DISTRICT BID ANALYSIS

AUDIT REPORT NUMBER 04B-6004

OFFICE OF INSPECTOR GENERAL

Office of Inspector General

Audit Team Members

Audit Manager Audit Team John Rendahl Candace Heins Salwa Soliman

Sections 20.055 and 20.23, Florida Statutes, require the Florida Department of Transportation's Inspector General to review, evaluate and report on policies, plans, procedures and other operations of the Department and recommend improvements. This audit was conducted to meet statutory requirements and assist management in the effective implementation of transportation programs by the Department. Our audit was conducted in accordance with applicable Government Auditing Standards issued by the Comptroller General of the United States (1994 revision) and Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors. We included such tests and other auditing procedures as we considered necessary under the circumstances.

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TABLE OF CONTENTS

Page EXECUTIVE SUMMARY BACKGROUND AND INTRODUCTION FINDINGS AND RECOMMENDATIONS I. II. District Bid Analysis Is Limited District Bid Analysis Is Reasonably Consistent 6 8 10 11 12 4 5

III. Districts Have Established Management Controls IV. Revised Procedure Resolves An Inconsistency V. Pay Item Unit Price Terminology Is Not Consistent APPENDICES A. B. C. D. E.. Objectives, Scope and Methodology Glossary DCP Limitations Management Response Distribution

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EXECUTIVE SUMMARY
This audit reviewed districts activities that constituted bid analysis on district construction and maintenance contracts. The scope excluded contracts involving the Contractual Services Office, consideration of steps to further decentralize district bid analysis, and detailed analysis of the District Contract Prototype system. Our principal objectives were to: C C Review bid analysis for reasonable consistency among districts, and Evaluate management controls over the districts bid analysis process.

We found that districts cannot perform bid analysis equivalent to that performed on contracts let by the Central Office due to the limitations of the District Contract Prototype (DCP) system, the system used for district contracts. DCP lacks the statistical capabilities used to analyze bids for Central Office-let contracts. DCP was not intended to be a full contract administration system. It was built for temporary use until an integrated system could be provided under BISP. Currently, through its joint participation in an AASHTO-sponsored construction management project, the Department is looking to implement other AASHTO software packages that would replace the existing DCP system, providing the districts with the analytical tools that are needed. This implementation would be done as part of the BISP effort but could be done in advance of the current BISP schedule. Over time, the dollar cap for district-let contracts has risen to $1 million. Currently, districts may let contracts over the $1 million limit on a case-by-case basis. If and when the dollar cap for district contracts is officially raised, districts would be unable to perform bid analysis on these larger contracts equivalent to that performed by the Central Office. If such equivalent analysis were deemed desirable, appropriate analytical tools would be required. The Assistant Secretary for Transportation Policy should direct a review of the Departments future expectations for bid analysis of district contracts and support pursuit of appropriate tools accordingly. We found that districts performed bid analysis on district contracts in a reasonably consistent manner. All districts have established processes that contain major elements in common for the technical review of bids (see page 9). The processes meet statutory and procedural requirements. Furthermore, we found that by incorporating several mechanisms as part of the bid analysis process, districts have included reasonable management controls to identify and reduce risks. The Contracts Administration Office should continue to encourage the districts efforts. During our audit the Contracts Administration Office revised the District Contracts Procedure. Upon its adoption, the specified percentages above or below the Departments estimate, applied in conjunction with bid analysis and contract award of district contracts, will be consistent with specified percentages on Central Office-let contracts. The Contracts Administration Office should pursue adoption and implementation of the revision to this procedure. The Central Office and districts do not have a common understanding of acceptable terminology for bid price proposal pay item unit prices from contractors when the intent is to charge nothing for the pay item. As a result, decisions to accept or reject bids may not be consistent, for example, when a bidder leaves a pay item unit price blank or enters no bid. The Contracts Administration Office should clarify acceptable terminology for use with pay items the contractor intends to provide at no cost to the Department.

