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Note from the editor

Dear readers, 

Long before a general contractor sets foot on a jobsite, an owner has charted the course for stakeholder interactions throughout the life of that project, with its selection of a project delivery method.  

While many owners opt for the compartmentation of design-bid-build, studies suggest that design-build, once considered an "alternative" approach, might overtake this "traditional" method. Meanwhile, the pressure to deliver complex projects on tight budgets is driving a leaner strategy that loops contractors into early design stages, such as through the integrated project delivery framework.  

Public-private partnerships haven't taken off in the U.S. like they have in other countries, but President Donald Trump's ambitious infrastructure plan could drive the creation of state and local government policy that's more attractive to private investors, some say.  

It's an evolving picture, no doubt, and to keep you apprised of it, Construction Dive will keep this page up to date with new trends and developments in project delivery strategy and adoption. Here are some highlights of our coverage over the last year.  

Thanks for reading, 

Kathleen Brown Associate Editor

Report: Design-build to deliver almost half of US projects by 2021

Design-bid-build (DBB) is the most widely used project delivery method in the United States, according to the Lean Construction Institute of America and other groups. Under this method, an owner contracts separately with a designer, who provides complete design documents, and a contractor, who provides the most attractive price bid to execute that design.

But recent research from consulting firm Fails Management Institute (FMI) indicates that the design-build (DB) delivery method, where an owner contracts with a single entity to perform both design and construction, is quickly gaining traction in the industry. According to the June 2018 “Design-Build Utilization” report, DB methods will represent nearly half, or 44%, of construction put-in-place (CPiP) spending across many market segments by 2021.

FMI’s findings were based on 82 interviews and 101 survey responses from construction firms in all revenue categories, ranging from ENR top-10 ranked companies to small firms. FMI assessed commercial, highway/street, educational, manufacturing, office, transportation, healthcare, lodging, recreation, water/wastewater, communication, public safety and religious construction market segments.

FMI predicted that collective DB CPiP spending in these segments will increase 18% between 2018 and 2021, swelling from $274 billion to $324 billion in value. Manufacturing, educational and highway/street segments are expected to comprise the top three market shares of 16%, 15% and 14% by 2021, respectively, followed by commercial with a 13% share.

No longer the “alternative”

Design-build and other alternative delivery methods like construction manager at risk (CMAR) and construction manager/general contractor (CMGC) have become more attractive options to owners wanting to tighten up project budgets and/or timelines, according to the study. Alternative methods were “indicated to provide the best avenue to achieve the originally identified cost,” the report found.

While 82% of owner respondents said they’ve used or plan to use DBB in the next five years, 58% of owners said they’ve used or plan to use DB.

Given the popularity of DBB, just over half of owners surveyed said usage would stay about the same over the next five years while 32% predicted a decrease and only 15% predicted an increase. Meanwhile, 29% of owners said DB adoption would stay the same while 67% predicted increased utilization.

One reason that DB methods have gained momentum, according to the report, is the passage of state legislation that facilitates the use of alternative project delivery methods. Last year, for example, Virginia legislators expanded design-build authority to all local governments, the New York governor’s budget added new state entities to the list of those authorized to use design-build and the Washington state legislature recommended design-build for construction of a bridge. Legislation in 38 states that enables use of public-private partnerships also plays a role in boosting DB utilization, the report found.  

“The use of alternative delivery methods in general is growing and will continue to do so, particularly design-build, as projects become more complex and need to be delivered in an expedited fashion,” said FMI consultant Paul Trombitas in a webinar hosted by the Design-Build Institute of America (DBIA).

Advantages, obstacles to adoption

Design-build methods promote a “culture of collaboration” that’s not always present in traditional contracting arrangements, Trombitas said. From the start of a project, designers and contractors in DB projects share decision-making and pitch unified project recommendations to the owner for meeting the owner’s schedule and budget, according to DBIA.

Seventy-six percent of owner respondents to FMI’s survey rated their experience with DB as “very good” or “excellent.” They cited increased opportunities to innovate and the ability to fast-track a project as the top two benefits of DB.

In contrast, “the almost contentious relationship that design-bid-build or low-bid pricing creates doesn't allow for the innovation, early collaboration and identification of effective solutions to deliver projects,” according to Trombitas.  

Plus, traditional project delivery methods can pit the designer and contractor against each other when project obstacles arise or changes are required, DBIA says, sometimes leading to litigation and project delays. In a collaborative DB relationship, however, change orders by the owner are less likely.

While DB contracting offers potential time and cost savings, making the switch to this alternative model sometimes requires owners to make a cultural shift. Owners often have to adapt their contract management practices and adjust to a smaller role in the design process. Another potential disadvantage for owners is less competition because of the smaller number of companies that can pull together an effective DB team.

However, FMI expects DB use to pick up as owners gain more exposure to the advantages of the approach. “A continued emphasis toward educating owners and project stakeholders on the process and benefits associated with design-build will facilitate continued adoption and greater utilization,” the report found.

Article top image credit: Pexels

Why P3s can be a project delivery method worth the risk

When executed properly, public-private partnerships can be a win-win for those on both sides of the aisle.

Design-bid-build may still be the No. 1 project delivery method for U.S. construction, but other processes are rising that could challenge DBB’s stake in how some projects are carried out.

One such arrangement, public-private partnerships (P3), is gaining steam with talks from Washington, D.C., about employing the method for President Donald Trump’s $1 trillion infrastructure spend. While more states and local entities are successfully turning to P3s to tackle major infrastructure overhauls and new projects, the method still runs up against a perception problem. Some elected officials are hesitant to employ P3s because they don’t want to let a private firm finance, construct and manage public assets.

