Breakthrough Technology: Best Value Performance Information Procurement System (PIPS) Delivery April 2008 P erformance B ased S tudies R esearch G roup PBSRG GLOBAL Dean Kashiwagi, Professor, PhD, PE Director

Efficiency: more economical, better value, higher performance Minimize management/administration of contract by as much as 90% Increase performance to 98% (on time, on budget with no contractor/vendor generated cost change orders, meet quality expectations) Pay no more, but contractors/vendors increase profits by 5% Minimize contract administration, decision making, and surprises

–Conducting research since 1994 –146 Publications –441 Presentations, 6,200 Attendees –530 Procurements –$683 Construction services –$451Non-construction services –50 Different clients (public & private) –98% Customer satisfaction –Decreased management functions by 90% –Increase vendor profit by 5% Worldwide as a leader in Best-Value Procurement /Construction Performance Research and Documentation 2006/ /2009 Award to Africa Best Value PIPS transformation International Council for Research and Innovations in Building and Construction Corenet Global 2005 Innovation of the Year Award

Current Research Clients General Dynamics United Airlines Entergy, Southern US Schering Plough Neogard TREMCO Heijmans, Netherlands Ministry of Transportation, Netherlands University of Minnesota Arizona State University New Mexico State University States of Washington, Missouri, Arizona (Parks and Recreation) US Army Medical Command USAF Logistics Command US Corps of Engineers City of Peoria, AZ City of Miami Beach, FL City of Sitka, Alaska NY/NJ Port Authority Denver Hospital Georgia Tech University, Florida International University, Central Connecticut University, Glasgow Caledonian University, Salford University (Research)

Logic Models Use logic instead of experience Price based system vs. best value Minimize the flow of information between parties Blind vs. the visionary contractor/vendor Minimize risk that they do not control

Experience vs.. Logic Knowing nothing Knowing everything Decisions

How to use logic instead of experience Admit that you don’t know Ask Ask those who come, how they know they know Ask them to go from beginning to the end of the project Ask them to minimize the risk they do not control

Me vs. Us Us Risks Risks Control Don’t Control Control Don’t Control Me & Them

Logic Models Use logic instead of experience Price based system vs. best value Minimize the flow of information between parties Blind vs. the visionary contractor/vendor Minimize risk that they do not control

Result of Using Logic Forces vendors to know what they are going to do before they do it Transfers risk and control Forces vendors to manage, document, and ensure that they are providing best value Makes the vendor accountable Makes the client’s personnel accountable Accountability brings efficiency and value

Logic and accountability stops “foolish actions”

Industry Structure High I. Price Based (minimums) II. Best Value (actuals) IV. Unstable Market III. Negotiated-Bid Specifications, standards and qualification based Management & Inspection Performance and price measurements Quality control Competition Performance Low High Owner selects vendor Negotiates with vendor Vendor performs Contractor manages and minimizes risk Client manages

High Low Performance Owners “The lowest possible quality that I want” High Low Performance Vendors “The highest possible value that you will get” Minimum Maximum Perception on Standards

Performance High Low Risk High Low Impact of Minimum Standards Contractor 1 Contractor 2 Contractor 3 Contractor 4 Contractor 1 Contractor 2 Contractor 3 Contractor 4 Performance High Low Risk High Low

Industry performance and capability Highly Trained Medium Trained Vendor X Customers Outsourcing Owner Partnering Owner Price Based Minimal Experience

There is something wrong with the delivery of services ….. No one knows how bad the problem really is….. Entire system is broken…. Requires more management…. Performance is decreasing…. Relationships are more important than results…. Skill levels are decreasing….

Management ….it becomes less important to be skilled, accountable, and able to minimize risk As management, control, and direction become more important….. Skill 1Skill 2Skill 3Skill 4

“Manager’s Code” The movement of risk..... Don’t Mess With It! YES NO YES YOU IDIOT! NO Will it Blow Up In Your Hands? NO Look The Other Way Anyone Else Knows? You’re SCREWED! YES NO Hide It Can You Blame Someone Else? NO NO PROBLEM! Yes Is It Working? Did You Mess With It?

Initial conditions Final conditions Procurement of services Time Laws

Initial conditions Final conditions Proposed Best Value Process Time Laws

How to use logic instead of experience Admit that you don’t know Ask Ask those who come, how they know they know Ask them to go from beginning to the end of the project Ask them to minimize the risk they do not control

Best Value System Performance Information Procurement System (PIPS) PHASE 3: MANAGEMENT BY RISK MINIMIZATION PHASE 1: SELECTION PHASE 2: PRE-PLANNING QUALITY CONTROL Best Value also known as “sealed competitive bid” in State of Texas

Self Regulating Loop (Six Sigma DMAIC Generated) Actions Minimize data flow Minimize analysis Minimize control Risk Assessment Preplanning, Quality Control Plan Measure again 50% Identify value (PPI, RA, Interview, $$$$$) V 50% Interview Key Personnel Past Performance Information M Requirements (DBB, DB, CMAR, DBO) Efficient Construction MR MM R R R = Minimize Risk = Self Measurement = Identify Value M R V

Information Environment Minimize documentation/information flow Minimize decision making Look for dominant information Minimize work for everyone Transfer risk to someone who can minimize risk

A lot of folks can't understand how we came To have an oil shortage here in our country. ~~~ Well, there's a very simple answer. ~~~ Nobody bothered to check the oil. ~~~ We just didn't know we were getting low. Dominant Information minimizes surprises

The reason for that is purely geographical. ~~~ Our oil is located in: ALASKA, California, Coastal Florida, Coastal Louisiana, Kansas, Oklahoma, Pennsylvania and Texas. ~~~ But our DIPSTICKS are located in Washington, DC.

