Hybrid Electric Ferries: Design-Build Contracting and Procurement

The 2022 Supplemental Transportation Budget directed JLARC to evaluate Washington State Ferries' design-build contracting approach for hybrid electric ferries. The review must include a comparison to best practices and opportunities for both cost and operational efficiencies. JLARC staff consulted with experts in marine engineering and procurement (VARD Marine, Inc. or VARD) to assist with the review. The consultant's final report is available in Appendix A.

WSF is electrifying its fleet, consistent with direction from the Governor and Legislature

Washington State Ferries (WSF) is a division of the Washington State Department of Transportation (WSDOT).

WSF currently manages a fleet of 21 ferries and 20 ferry terminals. Each vessel has an expected operating life of 50 to 60 years. The 2017 Legislature2017-19 Transportation Budget, Section 309(6). directed WSF to update its Long Range Plan to address service needs, characteristics for replacement vessels, and funding. One year later, the Governor issued Executive Order 18-01, which directed WSF to transition to a zero-carbon emission ferry fleet. In response, WSF produced the following plans:

• Long Range Plan update (2019). The plan recommends increasing the ferry fleet to 26 vessels and shifting from diesel-powered vessels to plug-in hybrid electric vessels by 2040. To do this, WSF plans to add three vessels, replace fifteenThe plan calls for replacing 13 vessels. Another two went out of service shortly after the plan was published. as they reach the end of their service life, and modify most of the remaining vessels.
• System Electrification Plan (2020). The plan documents how WSF will shift to plug-in hybrid electric vessels. It offers a high-level assessment of feasibility, requirements for vessels and terminals, schedules, anticipated capital investments, training and workforce needs, and future studies.

The 2022 Legislature stated that it intends to fund the electrification program as described in the Long Range Plan (RCW 47.60.838).

WSF must use a design-build contract approach specified in law

Chapter 47.60 RCW specifies how WSF acquires new ferries.

• Beginning in 2001, the law allowed WSF to use a design-build approach for new ferries.
  • In design-build, the buyer executes a single contract with one entity for design and construction services. WSF may pay an honorarium to unsuccessful shipbuilders to reimburse them for some of the preparation costs.
  • Design-build can include an "owner's model" approach. This means the buyer develops a concept design that shows one possible approach to meeting the requirements (e.g., ship speed, propulsion, capacity). Shipbuilders are not required to follow the design and the buyer does not guarantee its performance.
• In 2015, the Legislature amended the law and required WSF to use a design-build approach. Other changes included requiring a fixed-price contract, hiring an independent owner’s representative for each project, and starting a new RFP process if the bids from in-state shipbuilders exceed WSF's engineer's estimates. These changes are discussed further in other sections of this report.

Exhibit 1.1: Sections of Chapter 47.60 RCW specify WSF's acquisition approach

Source: JLARC staff depiction of RCWs 47.60.385, 47.60.386, 47.60.814, 47.60.815, 47.60.816, 47.60.818, and 47.60.820.

Design-build contracts transfer most risk to the shipbuilder

Ferry acquisition projects can involve schedule, technical, and cost risks.

• Schedule: Shipyard capacity constraints, design changes, or late equipment deliveries can delay a project.
• Technical: Shortfalls in how the vessel or its systems perform can keep it from meeting service needs.
• Cost: General inflation or increases in specific equipment or materials can raise costs above the estimated budget.

Regardless of the contracting approach, risk can be reduced by transferring or sharing it with others, or by addressing it in project requirements. Risk can also be accepted. The state attempts to transfer most risk by using a design-build fixed price contract.

• A design-build contract transfers most risk to the shipbuilder because the shipbuilder is responsible for meeting the schedule and technical requirements.
• A fixed price transfers most cost risk to the shipbuilder because the shipbuilder agrees to provide the vessel at the stated price, even if there are cost overruns.

Shipbuilders are likely to increase the price to account for these risks. Consistent with best practice, WSF tries to mitigate this increase through contract provisions that share risk. For example, WSF includes materials escalation clauses that share the risk of cost fluctuations for steel and copper-based materials. 

