Submitted to the Citizen as an Op Ed Piece on 9 June
The Op Ed piece is as follows:
With the announcement on Tuesday of the release of the long awaited $600 million of Federal money for rapid transit, the project is likely to take on a higher priority in the city. Assuming the plan does go through as currently envisioned, and currently, I have concerns in several areas, council needs a timelier financial project reporting process. One of the first items I would propose to Council is to amend the current City Purchasing By- law Number 50 of 2000 to incorporate a clause similar to the Nunn-McCurdy Amendment in the United States. This clause would require any project or contract with a value of over $50,000 and which is forecast to cost 15% more than contracted amount to be raised to Councils attention for review. If the actual amounts will exceed 25% of contracted amount, Council is to place work on hold pending a full review and determination of remedial or corrective action. Bigger projects would have these applied to smaller, but still large value, definable line items as well. This, of course, is predicated on a contract that leaves the city financially obligated for additional costs.
If we take the recently approved LRT tunnel as an example the city identifies an amount of $735 Million just for the tunnel. Using my suggestion, council would be notified only when the budget had grown to $845.25 Million or a cost over run of $110 Million [15% of $735 million]. Of the $735 Million, $135 million is for “includes property acquisition, the project office, or the project director’s contingency”.
The contingency amount, normally referred to and the ‘unknown or unexpected’ costs typically range from 3 to 10 percent of a construction project base costs In this example, it could mean that the project actually ran over by an additional $18 to $60 million OR MORE, depending on how much the land acquisition and project office costs. Yes, those are alarm bells you hear ringing.
I would, in a large dollar value project like this, ensure that the city staff monitor the expenditures on both the Project office throughout the project and the land acquisition costs which, by default, has to be done early in the schedule [you can’t dig the hole if you don’t have access]. Conversely, each of these 3 items should be broken out succinctly and tracked!! $135 million is very deep cash well to be able to unaccountably shuffle money around in.
City staff have historically, missed out by a significant amount in their cost estimates o the actual costs of delivering a project. There is, however a better way than Nunn-McCurdy. What council ideally needs to do is to ensure that cost and schedule risk is if not fully assumed by, at least significantly shared with the contractor(s) doing the work. There are two basic concepts of procurement I would suggest to staff and council to consider.
The first is “Firm Fixed Price”. This means the contract, once awarded states that the winning contractor shall deliver a contractually compliant item on the contractually specified date and, once approved by the city, shall receive the agreed to amount of money. Progress payments are made only upon completion of measurable progress activities. If the cost is more, the contractor pays, if the delivery is late, the contractor pays both for the overage and a penalty to the city. The only risk on the part of the city is to ensure the design is well defined before the item is put to tender.
The second approach is a “Cost Plus Incentive to Ceiling” contract. This type of contract, the winning contractor is paid a bonus which rewards them for delivering the contracted item at a cost less than estimated. For example, the city could say for every $1000 under the ceiling that the project is completed for, the contractor would be given $100. I certainly would be in favour of spending $1 dollar for every $10 I could save. The drawback of this concept is that it puts an overhead cost burden on the city to review expenditures made by the contractor. The elephant in the room is would the cost of the city’s staff oversight actually exceed any costs saved if this method were utilized?
Either method, when used with a change control system would prevent the city from incurring additional unexpected costs. The ceiling is the ceiling is the ceiling.
Yes, but the estimated cost of Phase 1 of the LRT system has already inflated from the original estimate of $1.8 billion to $2.1 billion(+/- 25%). How do we fix that? What needs to be done, as part of the Request for Proposal stage, or even at a vendor Qualification Stage is to have the experts identify where costs can be saved. These aren’t city staff, these are the people bidding for the work, the ones who actually have expertise. The tender is issued, with a mandatory requirement of a “Price not to Exceed” of $X.Y billion. Let us assume, as an example that staff has estimated/specified gold plated. Custom made Dufoil Ramerframer that will cost $1000. In responding, the contractor says, that with a no cost paper design change for the implementation, 2 nickel plated, off the shelf Dufoil Ramerframers could be procured at $50 each, giving the same functionality, giving a net savings of $900.
It is common sense that design, building, certifying and delivering of a low volume of anything will result in a higher per unit cost. If items can be altered, while still staying within those things which can not be changed such as minimum lighting levels, ie LED Lighting in place of Incandescent for lower lifetime costs those should be done. The $10,000 toilet seat does exist and the reason is that only 20 of them are being built to its unique specification.
Returning to the RT contract, if an experienced, prequalified vendor or vendors choose to bid, then all is good. If what the city is proposing absolutely positively is unrealistic, guess what, no one will bid for it. One or more of the requirements will have to be amended by council and the RFP reissued if, once looked at, council decides to continue. Either way, a reality check has occurred.
From my perspective, looking in at City Hall, it seems like these concepts are foreign. Yet, they are conceptually simple, easily enforceable, staff friendly and should allow council to do what they are supposed to do, and not be burdened with a lot of the noise and minutia that the current members allow and encourage themselves to be burdened with.
A good link is found here.