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BACKGROUND AND INTRODUCTION

District contracts were designed to provide a relatively fast and simple method of contracting for goods and services. Districts are authorized to develop and implement nonfederally funded construction and maintenance contracts of $1,000,000 or less and are responsible for all phases of district contract activities. However, depending on the amount of a district contract, different rules apply. District contracts of $250,000 or less typically follow District Contract General Specifications. Contracts that are greater than $250,000 and up to $1,000,000 require standard specification packages identical to projects let in the Central Office along with compliance with other specific rules. The nature of district contracts has evolved over time. Initially, district contracts were simple maintenance contracts, such as mowing contracts. Currently, district contracts include both maintenance and construction, may be simple or complex and may be $1,000,000 or less. On a case-by-case basis, a district contract may exceed this amount. For FY 1995-96, district construction contract lettings totaled $47,000,000 or just under four and a half percent of FDOTs $1,055,000,000 construction commitment. The FY 1995-96 commitment for district maintenance contracts totaled $103,000,000.1 District bid analysis is part of the contract bidding and award process. Sometimes referred to as a technical review, bid analysis occurs after receipt of the bids for a given contract and prior to award of the contract. The bid analysis is a review of bid(s) for irregularities in bid unit prices. Bids also undergo an administrative review to ensure compliance with applicable requirements. The award of a contract should be to the lowest responsible bidder whose proposal complies with all the requirements. The Contracts Administration Office performs annual Quality Assurance reviews of the districts administration of district contracts including bid analysis under Procedure 375000-001, District Contracts. The State Estimates Office has the responsibility for performing technical bid analysis on Central Office-let contracts.

Source: Production Management Office.

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FINDINGS AND RECOMMENDATIONS I. District Bid Analysis Is Limited

Finding Districts cannot perform bid analysis equivalent to that performed on Central Office-let contracts due to limitations of the District Contract Prototype (DCP) system, the system used for district contracts. A brief description of Central Offices capability to utilize data from the Contract Administration System (CAS) provides perspective for comparison with districts manual capability. For Central Office-let contracts, a statistical program compares bids and the Departments estimate to analyze bids for unbalancing and ultimately, to identify the low bid. One statistical analysis performed identifies bids with pay items that are outside established high and low ranges in comparison with the FDOT official estimate. This program evaluates all submitted bids, calculates an average cost for each pay item and flags items with above or below average prices. The quantities of flagged pay items should be checked for errors. Another analysis performed by the statistical program identifies front-end pay items, calculates the difference between the low bid and the next lowest bid, and analyzes the effect of loading the pay item, i.e., the time value of money. Front-loaded pay items are front-end pay items for which the contractor has overcharged since the contractor will be paid for these items up front. It is possible that due to front-loaded pay items in a bid, what appears to be the low bid is really not the low bid. The amount of the bid and the interest that could be earned on the money paid to the contractor are taken into consideration when determining the low bid. In contrast, DCP lacks these statistical capabilities. As a result, any statistical analysis done on district contracts has to be done manually. In the absence of DCP statistical capabilities, and as no access is reasonably available to the statistical programs used for Central Office-let contracts, several districts use alternative tools such as a LOTUS spreadsheet in bid analysis. District staff manually enter each pay item number, quantity, unit price and dollar amount of the estimate and each bids unit price and dollar amount of each pay item into the LOTUS spreadsheet. The spreadsheet computes the dollar difference between the estimate and each bid for each pay item. The information manually entered into the LOTUS spreadsheets has already been manually entered into DCP; however, the DCP data cannot be retrieved for use in the

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spreadsheets. Despite such efforts, the information produced by the LOTUS spreadsheet is not statistically based. Those in the Department with whom we spoke recognize that the DCP does not effectively serve the districts needs in managing district contracts. (Appendix C describes several DCP limitations.) From its inception, the DCP system was not intended to be a full contract administration system for district contracts. It was built as a prototype for temporary use until an integrated system could be provided under the Departments Business Information System Plan (BISP). Currently, through its joint participation in an American Association of State Highway and Transportation Officials (AASHTO)-sponsored construction management project, the Department is looking to implement other AASHTO software packages that would replace the existing DCP system, providing the districts with the analytical tools that are needed. This implementation would be done as part of the BISP effort but could be done in advance of the current BISP schedule. Currently, on a case-by-case basis, districts may let contracts well over the one million dollar limit. The potential for officially raising the dollar cap higher exists for district contracts. When that happens, responsibility for bid analysis of such contracts which were formerly analyzed with statistical program assistance would shift to districts. One option for addressing this possibility would be for districts to assess risk and concentrate more effort in bid analysis on those contracts that presented greater risk. For example, a contract in which the scope of work to be performed is difficult, or a contract with a greater number of pay items, or a contract with small quantities, may pose greater risk. Department managers anticipate that the historical trend in increasing the dollar cap in district contracts will likely continue. If the dollar cap for district contracts were officially raised, districts would be unable to perform bid analysis equivalent to that performed on Central Office-let contracts. This is because districts lack the sophisticated analytical tools in use with Central Office-let contracts. If the Department decided that the cost-benefit of statistical analysis warranted the effort to reduce risk in conjunction with district contracts, then the Department would need to provide appropriate analytical tools for this effort. Recommendation I We recommend the Assistant Secretary for Transportation Policy direct a review of the Departments future expectations for bid analysis of district contracts and support pursuit of appropriate tools accordingly.

