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Ohio Construction Reform Finalized- The New Reality


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The Governor's Budget Bill radically changed the rules for public construction work in Ohio. Those construction reform rules have just been finalized. At this seminar, our presenters covered everything you need to know about these sweeping changes and the legal and practical implications it holds for owners, contractors, and subcontractors involved in public construction work in the state. The topics discussed included:
• Alternative Contract Delivery Systems authorized, including Design-Build and Construction Manager At-Risk
• Changes to the Multiple-Prime Contractor System
• How to Compete in this New Environment
• New Rules for Bonding, Subcontracting, Prequalification and Best Value

Published in: Business, Economy & Finance
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Ohio Construction Reform Finalized- The New Reality

  1. 1. THE JUNE 2011 BUDGET BILL: WHAT DOES IT MEAN FOR THE CONSTRUCTION INDUSTRY? Ohio Construction Reform Seminar February 14, 2012
  2. 2. CONSTRUCTION REFORM• Project delivery and the demise of multi-prime contracting
  4. 4. MULTI-PRIME CONTRACTINGAdvantages Disadvantages• Direct Payment • No single source responsibility• No Mark-up • Less Coordination• Less Bid Shopping • More ClaimsCheaper on Bid Day? Cheaper at end of job?
  6. 6. IT ALL STARTED WITH CONSTRUCTION REFORM (2009)Reform Defeated except for 3 test projects (including OSU‟s Project One) Supposed to track costs and effectiveness
  8. 8. WHAT ARE THE MAJOR CHANGES• No multi-prime requirement• Authorizes design-build (DB) and construction manager (CM) at-risk• Authorizes competitive proposals rather than bids for DB and CM at-risk work
  9. 9. WHAT DOES THIS MEAN FOR OWNERS?• More flexibility in contractor selection• Greater choice over contracting methods• Less need for coordination or action• Single source responsibility• Less risk of claims?
  10. 10. WHAT DOES THIS MEAN FOR DESIGNERS? • Loss of control on design-build work
  11. 11. WHAT DOES THIS MEAN FOR CM AGENTS?• Less need for services if no multi-prime contracting• But not prohibited from serving as CM if made a CM at-risk proposal that broke down over the GMP. R.C. § 9.33(H)
  12. 12. WHAT DOES THIS MEAN FOR GENERAL CONTRACTORS?• Great advantages for large international firms• More politics with no-bid selection• Bonding capacity may become more critical• Competitive disadvantages for locally owned family construction companies
  13. 13. WHAT DOES THIS MEAN FOR SUBCONTRACTORS?• More Bid Shopping• Loss of control• No direct payment and less payment security• Delayed payment (10 days)• Worse contract terms
  14. 14. WHAT DOES THIS MEAN FOR INDUSTRY?WINNERS LOSERS- Owners - Subcontractors- Large international - Family-owned contractors contractors - Architects
  15. 15. NEW PROJECT DELIVERY METHODS • General Contracting • Design-Build • CM at-risk
  17. 17. DESIGN-BUILD
  18. 18. CM AT-RISK
  19. 19. NO-BID CONTRACTS• Design-Build• CM at-riskCompetitive Proposal Process (like selecting A/E)
  21. 21. WHO WILL OWNER WANT TO CHOOSE?• Safe Choice (“One of the Big Boys” or a “Known Quantity”)• Relationship• Politics
  22. 22. WHAT LEVERAGE WILL AN OWNER WIELD?• Make Owner Happy or Never Work There Again
  23. 23. CM AT-RISK OR DESIGN-BUILDER MUST:• Identify 3 prequalified bidders on each subcontract• Who are acceptable to owner• Need not award to low sub
  24. 24. WHEN DO THE CHANGES BECOME EFFECTIVE? Tied to approval of DAS rules (No later than 6-30-12)
  25. 25. SUBCONTRACTOR PREQUALIFICATIONS • What does the Bill say about Subcontractor Prequalification?
  26. 26. SUBCONTRACTOR PREQUALIFICATION• Each CMAR and D/B firm “shall establish criteria” to prequalify prospective subs. – The prequalification criteria must be approved by the public authority involved in the project. R.C. 153.502(A)• DAS “shall adopt rules” setting standards CMARs and D/Bs must follow when establishing their sub prequalification criteria. R.C. 153.503(B). – Unless specifically excused by the public authority, the CMAR or D/B firm must identify at least three (3) prospective bidders who are prequalified to bid on the subcontract. R.C. 153.502(B); and – The solicitation and selection of subs must be under an “open book” pricing method. R.C. 153.502(C).
