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Contracting Experiment Drawing Mixed Reviews

After four years of trying out a new way of awarding state contracts known as design-build, lawmakers aren't sure taxpayers get a better deal, and Texas businesses say they're being muscled out of jobs by larger, out-of-state companies.

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In 2011, with the population booming and the state budget buckling under pressure, Texas lawmakers decided to let state agencies experiment with a new approach they hoped would be quicker and cheaper at building expensive, complex projects.

The standard course for building roads, offices and such was to first take bids for a designer, then solicit bids for a builder after the design was complete. Under the new approach — called design-build — the two steps were joined. By hiring one or two companies to simultaneously design and build a project, chances to save time and money would theoretically emerge.  

But four years later, the approach has produced mixed results. Some Texas companies complain that design-build shuts them out, letting a few large companies dominate the field. Officials with some cities that have tried it say the model has led to spiraling contract expenses without a faster delivery time.

The 2011 regulations allowing limited use of design-build are set to expire in August. Absent any successful legislation to keep the brakes on, state agencies will be able to start using the approach more widely starting this summer.

Arguing that Texas still has some lessons to learn, a handful of lawmakers are scrambling to pass legislation that would put limits on the continued use of alternative contracting methods. 

“You need to walk before you run," state Sen. Robert Nichols, R-Jacksonville, speaking at an event last month. "And we haven't gotten past the walking phase.” 

While Nichols says he likes design-build, he's among several lawmakers filing bills this session to limit how often it — and a similar method called construction manager at risk (CMAR) — can be used. 

Under current law, the Texas Department of Transportation (TxDOT) has been allowed up to three design-build contracts per fiscal year, each costing at least $50 million. To date, TxDOT has undertaken six projects ranging from $84 million to $798 million. Other state agencies are allowed two design-build projects per fiscal year. Local governments are free to use the approach whenever they wish. 

Critics of the drift toward design-build and CMAR, including smaller contractors and the lawmakers who represent them, say they effectively cut many Texas companies out of the conversation. The contracts often go to large, out-of-state companies that have more experience with alternative methods, and agencies often require that potential contractors have prior design-build or CMAR experience before they'll even be considered.

“The competitive process has essentially been rigged so that only one company can compete for a contract – it is a very subjective selection process,” said Perry Fowler, executive director of the Texas Water Infrastructure Network, a trade association of Texas contractors specializing in water and wastewater treatment plants.

“We are in favor of this as a process. We just want it to be done correctly,” Fowler said, adding that further regulating design-build and CMAR contracts in the state is “good policy for the stewardship of our public dollars.”

Critics also point out that design-build projects do not always go to the lowest bidder. The selection process allows agencies to pick a contractor using “best value analysis,” which factors in things like experience, safety record and construction schedules.

According to the former director of the strategic projects division at TxDOT, Ed Pensock, best value analysis has provided clear time and cost savings to the state's taxpayers.

Despite the gripes, however, fiscally conservative lawmakers and free-market advocates say the state has no business protecting Texas companies that don't qualify for design-build contracts.

“Is the purpose of TxDOT to provide high-quality, reasonably priced roads to the Texas driving public as rapidly as possible, or is the purpose of TxDOT to use taxpayer dollars as a jobs program for companies that may not otherwise be able to compete?” asked Chuck Devore, the vice president of policy at the Texas Public Policy Foundation. “I would argue that it is incumbent upon TxDOT and upon lawmakers to provide for the most efficient use of taxpayer dollars.”

In 2014, TxDOT issued a design-build contract for a project titled Energy Sector, which included repairs to numerous roads around the state. The contract was supposed to make the projects cheaper by reducing overhead and consolidating material costs, but the project ran nearly 25 percent over budget.

That spawned criticism from Nichols and Duane Gordy, the executive director of the Community Development Education Foundation, who maintains that Texas needs to get better at deciding when to use design-build.

"[Design build] was a killer learning curve, and only now is the department catching up; the best place we can use these contracts right now, given our maturity, is on bigger projects," Gordy said. “[TxDOT] doesn't have the box or the boundaries they need sometimes, and I think some of the legislation we have seen coming out is a result of TxDOT not working inside the boundaries." 

For now, Nichols wants to make sure TxDOT remains limited to three projects a year. He filed Senate Bill 1294 to indefinitely extend the limit. His bill would also bump up the minimum price tag for a project to be considered for design-build from $50 to $250 million. The bill never made it to floor debate, though Nichols is attempting to add this provision to other House bills.

Prospects are slightly better for House Bill 2634 by state Rep. John Kuempel, R-Seguin, which looks to further restrict how CMAR contracts are awarded, with the goal of preventing affiliated companies from receiving both the design and building contracts. It was heard by a Senate committee on Thursday.

On the municipal level, where design-build remains unregulated, the case of the Weslaco water treatment plant has served as a cautionary tale for advocates of increased design-build regulation.

In 2011, the South Texas city contracted a single company to design and build a direly needed water treatment plant. Citing an "imminent threat to public health and safety," the city skipped the competitive selection process.

Contractor CDM, a company known to have political ties to Weslaco leadership, originally estimated the plant would cost $30.2 million. But by 2012 the final tab was set at $38.5 million, making the water treatment plant one of the most expensive in the state and double the cost of recently built, comparatively sized plants in the Rio Grande Valley. The project, which was slated to be completed on May 20 of this year, is at least four months from completion.

"This is an example of why smaller entities need to be careful in pursuing a design-build," said Michael Perez, the Weslaco interim city manager, who took over just four months ago. "If you don't have the depth of staff to oversee the bidding process, ensuring transparency, it may not result in the most economical use of taxpayer dollars."

Disclosure: The Texas Public Policy Foundation is a corporate sponsor of The Texas Tribune. A complete list of Tribune donors and sponsors can be viewed here.

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