At A Crossroads: Is Now the Time for Water Utilities to Rethink Procurement and Delivery of Capital Projects?
By Jim Baehr, Rudy Gonzalez & Gary Gumm
The following is a compilation of three points of view on the current and future state of capital projects delivery for water utilities. The Sourcing Process defines the current state, the potential for change and the value in changing – the what and why as examined by a sourcing professional. Sourcing & Capital Project Success describes the ideal operational model for sourcing and managing capital projects – the what and how – from the view of a procurement executive for engineering and construction services. Capital Projects – Delivery Alternatives provides the thoughts of a chief engineer on the importance of rethinking the current state.
The Sourcing Process
Jim Baehr – Sourcing Professional and Advisor
The two words, “aging infrastructure,” dominate much of what’s written regarding the current state of the water Industry. Two other words, “capital projects,” are synonymous. Most of the updating and upgrading of infrastructure will be addressed through capital projects.
Of the respondents to the recent Black & Veatch 2019 Strategic Directions: Water Report, 75.8 percent identified aging water and wastewater infrastructure as the most challenging issues facing the water, wastewater and stormwater industry today. The next most challenging was managing capital costs at 27.2 percent. This seems to be a wide gap for two issues that go hand-in-hand. One could interpret this gap as an indication that although replacing infrastructure is the prevailing issue, given the opportunity, utility professionals believe they can effectively handle these projects.
Water utilities are at something of a crossroads. The spectrum of capital projects presents complex challenges many utilities aren’t prepared to take on. Water utilities are steeped in the traditional methods of procuring delivery of these projects. It’s inertia, with the want for stability outweighing the need for change. It’s time to rethink any assertion that starts with “because we’ve always done it that way.” Water utilities must develop a procurement strategy that can be implemented across its capital projects, regardless of the size of the project or the size of the utility.
For decades water utilities have relied on their own capabilities to execute and manage a capital project – most handled by engineering and finance with input from operations. This conventional design-bid-build method works, but as infrastructure projects become more complicated and more demanding, there’s a need to find new ways. While the confidence to “do it ourselves” is laudable, the sheer volume of projects, as well as the need for innovative solutions will likely overwhelm even those utilities with capital projects savvy.
Utilities looking to design-build (DB), design-build-operate-maintain (DBOM) and public-private partnership (P3) models, need both skill and capacity to tackle projects. DBs and P3s are multifaceted and are fulfilled under an intricate contracting process. An AWWA/Ernst & Young report on public-private partnerships issued in early 2019 cites the “lack of managerial resources and experience to evaluate, structure, procure or negotiate P3 projects.” This necessitates finding outside help – consultants who bring expertise in fashioning commercial, technical and contractual strategies to meet the needs of the undertaking. This adds cost and doesn’t assure that the know-how will be transferred.
The following is a simplified look at the current state for managing capital projects:
Scenario 1 – Design-Bid-Build: The project stays in-house, is sourced by the owner/utility and the lifecycle is managed primarily by Engineering, Finance and Operations. The focus is very much on project design and delivery. The process is siloed and convoluted by hand-offs. For example, procurement becomes involved only when it’s time to issue the Invitation for Bid (IFB) or a Request for Proposal (RFP) if the basis for award is multidimensional – more than just price.
Scenario 2 – Design-Build: The water utility remains with the project owner but requires outside assistance to complete sourcing of a delivered project. Per the AWWA/EY P3 report, “for the right strategic decision to be made by a municipal utility…skepticism needs to be addressed by a senior champion and a utility team with appropriate financial, legal and procurement knowledge” which, as previously noted, is “lacking.”
For capital projects in both the private and public sectors, regardless of the scenario, it’s well established there should be a lifecycle framework, structured to be cross-functional and collaborative – comparable to the acquisition strategy employed by the Army Corps of Engineers. The process should include representatives from, but not limited to, the following departments: Asset Management, Engineering, Finance, Operations and Procurement. Responsibilities and accountability should be shared. This will require the identification and development of high-caliber asset management and procurement professionals capable of assimilating their asset management and procurement skills into each project.
Water utilities need to embark on a journey. They need to establish and embed an integrated approach that transforms short-term project delivery thinking into value delivery, lifecycle cost management and risk management. Decision makers have only two options: ignore the challenge and kick the can down the road or confront the challenge and begin to invest in creating new processes and developing the talented professionals to implement them.
Some utilities are already demonstrating procurement isn’t just an administrative function – that it can drive value. Procurement professionals are capable of bringing marketplace awareness and negotiation expertise. There’s also now the option to apply procurement technology to RFP development, issuance and evaluation. Technology can eliminate time-consuming manual tasks and provide time for more strategic work.
