluctant to spend more time and/or money on a re-competed procurement, or pursue other projects having a higher potential return on investment and/or win probability. There is one more significant potential downside for the owner using an indicative price as part of the selection criteria. A proposer may rationalize that in order to be awarded the project, they must submit the lowest indicative price. This may drive some proposers to submit an artificially low indicative price that potentially carries more risk for the owner in the form of change orders that show up later in the project. When the proposal scoring is tallied, the proposer with the artificially low indicative price has a greater probability of winning the project. This result can occur even when the owner selects its proposer on the basis of their qualifications, project approach, and indicative price, especially if the proposal scoring criteria are biased towards price. Also, if the owner does not specifically state that the indicative price is contractually binding, proposers may be inclined to be aggressive in their pricing. In the end, the owner may end up with a proposer that is not the most qualified firm, receive a project that doesn’t provide the best technical and operational approach, or have a reduced service life that is not detected until the project has been operational for several years.
In today’s escalating economy, an owner must use every tool available to keep customer rates low. When seeking an indicative price for collaborative-delivery projects, an owner should carefully consider the complexities of their project and whether an indicative price will be a meaningful selection criterion for themselves and for the competing proposers. Items for owners to consider in their evaluation include project size, planned treatment technology, inherent project risks, schedule criticality, and the experience of the proposers likely to pursue the project. Most importantly, the owner needs to ask themselves what they are trying to achieve when seeking an indicative price during the proposal phase. Whether the owner’s goal is to confirm the adequacy of their budget, to use the indicative price as a selection criteria differentiator, or to support later negotiations, an owner should communicate its goal so shortlisted proposer’s can develop their indicative price to meet this goal.