RFP Process By the Numbers

Posted on October 5, 2011

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Some hospitals and systems utilize a formal selection process to determine which architect and contractor teams they would like to work with. Such a system, though defensible to Boards and CEOs, is fraught with unseen limitations and waste. I support a more efficient way:  choose someone the administration trusts and negotiate an agreement. I call this the Trust Your Gut method. To better elucidate the value of the Trust Your Gut method, I offer a scenario.

Let’s say a hospital needs a new Emergency Department (ED). The project is approved and funded by the Board, and everyone’s excited.  What next? How should a designer and constructor be selected to build their vision? RFP or select-and-negotiate, i.e. trust your gut?

Let’s frame the issue. The U.S. average for ED visits per 1000 people is 415.  If the ED project is in a city of 50,000, that is 20,750 visits. Let’s round down to 20,000, then assume competing hospitals in the area take 50% of that demand, so we’re at 10,000 ED visits.

Average gross revenue per ED visit was $10,298 in 2009.  Once again, let’s round down to $10,000 and multiply it by our 10,000 visits to get $100 million of gross revenue. Now let’s assume after expenses and charity care 33% ends up as net revenue, or $33 million.

The economic value of the ED project to the hospital is $33 million per year.

I am not sure how long the average request for proposal (RFP) process takes, but it involves several steps.  The following is a prescribed protocol from a public, county Florida hospital for any project in excess of $1 million:

  1. Develop a request for qualifications (RFQ)
  2. Advertise opportunity
  3. Review RFQ submissions & qualify acceptable teams to receive RFP
  4. Develop the RFP criteria
  5. Advertise opportunity*
  6. Review RFP submissions & select short list
  7. Interview short list & rank
  8. Offer project to highest ranking team and execute exclusive negotiations to get under contract
  9. Select second-highest ranking team and execute exclusive negotiations (if #1 team fails to reach agreement); repeat until agreement reached

* – If RFQ is utilized and advertised, RFP will not be openly advertised again, and this step is omitted.

This process often includes hiring a criteria architect to write the RFQ and RFP. Many hospital systems then hire a program manager. Keep in mind, in traditional design-bid-build (DBB) project delivery, the RFQ/RFP process is duplicated:  one process for architect selection and a second, separate process for general contractor selection.

If we estimate time for these activities, we get something like:

  1. 2 weeks
  2. 1 week
  3. 3 weeks
  4. 3 weeks
  5. n/a
  6. 2 weeks
  7. 1 week
  8. 4 weeks
  9. n/a

Adding these up, we get 16 weeks using conservative timetables.  The hospital I spoke with said their official process takes at least 3-4 months.  Looking back at our $33 million dollar money-maker ED, a four-month (16 week) decision process just cost the hospital $11 million ($33 million x .33 years). 

Let’s also say the entire ED replacement project was estimated at $20 million, a healthy budget for a decent-sized ED.  Would a 16-week decision period, at an expense of $11 million dollars, pay for itself in the selection process?  In other words, would the 16-weeks to decide on a team save at least that amount on the overall project budget? 

Never, not even close. Even the most airtight RFP and best negotiated contract will not whittle a $20 million ED project down 55% to $9 million ($20 million – $11 million), nor would it help weed out outlandish bids 55% over the $20 million estimate; most bids are going to be +/- 15% of the estimate. Therefore, the client hospital is unlikely to save the time and expense lost through a competitive bid process. 

To pour salt in the wound, the RFP-selected architect will insist on confirming the need, meeting with users to verify program, and other activities already paid for once in the RFP development process.  Add that waste to the consultant costs of RFQ and RFP development, program manager, dual processes to select an architect and GC, and the additional time it takes to execute a DBB project versus DB, and the hospital is out millions of dollars more.

There is probably a project scale and magic dollar number at which an RFP process will pay for itself in savings. However, it is my belief 95% of projects are too small to benefit.  Instead, save a lot of money and trust your gut.

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