Despite success stories like Indiana’s Ohio River Bridge P3, which came in under budget and is generating revenue that is exceeding projections, a national spotlight on failed P3s, including a bankrupt Texas toll road built and operated under a P3, has left many state and local agencies wary of entering into such an arrangement.

Whether P3s will move more toward the mainstream will largely depend on state and local governments’ willingness to adopt new revenue streams, like tolling, despite uncertainties and the potential for public opposition.

When executed properly, the method can be a win-win for those on both sides. The private entity can see long-term revenue from such projects while the public agency is able to shift any potential risk to the private sector and leverage limited funding across a number of capital programs.

But how those arrangements are determined comes down on a case-by-case basis.

“I think one thing a lot of people think is that there’s a formula for P3s, but we look at them as all being unique in their approach,” according to Stephanie McFarland, a senior issue-management consultant who has worked with the Indiana state government. “[The state] looks at P3s more as a process you manage than a template or formula.”

For construction companies, engaging in a P3 can mean a guarantee for long-term revenue, whether that money comes from tolls or user fees that accrue from maintenance and operation contracts that span decades.

And the vast majority of P3s tend to work, Liz Holland, CEO of real estate management and acquisition firm Abbell Associates, told Construction Dive last year — but only if everyone is on the same page.

P3s run the biggest risk of derailment when the private and public entities don’t share a common goal. For a P3 to succeed, partners should lay out those goals long before a project has broken ground.

Considering the risks

But before partners can manage that process, both public and private entities have to formulate a list of all known project risks, according to Lee Weintraub, shareholder at Fort Lauderdale, Florida, law firm Becker & Poliakoff and chair of the firm's P3 group. Those risks include the risks in construction and design, cost overruns, delays, unforeseen conditions, land entitlements and land use, among other things.

Partners will also go over the risks that are inherent to the facility’s operation and to what extent usership — or lack thereof — and corresponding revenues align with their expectations.

After those risks have been identified, the next step is to delegate responsibility for handling such situations, should problems arise. Almost always, the construction and design risks will go to the private side and the political risks will go to the public, although the private side may help try to quash some opposition, Weintraub said.

While these negotiations attempt to account for any uncertainty, unforeseen risks are sometimes inevitable. When those risks arise, who will take care of any associated costs depends on who holds the broader share of responsibility.

“You have to see who has the obligation of that type of situation under the agreement,” Weintraub said. “If there is a tax change, for instance, whoever is operating the facility and managing the finances is the one who would take the brunt. If the contract doesn’t specifically define that risk, you just go broader.”

But dealing with as many risks up front as possible can limit the possibility of major cost overruns and legal fees.

When project stakeholders on the $1 billion Port of Miami Tunnel ran into issues with a tunnel boring machine (TBM) — a technology that, at that point, had never been used in the U.S. — both sides disputed who would take responsibility for the unexpected costs.

The project, however, was spared long delays and massive cost overruns thanks to an existing contingency reserve fund, according to Samara Barend, AECOM’s North America strategic development director for public-private partnerships.

“They had litigated the issue and specified it in the project agreement how it would be dealt with in terms of risk sharing. It wasn’t as much a killer as it could have been if it was a traditionally delivered project.”

According to Barend, P3s make sense for risky projects in uncharted territory — and the method can even lend itself to innovation. Because they bring all sides of a project team together in a unified format, P3s settings can be the perfect catalyst for devising more efficient methods of delivering a project.

“In this case, Florida was unwilling to take the risk of new technology for building its first major tunnel,” she said. “The P3 framework attracted proposals from teams that allowed the state to transfer this risk in a reasonable way and gave [it] certainty that the project could be delivered on time and on budget.”

Improving project schedules

Studies continue to point to P3s’ ability to improve project schedules and budgets when compared to traditional contract delivery methods. A study by Allen Consulting Group found that P3 projects in Australia were completed on average 3.4% ahead of schedule, while traditional public projects were 23.5% late on completion.

The public sector is beginning to open up more to those possibilities. “I’ve seen the market change dramatically from only a couple of states having P3 authority to now over 40 states having the ability to do P3s,” Barend said.

Specific state legislation and having fully operational projects can help explain that shift, according to Barend. And that momentum will likely continue with the success of P3s currently in the pipeline. “People are much more optimistic given that we have a lot more deal flow now than we had before,” she said.

Since 2010, there have been $36 billion worth of P3 transportation projects that have moved forward in the U.S. — not including the $8 billion worth of work at LaGuardia Airport.

And while some projects of national significance, such as a $9 billion expansion of three major highways that connect the Maryland to Washington, DC, and Virginia, are moving forward because of the delivery method, P3s can only be viable if there is political support for the project.

“Given the amount of focus on these projects and the attention that is brought when a city or state advances one, you need a lot of political support and a governor or mayor who’s willing to put their job on the line to be aligned with the project,” Barend said. “You need agency heads who will champion the concept — if the idea is being driven by the agency staff but it doesn’t have the support of a public official who is willing to get behind it, I don’t think it has any opportunity.”

Public agencies also have to do their due diligence in determining if they can commit to a P3, which can oftentimes be unaffordable. And, if they can, they need to answer one question before moving forward with a proposal — are they willing to take on the risk?

Article top image credit: Wikimedia

The strengths and challenges of integrated project delivery

Clint Stancil works on the Global Project Management Platform team supporting account and local market teams. Stephen Powell brings more than 10 years of experience to CBRE, using his construction background to assist in all aspects of healthcare projects. The opinions represented in this piece are independent of Construction Dive's views.

One of the most important decisions when launching a project is defining the project delivery method, specifically how a project is designed and constructed. Design-bid-build (DBB) and construction management at risk (CMAR) represent the majority of project delivery systems used today. Design-build is an alternative approach to DBB that can successfully deliver both horizontal and vertical construction projects no matter the project type.

