The federal government, one of the largest owners of facilities procuring construction, has had difficulty procuring performing construction through the low-bid, design, bid, specification, procedure. The federal government has implemented several programs with the intent of moving to a best value procurement system (considering performance and price or value), however, the success has been difficult to identify due to the following (Mather and Costello, 2001, Musio 2002):

1. Inability to change the current bureaucracy to a performance based environment.

2. Difficulty in identifying performance.

3. Inability to minimize the perception of subjectivity (personal decisions based on personal perception due to a lack of differentiating performance information that is difficult to explain and justify in a bureaucratic environment).

4. Inability to minimize the risk of nonperformance (on-time, on-budget, meeting quality expectations).

5. The inability to influence the contractor’s performance based on the potential of future work.

6. The lack of documentation of performance due to the variation of construction work and the many unique factors that impact construction performance.

The federal procurement policy is set by the Office of Federal Procurement Policy (OFPP) is a part of the Office of Management and Budget (OMB). The federal procurement policy is defined in the Federal Acquisition Regulation System, or the FAR System, more commonly known as the FAR. The Federal Acquisition Regulations (FAR) System is the vehicle in which all of the Federal agencies utilize in any and all procurement activities. The FAR consists of two volumes of 53 subparts and just fewer than 2000 pages.

The vision of the FAR has always been to deliver the best value product or services. This includes (FAR 1.102(b)):

1. Satisfy customer in terms of cost, quality, and timeliness.

2. Use contractors who have a track record of successful past performance or demonstrate a  current superior ability to perform.

3. Promote competitiveness.

4. Minimize administrative operating cost.

5. Conduct business with integrity, fairness, and openness.

6. Fulfill public policy objectives.

Information Measurement Theory (IMT) defines an entity in terms of characteristics related to the use of information or perception of differential (Figure 1) (Kashiwagi, 2001.) Information is defined as:

1. Relative data that predicts the future outcome minimizing subjective interpretation.

2. Minimizes differences in perception.

3. Minimizes decision making because the future outcome is predictable.

Figure 1 has two main components: the rate of change of organizations on the left hand side (change of information level vs. change of time), and the two way Kashiwagi Solution Models (KSM) charts on the right hand side. The Type A organization is defined as using information, the Type C organization is one that uses minimal information, and the Type B organization is in between. The relative level of the various characteristics going across horizontally defines type A organization. For example, Type A organization would not have many rules. The rules would stop the organization from changing. Type C organization that would have many rules, would also control and use minimum standards that would perceive everyone and everything as being the same and deserving of the same. This type of organization would tend to control its employees and its vendors.

IMT therefore defines organizations in the following terms (Figure 1):

1. Type A organization constantly perceives more information, which changes the way they do business.

2. Type C organization perceives very little information (cannot differentiate between options), needs rules to tell it what to do because it cannot perceive and differentiate, and therefore changes very slowly. A Type C organization is usually bureaucratic, resists change with rules, cannot use information, and is filled with personnel who feel comfortable in this environment.

A Type C organization will have the following attributes (Figure 1):

1. Use very little information.

2. Driven by rules, which prevent its personnel to use information to optimize the outcome.

3. Force its personnel to make decisions to determine if the rules are being followed.

4. These decisions are minimum standards that use the lowest common denominator.

5. Require means and methods specifications to direct marginal services on how to do their job.

6. Require inspection and other means of control (project management) to ensure that the marginal services do the minimum specified requirement.

7. Procure marginal performing services.

This type of procurement (Type C) has resulted in nonperformance construction services and is the purpose of the current FAR directive to use best value to procure the construction defined by the Type A contractor (Figure 1). The problem facing the federal government is that it is a Type C organization possessing all the attributes of an organization that does not use performance information, does not identify performing contractors, and have personnel that exercise control (inspection, management, and use means and methods specifications). The policy has been set, but the personnel have not been trained, the environment has not changed from a Type C environment to a Type A environment.

If the movement is made from Type C to Type A construction procurement, the following obstacles must be overcome:

1. Minimize the rules of procurement. There are many personnel who make and interpret rules (decisions). This includes lawyers, engineers, and administrators. This action is in compliance with the FAR but puts the performer at risk. Their motivation is not consistent with the FAR of adding value.

2. Minimize minimum standards set by standards related organizations, engineers, and procurement personnel. The only parties who require minimum standards are contractors who need to be directed. If the process selects best value, the minimum specifications are not needed. There is no such term as a high performance standard. A standard is by definition the minimal acceptable level. Performance is unique to a contractor, system, and application. Groups that set minimum standards are bringing very little added value, proliferate the low-bid environment, and have motivations that are not consistent with the FAR.