When engaged early, asset management and procurement professionals enable a capital project team to assess procurement-related risks and tradeoffs going beyond just evaluating the technical feasibility of a project. Asset management professionals can guide making risk‐based decisions – choosing the right project, at the right time, for the right reason. Procurement professionals can prepare an analysis of a project’s supply chain needs from both a commercial perspective and a risk perspective to better understand the potential impact of costs, availability and delivery.
Why change and why the importance of changing now? There are many reasons: improving management of the project process; eliminating functional siloes – collaboration; the division of labor; and knowledge transfer – learning what it takes to contract and deliver design-build projects. In addition to these benefits utilities can reduce capital project costs through a holistic attention to the project lifecycle and the associated total cost of ownership.
Sourcing & Capital Projects Success
Rudy Gonzalez – Procurement Executive for Engineering & Construction Services
For many water utilities, the procurement office role is limited to procuring indirect goods and services to meet operational needs. For capital projects the procurement function is often subsumed within the engineering and construction departments. It can also be delegated to outside consultants and contractors through Engineering Procurement and Construction (EPC) or Design-Build (DB) contracts. The EY-AWWA article cites a lack of skillsets and experiences in the procurement and legal disciplines as an impediment to the successful use of alternate delivery methods for capital projects. Nonetheless, for some of the larger water jurisdictions, forward-looking procurement executives are taking steps needed to earn a position in the capital asset planning lifecycle and are making significant impacts to the total cost of ownership.
The complex and long-term nature of capital projects causes procurement organizations to shy away from more direct involvement in the capital project process. However, the root causes for capital project failure or success can often be directly traced to the effective implementation of capital project sourcing planning and contractual execution. When asset intensive organizations devote resources and efforts to develop a more mature procurement model, capital projects benefit. Why? Because typically, 90 percent of a capital project is sourced externally – suppliers, contractors and consultants do the sourcing – not the owner. The remainder of this section will describe best practices for procurement executives keen to step up their capital project “game.”
For procurement organizations hoping to become a valuable contributor to the success of their jurisdiction’s capital improvement plan, some foundational processes and abilities must be in place. The first is transactional efficiency defined as: a consistent “requisition to purchase order to pay” process; a robust solicitation process; predictable understanding of procurement cycle times; and, a project tracking and visibility process to keep things on course. Second is a set of well understood rules of engagement, including: a strong knowledge of procurement regulations and policies; a set of contract templates that are comprehensive, well-understood, and easy to modify to fit the need; and, finally a good working relationship with the legal department. The third and perhaps most important can be a stumbling block for even the most seasoned procurement professionals – a desire to build strong trusting relationships with engineering and construction stakeholders. Procurement relationships must move away from the traditional role of a “compliance officer” towards the role of a “trusted advisor” who brings structure, solutions and collaboration to the capital procurement process. These foundational abilities can’t be underestimated.
As its proficiency to consistently execute and deliver on its core functionality solidifies, procurement can begin to introduce best practices designed to impact the success of capital-intensive investments. The following practices and capabilities are essential to transforming engineering and construction from a procurement category to a well-managed capital project center of Excellence.
Active engagement in all phases of the capital project lifecycle is essential. A common complaint is that projects are brought to Procurement during the sourcing phase without enough runway to effectively impact value. Participation at the earliest phases improves procurement’s ability to influence the success of a capital project by developing market intelligence, forecasting contractual capacity needs, planning for supply chain risks and developing solutions and alternatives.
Planning – Procurement’s role at this stage is to develop an understanding of future needs, to assess supply related risks, and facilitate the gathering of market intelligence. As a partner with engineering, procurement should investigate potential supply chain synergies across project portfolios, forecast needed internal resources, identify potential supplier capacity bottlenecks, investigate emerging technologies and suppliers, and identify potential regulation, policy or legal pitfalls.
Design – Many procurement organizations assist the capital project design phase by externally sourcing engineers and consultants. However, most stop short because they aren’t involved in the actual design of projects. Procurement’s involvement is critical here because this phase typically determines the technologies, methods and specifications to build the project. Engineers will reach out to suppliers for budgetary quotations, technical qualifications, and other sourcing information which can limit the ability to promote competition and/or may undermine negotiation leverage. Guidance by procurement can preserve the ability to realize the maximum value from contractual relationships.
Sourcing – This is typically where a procurement organization will become involved in a capital project. If procurement hasn’t actively engaged in the design phase, the ability to provide value in the sourcing phase is restricted. Procurement’s responsibility in this phase is to provide a robust, transparent and equitable sourcing process. This includes providing guidance when establishing selection criteria, developing contract terms to promote positive outcomes, addressing contractual risks, establishing contractor cost transparency, implementing performance metrics, and facilitating the negotiation of technical, legal, and commercial terms. Finally, procurement should make sure that any resulting contract includes a clearly defined implementation process and continuous improvement goals.
