The Reason for Murky Bidding on California High-Speed Rail: A Law Enacted in 1996, When the Bullet Train Was Just a Twinkle in California’s Eye

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On January 15, 2013, the Bay Area News Group (San Jose Mercury-News) reported in California High-Speed Rail Cost Figures Coming In, but No One Will See Them Yet that the chairman of the California State Senate Transportation and Housing Committee was upset about the sealed bids for the first segment of the California High-Speed Rail project.

…sealed envelopes containing the actual cost for the first leg of the high-speed rail line will finally be hand-delivered to state offices this week. But you won’t see the bid prices yet – and neither will the officials planning the project. They’ll be filed away in sealed containers, with the supporting documents locked up in fireproof cabinets…

But some outsiders are questioning why the state is taking so long to look at the price, particularly with so many taxpayer dollars on the line and a groundbreaking just months away.

“The process is supposed to be transparent,” said state Sen. Mark DeSaulnier, D-Concord, chairman of the Senate’s transportation committee. “Once the bid is in, it’s in the public domain, and the public needs to (be able to see) what the bids look like, especially on a project like this.”

Actually, the process is NOT supposed to be transparent. And Jeff Morales, CEO of the California High-Speed Rail Authority, is correct to point out that this practice is common for big projects around the nation and state. “It is the industry standard in design-build projects to open bid prices following initial evaluations as not to skew the process,” Morales stated.

Here’s the origin of what’s happening today with the murky High-Speed Rail bids. In 1996, Governor Pete Wilson signed into law Senate Bill 1420, introduced by Senators Quentin Kopp (a former High-Speed Rail Authority board member who has criticized the current manifestation of the project) and Jim Costa (who is now a member of Congress), to create the California High-Speed Rail Authority and “prescribe various powers of the authority relative to planning, contracting for the construction of, financing, and operating, a high-speed rail system.”

California Public Utilities Code Section 185036 (added to law by SB 1420) states the following:

185036. Upon approval by the Legislature, by the enactment of a statute, or approval by the voters of a financial plan providing the necessary funding for the construction of a high-speed network, the authority may do any of the following: (a) Enter into contracts with private or public entities for the design, construction and operation of high-speed trains. The contracts may be separated into individual tasks or segments or may include all tasks and segments, including a design-build or design-build-operate contract.

In the mid-1990s, California was beginning to experiment with the design-build procurement process for public works projects. Instead of using the traditional “design-bid-build” method of designing a project, bidding out contracts for construction, and then building the project, a state or local government would request proposals that combined design and construction for single-source delivery.

The idea is that design-build allows different facets of a project to be coordinated and integrated, and as a result construction is less expensive and completed faster. See the web site of the Design-Build Institute of America for its arguments in support of design-build.

However, there are potential drawbacks to public agencies using design-build procurement for taxpayer-funded construction. With design-build, state and local governments are allowed to award the contract to an entity that is not the lowest responsible bidder. Instead, the government chooses a design-build entity based on “best value” criteria that includes price but can also include other objectives, such as “community benefits.” (In the case of California High-Speed Rail, bidders fulfill the so-called “community benefits” criteria through a commitment defined in Section 7.11.3 to sign a specific union-only Project Labor Agreement with the State Building and Construction Trades Council of California.)

This somewhat subjective scoring system allows the government to avoid awarding a contract to an inexperienced or overreaching entity that submits a low bid, but it also invites temptation for government officials to subtly manipulate the scoring criteria to achieve a desired outcome, such as making sure their favored company wins the contract. In the worst circumstances, it opens up the possibility for outright cronyism, nepotism, and fraud.

Authorizing this kind of alternative procurement and delivery system for public works projects would seem to conform with California Public Contract Code Section 101, which states that “California public contract law should be efficient and the product of the best of modern practice and research.” But it seems to betray the principles in California Public Contract Code Section 100, which declares the intent of the Legislature in enacting the Public Contract Code to achieve the following objectives:

(a) To clarify the law with respect to competitive bidding requirements.

(b) To ensure full compliance with competitive bidding statutes as a means of protecting the public from misuse of public funds.

(c) To provide all qualified bidders with a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices.

(d) To eliminate favoritism, fraud, and corruption in the awarding of public contracts.

Obviously, the long-term success of design-build procurement relies on transparent procedures and promptly-accessible public records.

As the 1990s ended, state agencies and local governments throughout California were eager to win authorization in state law to award projects to design-build entities instead of using the design-bid-build method. Laws multiplied from 2000 to 2011 explicitly authorizing and reauthorizing “best value” bid criteria and establishing a methodology for many categories of local government entities. Language for these authorizations expanded from the crude, simple statement authorizing design-build for High-Speed Rail in Public Utilities Code Section 185036.