There is, however, a fourth delivery approach that has gained popularity known as integrated project delivery (IPD). 

What is IPD?

IPD is a project delivery approach that integrates people, systems, business structures, and practices into a process that collaboratively harnesses the talents and insights of all participants. This approach was developed to optimize project results, increase owner value, reduce waste, and maximize efficiency through all phases of design, fabrication, and construction. In the 1990s, various groups began focusing on project collaboration due to the declining productivity in the construction industry. On the heels of that focus, the IPD model started to gain momentum in the early 2000s.

At its core, IPD consists of a tri-party agreement. This is a contractual arrangement among an owner/project manager, constructor and design professional that aligns business interests of all parties. IPD is more than just a contractual vehicle, but a collaborative approach to delivery where there’s mutual trust between the team members and inefficiencies are avoided.

Many delivery models can create silos and messy handoffs from the various stakeholders, who can be more focused on individual goals rather than overall project goals. Instead, IPD looks to create better partnerships and foster an environment focused on shared goals.

IPD's strengths

While owners may desire a collaborative team focused on project-level goals over individual ones, a full IPD model is not right for every project. This system is best aligned to complex projects that last over 12 months and carry multi-million dollar budgets. Historically, IPD is successfully implemented in healthcare, higher education, manufacturing, and mission-critical and infrastructure project sectors.

Current trends include organizations looking for ways to align process improvement and team health with capital improvement projects. IPD enables organizations to use collaborative delivery methods to drive value through innovative approaches and improvement measures driven by teamwork with risk and reward sharing for successful delivery.

IPD is focused on creative ways for the project teams to become a central core with tools to operate and deliver a steady model for decisions and management. IPD can:

  • Eliminate waste in project design.
  • Establish the correct point of contact for each project task.
  • Improve job productivity.
  • Increase project value.
  • Improve construction methods.
  • Establish innovative tactics for approaching field work.
  • Create cost savings.
  • Produce innovative ways to reach goals.
  • Improve production techniques that will in turn improve the client’s bottom line project costs.

IPD projects share a common theme around collaboration, focused on a team mentality backed by an agreement. IPD contracts are built to bring teams together through the challenges they face. Although there are ways to be successful through trials in a collaborative delivery model, the IPD contract is built to prevent a team from sliding off track. The IPD structure creates an environment of open communication and establishes chain of command.

The process removes waste using a format that moves decisions and conversations through a defined reporting structure of core teams. Core teams provide opportunities for barriers to be removed between traditional roles and team member expectations. Varying groups in this delivery model may build strong relationships and want to work together again to nurture their partnership and success.

Studies have shown project outcomes are more successful using an IPD model versus others. A University of Minnesota School of Architecture IPD case study realized IPD created a “striking uniformity of success for all the teams in this study, regardless of project type, scope, geographic location, or previous experience with IPD.” This is a testament to the nature of expectations set using this team approach with a contractual model that reiterates the value created with the enhanced team environment.

IPD's challenges

Although there are quite a few pros to using IPD, there are a handful of cons. This delivery method requires teams to give (and take) to improve the overall project. This sort of ebb and flow can result in challenges being presented to teams that will take the brunt of the workload to assist in overall project success.

It’s imperative each team member understand their results in the greater good of the project, even when they may be required to pass normal tasks to other responsible parties on the team. When striving for innovative ideas, high functioning teams need strong partners. This will require team members to be flexible, knowledgeable, and always available. This process will show strengths and weaknesses of team members, pushing the stronger members to work harder.

Unfortunately, IPD is not always considered a lean delivery model in terms of personnel time. Ensuring documentation and information is readily available through an open environment can require some additional work and time from key parties. As an example, given the decrease in change orders due to open communication, the team is likely to be fully engaged in development, conversation, and documentation versus a traditional delivery method where it’s tossed back and forth for design and pricing exercises. 

Best project types

IPD works well with three project types: repetitive projects, complex projects and large projects.

A repetitive project resembles an assembly line in the way it garners improved results by maintaining a consistent team with incentives to increase outcomes from project to project.

Complex projects harbor a very focused team effort, regardless of size, focused on proper planning, innovation, and results. The final project type that has been successful using IPD is large projects.

Large projects benefit from strong team alliances and processes because the teams work together over a long period of time.

On a final note, IPD will continue to gain momentum in the world of complex projects, but trying to implement a full IPD model across projects with budgets less than $5 million may create more administrative burden than desired. The procurement issues alone may be a stumbling block for many organizations. IPD projects require intense time and work investments from team members, particularly in the early stages of the project. Owners should look first to engage a professional project management team to help determine the appropriate delivery system for their projects. 

Article top image credit: Perkins+Will

Top takeaways from the US' biggest design-build event

At its 2018 conference, the Design-Build Institute of America reflected on the delivery method's progression from "alternative" to one that accounts for nearly half of all nonresidential projects.

Nearly half of all spending in the U.S. nonresidential market now goes to design-build delivery methods. That was the resounding anthem of the Design-Build Conference & Expo this fall to salute the 25-year progression and keeping of the Design-Build Institute of America.

“Design-build is no longer an ‘alternative’ delivery method,” said Haskell Construction founder Preston Haskell, reflecting back to when he co-founded the association in 1993 with several other design-build pioneers who joined him on the stage Thursday to address up to 2,000 attendees.

“The method was a disruptor to the standard business model then,” co-founder Richard Kunnath, president of the Charles Pankow Foundation recalled. “Why wouldn’t everybody want to use this model, I wondered then." Well, there was resistance from folks in the industry who had been completing projects solely through traditional methods such as design-bid-build, Kunnath said, because that’s what they knew best. New methods were — and still are today — often seen as a form of “moving around people’s cheese,” he added.

