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Project Delivery Strategies
When
to contract for construction | Contract
documents
Key decisions | Typical
project delivery methods | CM
fast-track with a GMP | Footnotes
Early
in a project, a client must select a process for design and
construction. The process will affect the financing, the selection
of the project team, the schedule and the cost.
We
have experience with all the processes. We have worked as architects,
engineers, project managers, construction managers and Design/Build
contractors. We have worked with fast-track, bridging and traditional
processes. We have worked with GMP, cost-plus, target-price
and fixed-price contracts.
All
these processes are flawed, but they can all be made to work.
The best choice is governed by the exigencies of the project.
Phases of Design
and Construction
Design
and construction can be divided into three distinct phases:
project definition, design and construction. These phases (and
their subphases) can be overlapped, subdivided or regrouped,
but none can be eliminated. If one phase is done poorly, the
following phases are impaired.
Project
definition: At Barretta & Associates we subdivide this phase
into two activities.
- Discovery: the identification and analysis of project
requirements and constraints
- Integration: the description of the project and
the plan (including an estimate of cost and time for delivering
it)
Design:
Typically, design is divided into three phases.
- Schematic design: the basic appearance and plan
- Design development: an evolution of design that
defines the functional and esthetic aspects of the project
and the building systems that satisfy them
- Construction drawings and specifications: the details
of assembly and construction technology
Construction:
Construction can also be divided into several basic activities.
- Procurement: the purchasing, negotiation or bid
and award of contracts to construct the project1
- Shop drawings: the final fabrication drawings for
building systems2
- Fabrication, delivery and assembly: the manufacture
and installation of the building components
- Site construction: the labor-intensive field construction
and the installation of systems and equipment
Traditional
process is the term used for projects that are bid or negotiated after an
AE completes construction drawings. However, shop drawings are
done by contractors, so it's correct to argue that in all processes
some design is done by the contractor.
Bridging is a hybrid of Design/Build
and the traditional process. The contract documents are prepared
by the client's AE. They specify the project's functional and
esthetic requirements, but the details of construction technology
are described with performance specifications. The construction
contract is awarded halfway through design. Construction drawings
are done by a Design/Build contractor or a general contractor
with an AE as a subcontractor (who is also the Architect of
Record).
Design/Build contracts are typically
negotiated before project definition, or just after. The design/-build
contractor does all design (including construction drawings).
Fast-track is jargon for overlapping
design and construction to accelerate completion. It may be
done with the traditional process, bridging, Design/Build or
any other process.
There
is no technical reason not to overlap design and construction.
The problem is cost control: construction begins before the
design is complete, so the final scope and therefore the final
price may be disputed.
There
are two ways to fast-track a project. A single contract can
be awarded to a general contractor who may build the project
under a cost-plus contract, perhaps with a guaranteed maximum
price. Or the owner may retain a construction manager who may
bid the project in stages with complete contract documents for
each stage. The contracts for each stage are typically bid to
trade contractors. The general contractor is eliminated.
A
construction contract that includes a fixed-price, a target
price or a GMP requires a description of the result that the
contractor must produce. Different countries and different industries
have different traditions (and convictions) about the detail
required to describe that result. Typical documents are:
Construction
drawings and specifications Construction documents show how the building is made and what
it's made of. The drawings show details like the size and location
of reinforcing rods, wiring runs and duct sizes. The specifications
typically define the construction by product or by prescription.
Most U.S. AEs believe that these detailed construction drawings
and specifications are the proper way to define the required
result and to enforce a contract.
Bill
of Quantities In countries influenced by the British, licensed quantity surveyors
measure drawings, calculate the amount of each required material
and prepare a Bill of Quantities. Construction contractors bid
on the unit cost of each building material. These unit-price
contracts are common for highway construction and tenant fit-out
in office buildings in the U.S.
Design
development and performance specifications In many countries, projects are bid with
what we would call design development drawings (35-50 percent
of the level of detail that is contained in a full set of construction
drawings and specifications). Performance specifications describe
what systems must do rather than describe how they will do it.
Construction drawings are completed by Design/Build contractors
who maintain a staff of architects and engineers. In the U.S.,
the petrochemical industry, GSA and the Air Force are using
this technique.