  27. 27. DAS FINAL RULE ON PREQUALIFICATION• Issued January 24, 2012
  28. 28. DAS RULE 153:1-7-01: SUB PREQUALIFICATION• Under final rule, the CM-At Risk or Design-Build firm for each Project must establish “prequalification” criteria and prequalification is defined as:
  29. 29. DAS RULE 153:1-7-01: SUB PREQUALIFICATION• The CM-At Risk or Design-Build firm for each Project is required to establish criteria that “shall” include information on the bidding subcontractor‟s: – Financial condition; – Conduct and performance on previous contracts; – Facilities; – Management skills; and – Ability to “properly” execute the subcontract.
  30. 30. SUBCONTRACTOR PREQUALIFICATION• DAS Rule further requires that the prequalification criteria “shall:” – Further any diversity “or inclusion” goals required by law or the public authority; and – Require prospective bidders to affirmatively state that they “have not violated any affirmative action program during the last five years preceding the date of the prequalification application.” • NOTE: For projects governed by Section 9.47 of the Ohio Revised Code, subs may meet this requirement by submitting a valid certificate of compliance.
  31. 31. FINAL PREQUALIFICATION RULE• Criteria must also require the bidder to submit proof of current licenses to perform the work as required by a public authority or applicable law.• The public authority has the right to: – Require the CM-At Risk or Design-Builder to include “additional criteria for specific trade contracts” provided the additional criteria is “consistent with the scope and needs of the project including, but not limited to, knowledge of the local area and working relationships with local suppliers.”
  32. 32. SUBCONTRACTOR PREQUALIFICATIONAfter all that, the prequalification criteriaestablished by the CM At-Risk or design-builder(pursuant to the mandatory rule) are … – “subject to approval of the public authority, who may reject in whole or in part.” DAS Rule 153:1-7-01(D)
  33. 33. WHAT DOES THIS MEAN?• Public Owners have a lot of discretion, if they wish to exercise it, in guiding the final Project subcontractor prequalification rules. – Criteria could be set up to favor local businesses, disadvantaged businesses, etc. – It appears that owners can even reject pre- qualification criteria the design-builder or CM At-Risk included that were required by the Final Rule.• Possibility of bid disputes if a pre-qualified bidder is low but does not get the job?
  34. 34. WHAT ABOUT BONDS?OSU Project One case – no need for Payment Bond if project not bid.
  35. 35. PAYMENT BOND PROTECTIONS• Under the Ohio Supreme Court‟s June 21, 2011 decision in State ex rel. Am. Subcontractors Assn., Inc. v. Ohio State Univ., Slip Opinion No. 2011-Ohio-2881, payment bonds were not required under Ohio law on public works projects that are not awarded to a „bidder.‟• The June 30, 2011 Budget Bill requires that CMARs and DBs “shall provide a surety bond to the public authority in accordance with rules adopted by the director of administrative services…” See § 9.33(B) and § 153.70(C), respectively.
  36. 36. PAYMENT BOND PROTECTIONS• Current rule requires 100% performance and payment bonds
  37. 37. SILVER LINING FOR SUBCONTRACTORSStandard Subcontract Form on CM at-risk and DBwork: • Cannot waive lien rights • Must pay retainage as retainage released by owner
  38. 38. DOES PROMPT PAY STILL APPLYYes.CM at-risk and design-builder must comply withORC 4113.61
  39. 39. BEST VALUE SELECTION PROCESS FOR CM AT-RISK AND DESIGN-BUILDTwo Step Process: 1. Qualification Phase 2. Request For Proposal PhaseAn Evaluation Committee Shall Be Established ByThe Public Authority. – The Project‟s design firm or other independent advisors can provide support but are not permitted to participate as voting members.
  40. 40. QUALIFICATION PHASEPrior To Announcing The Qualification Phase, A Public Authority ShallEstablish Criteria For Evaluating A Firms‟ Qualifications That At AMinimum Shall Include:1. Competence to perform required services.2. Ability in terms of workload and availability of qualified personnel.3. Past performance.4. Financial responsibility.5. History of meeting diversity goals.6. Knowledge of local area, subcontractors, and suppliers.7. For Design Build Proposals- use of licensed design professionals in compliance with Ohio law. – Rules Provide For Use of Stipends For Design Build Proposals
  41. 41. QUALIFICATION PHASE• “Short-Listed Firms” – No fewer than three unless Evaluation Committee determines in writing that fewer than three are qualified.