But after the dust settled in those early days, Donald Warren, another founding father, noted observers began to see the reason the method thrived is because owners saw results: “Projects were delivered cheaper, better and faster,” the McCrory Construction executive vice president said, “and they will continue advancing in those directions.”

Now, 47 states are embracing design-build procurement and delivery for government projects and the lone holdouts are likely to follow eventually, if not soon, the group's founders promised.

Snapshot of the method’s continued evolution

The outlook is bright, according to Jim Hawk of Rosendin Electric, who shared research from FMI Corp. predicting that spending on design-build projects will ratchet up around 18% in the next three years to around $324 billion.

No market sector is spared from the delivery method’s advances, the Rosendin executive vice president continued during the Wednesday presentation, calling out building types such as data centers, which are one of the fastest-growing staples for Rosendin, and renewable energy facilities a slice not even represented yet on FMI’s pie. Beyond the data, Hawk noted he can tell anecdotally that the delivery of those segments through design-build will expand like “gangbusters.”

“There’s a lot more money going into these projects and they’re more architecturally and structurally elaborate than ever before,” he said about the progression of the method. “But that also comes with tighter tolerances and shorter schedules from owners. Every project now is considered fast-track.”

Hawk alluded to mega-projects in San Francisco such as the Transbay Transit Center and its neighboring Salesforce Tower, along with big arenas such as the Chase Center and 181 Fremont Tower, for which his firm recently completed electrical work.

“That’s all just to say that projects are getting bigger, taller and more sophisticated, and many of those owners and developers are turning to design-build,” he said, echoing what other owners and practitioners stressed throughout the event.

Clark Construction Group Senior Vice President Philip Sheridan took it a step further and provided a clear example of a “great design-build success story.” His team’s progressive design-build delivery of CSX Transportation’s Virginia Avenue Tunnel reconstruction in Washington D.C., set to conclude its 7-year journey this month, represents the largest Class 1 railroad project delivered by the method at a total spend of about $300 million.

What’s more, Sheridan emphasized in a comprehensive case study on the project, was that it was delivered ahead of schedule and cost targets with contingencies to spare all without major headaches or hang-ups through a tangled web of NEPA approvals and mitigation, community concerns about the site’s location in a dense urban environment, requirement of more than 300 permits and complex and consistent coordination with both the private owner and the District Department of Transportation, the Federal Highway Administration and other public agencies.

But while the application of design-build contracts to bigger and more sophisticated projects is certainly a trend, the inverse is true as well, said Larry Hurley, president of H2 Consultants and moderator of a panel on the future of the industry.

Whereas owners wouldn’t even consider the method for transportation projects under $20 million some years ago due to the complexity and risks involved, successful projects are meaning that smaller and smaller jobs fit the bill. Now, projects as low as $5 million are being considered for those types of projects in the same way they are for less-involved commercial projects. Design-build spending is increasing from both ends of the spectrum, meaning large dollar amounts and larger volume of smaller jobs, the panel concurred.

And it’s becoming increasingly challenging for all involved.“The increase in sophistication comes not just in the design phase with modeling, but also the construction phase,” Hawk continued. “There’s a move towards more prefabrication of building elements and pre-manufacturing of components, and part of that is to make things more efficient.”

There’s also a lot more code and regulatory compliance to follow, he continued. “Anytime there’s a fire or a failure there’s going to be new safety requirements and new codes in structural design. Builders have to get through that and understand it and have to adapt to it if they are going to play in that space.”

Seeing all practitioners through those challenges, he pressed, are two main touch points: teamwork and technology, which, he added, often go hand-in-glove.

Design-build is about ‘having the right people on the bus’

Teamwork, clear communication and attitude are the most important factors for success in the design-build process, starting with day one and especially in the preconstruction stages — that was another booming message from all players speaking at the event and on the sidelines.

Kunnath, sharing his wisdom from decades in the field, named those as the most important factors for the next generation to adopt. “It’s not only about cost and schedule, but the extent to which you embrace and understand and extract maximum value from each other. It’s the power of doing that and learning how to break down those barriers. It changes everything, especially the results.” Heard first in the discussion with the founders and then in echoes from other big players, the idiom of “having the right people on the bus” rang through the halls of the Ernest N. Morial Convention Center during the conference.

That means getting the right superintendents, foreman, estimators and other players involved on the job as soon as possible, Hawk said, and more importantly, getting subcontractors involved early. Hawk said he believes that having commitment and consistent dedication and involvement from all the right players early on is the single greatest way to improve outcomes.

Tech as the facilitator of design-build wins

How is that best done? Hawk pointed to technology, and for design-build practitioners, particularly BIM. “The use of technology is a huge deal these days,” he said, providing at least half a dozen examples of software, including Revizto and Bluebeam, for example, that members of a recent project meeting he attended recommended. “There are a ton out there, and you’ve got to analyze and choose which to use at the very start.

“Part of the increased adoption has to do with higher expectations on communications,” he said, noting that while being present in meetings is extremely important, having everyone on the same page with technology and digital communication is right there with it.

“BIM is a big part of preconstruction and it’s getting bigger. [Rosendin’s] BIM department four years ago was about 50 people. Now, it’s around 180 people. We are not at the point where we would do a BIM model on a project if its not part of the contract though it is a requirement on most all projects now but we are very close to seeing great savings and benefits that come out of a BIM model, and it's very close to paying for itself now.”

The panel looking forward to the next 25 years recalled how some of the best-performing projects they've been a part of involved co-location with up to as many as 300 stakeholders representing designers, contractors, field operators, owners and more empowered decision-makers. "We're not talking about two separate buildings in an office park with a shared parking lot," Hurley remarked. "We're talking about having everyone face-to-face and communicating." That's not always possible in today's age, the panel lamented, but when it's not, the next best facilitator of the relationship culture that fuels successful design-build project is technology, they concluded. 

