Agency Set to Award Water Contract to CH2M Hill, Bid Comes in 25 Percent Under Cost

While some have been concerned about the prospect that the Woodland-Davis Clean Water Agency (WDCWA)  lost two of its bidders on the water project, on Thursday the General Manager of the WDCWA, Dennis Diemer, announced that the negotiations have ended and the contract will come before the board on October 10 in Woodland for final approval.

According to a press release, the Board of Directors “is to consider awarding a $141.2 million service contract to CH2M Hill, the sole bidder able to meet the Agency’s requirements for project costs, quality assurances and performance guarantees.”  That price proposal is 25 percent lower than what the agency originally estimated costs to be.

The contract will come before the board at its regular meeting at 3 p.m. on October 10 at Woodland City Hall. If approved, construction of the facility is expected to begin in March 2014.

“We set the bar high for our expectations for quality and maximum cost,” said WDCWA General Manager Dennis Diemer in a statement Thursday. “During the past three years, we systematically reduced the project cost estimate and set a maximum project cost for the regional facilities to be constructed by the Design-Build-Operate team at $151.5 million.”

“CH2M Hill’s fixed price proposal came in $10.3 million under the maximum project cost requirement,” he said. “We are very pleased that CH2M Hill was able to provide a proposal significantly below our maximum cost limit and in compliance with all of the Agency’s requirements for the operation and maintenance of the facility at a substantial savings. CH2M Hill has a proven track record for delivering high quality water facilities. We’re confident in their ability to deliver the Agency’s project on time and within budget.”

In July, Mr. Diemer came before the Davis City Council to discuss the progress of the surface water project.  While he discussed in general the entire project, much of the questions from the public and council related to the withdrawal of two of the three DBO (Design-Build-Operate) teams.

Among the key questions is how we get a competitive price with only one bidder.   If CH2M Hill does not meet the price ceiling, “then we’ll have some decisions to make,” Mr. Diemer said in response to a question from Councilmember Lucas Frerichs.

“At that point we’ll have to decide whether we want to reengage in another Design-Build-Operate procurement process or whether we want to shift to a design-build process,” he said.  “Shifting to an alternative bid procurement methodology at this point will take time and will be expensive.”

Councilmember Brett Lee asked how cost-overruns are then handled.

“That is their guaranteed maximum price,” Dennis Diemer explained.  “There are essentially no allowances in the contract [for cost overruns].  Any issues or problems that they encounter in the design, operation or construction – they’re to bear those costs and those risks.”

This contract qualifies by falling inside the maximum price ceiling set at $151.5 million.

At the same time, as Councilmember Lee pointed out in July, in a competitive bid process maybe there would be incentive to find those last cost-saving ways to get the bid down to $135 million, but that does not exist in a single-bid system.  And in fact, they never came close to reaching $135 million.

According the release, CH2M Hill submitted a proposal for the project in July 2013.

“Following an exhaustive review by the Agency, that proposal was deemed compliant with the Agency’s requirements for use of the latest construction technology and operating procedures,” the agency said. “These requirements will best ensure full compliance with present and anticipated state and federal drinking water regulations. The Agency Board subsequently authorized the negotiation of a service contract with CH2M Hill.”

There are several key components of the proposed service contract.

First, it transfers “substantial construction, maintenance and repair risks to CH2M Hill.” CH2M Hill, “will be responsible for: obtaining and maintaining numerous permits, licenses and other regulatory approvals; any additional design costs that exceed the fixed price proposal; increased costs associated with failure to complete design and construction on schedule; certain risks associated with differing site conditions; consistently producing treated water that complies with all federal and state drinking water regulations; costs associated with equipment breakdown and failure; and repairing and replacing facilities as may be required throughout the operations phase at a cost not to exceed the established service fee.”

According to the release, “In the event that any of these risks occur, CH2M HILL will be required to expend its own capital to address the risk and resolve problems.”

The contract also provides, “Unconditional guarantees to the Agency for the full and timely performance of the design, construction and operation obligations.”

Moreover, “Plans for the competitive subcontracting of approximately 70 percent of construction work, which includes materials and the construction of the the pipelines and water treatment facility.”

The contract also contains, “Provisions for the ‘open book’ review of costs for the roughly 30 percent of the work CH2M Hill will perform directly, such as project design.”  There is “[a] program for the major maintenance, repairs and replacement of Project machinery, equipment, structures and improvements, and a method for funding that work as part of the annual service fee to be paid during the 15 to 20 year operations period.”

Finally, “Partial design and construction financing in an amount equal to 10 percent of the design-build price (approximately $14 million). Under these terms, the Agency will finance 90 percent of the design-build price and CH2M HILL will finance 10 percent on an ongoing basis until completion of construction. The Agency is obligated to repay the financing only after the satisfactory completion of design and construction.”

Does this contract allay concerns about the bidders dropping out of the process? Information on the service contract is available as part of the October 10 Board agenda packet, which can be accessed via the Agency’s website. The entire service contract is available on the Documents page of the Agency’s website.

The Woodland-Davis Clean Water Agency is a joint powers authority representing the cities of Woodland and Davis, and UC Davis. The Agency is responsible for planning, financing and constructing a surface water supply project to provide high-quality surface water from the Sacramento River to the cities by 2016. The primary objectives of the project are to improve water supply reliability and water quality, and to help the cities comply with increasingly strict water quality regulations.

—David M. Greenwald reporting