Design-build less common among other U.S. ferry owners and optional for WSDOT civil engineering

Although design-build is often used for ferry projects internationally, in the US, it is much less common than design-bid-build. Design-bid-build is a more traditional contracting approach in which shipbuilders bid based on the design offered by the ferry owner. VARD notes that design-bid-build tends to be used for projects with new technology and design-build tends to be used for more conventional projects. A design-bid-build approach has advantages (e.g., increased control and flexibility) and disadvantages (e.g., increased risk and time). Other public ferry owners in the U.S. (e.g., North Carolina, New York City, Alaska, Massachusetts) have used design-bid-build for their vessel acquisitions.

WSDOT can choose to use design build or other contracting approaches (e.g., design-bid-build) for civil engineering projects based on the project's needs and benefit to the state.

WSF is acquiring five plug-in hybrid electric Olympic class ferries

WSF's Long Range Plan and System Electrification Plan call for using plug-in hybrid electric vessels. Vessels will be powered by batteries, which will be charged at the terminal. Each will also have at least two diesel generators on board.

WSF attempted to purchase hybrid electric ferries under an existing contract

In 2007, WSF signed a contract with Todd Pacific ShipyardsPurchased by Vigor Industrial in 2011. for diesel-powered Olympic classOlympic class ferries carry 144 cars. vessels. Between 2012 and 2018, the shipbuilder delivered four Olympic class ferries and discussed providing more.

As noted above, the 2015 Legislature passed new requirements for ferry acquisitions. It exempted ferries purchased under existing contracts from these requirements.

In 2019, the Legislature approved an extension of the existing contract to build five new hybrid electric Olympic class vessels. This exempted the new vessels from the 2015 requirements. The intent was to save time and money by not rebidding the contract. The contract negotiations ended in 2022 after WSF and the shipbuilder (now known as Vigor Shipyards) were unable reach agreement.

WSF plans to issue a new Request for Proposal (RFP) in 2023

WSF plans to issue the RFP for the hybrid electric Olympic class vessels in the first quarter of 2023. These vessels will be the first to be acquired under the 2015 laws.

In July 2022, WSF issued a Request for Information (RFI) that included an overview of its acquisition strategy for the hybrid electric Olympic class vessels. The RFI noted that WSF intended to purchase five vessels, with an average price of $220 million, to be delivered between June 2027 and December 2031 (one vessel every 13 months). It asked interested shipbuilders to provide feedback about the stated price target and delivery schedule, as well as the time allowed for proposal development and other financial considerations. The RFI also stated that the contract would include enforceable small business enterprise goals, as required by state law.

In October 2022, WSF held an industry day event for interested companies. Attendees included shipbuilders, materials suppliers, and consulting firms. At the event, WSF noted that it would offer Vigor's design as an owner's model that shipbuilders could use as the basis for their own designs and proposals. WSF stated that in response to industry feedback, it was reviewing the price target, delivery schedule, and request for fixed prices on all five vessels.

Exhibit 1.2: Hybrid electric Olympic class vessels will be the first to be acquired under the 2015 laws

Source: JLARC staff analysis of WSF documentation.

WSF also has begun early planning work to acquire a different class of plug-in hybrid electric vessels that will carry 124 vehicles. The RFP process is currently estimated to occur in the 2025-27 biennium, with the first vessel to be delivered in 2031.

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WSF requests funding for new ferries through the state transportation budget

Washington State Ferries (WSF) requests vessel funding from the Legislature as part of the Washington State Department of Transportation's (WSDOT) budget request. As required, the budget request and supporting documentation include high-level cost estimates for the current and ten future biennia. The Legislature must authorize funding before WSF issues a Request for Proposal for any ferry. In general, WSF begins estimating the cost of a vessel during conceptual design (see Exhibit 2.1). WSF provides updated estimates in its regular and supplemental budget requests.

WSF funding requests do not clearly explain assumptions, data sources, methods, or uncertainty

Between September 2018 and December 2022, estimates for the first hybrid electric Olympic class vessel increased from $188 million to $249 million. Although WSF has supporting documentation, the estimates it shares with the Office of Financial Management (OFM) and legislative staff exclude the information. For example, they do not clearly show:

• How much cost change is due to inflation or other factors (e.g., design changes, updated information).
• Whether the estimate includes materials for future vessels.
• Whether the estimate includes design costs.
• The method used to create the estimate.