Article top image credit: Design-Build Institute of America

Moody's: Trump's infrastructure plan could grow P3 market

Dive Brief:

  • A recent Moody's Investment Services report suggests that President Donald Trump's $1.5 trillion infrastructure plan could result in more private investment through public-private partnerships (P3s), but that state and local governments will have to rethink their revenue policies in order to attract investors.
  • Moody's gives the Trump plan points for allowing more federal agencies — therefore a wider variety of projects — to use P3s and for providing financing options like low-cost loans and private activity bonds. The investment group also applauded the administration's push for a more streamlined permitting process.
  • The growth of P3s, Moody's said, is largely dependent on whether state and local governments will be willing to embrace new revenue streams, like those from tolling, in the face of public opposition to those kinds of fees. Moody's also said that the suggested limited environmental reviews could cause problems for project owners and operators in the long term, and that the president's plan lacks funding details, particularly in the identification of long-term revenue for the Highway Trust Fund.

Dive Insight:

The Highway Trust Fund, which allocates money to the states for surface transportation projects, has been running near empty for years, but lawmakers have refused to seriously consider an increase in the federal gas tax, which has remained at 18.4 cents per gallon for gas and 24.4 cents per gallon for diesel since 1993. The U.S. Chamber of Commerce, and, to a lesser degree, the White House, supports a 25-cent-per-gallon increase in the taxes for both gas and diesel.

However, former House Majority Leader Paul Ryan (R-Wis.) last year called the tax increase a non-starter. Senate Minority Leader Chuck Schumer (D-NY) has long been opposed to a gas-tax hike and came out against an earlier suggestion by the Trump administration to raise it even seven cents.

Whether it’s an increase of the federal gas tax or some other revenue-generating plan, if lawmakers don't come up with a way to secure long-term funding, the Congressional Budget Office said the HTF will go bust in approximately seven years.

In addition to states dealing with the potential reality of a depleted HTF, the president's infrastructure plan puts responsibility on state and local agencies for coming up with most of the financing for projects deemed to be local or regional.

The $13 billion New York-New Jersey Hudson River tunnel replacement is caught in the crossfire of this new policy. The Port Authority of New York and New Jersey, along with New York and New Jersey governors, said they struck a deal with the Obama administration to fund half the project, but Trump's Department of Transportation has denied there was ever such a deal and suggested the tunnel is a local concern, meaning it is not entitled to that much federal financing. Critics of Trump's position maintain the Hudson River tunnel has national economic impact and should be treated as such.

Article top image credit: Flickr User HelveticaFanatic

Design-build risk abounds, but can be mitigated

Risk is in the eye of the beholder, an experienced consultant says, and spread uniformly across projects. The trick isn't identifying risk, but finding effective ways to manage it.

“There is no such thing as risk.” That was the bold message delivered by Grant Holland of Mott MacDonald at the Design-Build Institute of America's annual conference this fall in New Orleans. “You cannot quantify, in definitive terms, a particular risk on a project. Every stakeholder has a different view of that risk, they value it differently and they price it differently.”

Instead, the vice president of the United Kingdom-based consultancy’s advisory practice told attendees, “a risk profile is in the eye of the beholder.” In his 25 years of working on U.S. state department of transportation design-build projects, Holland said he’s seen models change from being focused on “risk transfer” to “risk mitigation.”

Common risks embedded in massive design-build and public-private partnerships, for example, tend to be pretty uniform across all projects. “Whether it’s environmental risks, utilities risks, design risks, resources and labor risks — they tend to be constant throughout projects.” At this point in the delivery method’s evolution, he said, it’s less about identifying risks and more about coming up with ways to mitigate them.

One of the more recent methods for doing so, Holland continued, is through allowances. The public sector stakeholder might throw out a number in the early stages of a project that serves as wiggle room. “Whether it’s $2 million or $5 million or whatever number the owner thinks is right” to serve as a ballpark estimation of possible risks, the owner tells the builder to “put it in your bid." Then it’s on the contractor to spend that amount on risks.

After that certain amount, a cost-sharing mechanism often now comes into place, in which the stakeholders distribute the burdens when they exceed a set number.  Holland said he’s seen this method employed on all tiers of projects, and has seen it put in place for all risks combined, individual risks, and in a number of different scenarios, including for “unexposed ordinance risks, of all things."

Just transferring risks, rather than mitigating them, becomes a problem considering they are hard to define and vary among stakeholders. Despite knowing what they are, putting the onus on individuals becomes challenging in the design-build environment, especially as projects become more sophisticated.

That’s especially the case when contractors display various levels of “risk tolerance,” Holland continued. “Certain contractors will take a more tolerant approach to certain types of risks as opposed to the overall basket of risks, and what they are willing to accept varies both among contractors and across projects.”

He named Kiewit as an example of one of many contractors he’s seen come to an owner on a particular project and say, “'there is no way on the face of the Earth that we can move this project forward given that risk.' But on the other side of the country, they’ll come in and say nothing at all. It’s the exact same risk, but they don’t balk at it.”

Owners must then determine the level of tolerance among bidders. Do they give the job to the most tolerant, or do they listen to each short-lister’s concerns and really evaluate what’s going on? In Holland’s view, the latter approach is taking more and more precedent as projects get bigger and there are a lot higher dollar amounts.

Take the Virginia Department of Transportation, for instance, Holland went on. A colleague of his, Dusty Holcombe, now the vice president of transportation infrastructure at RS&H, described his days at VDOT working on P3s to Holland as being a time when listening counted a whole lot for all involved.

“One contractor would come to VDOT and mention a problem, saying they couldn’t continue, and VDOT would say, ‘sure, we have to take a look at it,' " he said. "But then another would say the same, and VDOT would decide it definitely needed to take a hard look right away. But after a third short-listed bidder identifies a problem, it’s on the owner to go back and completely recalibrate things.”