  42. 42. REQUEST FOR PROPOSAL PHASE Pricing Proposal Technical Proposal• A List of Key Personnel • Identity of the Proposed• A Statement of General Team. Conditions & Contingency • Project-Specific Plan• A Fee Proposal that – Schedule includes: – Approach & sequence to the Work – Preconstruction fee – Approach to performance – Construction fee specifications – At-Risk fee – Plan for anticipated – GMP if applicable procurement difficulties – Plan for meeting diversity goals
  43. 43. MINIMUM CRITERIA Pricing Criteria Performance Criteria• Preconstruction fee • Schedule• Construction fee • Approach to work• At-risk fee • Work sequence• General Conditions • Performance history• GMP proposal if • Approaches to applicable performance specifications • Plan for anticipated procurement difficulties • Plan for meeting diversity/inclusion goals
  44. 44. INTERVIEWS• Evaluation Committee Shall Interview Each Short Listed Firm That Submits A Pricing and Technical Proposal – Interview Is Not To Be Included In The Scoring of The Proposal
  45. 45. GMP PROPOSAL PROCEDURES• Public Authority shall define GMP requirements, which may include – Total Cost of Work – Allowances – Assumption and Clarifications – Project Schedule – Scope of Work to be self-performed• GMP shall be submitted in a sealed envelope – Opened after interviews and Evaluation Committee‟s scoring of performance and pricing criteria.
  46. 46. DETERMINATION OF BEST VALUE• The Evaluation Committee shall evaluate each Pricing and Technical Proposal utilizing the performance criteria and pricing criteria. – The performance criteria and pricing criteria shall be evaluated separately. – Evaluation Committee shall combine evaluations to reach a final evaluation. – Committee shall rank the short-listed firms based on the final evaluation.
  47. 47. ANNOUNCEMENT AND CONTRACT NEGOTIATIONS• Public Authority shall announce the firm determined to be the best value and shall enter into contract negotiations.
  48. 48. PROPOSALS AND PUBLIC RECORDS• Proposal and Other Records Shall Be Made Available For Inspection AFTER Announcement of the Best Value Firm.
  49. 49. FOR CM AT-RISK MULTIPLE PRECONTSTRUCTION STEPSProgramming Schematic Design GMP Stage ConstructionVerification Design Developme DocumentStage Stage nt Stage Stage
  51. 51. SIMILAR ARTICLE 8 PROVISIONS• 10 Day Notice Requirement• Certified Claim To Be Submitted 30 Days After Notice Is Made• Architect/Engineer Provides Initial Review Claim For CM at Risk – For Design Build Contract – Criteria Architect/Engineer Provides Initial Review of the Claim.
  52. 52. CM AT-RISK AND DESIGN-BUILDEXTENSIVE INSURANCE REQUIREMENTSIncludes Professional Liability Applies To Subcontractors
  53. 53. NEW RULES FOR ELECTRONIC ADVERTISING/BIDDING• DAS has proposed new rules for electronic advertising and bidding on projects.• Effective February 2, 2012.
  54. 54. RULES FOR ELECTRONIC ADVERTISINGNew rules allow a public authority to advertise aproject electronically in three ways:• On the website of a newspaper in the project county.• On the state public notification website.• On the public authority‟s website, or on a non- official website (such as a trade association).
  55. 55. RULES FOR ELECTRONIC ADVERTISING• Public authority can use electronic advertising to reach out to diversity/inclusion programs.• Public authority can us electronic advertising to provide full description of project, and to provide information on how to submit a bid.
  56. 56. RULES FOR ELECTRONIC BIDDINGWhat the state can require:• All bids to be submitted through the state‟s enterprise electronic bidding module.• Bidders to register with state‟s enterprise electronic bidding module.• Fees: registration, maintenance, subscription cost. (state can waive for diversity/inclusion programs)
  57. 57. RULES FOR ELECTRONIC BIDDINGWhat the state can provide:• Assistance or training in the electronic bidding software/subscription service for interested bidders.• Access to a computer for interested bidders.• Notice of availability of electronic bidding in any advertisement for the project.• Protection of submitted electronic information prior to bid deadline.
  58. 58. RULES FOR ELECTRONIC BIDDING• System will allow bidder to submit, resubmit, and withdraw a bid prior to the published bid deadline.• State will consider all electronic bids submitted before the published bid deadline.
  59. 59. RULES FOR ELECTRONIC BIDDINGBUT…the state is not liable if:• An interested bidder can‟t submit a bid due to “technical issues or obstructions.”Technical issues are not sufficient grounds for abid protest.