A major advantage for utility and agency owners who chooses a design-build procurement process is the flexibility to optimize overall project risk to reduce cost and schedule. In contrast with design-bid-build procurement, owners are limited by the contracting approach and regulations that separate responsibilities for design and construction, and do not value overall performance.
In a design-build delivery, the owner transfers the risk to the design-builder for single source responsibility to integrate all of the design-builder furnished equipment, material, labor and professional services to achieve facility operating performance defined by the contract documents. Importantly, the contract documents include the owner’s Request for Proposal (RFP), design-builder’s proposal, the final design-build contract, as well as subsequent amendments.
How Can Owners Optimize Risk to Reduce Overall Cost and Time?
Addressing risks actually begins early in the project planning stage, when owners are defining their goals and priorities. In developing the technical scope and contract documents owners assign risk for certain performance items.
Risks assumed by the owner may reduce design-builder cost, but can create additional owner costs that increase the final project cost. However, too much risk assigned to the design-builder may result in higher bid prices and potential cost of claims that also increase overall project cost.
Key Suggestions for Owners Assigning Risk
Unforeseen Site Conditions Risk: Assigning the unforeseen risk (of site conditions) to the owner, eliminates unnecessary bid cost contingencies. If necessary a specified contingency can be created that, if not required, stays with the owner.
Geotechnical Risk: The owner conducts an early geotechnical investigation and provides report to RFP proposers. Subsequent to awarding a contract, the design-builder has a specified time period to supplement the initial investigation and identify changes that may affect cost and schedule impacts.
Schedule Performance Risk: in this component, the owner requires schedule milestone dates and Design-Builder to meet proposed resource levels. The focus on this aspect is performance rather than detail schedule sequences.
Using Schedule Bonus Incentives as well as Liquidated Damages to stimulate performance without increasing liability for owners is another suggestion. Developing these incentives are structured to benefit both owner and design-builder.
Quality Performance Risk: All quality risk is assigned to the design-builder including any environmental quality risk; however, the exception occurs when owners provide equipment, material and services — upon which, this risk is then assigned to the owner.
Safety Performance Risk: This risk is allocated to the design-builder, except for any owner performed activities with owner staff or others contracted to the owner
Hazardous Materials Risk: This risk is assigned to the design-builder for all items brought to site; while risk for materials previously at or on the site are assigned to the owner.
Plant Process / System Performance Risk: The design-builder is assigned this risk, except for items provided by the owner.
Cost Escalation Risk: This risk is assigned to the design-builder except where bid price contingencies can be reduced, if the owner specifies escalation for certain items procured during certain periods of the project based on specific price indices.
Uncontrollable Circumstances Risk (“Force Majeur or Acts of God”): Unless the owner specifies that the design-builder include potential delays into their bid-price, this risk is assigned to the owner who has long term benefit of the project.
Change of Laws & Regulations Risk: This risk is assigned to the owner because owners do not want contingencies for these situations included in bid prices.
Indemnification Risk: This risk requires the indemnification of the party that does not cause the damages.
Warranty Risk: Commence warranties upon completion of performance testing and initial operation of the facility. Recognize Owner beneficial use of plant performance capability is tantamount to Substantial Completion and warranties will commence. Be selective on requesting longer term warranties based on benefit – cost analysis
Disputes & Claims Risk: Implementing a collaboration initiative, such as a Partnering Program from the conception of the project that involves both executive and project level personnel is an essential step to addressing issues that emerge in the project. Owners should specify that mediation will be required early on in the dispute process when issues are not resolve promptly. For large projects, over $100 MM, owners may want to consider establishing a Dispute Review Board (DRB) to mitigate disputes.
Once Risk is Assigned
Generally speaking, the greater balance that owners provide in defining and assigning risks, so that each party is knowledgeable as to how it can effectively manage their risk, will result in less overall risk in the project. The key is to use the suggestions above to accurately define and identify the associated risks.