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A “THINK TANK” PLAYS LOOSE WITH THE FACTS

Posted By ACEC Texas, Thursday, April 9, 2015

The Texas Public Policy Foundation recently released a report on transportation funding titled The Road Forward:  Improving Efficiency in Texas Transportation Spending.   The conclusion is that Proposition 1, ending diversions, and contracting “reforms” will provide plenty of money for transportation through 2017.

Of course, the legislative debate on transportation funding is not about getting through 2017, it is about long-term needs.  Leaving this aside, one does not have to get far into the report conclude that it appears to be a conclusion in search of evidence, and that the evidence is contorted to get to the conclusion.

First, the initial statement in the report is that Proposition 1, adopted by voters in 2014, provides at least $1.5 billion annually for transportation.  A glance at the Comptroller’s Biennial Revenue estimate or the state budget tells you that that “fact” is wrong.  The BRE and both appropriations bills estimate the funding from Prop 1 at approximately $1.2 billion per year.  Furthermore, since Prop 1 revenues are tied to oil and gas severance taxes (and in turn to oil and gas prices and production), most budget analysts expect that part of the revenue estimate to be revised downward.   A more realistic estimate of State Highway Fund transfers is probably $1 billion annually in the next biennium.   One billion dollars over the biennium is apparently a rounding error if you are trying to make a point.

Second, the chart on page five of the report regarding inflation in the highway construction area is borderline manipulative.   The table states that the Highway Cost Index (a measure of relative inflationary or deflationary changes in the cost of materials) was 1.27 in 2006 and 1.03 in 2014, projected to be 1.06 in 2016.  In other words, the conclusion is that cost of highway construction has declined.

Again, these “facts” are either wrong or misrepresented.  The graph attached is from the Federal Highway Administration’s website and depicts the National Highway Construction Cost Index (HCI).   The HCI was in fact 1.27 in March of 2006, but in September of 2014 it was 1.13, not 1.03.  (There is no forward projection of the HCI that we are aware of.)   More to the point, using the trend from 2006 – 2014 is duplicitous.  This period suggests a downward trend line in the HCI, whereas looking at a longer period (2003-2014) demonstrates exactly the opposite. Further, TxDOT’s HCI, which is Texas-specific and therefore more pertinent) demonstrates an even greater increase in costs.  This index shows a 12-month moving average in April 2004 of 121.2 increasing by March of 242.4.  The TPPF report clearly understates the significance of the increase in commodity costs of construction materials.

Finally, the report considerably exaggerates the savings that might accrue from increased use of design-build procurement procedures.  TxDOT has the ability to use design-build processes and its ability will increase after September 2015 when an annual limit of three projects for year sunsets.   (The TPPF report states that engineering interests are attempting to maintain this limitation but that statement is flatly wrong.)   

The report suggests that money could be saved by removing a requirement of existing law that DB requests for proposals include approximately 30% schematic design.   No evidence is offered for this and it would be difficult to find many in the engineering/construction industry that would agree.  Some design is required to gain environmental clearance for a project and to put potential proposers on a level playing field in submitting proposals.  In fact, removing this requirement would more likely escalate the cost of bids and proposals as responders include a higher level of risk-pricing.

As to the idea that, expanded use of DB could generate 30% cost savings, again, most in the industry would scoff at that number, including both proponents and opponents of design-build.   The Federal Highway Administration’s study of design-build effectiveness in 2006 concluded that:

. . . design-build project delivery, in comparison to design-bid-build, had a mixed impact on project cost depending on the project type, complexity, and size. The surveyed design-build project managers indicated that project delivery approach (i.e., design-build versus design-bid-build) can be a contributing factor in controlling and potentially reducing project costs. However, project delivery approach was perceived to be less of a factor in affecting project cost than other characteristics of the project or its participants.

When project cost information was used from the project surveys, the design-build projects experienced no appreciable change in total cost due to off-setting cost increases and cost decreases among the project sample surveyed, which both vary widely. When cost information was used from a subset of similar design-build and design-bid-build projects, the design-bid-build projects demonstrated more favorable cost results.

Project costs experienced most growth from contract award to project completion. Respondents to the design-build project survey indicated that the leading cause of project cost changes was change orders: owner required additions or subtractions and design-builder or contractor suggested additions or subtractions. This was true for both project delivery approaches, with design-build projects being significantly more sensitive to delays, additions, or subtractions caused by third parties than design-bid-build projects.

Change orders represented 5 percent of the total costs for the surveyed projects. Claims represented less than one-tenth of one-percent of total project costs. The subset of design-build projects had fewer change orders than the comparable design-bid-build projects, but the average cost per change order was greater for the design-build projects. This can be attributed to the greater size of design-build projects. This was confirmed by the fact that change orders represented about the same share of total project costs for both design-build and design-bid-build projects. In contrast, the dollar value of claims per project was significantly lower for design-build projects than for comparable design-bid-build projects, with the subset of design-build projects having no reported cost of claims.

This is a less-than-ringing endorsement of the idea of 30% savings.  And in fact, the executive summary of the study includes a chart on the estimated impacts of using design-build on cost, duration, and quality which shows the median impact on cost as 0.0%.  

There are valid reasons for using design-build project delivery, but any expectation of achieving 30% cost savings is not one of them.

  


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Can We Afford to Take Tolls Off the Table?