The lack of documentation has reportedly led to confusion for legislators and legislative staff about why estimates change and whether the estimates are comparable. According to the Government Accountability Office (GAO), best practice is to clearly and thoroughly document cost estimates. Well-documented estimates show the data source and the data's reliability. Documentation also should describe how the estimate was developed so that it can be understood and replicated. Documentation may help explain differences between the cost estimate and the budget request (e.g., to reflect sensitivity around contract negotiations), or if the estimate is likely to change.

Cost estimates should change and become more refined over time

Best practices, such as those published by GAO, and industry practice call for refining cost estimates throughout a project.

Estimates should account for both risk and uncertainty. As a result, early estimates may vary significantly from each other and the final price.

• Risk factors can be identified, quantified, and mitigated. These include schedule delays, material costs, and technical changes. See Section 3 for more detail.

• Uncertainty factors are unknown and cannot be quantified. These include the difference between the estimated vessel cost and the shipbuilder's price. Price includes factors such as productivity, overhead, labor rates, and profit expectations. This information often is confidential and dependent on both market conditions and competition. Uncertainty should largely disappear once bids are available, since state law requires fixed price contracts.

WSF uses standard estimating methods that produce single value estimates of vessel costs

In addition to using better information as the project advances, best practice is to also use different cost estimation methods. WSF follows normal industry practice in moving from top-down cost estimates to more detailed bottom-up estimates as a project advances and design becomes more refined. These approaches produce estimates that are a single value (e.g., $220 million).

Top-down estimates use known data from similar vessels to predict costs for the planned vessel

Top-down estimates are created early in a project when there is less detailed information available. WSF uses a common top-down method called parametric estimating. A parametric estimate uses historical data about cost drivers from other vessels to estimate the cost of a new vessel. Cost drivers can include dimensions, weight, operating speed, and vehicle/passenger capacity. In the planning phase, most of the estimates that WSF provided to OFM and the Legislature were top-down estimates. This is consistent with industry practices.

Bottom-up methods are more detailed ways of estimating construction costs

Bottom-up estimates add individual line items to create an estimate of the total cost of the new vessel. For the estimate to be accurate, most of the vessel design must be complete. WSF hires expert consulting firms to create bottom-up estimates called the engineer's estimate.

WSF hired a consulting firmGlosten. to complete the engineer's estimate for the hybrid electric Olympic class ferry, as designed by VigorShipbuilder previously in negotiations with WSF for hybrid electric ferries.. An independent review by JLARC's contracted consultant found the estimate to be thorough, well-researched, and compliant with the requirement to identify cost drivers (RCW 47.60.815).

Exhibit 2.1: Estimates are refined as the project advances and more accurate information becomes available

Source: JLARC staff summary of information in VARD report.

Applying a probabilistic approach, like the one used for WSDOT civil engineering projects, would help to convey the level of uncertainty involved

The Government Accountability Office (GAO) publishes a cost estimating guide. It notes that a single value estimate "by itself provides no information about the underlying uncertainty of the estimate and is insufficient for making good decisions about the program.”

Industry standards and GAO best practice guidance recommend using a probabilistic approach with any top-down or bottom-up estimate. Probabilistic approaches determine a “most likely” cost for each line item in the project and a level of confidence based on the source of information. The result is a cost range that allows decision makers to set a budget based on the likelihood that the actual cost will be at or below a certain amount.

WSDOT uses a probabilistic approach for civil engineering projects

WSDOT uses a probabilistic approach called the Cost Estimate Validation Process (CEVP) for all civil engineering projects valued over $100 million. The CEVP provides a biennial budget estimate based on the 60^th percentile of the project’s total cost. It also provides data about the range of costs and risks so the Legislature can make informed budget decisions.

WSF intends to use WSDOT's approach for the hybrid electric Olympic class ferry acquisition

WSF intends to use the CEVP and expects to complete the process for the plug-in hybrid electric Olympic class ferry during the first quarter of 2023. However, it plans for this to be a one-time event for this acquisition. Best practice is to periodically refine the estimates as more accurate information becomes available, and apply the probabilistic approach each time.