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II. District Bid Analysis Is Reasonably Consistent

Finding Districts performed bid analysis on district contracts in a reasonably consistent manner. The Florida Administrative Code prescribes requirements for award of a contract to the lowest bidder.2 The Departments Standard Specifications for Road and Bridge Construction describes irregularities which may cause proposals to be rejected.3 The Departments District Contract General Specifications requires review for irregular or unbalanced bids.4 The District Contracts Procedure provides that all bids should be subject to a technical review. The procedure also indicates that the District Awards Committees purpose is to review the low bid for proposal/bid document irregularities in the bid unit prices, when only one bid is received or when the low bid exceeds the Departments estimate by more than the specified percentage. The Departments official engineers estimate shall be the base upon which all reviews are to be made. The Committee shall also review any other irregularities brought to its attention by the District Contracts Administrator.5 All districts have established processes to perform technical bid analysis. District processes fell into two basic categories. In several districts a multi-discipline committee reviewed bids, provided information and recommended action for the Awards Committees consideration and final decision. In other districts, staff supplied
2 Section 60D-5.007, Florida Administrative Code, (1)...Award of contract will be made to the responsive bidder determined to be qualified in accordance with the provisions herein and meeting the requirements of the bidding documents, that submits the lowest valid bid for the work. The lowest bid will be determined as follows: (2) The lowest bid will be the bid from the responsive bidder that has submitted the lowest price for the base bid or the base bid plus the additive alternates or less the deductive alternates chosen by the Agency to be included in or excluded from the proposed contract, taken in numerical order listed in the bid documents. The order of the alternates may be selected by the Agency in any sequence so long as such acceptance out of order does not alter the designation of the low bidder. (3) On projects whose bidding documents provide for evaluation of the bids based on first cost and life cycle cost and performance criteria, the lowest bid will be the bid by the firm whose bid products are determined to yield the lowest total cost in accordance with the criteria set forth in the bidding documents.

Standard Specifications for Road and Bridge Construction, Article 3-2, The award of the contract, if it be awarded, will be to the lowest responsible bidder whose proposal complies with all the requirements necessary to render it formal. Standard Specifications for Road and Bridge Construction, Article 2-6, A proposal will be subject to being considered irregular and may be rejected if it shows omissions, alterations of form, additions not called for, conditional or unauthorized alternate bids, or irregularities of any kind; also if the unit prices are obviously unbalanced, either in excess of or below the reasonable cost analysis values. District Contract General Specifications, Section 1.8, All proposals shall be subject to review for unit prices that are obviously unbalanced either in excess of or below the reasonable cost as compared to the Departments (sic) official estimate and historical prices kept by the Department. The submittal of an irregular/unbalanced unit price may be deemed as a violation of contract requirements and subject to the rejection of the Contractors bid proposal.
5 4

District Contracts Procedure 375-000-001-g, (2), page 4.

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information for the Awards Committees consideration but did not provide a specific recommendation to the Committee. Each district sent all contracts to its Awards Committee for decision although the District Contracts Procedure allows contract awards to bypass the Awards Committee under certain conditions. Based on site visits to each district, interviews and contract file reviews, we concluded that the bid analysis process in all districts contained major elements in common. Districts bid analysis: C C C C C C C C C Followed the Departments award-to-low-bid philosophy. Occurred prior to award of the contract. Was performed by personnel with different professional transportation backgrounds. Used the districts official cost estimate as the basis of comparison against the apparent low bidder and others as necessary. Compared pay item unit prices of bid(s) against the estimate as needed to review for unbalancing or errors in quantities. Included bidder-to-bidder comparison(s) as needed. Calculated the percent variance of the total dollar amount of the bid from the estimate total. Prompted contact with the low bidder when unit prices were extremely low or high to determine reasons or whether the contractor understood the scope. Reviewed bids for unbalancing (but six of eight did not analyze bids for frontend loading).

