Aug 14 2010

Piedmont’s Flawed Construction Bid Process

An analysis of the City’s bidding process for the Piedmont Hills Utility Undergrounding District (PHUUD) construction project which cost Piedmont taxpayers $2 million in cost overruns.  By Rick Schiller.

June 2010

This report is concerned with 1) the bid information that City staff had in hand before accepting any construction bids for the PHUUD and 2) whether the process of selecting a contractor was done objectively and in the best interest of Piedmont taxpayers.

The following table shows the base bid and the critical Line 38 “rock clause” for the eight contractors who bid on the PHUUD mainline trench work.   Line 38 is listed as “rock excavation (revocable)” on the unit price bid form at a per cubic yard (CY) price.

Contractor/City                                         Base Bid                            Line 38

Valley Utility Svc./ Sacramento       $1,515,204                      $2,190

Tennyson Electric/Livermore           $1,735,789                      $425

Synergy Project Mgn./S.F.                  $1,896,112                       $150

Ranger Pipeline, Inc./S.F.                   $1,945,179                       $250

Smith Denison Const./Livermore    $2,011,724                      $350

Underground Const./Benicia            $2,344,514                      $275

St. Francis Electric/San Leandro    $2,594,979                       $1,000

MCH Electric, Inc./Tracy                   $1,850,110    $6,000/$90,000 cap

At the last City Audit meeting, I made comments specific to Valley Utility being over 300% higher per yard than the average of the next five responsive bids even after staff “renegotiated” the rock clause in the contract.

Tennyson Electric is the second lowest bidder with a base bid $220,585 higher than Valley Utility’s.

The draft Preliminary Engineer’s Report from Harris Engineers, dated Jan. 10, 2007, estimated construction costs of $3,744,000 and a total project cost of $6,904,000.   Subsequently, the final Harris Engineer’s Report presented to the City Council on May 5, 2009,  showed the construction cost exactly the same as the Valley Utility bid of $1,515,204 and a total project cost of $3,879,315.

Confirming this substantial difference is the Nov. 20, 2009 PHUUD Steering Committee’s letter to PHUUD residents stating: “YOUR TOTAL COST IS FAR LESS THAN PREDICTED IN 2007.”  On a per household basis, the Valley Utility bid was the essential element that brought the PHUUD costs in at $15,477 less than the initial Harris Engineering estimate.  Had Tennyson’s bid been accepted, the per household cost for the 144 households in the district would have been $1,531 higher.

MCH Electric’s Line 38 rock clause of $6,000 is extremely high, with its Line 38 rock clause bid capped at $90,000.   MCH’s bid would not have been considered as all other contractors’ rock clause estimates are open ended while MCH capped this critical unit price.  The MCH bid is not being used for this comparative analysis.  Thus, the average bid for the Line 38 rock clause is $663.  Valley Utility’s bid is 330 percent of the average; it is 515 percent higher and 1,460 percent higher, respectively, than the next two bidders  — Tennyson and Synergy.  Because Valley Utility’s’ Line 38 rock clause is so much higher than that of any other bidder,  it appears to be an irregular bid.

Larry Rosenberg’s Staff Report, dated Dec. 7, 1009, states that when bedrock was discovered during the first week of construction in July,  a “time & materials” plus 15% contract was negotiated with Valley Utility rather than the firm’s Line 38 rock clause price of $2,190 per cubic yard.  I spoke to both Michael Tennyson (owner/senior estimator) and Curtis Brand (project manager) of Tennyson Electric.  Both assured me they would have honored their company’s $425 per yard rock clause bid regardless of the amount or type of bedrock found, including blue granite.  The matter speaks for itself as contractors that do not honor their contracts generally do not remain in business.

Unbalanced Bid?

The responsibility of Piedmont City staff is to reject any bid that appears irregular in comparison to other bids.  An irregular line amount, especially on an unknown quantity item such as the Line 38 rock clause, may indicate an unbalanced bid.  An unbalanced bid has unit bid items that do not reflect reasonable actual costs plus a reasonable proportionate share of the bidder’s anticipated profit, overhead costs and other indirect costs. With an unbalanced bid, a contractor is essentially attempting to “buy” the job by producing a low base bid, knowing profit will subsequently be made on substantial change work orders.  As of March 30, 2010, payment requisition #48 shows Valley Utility had billed “$3,159,860 in net change orders.”  This is double Valley’s original base bid.

Low construction costs encouraged PHUUD district residents to vote affirmatively for their undergrounding project  Harris Engineers Preliminary Report of Jan. 7, 2007, in addition to forecasting much higher construction costs, also called for a “30% Contingency.”   However, Harris Engineers  Final Report of May 4, 2009 stated a “15% contingency.”  The actual contingency allowed on Valley Utility’s $3,813,121 bid was $543,527, or 14.25%.   While two previously completed undergrounding districts had used a 15% contingency perhaps Harris Engineers initially noted an issue in the PHUUD that required a higher contingency.  Had the original contingency estimate of 30% been used, there would have been an additional $600,435 available for cost overruns.

No Geotechnical Work

All contractors were informed by the language in the bid documents that “no geotechnical work has been done.”  Being aware of this, contractors bid a Line 38 rock clause number that would minimally allow them to make a reasonable per cubic yard profit if bedrock was found.  After comparing the contractors’ originally bid per CY price, if another contractor had been selected (such as Tennyson), the net cost for change orders on a per CY price would have been about one-fifth of Valley Utility’s.  In addition, the ultimate cost to those Piedmont taxpayers outside the district would have been substantially reduced and in all likelihood eliminated entirely if the original 30% contingency had been used.


Why was the Valley bid chosen when it appears to be irregular and irregular in the most critical aspect of the bid — the Line 38 rock clause?

Was the PHUUD Steering Committee aware of substantial bedrock in their district?

Was the Valley bid an unbalanced bid?

Why was geotechnical work not required by staff once substantial bedrock was found in the first week of construction (Rosenberg, Staff Report, Dec. 7, 2009)?

Why wasn’t Tennyson Electric or another contractor, Ranger Pipeline, who has extensive experience digging in blue granite, brought in to replace Valley Utility early on?

Why wasn’t a competitive price in line with the other bids negotiated with Valley Utility once substantial bedrock was found? (The City has stated they had the right to terminate the contract with Valley upon a 10 day notice.)

Why was the 30% project contingency amount as recommended by the Jan. 10, 2007 Harris Engineer Preliminary Draft Report reduced to 14.25%?

Why didn’t City staff members inform all City Council Members about the problems in July 2009?

Leave a Comment