The process has come a long way during the span of Holland’s career, he said. One caveat he mentioned, though, is when there are risks associated with operations and maintenance. “I haven’t seen evidence that either the contractor community or public owners truly understand the risks associated with O&M tails. I don’t know how they can price it, I don’t know how they can evaluate it, but that is the area that we are going to begin evolving to, and that will be the next conversation on risks.”

That brought Holland to the delivery method’s evolving take on various-sized projects. He brought up the “big, sexy, career-making projects” to which the industry is progressing toward continually, but noted that design-build is also adapting its model to smaller and smaller jobs as well. “We used to not touch anything less than $100 million for infrastructure,” he continued. “Now we’re down to the $5 million range common in commercial design-build work.”

Larry Hurley, moderator of the panel Holland spoke at and president of H2 Consultants, chimed in with an anecdote about the changes he’s seen in the decades he’s been involved in transportation P3 work. “The Salt Lake City I-15 was the first $1B project that I remember working on,” he said. “At the same exact time, we were working on a $15 million contract for an entrance road to Yellowstone National Park, and that was a good-size contract for us at the time. It was a tremendous jump for us when we were doing maybe $130M a year in revenue.”

Holland said the reason design-build stakeholders are able to adapt the delivery method’s success to more small, varied jobs is that over the years it has increasingly gained experience inching it toward a “standard contract” regarding risk, or a kind of institutional framework for how to move all types of projects forward.

“Underneath that framework we’re able to begin developing the contractual procurement models that allow us to reduce the overhead down to smaller and smaller design-build projects," he said. "So that’s a trend we’re going to see significantly in coming years.”

He juxtaposed that trend with the trend with that of mega-projects
there are more than a dozen above $4 billion in Texas alone, Hurley said and stressed the sheer magnitude of the risks involved in such high-dollar projects. “They’ll always be extremely expensive, and they’ll have overhead in the procurement and contracts to negotiate — it’s just the nature of those projects. And that makes those smaller projects more appealing," he concluded.

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How owners select project delivery methods

Company culture, previous experience, technology and more influence what method an owner selects.

Long before the first shovel-full of dirt is excavated and the first screw is driven, a project's owner must decide what project delivery method is best suited for the job. There is no shortage of options to consider, and although the project budget and scope certainly play into the decision, the culture and mindset of the owner and developer are paramount.

Design-bid-build (DBB) is the traditional model, but other methods, including design-build and integrated project delivery, are gaining traction.
 

Design-build, in which the design-build team works under a single contract with the owner, gets a project done 33% faster than other project delivery methods, said Lisa Washington, executive director and CEO of the Design-Build Institute of America. She attributes that efficiency to the overlap of design and construction.

The team, which frequently involves the owner, designer, contractor and key specialty trades, meet early on discuss how best to use the budget to achieve the owner's goals while addressing challenges and constraints. This allows for more design flexibility that the more prescriptive design-bid-build approach.

"Building on the expertise of all the key players, including the owner, they find the best solution within the budget the owner feels has addressed their goals and challenges," Washington said. "That's where the innovation and collaboration in design-build really kick in and bring value."

Washington said that management consulting and investment banking firm FMI Corp. research shows owner satisfaction is much higher in design-build environments because everyone creates a vision together.

Integrated project delivery (IPD) provides a methodology and process that allows for consistency and understanding of how to improve construction, said Stephen Powell, senior project manager for CBRE Healthcare. "It plays off of a lean construction mentality in order to get to IPD," Powell said. "In that mentality, you look for ways to improve something that has room for improvement."

He said the owner generally is the most important person in executing an IPD project. "The owner has to have an understanding of IPD in order to put it on the table," he said. "I don't know that it would work as strongly if it was driven by just one of the other partners."

Clint Stancil, managing director of CBRE Project Management’s Global Leadership and Platform, agreed. "While a contractor might be able to recommend IPD as a delivery model, it can be harder for them to implement it if the owner is a little apprehensive or not as passionate about IPD as they are about another model," he said. "It's much easier to get all team members in line and engaged compared to when it's suggested by the architect or general contractor."

Attitude factor

Nearly any delivery method can be used for any project, but it's the owner's attitude toward varying delivery methods that frequently dictates the direction.

"We really encourage owners to think about their internal culture and each individual project when considering design-build," Washington said. "The project delivery discussion is among the most important decisions they'll make and will drive how the team works together. If you're an owner with a siloed culture and people who are not accustomed to working together and ingrained in the old design-bid-build approach, the process will not work because there's a mental shift that goes along with the different method of contracting."

Stancil sees owners relying on their education or past experience to determine the delivery method. "Any client we see going down the IPD route is generally more knowledgeable because IPD is a more complex model," he said. "Clients often default to the way they've always done business when they determine a delivery system, which may or may not be the most efficient or appropriate model."

Washington cited 2015 research from the Construction Industry Institute that suggests three elements can enhance collaboration on any type of project, regardless of the delivery method: Transparency and cost, early involvement of the core team and a qualifications-based selection process.

Contract details

IPD puts every entity involved in the same pot of risk and reward. "If the project fails, everybody fails," Powell said.

The flip side of sharing the risk, however, comes in sharing the reward, which is why a key component of IPD contracts involve incentives. "You're looking for some sort of incentive to offset the risk you're asking the team to take on," he said. "There are success metrics and factors you'll want to put in place to prove that a reward is justified and success was met, which sometimes necessitates getting into the granularity of understanding the cost."

Powell also said there might be an additional audit or accounting efforts to ensure the success factor score is validated.

Stancil added that sometimes executing the contract can pose challenges because various legal parties and procurement departments must collaborate. "It's not a situation where you're just negotiating directly with an architect and then directly with a contractor or another provider," he said. "You're negotiating an agreement across all parties at the same time."