On January 20, 2011, the California State Senate Local Government Committee held an oversight hearing on design-build, specifically focusing on the authorization for counties (which was about to expire). The report produced from this 90-minute, 19-panelist hearing is probably the best available source for the public and the news media about the actual implementation in California of design-build procurement, as opposed to theory and rhetoric. See Faster, Cheaper, Better? How Counties Use Design-Build Contracting. The Summary Report from the Oversight Hearing – Wednesday, January 20, 2010 – California State Local Government Committee (also still posted on the California State Senate web site).

In his role of vociferously opposing the privatization of engineering work through design-build, Ted Toppin, Legislative Director of the Professional Engineers in California Government (a public employee union), revealed the weakness of design-build at the oversight hearing:

Taking a self-described “contrary view,” Ted Toppin told legislators that the Professional Engineers in California Government doesn’t support design-build contracting for four reasons: (1) design-build laws favor contractors over taxpayers, (2) design-build contracts avoid competitive bids in favor of best-value lump sum bids, (3) the design-build selection process is highly subjective, and (4) design-build methods eliminate public inspection of the public works projects. His group is neutral on extending the sunset clause for the counties’ design-build statute, provided that the Legislature requires expanded objective reporting. Toppin then specifically alleged that Sonoma County’s report to the LAO incorrectly reported the cost of its design-build contract. Toppin also claimed that Stanislaus County officials ignored state law when awarding their design-build contract for a swimming pool, failing to consider cost, life-cycle costs, and safety records, as required by law. Further, Toppin said that Solano County incorrectly reported contract costs and didn’t consider the cost criterion when awarding the contract. He told legislators that PECG opposes the expansion of design-build contracting to other projects and opposes a standard statute. [Written reactions from Stanislaus County and Solano County appear in the yellow pages.] Senator Price asked Toppin if design-build contracting has “any redeeming social value at all,” to which Toppin replied that state law should follow the approach for state highways that relies on early involvement and inspection.

While generally supporting the concept of design-build procurement on behalf of my former employer – Associated Builders and Contractors (ABC) of California – and addressing some obscure technical issues related to pre-qualification, I also criticized some of the historical problems with design-build procurement that we now see emerging in 2013 with the California High-Speed Rail:

Dayton criticized the project labor agreement signed as part of the design-build process for the San Joaquin County administration building. His group had difficulty in obtaining public records such as the subcontractors’ bid lists and payroll records. Dayton recommended that future design-build laws ensure public access to those documents, and submitted specific draft language. After the hearing, Dayton provided the Committee with six other proposed amendments to the design-build statutes.

As you can see in the final version of Senate Bill 879 (2010), the ABC of California lobbyist Juli Broyles of California Advocates and I succeeded in getting the law amended to included this new public records accessibility language in California Public Contract Code Section 20133 (g):

(g) Lists of subcontractors, bidders, and bid awards relating to the project shall be submitted by the design-build entity to the awarding body within 14 days of the award. These documents are deemed to be public records and shall be available for public inspection pursuant to this chapter and Article 1 (commencing with Section 6250) of Chapter 3.5 of Division 7 of the Government Code.

But such a requirement does not apply to the design-build procurement for California High-Speed Rail. Why? Because the California State Legislature never adopted this recommendation of the California Legislative Analyst’s Office in its February 3, 2005 report Design-Build: An Alternative Construction System:

Instead of separate legislation providing the design-build authority for different time spans for different groups of state and local entities, as currently exist, we recommend that a single statute be adopted that applies to all public entities providing the same authority and limitations, if any.

Nor did the California State Legislature adopt the exact same recommendation five years later from the California Legislative Analyst’s Office in its January 8, 2010 report Counties and Design-Build (also still posted on the LAO web site):

Instead of separate legislation providing the design-build authority for different time spans for different groups of state and local entities, as currently exist, we recommend that a single statute be adopted that applies to all public entities providing the same authority and limitations.

As a result, the California High-Speed Rail Authority has broad authority to develop its own “best value” criteria and scoring system, while keeping the details out of the public eye.

See an American Recovery and Reinvestment Act (ARRA) California High Speed Authority Design Build Program Plan produced by Parsons Brinckerhoff for the California High-Speed Rail Authority. ARRA was the stimulus package enacted by President Obama in 2009.

Does Senator Mark DeSaulnier Read the Legislation He Supports?

Despite his complaining about the murky bidding process for California High-Speed Rail, Senator Mark DeSaulnier has repeatedly voted for bills that authorize or reauthorize design-build procurement or other alternative delivery systems that include “best value” criteria and the same kind of scoring system that California High-Speed Rail is using.

For example, in 2012 he voted for Senate Bill 1509, which reauthorized design-build for K-12 school and community college districts. He also voted for Senate Bill 1549, which authorized design-build for projects of the San Diego Association of Governments (SANDAG). And he supported the use of design-build procurement by Contra Costa County when he served on the Board of Supervisors, and on more than one occasion.

Nevertheless, it’s good to have him pointing out some of the questionable practices of the bidding procedure for the California High-Speed Rail, although he surely won’t be criticizing the Authority’s requirement that contractors sign a Project Labor Agreement.

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