Filter 1 Past Performance Information Filter 2 Proposal & Risk / Value Plan Filter 4 Prioritize (Identify Best Value) Filter 5 Pre-Award Phase (Pre-Plan) Filter 6 Weekly Report & Post-Rating Time Quality of Vendors Filter 3 Interview Award High Low Performance Information Procurement System (PIPS)

Me vs. Us Us Risks Risks Control Don’t Control Control Don’t Control Me & Them

Unforeseen Risks PERFORMANCE SUMMARY Vendor Performance Client Performance Individual Performance Project Performance QUALITY ASSURANCE Checklist of Risks Sign and Date QUALITY CONTROL Risk Risk Minimization Schedule WEEKLY REPORT Risk Unforeseen Risks

PM 1PM 2PM 3PM 4 Procurement Officer 1Procurement Officer 2 Director Contractor 1 Contractor 2 Contractor 3 Contractor 4 Contractor 5 Contractor 6 Contractor 7 Contractor 8 Contractor 9 Contractor 10 Contractor 11 Contractor 12 Contractor 13 Contractor 14 Contractor 15 Contractor 16 US Medcom Dominant Information System Procurement Officer 1Procurement Officer 2 PM 1PM 2PM 3PM 4 Director

Division Overview

Contractors

PM/PI Performance Line OVERVIEWPM 1PM 2PM 3 Total Awarded Budget$50,000,000$10,000,000$45,000,000 Current Cost$51,250,000$10,000,000$45,800,000 Over Budget$1,250,000$0$800,000 OVERVIEW OF PROJECTS Total Number of Projects1536 % Projects Completed On Time87%100%83% # of Jobs Delayed201 % Projects Completed On Budget93%67%100% # of Jobs Over Awarded Budget110 AVERAGE PROJECT Project Budget$3,333,333 $7,500,000 % Over Awarded Budget2.5%0.0%1.8% # of Days Delayed15011 Number of overdue risks Owner Rating Risk Number

UMN Pilot Program Analysis Number of Best-Value Procurements: 45 (GC, Mech, Elec, Roof) Allocated Funds: $10.8M Awarded Cost: $10.0M (-7.4%) Average Number of Proposals: 3 Projects Where Best-Value was also Lowest Cost: 49% Completed Projects: 18 –Cost Increases: 5.4% (Client) / 0.4% (Unforeseen) –Schedule Increases: 49.6% (Client) / 0.8% (Unforeseen) –16 projects had no contractor cost increases UMN Project Manager’s management decrease: 90% Average customer satisfaction: 100% Average contractor close out rating: 9.4

ASU (largest university in US) Procurement office is transforming into best value operation Food services (10 year, $400M), sports marketing, furniture, and IT/networking Transfer contract administration to contractors as well as risk and control Results validate best value PIPS process Process is affecting business practices at ASU

Commissions $30,254,170 $60,137,588 $64,000,000 Capital Investment $14,750,000 $20,525,000 $12,340,000 Equipment Replacement Reserve $ 7,213,342 $ 4,100,001 $ 8,171,811 Total $52,217,512 $84,762,589 $84,511,811 Raw Financial Analysis Financial Criteria Incumbent A Awarded vendor BC Total financial distance between incumbent and awarded vendor: $ 32,545,077 (66%)

Entergy Test Results $100K investment ($75K education/$25K license) 7 projects, 3 completed 83% low price First two projects: $8M budget, regular bidders bid $6.7M on two projects BV contractor attracted by system bids $3.2M (saves Entergy $3.7M, on time on budget, and met Entergy expectations. Cushman & Wakefield PMs transferred off of both projects (leaving no PM support on both projects) Non-performer allowed to participate, performs well Used on traditional delivery another project, does not perform Conclusions: best value saved funding, minimized need for PM, and assisted non-performing contractor to perform

Alpha Roofing Manufacturer Neogard and BASF 98% customer satisfaction 98% roofs not leaking Service period Customer satisfaction rating Every other year, physical inspection of roofs Every year, call every customer of roof larger than 5,000 SF

Alpha Contractor PLines

Performing Systems Location: Torrington, WY Roof installation: year spec Hailstorms: 1984, 1999 Hail tested: 1995,2002 Recoated: 2003: 3 inch steel ball from feet Green, sustainable, lightweight, retrofit over existing

Dallas Independent School District “ Circle of Life ” Meaningless technical data & Price based award Poor quality products Bad applications Buy Best Value

43 No Correlation Between Performance and Price

Best Value PIPS Technology Contracts with vendors who minimize the risk they do not control Transfers risk and control Makes everyone accountable Creates a transparent system Uses dominant information Improves the way clients do business Procurement office becomes the agent of change, value, outsourcing, and accountability

Payoff 98% performance Minimize 90% of contract writing and administration Maximize vendor profit by 5% Pay same or less Increased value

Comments / Questions Next Session: ASU Transformation