Exhibit 2.2: A probabilistic approach shows the range of costs. Decision makers can set budgets based on the likelihood that costs will be at or below a certain amount.

Source: JLARC staff depiction of probabilistic approach based on WSDOT CEVP and notional drawings from both the Government Accountability Office and JLARC staff's project consultant.

Legislative Auditor's recommendations to WSF

• WSF should ensure that cost estimates provided to OFM, legislative staff, and the Legislature are clear and well documented.
• WSF should apply probabilistic approaches to its cost estimates and clearly indicate the likelihood of the cost falling at or below the funding level requested.

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Low bid and best value are common ways to award competitive contracts

Regardless of how the contract is structured (e.g., design-build or other), buyers have options for how they award a competitive contract.

• One option is a low bid selection. The agency awards the contract to the firm offering the lowest price, technically acceptable proposal. Technically acceptable means that it meets the requirements in the Request for Proposal (RFP). This selection method is appropriate when projects have clear requirements and low risk.
• Another option is a best value selection. The agency awards the contract to the firm based on the relative importance of price and other factors (e.g., technical capability, past performance, use of small businesses). According to the Government Accountability Office (GAO), this selection method is appropriate when requirements are less clear, more design work is needed, or risks are high.

Exhibit 3.1: Selection of the winning proposal may consider price and other factors to varying degrees

Source: Adapted from GAO report 19-691.

Statute requires WSF to use a low bid selection. This may discourage shipbuilders from suggesting features that lower life cycle costs.

By law, Washington State Ferries (WSF) must award the contract to the shipbuilder that offers the lowest bid for a technically acceptable proposal (RCW 47.60.820).

WSF intends to allow shipbuilders who bid on the hybrid electric Olympic class ferry acquisition to offer technical proposals that differ from the owner’s modelDesign produced under previous contract.. However, there is no incentive to propose improvements that reduce life cycle cost if doing so increases the shipbuilder's bid price.

A best value selection would allow WSF to choose a shipbuilder that meets criteria in addition to upfront price

In a best value selection, bids are evaluated based on both price and non-price criteria. If the Request for Proposal (RFP) clearly states the criteria and their relative priority, bidders can focus their responses on the elements that offer the greatest overall value.

For ferry acquisition, selection criteria could:

• Encourage shipbuilders to offer designs that lower life cycle costs or reduce project risks.
• Reflect current legislative priorities to have vessels built in Washington and encourage the use of small or minority-owned businesses.
• Evaluate the shipbuilder's facilities, workload, expertise, capability, and ability to meet the schedule as part of the overall award criteria. By law, these factors are currently used only to select the shipbuilders that are eligible to submit a bid (see Phase 1 in the graphic below).

The best value selection is commonly used in federal procurements and in Washington State Department of Transportation (WSDOT) civil engineering projects. The 2021 Legislature approved it for use by any county that purchases electric ferries (RCW 36.32.234).

By law, a WSF ferry RFP is restricted to in-state bids. If it is unsuccessful, a second round begins, which adds time to the procurement process.

As noted in Exhibit 3.2, state law requires WSF to use a phased approach to design-build contracting for ferries.

The current approach provides an initial preference for shipbuilders in Washington. WSF may only seek out-of-state bids if the fixed prices from all Washington shipbuilders are more than 5% above the engineer's estimates. These estimates are unique to each bid and are based on detailed information and developed designs. The law was passed in 2015 and has not been applied to a ferry acquisition. JLARC staff's consultant identified potential challenges for implementation:

• It may be difficult for in-state bids to be within 5% of the engineer’s estimate because the estimate focuses on cost. Estimators try to account for other factors, such as risk tolerance, profit, and productivity, that the shipbuilder incorporates into its price. However, there is a great deal of uncertainty about these proprietary charges.
• In this design-build approach, each shipbuilder’s design must be compared to an engineer’s estimate that reflects that specific design. For example, the engineer's estimate created in 2021 is based on Vigor'sShipbuilder previously in negotiations with WSF for hybrid electric ferries. design of the hybrid electric Olympic class ferry. It cannot be reused as-is because other shipbuilders are likely to have different designs. The development of multiple estimates adds time, cost, and complexity.
• Limiting the potential shipbuilders to those in-state means the production capacity and existing workload of the shipyards may constrain the project schedule.
  • Statute does not provide guidance if WSF identifies no qualified shipbuilders in Phase 1 based on factors including workload, expertise, and ability to meet the schedule.
• WSF estimates that a second RFP process would add more than a year to the project schedule.