There
are four basic decisions in setting project delivery strategy.
They are:
- Number of contracts
- Selection criteria
- Relationship of owner to contractor
- Terms of payment
These
decisions aren't either/or. There are shades of gray.
Number
of contracts
A
project may be awarded with one contractor, as in design/build.
In the traditional process there are two contracts: one with
an AE and one with a construction contractor. (There are three
with a project manager.) With a construction manager you may
have contracts with 40 prime subcontractors, or you may purchase
building materials and equipment and arrange multiple labor
contracts. There may be thousands of contracts.
With
multiple contracts a client can fast-track a project (overlap
design and construction). Direct purchase of labor and materials
eliminates overhead markups. Unbundling design allows selection
of specialists, and unbundling construction allows careful selection
of specific manufacturers and trade contractors. So as the number
of contracts increases, the opportunities to save time, money
and improve quality also increase.
So
does risk. Clients who choose to manage multiple contracts must
manage the contracts well or take the responsibility for management
failures. Consequently, most clients package contracts under
a general contractor or choose a construction manager to3
help if they use multiple contracts.
Selection
criteria
A
contractor may be selected on the basis of price or qualifications.
Owners often consider both and require a proposal (which could
be a management plan or a design) and a price.
Typically,
AEs are selected with an emphasis on qualifications, and construction
contractors are selected on the basis of price. But there are
owners who select AEs on price and those who select GCs on qualifications.
The
selection criteria are influenced by what is to be bought. If
it's a common product, easily defined and easily evaluated,
there is little reason not to choose on the basis of price.
But if the product is unusual or proprietary, or if service
is required, or if intellectual qualities (talent, creativity,
wisdom, judgment or experience) are required, selection is usually
based on qualifications.
Contractual
relationship
A
contractor may be viewed in one of two ways: as an agent or
as a vendor. An agent represents the client's interest and has
a fiduciary responsibility. A vendor delivers a specified product
for a price.
AEs
are usually viewed at the agency end of the spectrum and contractors
at the vendor end. But there are exceptions. Some owners ask
contractors to act as their agents in procuring and managing
construction and treat AEs as vendors of plans and specifications.
When
owners need guidance or advice, they typically choose an agent
(a fiduciary) relationship. Owners who know exactly what is
required typically form vendor relationships.
There
can be a conflict of interest if a contractor is both agent
and vendor or if a contractor changes from agent to vendor in
the course of a project. For instance, an AE that designs a
building for a fee is usually precluded from bidding on construction.
Some owners don't worry about the conflict of interest and look
for good reputations and continuity instead.
Terms
of payment
A
contractor may be paid based on the contractor's costs. At the
other end of the spectrum is a fixed-price. Contracts tend to
be cost-plus when the scope is unknown and fixed-price when
the requirements are well defined. There are variations between
cost-plus and fixed-price. The common arrangements are:
Cost-plus
Contractor is paid actual
costs plus a fixed or a percentage fee.
Cost-plus
with target price Contractor is paid actual costs plus a fee. However, a target price
is set, and the contractor shares in the savings or the overrun.
The target price is modified by change orders as the project
progresses.
Cost-plus
with a guaranteed maximum price Contractor is paid actual costs plus a fee. However,
a maximum price is set, and the contractor will share in the
savings but will pay all of the overrun. The GMP is4
modified by change orders.
Unit-price Contractor is paid a predetermined
amount for each unit of material put in place (or removed).
Fixed-price Contractor is paid a fixed
sum for the work.
These
payment terms may be combined in one contract. For instance,
many contracts are fixed-price with unit-price provisions for
rock removal during excavation or tenant work during lease-up.
Change orders may be based on a cost-plus arrangement.
Variations
are infinite. Examples of the most common follow.
Traditional
process
Most
U.S. projects are design, bid, build. An AE defines the client's
needs, designs the building, prepares construction drawings
and specifications and administers construction. Drawings and
specifications serve two purposes. They are guidelines for construction,
and they are the contractual definition of what the contractor
is to build. Contractors may be prequalified and short-listed.
They usually provide a bond. Typically, the low bidder is awarded
the work. The AE is at the agent end of the spectrum, the contractor
is at the vendor end.