We concluded that district bid analysis was undertaken in compliance with administrative regulations and departmental procedures and performed in a reasonably consistent manner. Recommendation II We recommend the Manager, Contracts Administration Office, continue to encourage the districts bid analysis efforts.

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III.

Districts Have Established Management Controls

Finding Districts have established management controls to reduce risk associated with bid analysis. The Department is required to award a contract to the bidder that submits the lowest valid bid.6 Bid analysis prior to award of a contract assists in meeting this requirement. Among the risks associated with bid analysis are the risks of identifying as irregular a bid that is not irregular or failing to identify an irregular bid. Districts have established several mechanisms as part of the bid analysis process to control such risks. For example: C All districts have established processes to perform bid analysis on all contracts although technical review is not required by District Contracts Procedure 375000-01-g. All districts have established a mechanism to provide information, as appropriate, for the Awards Committees consideration although specifics vary. District staff with relevant knowledge and expertise participated in the process. In all districts all contracts were sent to the Awards Committee for its decision to award or reject the bid although the District Contracts Procedure does not require approval by the Awards Committee of every contract.

C C C

We concluded that the districts bid analysis process included reasonable management controls to identify and reduce risks. Recommendation III We recommend the Manager, Contracts Administration Office, continue to encourage the districts efforts.

Section 60D-5.007, Florida Administrative Code. See footnote 2, page 8, for partial text.

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IV. Revised Procedure Resolves An Inconsistency

Finding The Contracts Administration Office has revised Procedure 375-000-001, District Contracts, so that specified percentages above or below the Departments estimate, applied in conjunction with bid analysis and contract award of district contracts, will be consistent with specified percentages on Central Office-let contracts. Specified percentages referenced in the District Contract procedure should be consistent with those established for Central Office-let contracts. The specified percentage is the percent that the total dollar amount of a bid is above or below the total dollar amount of the Departments estimate. The decision to award a contract must be made by a districts Awards Committee if the bid is outside the applicable specified percentage. During the audit, we found that the specified percentages used in conjunction with Central Office-let contracts were different than those for district contracts. We advised Contracts Administration Office staff of the difference, and they revised District Contracts Procedure 375-000-001-g (in conjunction with other revisions) so that specified percentages referenced are consistent with specified percentages applicable to Central Office-let contracts. The specified percentages are shown in the chart below. Contract Amount $250,000 or Less Above $250,000 and Up to $1,000,000 District Contracts and Central Office-let Contracts Specified Percentage = 15% + Specified Percentage = 25% Specified Percentage = 10% + Specified Percentage = 25% -

The draft procedure is being processed at the time of the audit. Recommendation IV We recommend the Manager, Contracts Administration Office, pursue adoption and implementation of the revision to this procedure.

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V. Pay Item Unit Price Terminology Is Not Consistent

Finding Central Office and districts do not have a common understanding of acceptable terminology for bid price proposal pay item unit prices from contractors when the intent is to charge nothing for the pay item. As a result, decisions to accept or reject bids may not be consistent. Acceptable terminology for bidding pay item unit prices at no cost has not been defined. The Departments Standard Specifications for Road and Bridge Construction describes irregularities which may cause proposals to be rejected,7 and the Departments rights prior to award of the contract.8 The Departments District Contract General Specifications, section 1.2.3, states, Unit prices of each pay item, including lump sum items, for all bid items should be shown in both words and figures (if so indicated on the bid price proposal sheet), and all extensions shall be carried out and entered into the Amount Column of the bid price proposal sheet.... Central Office and districts were not consistent in interpretation of acceptable terminology (words or figures) for pay item unit prices on a bidders bid price proposal in cases where the intent of the bidder was to charge nothing for the pay item. In cases where a bidder left a pay item unit price blank, Central Office and seven of eight districts reported that the bid would be considered irregular or nonresponsive; the bid contained an omission, and the bid was not complete. This meant the bid would not be considered for award. However, personnel in one district reported that while not a common occurrence, rather than immediately declaring the bid nonresponsive, the contractor might be contacted to determine the intent. If the intent were to charge nothing, then the bid would be accepted. Ultimately, the time and effort might result in protecting the best interests of the State. In cases where the bidders intent was not to charge any money for a listed, regular pay item, staff in the Central Office and districts were not consistent in their interpretation of whether terms such as no bid or $0.00 would be declared acceptable or irregular.