Execution – Procurement’s role in this phase is to act as arbiter among the various parties during the performance of a contract. If procurement has done a good job in the previous phases, clearly defined processes and authorities for addressing potential changes will help to preserve budgets/contingencies, reduce delays due to burdensome administrative processes, reduce contractor claims, and preserve a positive relationship between engineering, construction and the contractors. When changes or conflicts occur, procurement must facilitate resolution by documenting performance shortfalls and enabling effective corrective action. Procurement should assist project managers to negotiate and review costs of any change orders. Finally, procurement must ensure that lessons learned are captured and that supplier performance is documented for future sourcing project evaluation.
Operation – Once the project has been completed and placed into operation, procurement’s participation must continue because it is during operation that the value of a project is realized. Areas that can benefit from procurement’s involvement include warranty management, performance agreements with schedule, cost and quality incentives, and facilitating continuous improvement processes and goals.
Capital Projects – Delivery Alternatives
Gary Gumm – Chief Engineer, Retired
My involvement in capital project delivery spanned my entire 40-year career as an engineer, culminating as chief engineer for two different water/sewer utilities. Learning from the many ups and downs associated with hundreds of different projects and programs yielded some simple concepts that I came to live by.
The first is that the needs facing the engineer always exceed the abilities of available resources, both monetary and staffing, to meet them all. There’s a need to get the best one can with what one has to work with. The second is that the design-bid-build approach too often does not provide the best solution and low bid doesn’t always yield the lowest total cost of project delivery. And third, prominent in the water industry, is that too often there’s not the redundancy to allow a project to move forward without directly affecting the operation of the existing infrastructure and its operations/maintenance staff. This can force the water utility to be overly conservative and cautious about how to accomplish those things needing improvement. Water and sewer services are a 24/7 opportunity to succeed or fail. And, failure isn’t an option.
Those utilities using the low bid approach too often use procurement sparingly as glorified clerks who process the advertising and bidding. Moving to any alternative delivery and then expecting that applying the same approach will likely lead to dissatisfaction. Procurement staff needs to be involved at the beginning of any capital project. It’s imperative that for each project the acquisition strategy be uniquely developed. Any attempt at a rote approach will likely lead to disappointing results. For alternative delivery there are subtle and not so subtle differences in approaches, including contract provisions, selection processes and contract management. Broad procurement experience and a thorough understanding of requirements can best lead to a successful conclusion.
But, involving procurement early is only the tip of the iceberg. Additionally, the legal, finance operations and maintenance, as well as planning, engineering and construction management all need to be involved – almost from project inception. This is the only way to gather all the requirements necessary for selection and contract development.
Utilities with a robust asset management program will likely have these same players already engaged. Done correctly, the requirements are vetted, analyzed and determined as the business case is developed. Making changes while still operating and supporting the customer is always difficult. Everyone is already busy just trying to keep services going. It’s too easy to fall back on the status quo. This is why it’s essential to have asset management orchestrate the best approach to making changes.
Once the requirements and available assets are completely determined, the solution becomes obvious if, and only if, the team knows what it needs, what can and cannot be done with existing resources and the best way to procure what’s necessary. If there are shortfalls, there will be a need to obtain professional assistance to overcome the gaps. This complicates the delivery process. However, there are myriad delivery vehicles that can be used. The procurement team must know what vehicles are available and must know how to acquire them. The legal department must be equally knowledgeable. If experience is lacking then training should be considered.
I foresee no societal changes that would likely change the basic precepts of project delivery as I’ve outlined above. A working asset management program is also fundamental to feeding an adept and flexible capital project delivery process. Utilities lacking the resources or knowledge must develop it, perhaps from scratch. This takes a culture change.
Champions from each department, working together smartly, are the only way to make the necessary changes. It’s not simple, but the alternative will likely lead to failure as infrastructure ages and breaks down. Crews will become inundated with emergencies leaving too little staff and too little funding to do anything about it.
Success will not happen quickly. It will never happen if there isn’t a beginning. Slow and steady wins the race and the earlier we begin, the earlier we can win.
Jim Baehr is the founder of the Sourcing Strategies Group, which supports the supply management needs of clients in both the public and private sectors. He has also served as an independent advisor leading transformation initiatives and supply management projects for chemicals, energy, retail and water clients. Baehr is a frequent contributor to WF&M.
Rudy Gonzalez, CPSM, is a supply management practitioner with experience leading procurement in public and privately-owned utilities where he develops high-performance procurement teams that support major capital programs and organizational transformations. Originally from the Southwestern United States, Rudy and his wife Natalie reside in the Washington, D.C. Metro area.
Gary Gumm, P.E., retired, served as the chief engineer at the Washington Suburban Sanitary Commission from 2007 to 2018, leading a 375-person staff of engineers and other professionals with annual operating and capital budgets of more than $500 million. He has 40 years of experience leading engineering design, construction and environmental programs.