Posted By ACEC Texas, Monday, March 23, 2015

Anti-toll sentiments are busting out all over at the Capitol these days – rallies against tolls and bills against system financing of toll roads, against managed lanes, against toll equity contributions, and more.  There is a sense that now that the Legislature is getting serious about funding transportation, we can forego the toll solutions that have expanded drastically over the past decade.  But is that true?

There is no question that the proliferation of toll roads has been related to the Legislature’s (and the previous Governor’s) unwillingness to consider traditional financing.  There were other options:  One analysis indicated that the growth in gross toll revenue connections by the state’s toll road agencies since 1991 was almost exactly what would have been raised by a half-cent annual increase in the state’s motor fuel tax rate.  But in the absence of greater traditional funding, the metropolitan areas of the state embraced the only option the Legislature gave them for capacity expansion of major thoroughfares – tolling.

There probably is an amount of money that the Legislature could commit that would allow toll solutions to be taken off the table, but with current proposals we are a long, long way from it. 

In 2012, the state’s 2030 Committee estimated that the state faced a $170 billion gap (in 2010 dollars) between available funding and the amount needed to maintain current conditions over 25 years.  Legislators were told in follow up hearings that approximately $50 billion of that gap would come from local funding, primarily toll-based.  That is where the idea of $5 billion in needed state revenue ($120 billion over 25 years).

Depending on the day – and the bills in question – the 84th Legislature seems headed toward stopping diversions from the highway fund ($600 million per year) and dedicating a portion of either the state’s motor vehicle sales tax or general sales tax ($2-$2.5 billion net of debt service repayment) to the state highway fund.   Furthermore, absent the passage and adoption of a constitutional amendment, this may or may not be a long-term commitment.  In any event, the funding will need to be leveraged with toll solutions where appropriate to achieve any significant inroads in mobility.

It is appropriate to invest new money into the free-access, non-toll system, as HJR 13 and SJR 5 do.  But toll options can expand mobility, and should not be taken off the table.

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STATE CONTRACT & PURCHASING PROBLEMS – OUR PERSPECTIVE

Posted By ACEC Texas, Wednesday, February 4, 2015

State contracting problems have been in the news lately – thanks to the Health and Human Services Commission – and there is a lot of discussion at the Legislature about the extent of the problem.   Is it widespread?  Or limited to this agency?  Due to a lack of oversight? What are the solutions?

Here’s our perspective on this:  The problems are not widespread.  Rather they are mainly associated with HHS (obviously), information technology procurement, and with overuse of purchasing cooperatives.  The Legislature can learn from the experience of the design and construction industry in dealing with purchasing co-ops and craft a solution that is appropriate to the problem.

The idea of purchasing cooperatives is rooted in the power of bulk purchasing.  If a group of governmental entities can find the best price on desks, computers, school buses, or other commodities through a master bid, why not make this price available to others?

Where this model breaks down is when it gets expanded to services rather than commodities, to site-specific or variable projects, or to large-scale projects rather than incidental ones. 

In the design and construction industry, this pre-pricing model showed up several years ago under the name of “job order contracting.”  The notion was that certain construction could be pre-priced (e.g., dollars per feet of sidewalk or per square foot of drywall, etc.) then procured on an “indefinite delivery/indefinite quantity” basis.  At the same time, purchasing cooperatives proliferated, set up by government agencies and associations, often seemingly to get the fees that came to middlemen as a percentage of sales.

Inevitably, of course, the combination of job order contracting and purchasing cooperatives led to abuse.  Cooperatives let select vendors lock up large sections of the state.  Local contractors often did not even know about projects or have an opportunity to bid. There was little transparency transparency on activities, or on where the money went.  Large purchases were done under master contracts with little involvement of governing boards.  One agency formed a private company to house its co-op, with its staff as directors, to shield transparency.  One school district built an entire new school with JOC.

But at least in the construction area, abuses led the Legislature to enact some reform.  Purchasing cooperatives cannot be used to procure architectural and engineering services.  Job order contracts are limited to maintenance, repair, or minor construction (not new buildings).   The term of the master contract is limited to two years.   A maximum aggregate contract price must be established when the proposal is advertised, and the governing body must approve any work authorization or task order that exceeds $500,000.   Any task order that requires engineering or architecture must have oversight of a design professional on the staff of or selected by the governmental entity.

What does this experience offer to the State’s current problems?  A lot, since the problems at HHSC seem mostly rooted in the inappropriate use of a purchasing cooperative.  Some the lessons learned in design and construction can be applied here.  First, services should be excluded; IT problems are probably similar to engineering and architectural problems in that they are not generic and are not really suitable to being pre-priced.  Limit the aggregate contract price.  Require approval of job orders.  Set a limit on the contract.  And mostly, provide transparency.

But the Legislature should resist the argument that this HHSC issue is symptomatic of broader problems. There is little evidence of this at this point.  In the design and construction industry, the State executes hundreds of millions of dollars in design contracts and billions in construction contracts – all competitively procured, all publicly noticed, all with conflict of interest provisions, all with oversight, all with procedures to enforce accountability.  There are occasional problems, but they are dealt with expeditiously.

We hope the Legislature will take this opportunity to further reform and limit purchasing cooperatives, and shine the light of day on them, without creating more solution than there is problem.

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2017 ACEC Texas Leadership Forum: Session II - Business Management Skills

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