• Some federal funding is available only if the competition for the ferry construction contract is open to all shipbuilders in the U.S.

Exhibit 3.2: State law requires a three-phase design-build contracting approach

Source: JLARC staff depiction of RCWs 47.60.814, 47.60.815, 47.60.816, 47.60.818, and 47.60.820.

Other states offer in-state preferences in initial RFP

While other states offer in-state preferences for shipbuilding and other construction activities, none initially limit bids to in-state firms. Rather, they structure the initial RFP to include preferences or selection criteria that benefit in-state businesses. For example:

• Alaska has provided a 5% preference to the bid price for in-state firms. It also awards in-state bidders an additional 10% overall evaluation point preference in the scoring criteria.
• At least ten states have a "percentage preference." This preference is applied when an out-of-state bidder offers the lowest price. It allows agencies to select an in-state bidder if they are within a specified percentage of the lowest bid.
• States including Florida, Maine, and Texas use a "tie-bid preferences" approach that allows procurement officials to select an in-state bidder if materials are of the same price and quality.
• Other states, including Louisiana and Rhode Island, offer preferences for out-of-state proposals that include a partnership with in-state firms.

Legislative Auditor's recommendations to the Legislature

• The Legislature should consider amending state law to allow WSF to use a best value selection process for ferry acquisition.
• The Legislature should consider amending state law to allow WSF to offer a single nationwide RFP that increases competition, offers in-state preference, and protects against the risk of a longer procurement process.

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A vessel's life cycle costs include acquisition (e.g., design, construction), operations, maintenance, and disposal. The U.S. Government Accountability Office (GAO) estimates that 70% of a vessel’s life cycle costs are experienced after construction. An even higher percentage may be experienced for vessels that have a relatively long (50 to 60 year) life expectancy, such as Washington's state ferries. The best opportunities to control these costs are early in a project, during the project’s predesign and design phases when the technical and contractual requirements are set.

Exhibit 4.1: Influence over a vessel's life cycle cost is greatest during early project phases

Source: Adapted from report prepared by JLARC staff's consultant (Appendix A).

WSF uses predesign studies to inform a vessel's technical requirements but could do more to assess life cycle costs

Predesign studies explore ways to address a vessel's requirements. For example, Washington State Ferries' (WSF) completed predesign studies for the hybrid electric Olympic class ferries explored how to minimize vessel wake, convert vessels to plug-in hybrid electric propulsion, and appropriately size battery banks. The results of the studies guide the technical requirements in the Request for Proposal and the vessel design.

Statute requires predesign studies to include certain information, including an evaluation of long-term operating costs related to fuel efficiency, preservation, and staffing (RCWs 47.60.385–.386). WSF's completed predesign studies for the diesel and hybrid electric Olympic class vessels that addressed life cycle costs related to fuel efficiency and preservation but did not evaluate long-term staffing costs.

WSF reports that it selects the topics for predesign studies based on stakeholder input and industry trends. VARD Marine Inc. (VARD), JLARC staff's consultant, found that the topics are valid. However, WSF's approach may unintentionally exclude topics that have a significant effect on life cycle costs, such as the potential impact of new technology on crew size and training. A systematic approach could also incorporate information about cost drivers based on WSF's experience with vessels already in operation.

WSF's change management system is consistent with best practices

Changes are typical in a shipbuilding contract and can occur during the design or construction phases. Some may be driven by changes in regulations. When this occurs, the shipbuilder is contractually required to comply. Other changes may be proposed by the owner or shipbuilder based on changing needs, new information, or technology improvements. Best practice is to ensure that non-regulatory changes are managed appropriately and tracked from the time they are raised, through the approval process, and to their resolution.

