Title: Benefits of Structuring Bid Documents with Options

Phase(s): Final Design, Construction

Category: Management

Date: April 21, 2009

1. Background

During multiple risk assessments and throughout the ensuing project implementation phases, numerous situations have been encountered where projects benefit from the judicious use of options, alternative offerings and/or break-out pricing in bidding and awarding contracts.

2. The Lesson

Usually by the time a project is preparing solicitation documents for the various elements of project scope, the cost and schedule of the project have been set.  However, the risks that can challenge that project cost and schedule are usually still quite high at this point in project implementation.  Therefore, a project can benefit by additional degrees of freedom that allow project management to make minor course adjustments in order to preserve budget and schedule, including sufficient contingency, while delivering the project scope as agreed.  The use of options, alternatives and break-out pricing in the procurement process is one method that can provide that kind of flexibility to the project.

Once a scope of work has been bid and awarded, the grantee no longer has competition to drive favorable pricing for added, deleted or changed elements of scope within the contract.  For example, if a grantee wants to delete scope from an awarded contract, the value of the deleted scope that the grantee is able to realize through negotiations and change orders is rarely the full value of the scope that could have been achieved in a competitive environment on the open market.  If, on the other hand, the bid documents are carefully structured to separately price that scope during the bidding process, competition and the contract terms preserve the optimum value for the grantee for some period of time after contract award.  Thus, if the pricing on this contract or another contract bid within the same relative period of time were to come in significantly higher than budgeted, or if the project were to encounter some other circumstance that threatens the project budget, the grantee could mitigate the risk impact by deleting (or choosing not to exercise an option for) the scope, and receive the maximum amount of credit to redirect to other project needs. 

The availability of procurement options can also improve flexibility for projects to mitigate schedule impacts.  An example where this has been encountered is when one procurement, such as a rail vehicle procurement, supports several of a grantee’s projects.  If one of the affected projects, for example, is approved and ready to advance, but a second related project is awaiting a Full Funding Grant Agreement before it can commit to the purchase, careful structuring of procurement options within the contract would allow the first project to proceed without being delayed by the second.  Of course, compliance with Circular C4220.1F and other federal procurement requirements must be met as well

3. Applicability

The application of bid document options, alternates and break-out pricing can be applied to most major transit capital projects across the nation.  It has been used by a number of grantees as a successful method for mitigating risks and managing the project’s cost and schedule.  

4. References

None