Pros The process is easy to
manage. Roles are clear, the process is universally understood.
Since the owner has a defined requirement and a fixed price,
it appears prudent.
Cons Construction can't start
until design is complete. There is not a fixed price for construction
until much work has been done. If bids are over the budget,
more time and money are lost for redesign. Design suffers from
a lack of input from contractors and subcontractors. Procurement
of subcontractors by the general contractor during the bid period
is typically unbusinesslike.
Traditional
process with a project manager
Owners
often add project or construction management companies to the
traditional process to mitigate the traditional flaws. The idea
is to select an organization with experience in construction
to improve cost, schedule and quality control; improve the constructibility
of the design; develop risk management and claims protection
programs; improve other management controls to smooth the process;
and improve field management.5
Often
project managers unbundle design and construction contracts.
Instead of a single AE, projects may have a planner, a design
architect, a production architect and separate architects for
different aspects of the interiors. These firms may be selected
by the owner and PM and assigned to the lead architect. The
PM may also negotiate major items of manufactured equipment
and subcontracts and assign them to the selected general contractor.
That maintains a single, bonded price for construction but allows
direct negotiation (and useful collaboration) with speciality
subcontractors and manufacturers. Procurement of subcontracts
also provides cost feedback. That reduces the possibility of
a bust on bid day.
Fast-track
Many
owners look for ways to accelerate schedules. Fast-track --
starting construction before finishing design -- is a common
technique. Fast-track can be used with the traditional process,
with bridging or with Design/Build. However, it is most common
with CM.
Pros The process saves time.
Cons The problem with fast-track
is inherent in its advantage. Since construction is started
before design is complete, the owner lacks the security of a
fixed price based on complete construction documents. There
is no contractual assurance that the project will be completed
within the budget. There are two common approaches that mitigate
this problem: construction management with a guaranteed maximum
price and construction management with multiple prime contracts.
CM fast-track with a GMP
Many
general contractors provide CM services under a cost-plus general
construction contract with a guaranteed maximum price. The argument
is simple: since the project isn't fully designed when construction
begins, the contract should be cost-plus. But to give the owner
security that the project will be built within the budget, the
contractor provides a GMP.
Pros The process works for
developers or experienced private sector clients who can select
contractors on the basis of qualifications and integrity, reward
them with repeat work and manage them vigorously. The process
also works for simple office buildings that are well understood
by all (the client, the AE and the contractor).
Cons The contract is hard to
enforce. The guaranteed maximum price is for work that isn't
completely defined. As design progresses there is opportunity
for a contentious or inept contractor to make claims for changes
that are "out of the guaranteed scope." The GMP is
a defined price for an undefined product.
Furthermore,
owners with complex buildings, the public sector or large corporate
or institutional clients should be circumspect about a cost-plus
contract with a GMP. First, it's difficult for these kinds of
owners to award and administer cost-plus contracts. Second,
these owners are particularly vulnerable to claims and change
orders. Awarding a contract with incomplete documents increases
vulnerability to claims, particularly for owners with deep pockets.
CM
fast-track with multiple prime contracts
The
general contractor is eliminated and replaced with a construction
manager who manages the project in an agency (fiduciary) capacity.
The
CM bids construction to trade contractors just as a GC would,
beginning with items critical to the schedule. One common strategy
to avoid downstream overruns is to award only the shop drawing
phase of the first trade contracts. The CM delays final notice
to proceed with construction until most of the work is bid and
the project cost is certain. On government work, the subcontracts
are directly with the owner. In the private sector, the CM may
hold the subcontracts as agent of the owner.
Pros Clients have a professional
construction manager on their side. The multiple trade construction
contracts are fixed-price based on complete documents with little
room for change orders.
Cons Multiple contracts can
make for administrative difficulty. If one prime trade contractor
damages another by delay, the owner can get caught up in the
fight.
The
secret of a successful fast-track project isn't the legal security
of a contract. Nor does anyone believe it's risk-free. Success
only comes from good management. The professional approach works
better for the public sector because governments can select
professionals on the basis of qualifications to replace the
function of a general contractor. Governments also have difficulty
exercising the management sanctions that are the necessary stick
to make a cost-plus GMP contract work.