3. Minimize inspection and management by user-represented parties. A performing contractor is responsible to bring their project in on-time, on-budget, and meeting quality expectation. By directing the contractor, the user representing project management group is bringing the user liability. If a contractor needs assistance, they should hire project management personnel. Project management parties representing the user have motivations not consistent with the FAR.

4. Minimize means and methods specifications. The design community has fought this movement because they perceive their job is being minimized. Their expertise is not in specifying construction means and methods. They are designers. They do not have extensive expertise in construction. Due to their participation in means and methods specifications, their insurance rates have increased due to increased risk. Their current motivation is not consistent with the FAR.

The obstacles are seemingly insurmountable due to the motivation by parties who have motivations not consistent with the FAR or the federal government. The government system has not been optimized (best value for lower cost). Instead of paying performing contractors to do performing work, the government has put the resources into parties who have furthered their own interests. There are currently many groups that make their living off of an inefficient government low-bid procurement system.

A "best value" system that meets all the requirements of the FAR, the Performance Information Procurement System (PIPS), has met with the following opposition due to motivations to not change the past low-bid system (Miwa, 2002):

1. Parties stating that the low-bid results were fine.

2. The work of designers is being minimized.

3. It is unfair for the government to penalize non-performing contractors.

4. Why does a manufacturer of contractor have to show references that prove performance?

5. It is unfair for government procurement to limit construction to contractors who perform.

6. Performance costs too much.

Preliminary results of 150 tests over three years in the State of Hawaii have resulted in performance results (99% on-time, no contractor generated change orders, and a 9.5 rating out of 10.0 for quality). The beneficiaries of performing construction are performing contractors, quality oriented organizations, craft person training organizations, designers, and facility managers, and the end user and taxpayers (Kashiwagi and Mayo, 2001, Miwa, 2002).

There are two major issues with doing best value procurement of construction in the federal government:

1. Finding the justification to use performance criteria (non-price criteria) and price to select a contractor.

2. Using a performance contracting process that minimizes directives and uses more performance based requirements.

For one reason or another the FAR is very confusing on the procurement of construction based on non-price criteria. In Part 36 which governs procurement of construction, it states "When a requirement in this part is inconsistent with a requirement in another part of this regulation, this Part 36 shall take precedence if the acquisition of construction or architect-engineer services is involved." (FAR 36.101b) It then continues in 36.103 Methods of contracting, with the following: "Contracting officers shall acquire construction using sealed bid procedures if the conditions in 6.401(a) apply…" (FAR 36.103(a)). To find what conditions are required to use sealed bids, Subpart 6.4- Sealed Bidding and Competitive Proposals, states that sealed bids should only be used if "…It is not necessary to conduct discussions with the responding offerors about their bids…" (FAR 6.401(a)(3)). It then continues "…(b) Competitive proposals. (See Part 15 for procedures.) (1) Contracting officers may request competitive proposals if sealed bids are not appropriate under paragraph (a) of this section." (FAR 6.401(b)). In Subpart 15.002, it states "(b) Competitive acquisitions. When contracting in a competitive environment, the procedures of this part are intended to minimize the complexity of the solicitation, the evaluation, and the source selection decision, while maintaining a process designed to foster an impartial and comprehensive evaluation of offerors' proposals, leading to selection of the proposal representing the best value to the Government (see 2.101)." (FAR15.002(b)) It also states "An agency can obtain best value in negotiated acquisitions by using any one or a combination of source selection approaches. In different types of acquisitions, the relative importance of cost or price may vary." (FAR 15.101) The result of FAR Parts 36, 6, and 15 allow any process to procure construction when it is necessary to conduct discussions with offerors about their bids. It has been shown that the discussion with the offerors about their bids is much more effective than having the contractors respond to a specification (Kashiwagi, 2001).

One of the problems with Best Value Procurement, which is based on performance and price, is the similarity to what the FAR calls performance contracting. FAR Part 37-Service Contracting; subpart 37.6-Performance-Based Contracting is the governing body of Performance Based Suppliers Contract (PBSC). This is the only section of the FAR that addresses performance contracting or the contracting of services based on performance requirements instead of means and methods. First, it states that "Use performance-based contracting methods to the maximum extent practicable, except for - (i) Architect-engineer services acquired in accordance with 40 U.S.C. 541-544 (see Part 36); (ii) Construction (see Part 36)" (FAR 37.102). However, since Part 36 and Part 6 state that the sealed bid does not apply, there is an issue of whether the performance contracting principles of Part 37 can now be applied to construction. Confusion is caused because it also references the procurement process as one that considers past performance and capability to perform as well as price. However, FAR 15 allows construction to be procured using non-priced factors.