7 Standard Specifications for Road and Bridge Construction, Article 2-6, A proposal will be subject to being considered irregular and may be rejected if it shows omissions, alterations of form, additions not called for, conditional or unauthorized alternate bids, or irregularities of any kind; also if the unit prices are obviously unbalanced, either in excess of or below the reasonable cost analysis values. 8 Standard Specifications for Road and Bridge Construction, Article 3-1, Until the actual award of the contract, however, the right will be reserved to reject any or all proposals and to waive technical errors as may be deemed best for the interest of the State.

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Specific definitions or standards that govern acceptable terminology in bidding on pay items have not been developed. Several districts reported that instances wherein the contractor has omitted a price for a pay item are uncommon. However, inconsistent decisions to accept or reject bids among districts in awarding district contracts or between districts and Central Office in awarding Central Office-let contracts may be confusing or unfair to contractors who bid in more than one district or who bid on both district and Central Office-let contracts. Recommendation V We recommend the Manager, Contracts Administration Office, initiate a revision of the Departments Standard Specifications for Road and Bridge Construction and the District Contract General Specifications which clarifies acceptable terminology for use with pay items that the contractor intends to provide at no cost to the Department.

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Appendix A

OBJECTIVES, SCOPE AND METHODOLOGY

Objectives
Section 20.23, F.S., requires the Florida Department of Transportations Inspector General to review, evaluate, and report on policies, plans, procedures, and other operations of the Department and recommend improvements. This audit was conducted as part of the FY 1995-96 Work Plan and was designed to meet statutory requirements. The audit objectives were to: C C Review bid analysis for reasonable consistency among districts. Evaluate management controls over district bid analysis to identify and reduce risks.

Scope and Methodology

The scope of the audit included district construction contracts including lighting/signalization contracts and district renewable and nonrenewable maintenance contracts executed during the last half of fiscal year 1993-94, fiscal year 1994-95, and the first half of fiscal year 1995-96. Excluded from the scope were contracts that involve the Contractual Services Office, consideration of steps to further decentralize district bid analysis, and detailed analysis of the District Contract Prototype (DCP) system. Our methodology included interviews and a review of district contract files in each district. We interviewed district personnel associated with bid analysis, such as Contracts Administration staff, personnel who review bids, Technical Bid Review Committee members, Awards Committee members, and legal staff. We also interviewed Central Office personnel associated with the bid analysis process. We reviewed a judgmental sample of 30 district contract files in each district, a total of 240 contract files. Our sample included construction contract and renewable and nonrenewable maintenance contract files9 from FY 1993-94 through FY 1995-96. Some contracts were $250,000 or less, some were greater than $250,000 and up to $1,000,000, and a few exceeded $1,000,000. We selected some contracts with bids that were within and some with bids that were outside the specified percentage in comparison to the estimate.

One contract file in the sample was a fixed capital outlay contract. This type of file is generally not in the DCP system although it undergoes the same bid analysis as do the other contracts.

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Appendix B Bidder Front-end Loading An individual, firm or corporation submitting a proposal for the proposed work. Overpricing pay items/work done early in the project to get more money at the beginning of the project. There may be a cost of money to the Department due to money being paid out early versus over the normal construction life of the project. (Also front loading) Certain pay items such as mobilization are paid for at the beginning of the project or early in the construction life of the project. A firm with the capability in all respects to perform fully the contract requirements and the integrity and reliability to assure good faith performance. (Also qualified bidder) A firm which has submitted a bid or proposal which conforms in all material respects to the invitation to bid or request for proposals. The established percentage that a bid may vary from the Departments official estimate: otherwise, award by the Awards Committee is required. The specified percentage varies, depending on the total contract amount. Applies when items are bid unusually high or low in relation to the Departments official engineers estimate or if the unit prices are obviously in excess of or below the reasonable cost analysis values. (Also unbalancing)