Bidding process

When an owner puts forth a request for proposals, it has already decided on a project delivery method and at that point it's up to the contractor to decide whether to submit a bid, Washington said, as opposed to the contractor having a say in the delivery method of a given project.

When deciding to bid, a contractor typically examines its chances of winning the job, which can be based on factors such as experience with similar work in size or building sector. A contractor might think about an owner’s ability to assemble a strong team, as well as consider how realistic the budget and schedule are.

"The contractor has a good idea of whether something is realistic because they do this every day," Washington said. "The realism of the budget and schedule is a key factor."

After an initial call for proposals, the owner decides on a shortlist, which the Design-Build Institute of America recommends should be no more than three, giving any one firm a 33% chance of winning the final project. "We highly recommend because of the cost and effort that goes into submitting a full technical proposal that owners need to shortlist to the three most highly qualified firms so their odds of winning are more palatable and attractive for them to bid on the project."

Technology's impact

BIM's increasing popularity has contributed to more collaborative formats for design and construction, said Powell. "Almost every IPD contract would have a strong BIM utilization plan … providing a platform to share information and, if possible, reduce certain waste or risk that one of the partners might have for designing things that aren't necessary. BIM is the perfect example of a gateway into helping IPD succeed."

Stancil agreed: "As more collaborative technology like BIM continues to grow and get more efficient it will enable delivery systems like IPD to take a stronger hold. Without that, it's much harder to collaborate."  

Likewise, BIM supports what already is a very collaborative environment in design-build. "BIM can be used throughout the entire design and construction cycle, starting with helping the owner visualize what they want," Washington said. "But it can also be used for other things like cost comparisons. It allows for very easy cost comparison and swaps so you can see what Option A vs. Option B offers."

BIM also helps contractors stay better attuned to what the other team members are doing and allows them to more effectively schedule work, she said.

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The real-world case for lean construction

Lean integrated project delivery gives contractors a window into waste that they might otherwise miss.

Lean integrated project delivery starts with a set of ideals around collaboration and waste reduction, but when put in action on jobsites, it's about driving projects ahead of schedule and under budget, said Felipe Engineer-Manriquez, corporate lean manager at McCarthy Building Cos. during a session at Procore's Groundbreak Construction Conference this fall.

The labor shortage is not likely to let up for some time despite firms’ best efforts at recruitment, said co-panelist Greg Martin, senior manager of operational excellence at The Weitz Co. What's more is that construction spending shows no signs of slowing. This leaves contractors with one option: work more productively with the resources they have by eliminating all forms of waste.

According to the Lean Construction Institute, waste can take eight forms on construction jobsites:

  • Transportation — unnecessary movement of people, equipment and materials between processes.

  • Inventory more material or tasks than are required.

  • Motion unnecessary movement of people or equipment within a process.

  • Waiting delays or stoppages.

  • Overproduction making something before it’s needed.

  • Overprocessing carrying out more processes than the customer requires.

  • Defects  production that requires rework.

  • Unutilized resources failing to utilize all talent and resources available.

Eliminate ineffeciences

On a Hilton hotel project in Des Moines, Iowa, Weitz asked all trades and stakeholders involved to see what they could do to eliminate inefficiencies in these categories. With approval from Hilton, the contractor worked with the architectural team to design a prefabricated bathroom pod that could show up to the site, ready for installation in each unit. They worked out the kinks of installation through Navisworks simulations and on-site were able to install 250 bathrooms in 11 days, which Martin said was actually more time than they needed.

The project team saved 15 trips per bathroom compared to the average workflow involving tile installation, paint finishes, toilet fixtures and more. “The trips of going up and down a manhoist, going all the way to the far end of the floor, taking out materials  all that motion’s saved,” Martin said.

In addition, the plumber was able to prefabricate standardized components and the door installer eliminated waste by the simple step of delivering doors with hardware already prepared. “The more parts and pieces we can put together [to] make this an erection set where it shows up and goes into place, that’s eliminating waste," he said. "It’s adding value."

A window into waste

An August report from PlanGrid and FMI Corp. found that construction professionals spend 35% of their day on “non-optimal” tasks stemming from inefficiencies on the project, such as hunting down information, resolving conflicts and doing rework. This translates to more than 14 hours lost per person each week, or almost two full working days that could be spent moving the project forward instead, the report found.

Inefficiencies seep into many areas of the construction business, both on- and off-site, but this doesn’t have to be the case, according to Engineer-Manriquez. “Think about these types of waste as unwanted house guests,” he said. “They’re in your house right now. You don’t want them to stay, so you should really get to know them to see what makes them tick and get them out as soon as possible.”

Lean methods like pull planning (sequencing a project by working backward from a target completion date) and A3 reports (a collaborative decision-making workflow developed by Toyota) give companies a window into waste that they might otherwise miss, lean proponents argue.

For example, McCarthy used an A3 framework to address a pattern of late payments to customers. Accountants and various division heads started with a deep dive into the problem, finding that the 45-day average was even more delayed than they realized. They were able to reshuffle their processes and avoid a $300,000 alternative a software that may or may not have saved them a dollar, Engineer-Manriquez said.

Who doesn’t want more time and money?

“We know that projects that utilize a high lean intensity are three times more likely to finish ahead of schedule and two times more likely to finish under budget,” Engineer-Manriquez said, compared to projects involving traditional methods that don’t always account for the complexity of construction. Yet, lean construction is not taking off the way it should given industrywide challenges, panelists and attendees remarked.

So why the hesitance?

Sometimes a lean proponent’s conviction that this is the way to go can put off employees and subcontractors, Engineer-Manriquez cautioned. The first and most important lean principle is respect for people, he said, and this should include a recognition that they are expert in what they do, whether or not it fits the lean formula yet.