PBSC identifies that the federal government wants the best value or highest performance for the best price. The objective as discussed before, is for PBSC contracts to remove the government from managing the contractor and the contract, and put the risk of contract performance on the contractor. It is clearly stated in the forward from ‘A Guide to best Practices for Performance-Based Service Contracting’ issued from the Office of Federal Procurement Policy:

"Performance-based service contracting (PBSC) emphasizes that all aspects of an acquisition be structured around the purpose of the work to be performed as opposed to the manner in which the work is to be performed or broad, imprecise statements of work which preclude an objective assessment of contractor performance. It is designed to ensure that contractors are given freedom to determine how to meet the Government’s performance objectives, that appropriate performance quality levels are achieved, and that payment is made only for services that meet these levels."(OFPP/OMB 1998)

The Guidebook for Performance Based Services Acquisition (PBSA) in the Department of Defense (December 2000) states that: "To the maximum extent practicable, agencies shall use performance-based methods for acquiring services…Contractor performance assessments (the process known as quality assurance) should focus on outcomes rather than on contractor processes. Focus on insight of the contractor performance, not oversight. Periodic assessment of contractor performance should emphasize clear standards of performance, and it should be consistent with past performance assessments." The PBSA states the elements of performance-based procurement should include: Performance work statement, measurable performance standards, remedies or method to enforce performance, and performance assessment. The PBSA states that the following objectives should be met:

1. Maximize performance.

2. Maximize competition and innovation.

3. Encourage and promote the use of commercial services.

4. Shift the risk from the government to the industry. This assumes that the government had the risk. This is refuted by many who claim to the government that they have the risk, but when nonperformance occurs, request the government to pay for solutions.

5. Achieve savings. This will come with the procurement of construction (design, management, and procurement) and with the minimization of poor performance (poor performing contractors who can no longer compete due to their inability or lack of motivation to perform to performance requirements).

In the OMB Government Performance Results Act of 1993, OMB identified the following:

1. "Waste and inefficiency in Federal programs undermine the confidence of the American People…"

2. "Federal managers are seriously disadvantaged in their efforts to improve program efficiency and effectiveness, because of …inadequate information on program performance."

3. Federal agencies are to submit strategic plans on implementing performance requirements, annual performance plans, and management accountability plans.

As shown in Figure 1, the opposite of the means and methods specification is performance requirements. This matches up with the description of best value, which considers performance and price. FAR Part 37 clearly infers that construction should be procured using FAR Part 36, but since FAR Part 36 and Part 6 allow construction to be procured through other processes, there is no clear directive that stops construction procurement that requires clarification from bidders from using practices that move the risk from the owner to the contractor. This paper identifies such principles as best value and not restricted to performance contracting as identified in the FAR. The FAR therefore encourages the procurement of best value, performance and price, and moving the risk to the contractor to perform.

The following are requirements of a best value system as defined in the PBSC (FAR Part 37):

1. Maximize performance (cost, quality, and timeliness).

2. Maximize competition.

3. Use contractors who have a track record of successful past performance or demonstrate a current superior ability to perform.

4. Encourage the use of commercial services.

5. Shift the risk from the government to the industry and contractors.

6. Achieve savings in delivery and performance.

7. Minimize administrative operating cost.

8. Conduct business with integrity, fairness, and openness.

The following concepts that are used in best value procurement would also meet the requirements of performance contracting:

1. Require past performance, and have past performance impact selection would attract those with performance.

2. Minimizing minimum standards would increase competition (no contractor would be disqualified). However, a contractor with more documented performance would have the advantage of a contractor with less documented performance.

3. Minimizing management of designers and contractors.

4. If performance (past performance, current capability to minimize risk, and price) is used to select contractors, the contractors’ quality would govern the selection and performance of construction.

5. Minimizing subjective decision-making through blind review of current capability to minimize risk and prioritization on performance information without translation (subjective decision making) increases the integrity, fairness, and openness of the process.

Figure 2 shows information filters in the PIPS model which reduce the subjective decision making of government personnel, thus moving the control and risk on performance to the industry and contractors:

1.  Filter 1: Contractors understand that the owner will award based on performance and price. Performance includes past performance, and the performance on the subject project will count 25% of the future performance. Also critical components, site superintendent, project manager, and critical subcontractors having past performance. Contractors select their own past performance references which eliminates the problem of contractors protesting their past performance ratings.