Design/Build
With
Design/Build, one company provides both design and construction.
Some owners like the Design/Build idea, but they want to cherry-pick
specialized designers. In these cases, the AE is a subcontractor
to a GC or a Design/Build contractor.
Pros There is a single point
of responsibility for both design and construction. Design/Build
contractors add construction practicality to design imagination.
Owners get an enforceable price for construction sooner and
can fast-track the project. The contractor can negotiate subcontracts
methodically so the owner can benefit from good prices, reliable
subcontractors, better technology and tighter contracts.
Cons More projects would be
Design/Build if they could be bid. But it's difficult to formulate
an enforceable price before design begins. The paradox: It's
hard to define the work to be done for an agreed-upon price
without design. If design is done, then it's not Design/Build.
Some
Design/Build companies work under an AE fee with a target price
until the design is set. They then negotiate a final price for
construction. They agree that the client may obtain prices from
other contractors as well. The Design/Build contractor begins
in an agent role and changes to a vendor role. Many do so with
integrity. But many clients feel that it's unwise to hire a
contractor to define a product as an agent that the contractor
will then sell as a vendor.
Bridging
Bridging
is the U.S. name for a Design/Build process common in Europe
and Japan and in the petrochemical industry.
In
the bridging process there are two AEs. The first AE is under
contract with the client. Bid documents define the functional
and esthetic characteristics of the project. They include drawings
similar to design development in the traditional process. There
is a combination of performance and traditional specifications.
These documents define the parts of the building that the client
wants to control, typically the functional and esthetic aspects.
But the documents leave considerable latitude for contractors
to look for economies in construction technology.
The
project is bid (or negotiated) by Design/Build contractors or
by a GC with an AE as a subcontractor. The contractor's AE (the
second AE) does the final construction drawings and specifications
and is the Architect of Record. Typically, construction doesn't
begin until the final construction drawings are complete and
it's clear that there are no misunderstandings about what was
intended by the bid documents. If there is disagreement the
client owns the plans and may use them to take competitive bids.
Pros
Bridging has the beneficial
attributes of the traditional process: a bonded, enforceable
lump-sum contract and complete contractual documentation before
construction starts. It also has the beneficial attributes of
Design/Build: centralization of responsibility, integration
of practical construction knowledge into final design and reduction
of the time and cost required to obtain an enforceable lump-sum
price for construction.
By
centralizing responsibilities during construction, bridging
minimizes the opportunity for contractor claims based on errors
or omissions in the drawings or specifications. It also centralizes
the responsibility for correction of post-construction faults
in the design or construction.
Cons The biggest problem with
bridging is that it's new in the U.S. The construction industry
is large and replete with contractors, AEs, consultants, subcontractors,
manufacturers and suppliers. Tradition is the great facilitator.
These organizations don't all understand bridging and may not
perform well without careful management.
All these processes
are flawed, but they can all be made to work. The best choice
is governed by the exigencies of the project. The biggest issue
is the quality of the people. The best way to get a good project
is to get good people to do it, set the environment for collaboration
and make sure responsibilities are clear.
1 This activity occurs at
many levels. The way the client buys construction affects the
methods that may be used by construction managers, general contractors,
subcontractors and suppliers.
2 One could easily argue
that shop drawings are really the last phase of design. They
are included in the construction phase only because they are
done by contractors after they have been selected.
3 The term "construction
manager" is frequently used synonymously with "project
manager." Often the term "project manager" is
used with the traditional process, and "construction manager"
is used with multiple-contract fast-track. A GC may take the
title of construction manager with a GMP contract. The same
company may provide all three kinds of services for different
clients.
4 Many people use the term
GMP synonomously with fixed-price. That is incorrect. A GMP
is a lid on a cost-plus contract with a defined scope. It is
one of the most difficult of all contracts to manage. It has
the problems of both fixed-price and cost-plus contracts. It
is more susceptible to change orders than a fixed-price
because it is typically given before construction drawings are
complete. There will also be many issues over the definition
of "cost," e.g., rental rules on contractor-owned
equipment or ownership of workman's compensation refunds or
penalties.
5 Although it is not yet
common in the industry, 3D/I has also emphasized the project
definition phase as an important project management service.
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