GLOSSARY

Front-end Pay Items Responsible Bidder

Responsive Bidder

Specified Percentage

Unbalanced

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Appendix C

DCP LIMITATIONS

It is common knowledge that the DCP has limited capabilities and poses a number of challenges. Several brief examples of these limitations are described below. DCP does not have historical unit prices. When a pay item is entered into DCP, a search of the Contract Estimating System (CES) is necessary to obtain the historical unit price. Then, the unit price must be manually input into DCP. In contrast, the CES, used for Central Office-let contracts, captures and maintains historical unit prices. The information is available on a statewide, district, or county average basis. When a pay item is entered into CES, CES provides the historical unit price for the item, which may be further manipulated as the estimate is refined. DCP will not accept alternate pay items. Depending on the type of contract, some contracts allow for alternate pay items. Alternates provide bidders with options for accomplishing specified work with certain pay items. Allowing for alternate pay items where appropriate is important as economics are a factor, particularly as the size of lettings increases. Alternate pay items can be entered into CES with Central Office-let contracts. However, DCP wont accept alternate pay items. As a result, in a district contract bid proposal, the district must choose one alternate for the bidder to bid on which defeats the purpose of having alternates. DCP lacks an efficient way to copy data from one contract to another. For each district contract, information is entered into DCP to produce the bid price proposal, the form bidders use to submit their bid. For each pay item in the contract, information is manually entered into DCP, including: pay item number; plan quantity; unit of measure by which the pay item will be paid; and pay item description. Many contracts within DCP, such as maintenance contracts for highway lighting, have similar or identical pay item numbers and quantities, but there is no efficient way provided to copy the information from one contract to another. This causes the users to spend an inordinate amount of time retyping similar data into DCP many times. DCP does not support optional base item numbers. Items are defined in DCP to a project during the preliminary cost estimating task, and once the contract has been advertised, item numbers cannot be changed. The pay item for optional base is one that, through the bidding process, the bidder identifies the proper pay item number within the base group that will be used for bid comparison. Because DCP will not allow for changes after the official cost estimate is pulled, districts must manually compare the bids for any optional base projects.

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Appendix D

MANAGEMENT RESPONSE

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Appendix E

DISTRIBUTION

Ben G. Watts, Secretary Malcolm R. Kirschenbaum, Chairman, Florida Transportation Commission Attention: Jane Mathis (2) Charles L. Lester, Office of the Auditor General Attention: L. R. Weathermon (2) Frank Carlile, Assistant Secretary for Transportation Policy Nick Serianni, Assistant Secretary for District Operations Tom Barry, Assistant Secretary for Finance and Administration Bill Deyo, State Highway Engineer Juanita Moore, Manager, Contracts Administration Office Pamela Leslie, General Counsel Jake Kraft, Quality Management Coordinator Jim Hensley, Director, Communications & Governmental Affairs Thomas F. Boyd, Comptroller Stan Bittner, Chief Information Officer Larry Berridge, Manager, Organization and Procedures Bill Kynoch, Budget Officer Harold Lewis, Governor's Chief Inspector General Attention: James Thomas John Turcotte, Director, Office of Program Policy Analysis and Government Accountability Chairman, House Committee on Transportation Attention: John Johnston Chairman, Senate Transportation Committee Attention: Dorothy Johnson Chairman, Joint Legislative Auditing Committee Attention: Terry Shoffstall Chairman, House Appropriations Committee Attention: David Coburn David Twiddy, Secretary, District 1 Ken Morefield, Secretary, District 2 Edward Prescott, Secretary, District 3 Rick Chesser, Secretary, District 4 Nancy Houston, Secretary, District 5 Jose Abreu, Secretary, District 6 Bill McDaniel, Secretary, District 7 Jim Ely, Secretary, Turnpike District Marcia Mathis, Director, Governmental Programs Jennings R. Skinner, Division Administrator, FHWA USDOT - OIG, Regional Office, Atlanta, Georgia Attention: Alan Robson Chairman, Senate Appropriations Committee Attention: John Andrew Smith

Dr. Karen Stanford, Executive Director, G.A.P. Commission

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