VARD noted that WSF's change management system is well-organized, detailed, and aligned with best practices. For example, documentation includes official forms from WSF and the shipbuilder showing who made the change request, the justification, and the decision about whether to proceed. VARD observed the following:

• Diesel Olympic class vessels: WSF and the shipbuilder (Vigor) had few changes throughout the process. The project had refined and well-formulated requirements, WSF was disciplined in avoiding change, and the change order process was robust. The total value of changes was 1.4% of the contract price.
• 2019 hybrid electric Olympic class vessels: The design phase did not follow normal practices as detailed in statute because the contract was an extension of a previous agreement. The requirements were not fully developed and there was more technical uncertainty (e.g., the effect of the propulsion system on other design requirements). Design changes included passenger elevators, use of non-metallic piping, and battery room access. This led to multiple increases to the scope of work, schedule, and cost before the contract's termination in 2022.

Contingency is used to pay for a limited set of change orders after the contract is awarded

Although WSF must use a fixed-price contract, state law allows it to approve change orders on a limited basis. In its budget, WSF can ask the Legislature to appropriate up to 5% of the contract price as contingency to pay for change orders. The Office of Financial Management (OFM) must approve contingency expenditures (RCW 47.60.820).

WSF pays shipbuilders in monthly payments

WSF has few cost and schedule reporting requirements in its contracts. In previous acquisition projects, it made monthly payments to the shipbuilder.

• For the functional design (see Section 2), WSF paid the shipbuilder in uniform monthly payments. These payments reflect the total price for the work spread equally over the time needed to complete it.
• For detailed design and construction, WSF paid the shipbuilder in monthly progress payments. These payments are based on the shipbuilder's estimate of progress since the last payment cycle. However, the contract notes that these estimates are tentative and should be used only for determining payments. They are not considered evidence of progress or acceptability.

WSF states that it prefers this payment method because it is administratively simple and costs less to manage. WSF believes these payments can help the primary contractor make timely payments to small businesses employed as subcontractors and suppliers. However, WSF acknowledges it has limited recourse when the shipbuilder does not deliver the expected results during the design phase.

Best practice links payments to significant milestones or measurable progress

Federal and private shipbuilding contracts typically use payment approaches that are based on the completion of milestones or measurable progress. These approaches can reduce project risk and improve the shipbuilder's performance.

• Milestone-based approaches link payments to certain major events such as final design review, steel cutting, or trials. The nature and value of these payments can be negotiated based on the shipbuilder's construction plan.
• Earned value approaches consider cost, work scope, and schedule. For each time period in a project schedule, the planned value of the work is compared to the actual value of the work completed. The shipbuilder is paid only for measurable progress. This is commonly called Earned Value Management (EVM). EVM is well-suited for complex projects with long production periods, high risk, and high costs.

Governments and industry consider EVM a worldwide best practice management tool

At the federal level, EVM became a standard required practice for government contractors in the 1990s.

The shipbuilding industry also recognizes EVM as a best practice for ensuring cost and schedule control. For example, the intended shipbuilder for the hybrid electric Olympic class ferry (Vigor) required its contractors to adhere to EVM by allowing them to report and invoice only for physical progress on scheduled deliverables.

WSF's parent agency, the Washington State Department of Transportation (WSDOT), has used EVM to measure performance and progress for some capital projects since 2009. Its guidance document notes that EVM can help WSDOT determine the health of the project in terms of cost and schedule, and use the data to forecast project trends.

Legislative Auditor's recommendations to WSF

• WSF should ensure predesign studies evaluate long-term costs as directed by statute and that the suite of studies for each acquisition project addresses the most significant potential life cycle cost drivers.
• WSF should tie shipbuilder payments to significant milestones or measurable progress.

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Chapter 47.60 RCW details the approach that Washington State Ferries (WSF) must use to acquire new ferries. The law was adopted in 2001 and has been modified multiple times, including significant changes in 2015. Materials reviewed by VARD Marine Inc. (VARD), JLARC staff's consultant, indicate that WSF complied with the laws in place at the time for its recent vessel acquisitions. For example, its Requests for Information or Proposal packages have included relevant statutory references.