2. Filter 2: Contractors must identify and minimize risk of not being on time, on budget, or meeting quality expectation. They must also value engineer project, identifying how the project could result in a greater value. It includes a detailed cost estimate and construction schedule. The contractor’s key personnel are also interviewed. Contractors who do not have experience will eliminate themselves. This is one of the clarifications that meet the requirements of the FAR to allow a process other than sealed bid.

3. Filter 3: The contractors are prioritized based on past performance of critical elements, capability to minimize risk, and interview of site superintendent and project manager by an artificial intelligent processor (Displaced Ideal Model, DIM) that has no bias. The performance numbers are not translated. The processor reads the numbers, takes into account a relationship of factors based on the user’s needs, and prioritizes the contractors.

4. Filter 4: Pre-award Period and Meeting. This is the most critical component of the process. This step ensures that the risk is passed to the contractor. This is where the further clarification is required as stated in the FAR. This step differentiates PIPS from all other performance based processes. The top prioritized contractor must do the following:

    

   · Coordinate all drawings and specifications with critical subcontractors and manufacturers.

   · Identify any components that need clarification. Get clarification before award.

   · Answer any technical questions.

   · Reconfirm the expectations of the user.

5. Sign a contract to construct based on intent of RFP, management of risk, clarifications, construction schedule, and price. The contractor is at risk. However, the user will facilitate and assist the contractor to be successful. There is no project management required by the owner.

6. Filter 5: Performance on this project will count 25% of future past performance rating. The past performance rating will then be used directly in future selections. This is a big difference from most current PBSC systems.

There is a major difference between Filter 5 and other PBSC systems. In most PBSC systems, the past performance is used as a pre-qualifier, and then the award is made based on price. This gives no incentive to contractors to improve performance. They will meet minimum expectations. This is the fallacy of performance standards. In the information filters, the contractor’s improved performance translates directly into a competitive advantage. This characteristic makes PIPS an elegant process. The process is a continuous improvement process. It sets PIPS apart as not only best value, but also a process that results in higher contractor performance.

PIPS has been tested out successfully on over 300 projects over 7 years on projects ranging from under $100K to over $50M. It has an on-time rating of over 98%, has no contractor generated cost change orders (not identified by the owner as design errors) on over $100M of construction, and has a 9.5 performance average. It is the only PBSC process with detailed performance information over a period of time. PIPS meets all the theoretical requirements of an information system, minimizing standards, control (inspection and project management, decision making), and procurement rules.

The federal procurement policy office is recommending best value procurement of construction work. Federal procurement directives (FAR 37) identify that the low-bid award process is:

1. Inefficient.

2. Has not provided quality construction.

3. Gives the risk to the government instead of contractors and designers.

4. Is not to the advantage of the government.

The federal government is requiring all agencies to meet goals to procure a minimum of 25% of all services by performance-based procurement (best value). The federal government is also stressing to move the risk to the contractors, and allowing them to minimize the risk of nonperformance. The federal government is also directing to use commercial services to accomplish the work. Government personnel should measure performance and remove itself from dictating how the work should be done.

The Performance Information Procurement System (PIPS) is a working process that can be used to meet the requirements of best value procurement and the FAR. It is theoretically correct and has been tested and validated. It moves the risk to the industry, and thus allows the experts to minimize the risk of nonperformance (on-time, on-budget, and meeting quality expectations). Entities who do not support moving to best value procurement have motivations that are not consistent with the FAR or the federal government.

Office of Federal Procurement Policy (1998) A Guide to Best Practices for Best value Service Contractin, p. 2

Office of Federal Procurement Policy, Federal Acquisition Regulations System (2001), http://www.arnet.gov/far/loadmainre.html.

Kashiwagi, D.T. and Mayo, Dick (2001). "Best Value Procurement of Construction Using Artificial Intelligence," Journal of Construction Procurement, Volume 7, No. 2, pp. 42-49.

Kashiwagi, D. T. (2001) Information Management Theory, 4^th Edition, Tempe: PBSRG.

Kundsen, L. (2000) Letter from the State of Utah’s Program Director regarding the close out report to PBSRG on Bridgerland ATC.

Mather, Chip and Costello, Ann (2001) "An Innovative Approach to Performance-Based Acquisition: Using a SOO" Acquisition Directions Advisory, Acquisition Solutions, Chantilly, Virginia, May 2001, pp.1-10.

Miwa, Steve. Personal conversation with State of Hawaii PIPS Administrator, February 21, 2002.

Musio, David. Personal conversation with FPPO deputy on the FAR and movement toward best value procurement of construction, February 7, 2002.

Zeleny, M. (1982) Multiple Criteria Decision Making. New York: McGraw-Hill.