Lessons Learned from Other Industries: Bonding Company Takes $800,000 Hit on HDPE Pipe Failure
By Edward J. DeMarco, Jr.
In the spring of 2009, city employees in Tyndall, South Dakota, noticed that a stretch of asphalt roadway was developing unusual cracks and settlement. The city soon discovered that a significant portion of a 4,000-foot high-density polyethylene (HDPE) pipeline installation completed a little over two years earlier had severely deflected—as much as 25% in some sections—from its original shape.
This case is interesting because it shines a light on vendor risk management. Fearing an impending catastrophic failure, the city informed the original contractor that replacement of the pipeline was inevitable. The surety company holding the performance bond eventually stepped in to investigate the cost of replacing the failed pipeline. They requested bids from several area contractors for replacement of the pipeline, again using HDPE pipe.
However, after H&W Contracting was awarded the contract, the company reviewed the specification for the replacement and convinced the city to use reinforced concrete pipe (RCP) instead. The decision was reached due to the significant risk of another failure if HDPE were used again In addition, although the RCP purchase price was marginally higher than HDPE, a significant cost savings was realized due to the need for less backfill materials and the avoidance of extra labor required to ensure proper compaction in the pipe envelope surrounding the HDPE. The 48-inch corrugated HDPE pipeline had been installed at depths of nearly 17 feet, requiring 13 feet of backfill. The Tyndall HDPE failure, and resulting replacement with concrete pipe, cost the bonding company roughly $800,000.
The fallout from this costly incident has greatly increased the degree of scrutiny given to engineering specifications by bonding companies, specifically when flexible pipe products are recommended. At least one surety bond association has even gone to the effort of posting alerts on its website to ensure that the financial risks of poorly engineered installations are top-of-mind amongst its members.
Scott Hofer, then general manager of Hanson Pipe & Precast in Sioux Falls, which won the bidding on the replacement contract, provided the following assessment: “This project was complex and offered a higher risk of failure with the use of flexible conduits. The use of RCP simplified the replacement project and reduced the risk to all involved because of the inherent strength and durability concrete pipe offers.”
Takeaways:
- In any situation where a third party vendor is used which rises to the level of “materiality” or “significance,” a proper risk assessment should be completed.
- The risk assessment must be tied to the scope of work; RFP process; due diligence; and vendor selection.
- Vendor selection is often the domain of purchasing specialists who lack sufficient expertise in the subject area relating to the vendor.
- While cost is always a concern, risk mitigation should be considered at the outset – what could go wrong? What will it take to fix?
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Edward J. DeMarco, Jr. is the General Counsel and Director of Operational Risk of The Risk Management Association. He may be contacted at