WSF's primary vessel policy document does not reflect statutory changes made in 2015

WSF's policies and procedures for vessel acquisition and preservation are documented in the Vessel Engineering Manual (Manual). The last substantive update was in 2002. A minor update in 2012 reflected agency reorganization. There have been no changes since then. As such, it is inconsistent with current law, including the statutory changes made to WSF's vessel acquisition process in 2015, such as:

• Requiring a design-build process and fixed-price contracts.
• Limiting contingency to 5% of the contract price and requiring OFM approval of contingency spending.
• Requiring WSF to hire an independent owner's representative to manage or oversee project elements, including change orders.
• Stipulating that if none of the bids from the initial in-state Request for Proposal (RFP) are within 5% of the engineer's estimates, WSF must reject all bids and issue a nationwide RFP.

Exhibit 5.1: Content in the WSF policy manual was last updated in 2002

Source: JLARC staff analysis of WSF's Vessel Engineering Manual and statutory changes.

WSF policies do not address best practices for key steps of the acquisition process

As noted in other sections of this report, WSF follows many best practices for vessel acquisition. However, it has not updated its policies and procedure documents to reflect these practices. This may result in inefficiencies or increased project risk. For example, the Manual does not provide current guidance for the following key elements:

• Predesign studies. The Manual does not document how predesign studies will be selected or what content is required.
• Cost estimates. The Manual requires estimates, but provides limited guidance for developing and documenting the work. In particular, it does not define the process for estimates developed by WSF staff.
• Risk management. The Washington State Department of Transportation (WSDOT) requires active risk management of large capital projects, including ferries, and its Project Risk Management Guide aligns with best practices. However, the guide has a civil engineering focus. WSF does not have a similar set of policies for risk management in ferry projects. This would include a risk management process, organizational risk profile, and risk assessments with a shipbuilder.

WSF does not require or conduct formal "lessons learned" reviews

Best practice is to conduct a formal "lessons learned" review at the end of each project or after the delivery of each vessel on a multi-vessel project. The review can inform and refine the approach to key steps in future procurements. The Manual directs staff to conduct such reviews when contracts close and to use the information in future procurements. This guidance appears insufficient, since WSF staff reported that the process is informal, not timely, and may not inform other projects.

WSDOT policy documents are tailored to civil engineering work

WSDOT has published many guidance documents such as its Cost Estimating Manual for Projects and Project Risk Management Guide. However, the materials are written for civil engineering work and little of it is directly applicable to ferry acquisition.

Absent policy documentation, WSF relies heavily on staff expertise and independent consultants

In the absence of documented policies, WSF relies on staff expertise to determine how it will manage each vessel acquisition and ensure statutory compliance. It currently has four staff members dedicated to vessel acquisitions. The equivalent of seven shared staff members assist with contracts, legal review, inspections, and other work. WSF supplements its in-house expertise with consultants (e.g., engineering analysis).

A heavy reliance on staff knowledge and expertise, without documented policies and clear succession planning, could leave WSF vulnerable if it experiences turnover or retirements. For example, a less experienced in-house team may have difficulty defining its support needs (e.g., expert consultants). This increases project risk.

Effective documentation that is updated as statute and best practices evolve helps retain organizational knowledge and mitigate the risk of having that knowledge limited to a few personnel. Effective documentation would also provide a consistent means for communicating information and knowledge to external parties, including the Legislature and the consultants that work on ferry projects.

WSF hired an Independent Owner's Representative as required by statute

In 2015, the Legislature required that WSF hire an independent owner's representative (IOR). The IOR serves as an intermediary between WSF and the shipbuilders during development and construction of the first vessel in each new class of ferries (RCW 47.60.810). The IOR must be the primary advocate and communicate with shipbuilders, perform quality oversight, manage change order requests, and ensure contract adherence.

WSF hired an IOR for the plug-in hybrid electric Olympic class acquisition. However, the IOR's contracted scope is narrower than the role directed by statute. WSF states that the scope reflects available funding. According to VARD, the narrow scope is more consistent with industry practice. This is the first time WSF has used the position.

Legislative Auditor's recommendation to WSF

• WSF should update its ferry acquisition policies and procedures to reflect current laws and best practices.

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