“Accept people exactly where they are” and allow them to “voluntarily want to come and see the value,” he said, and if they don’t, that value probably isn’t being communicated well.

Collaboration and information-sharing are central to lean, and underpinning these are conversations that start with: “I’m not here to tell you what to do; I’m here to support what you already do to make your job easier,” Engineer-Manriquez said. Over time, that dialogue “sustains the change” and allows it to grow, he said.

Article top image credit: The Weitz Co.

Why project delivery methods are limited for public projects

Process roadblocks and owner aversion stand in the way of more collaborative approaches, but a spotlight on success stories could lead to wider adoption.

Two of the biggest priorities for construction contractors in the public and private sectors are getting a project done on time or ahead of schedule and keeping costs at or under budget. That’s why many contractors have embraced collaborative project delivery methods like design-build and integrated project delivery (IPD). With more upfront planning and communication between job team members, the risk of errors and the need for costly workarounds can be reduced, which translates into a more successful construction experience for everyone involved.

However, there is still some resistance to using these methods because of state and local regulations, as well as a hesitancy on the part of some owners. When it comes to performing construction work on a publicly funded project, rules abound, and there are limits to just how collaborative a project can get.

It makes sense to have parties to a construction contract talking with one another rather than “treating each other like combatants,” said Brian Perlberg, senior counsel of construction law and contracts at the Associated General Contracts of America, but there are restrictions on those collaborative efforts.

For example, Perlberg said, some regulations restrict communication between the owner and contractor prior to the final award. In addition, from the perspective of the public agency, there needs to be an even playing field, and substantive contact with contractors or subcontractors before the award could harm the objectivity of the bid process, he said.

Integrated delivery issues

There are also difficulties particular to IPD. “IPD is hard to do in the public sector [because of] the typical public procurement process,” Perlberg said. An IPD team, he said, is usually assembled based on qualifications rather than price, so that delivery method would not normally work in a process that required the winning contractor to have the lowest bid.

Contractor licensing laws, he said, also can dictate what kind of work a construction company can legally perform. If the contractor’s scope of work, for example, veers into design, that can present some challenges.

In New York, said John-Patrick Curran, a partner at Sive Paget & Riesel, the state Department of Education maintains that design-build contracts are against the law because such an arrangement constitutes the unlicensed practice of design services. However, he said, in a 1988 New York State Court of Appeals decision, the court ruled, in essence, that design-build contracts are valid as long as the contract identifies a licensed design professional who will perform all the design services for the project. 

California, said Lisa Dal Gallo, a partner at Hanson Bridgett, prevented the use of design-build on publicly funded projects, but a state law passed in 2014 allows cities, counties, special districts and transit districts to start using that method of project delivery. The first transportation project awarded under the new regulation was for the $1.2 billion expansion of Interstate 405 in Orange County.

However, Dal Gallo said that IPD contracts are another matter in California and elsewhere. “Most state public entities in the U.S. currently lack legislative authority to use IPD,” she said. “This is primarily because IPD requires negotiated contracts that include the waiver of certain claims, and there is not an outside guarantee on the contract price.” Colorado, she said, is a notable exception. 

The Design-Build Institute of America tracks the various federal state and local agencies that permit design-build to be used, as well as the applicable laws (here, here and here), and Lisa Washington, executive director and CEO of the institute, said that it's design-build's single-point of responsibility for both construction and design services that is the sticking point with some state agencies, like in California and New York.

One reason state or local governments might not be willing to make the regulatory changes necessary to allow a delivery method like design-build, Washington said, could come down to a misunderstanding of how design-build works. For example, some lawmakers might think that design-build projects mean bigger companies from out of state will move in and take jobs away from local contractors. But the owner is in control of what's in the contract, she said.

“The owner could say, ‘I need local contractors to be involved to make sure jobs don’t go out of the state,’ ” Washington said. “Even an outside contractor will need local expertise.”

Owner-achitect relationship

There is often also a misunderstanding on the part of the owner that the “trusted adviser” relationship with the architect will go away if the architect is part of a design-build team. “In reality,” Washington said, "the designer is right there with all the other key players.”

According to Dal Gallo, owners also might not be prepared for the level of involvement of collaborative project delivery methods. "Both IPD and design-build require a lot more leadership from the owner and an increased time commitment," she said, "and not all owners have the capacity or desire to be that engaged."

IPD projects are harder to administrate, Dal Gallo said, and require some level of project savvy. In addition, sorting out the insurance for IPD projects is more complex, and the owner takes on risk for direct costs on overruns. IPD and design-build projects require more upfront outlays for legal costs, too, even though Dal Gallo said those can eventually be recaptured because of the value and efficiencies of collaboration.

So what will it take to persuade owners to give collaboration a try?

Changes usually come about in the public sector, Perlberg said, after the private sector has demonstrated a successful track record that public agencies can then model. If the government tries one of these collaborative methods and sees good results, he said, then that could prod them into being more proactive as far as project delivery. However, there is also a risk of retrenchment on the part of those agencies if they have a bad experience.

So small steps, Perlberg said, are sometimes the interim answer. For example, no matter what method of project delivery an owner uses, the major players can co-locate at the job site. “That one step alone,” he said, “is one of the most powerful things you can do on any project.”

Owners, Washington said, are key in driving change. Also, agencies like state DOTs listen to other state DOTs about their experiences with more collaborative project delivery methods and are more likely to give them a try if they hear about a success story.

"I think more and more public agencies are looking for better ways to deliver projects and that there is and will continue to be an uptick in more collaborative delivery methods," Dal Gallo said. "Claims are no fun, and there are many case studies now that demonstrate that collaborative delivery methods reduce waste, increase creativity, add value, and reduce claims. And best value is in the public's best interest."

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