For owners considering collaborative-delivery approaches for water and wastewater projects, such as progressive design-build (PDB) or construction management at-risk (CMAR), one of the biggest impediments to acceptance is the perception that the final cost of the project would be larger than a traditional design-bid-build and cannot be controlled. Based on our research, there are two primary reasons this stumbling block exists. One relates to the owner’s belief that their initial cost estimates are correct and that the project can be designed and constructed within their budget. A second, and perhaps more important issue, is that many owners still do not understand how the collaborative process evolves and how to reach a final acceptable price on the project, primarily because they are only familiar with the design-bid-build pricing process that uses the low-bid approach.
The underlying factor throughout this whole struggle is really the owner’s budget. As a result, the key to an owner’s acceptance of the collaborative-delivery approach is knowing how to resolve or prevent a situation from occurring after the partial design is completed, the contract is awarded, and the design-builder proposes a guaranteed maximum price (GMP) that exceeds the owner’s approved budget. When efforts of both parties fail to reconcile the cost and agreed scope of work, owners exercise an available option in the collaborative-delivery process to opt out of their contractual obligations through an “off ramp” and terminate the contract. This results in the owner re-procuring the project via a public bidding process for a low bid.
So, the dominant question before the industry is – what steps can both parties take to avoid an owner feeling like an “off ramp” to end the contract is their only choice? Industry best practices are available that enable owners to get the project they want for the price they can realistically afford. However, the first step is to clearly understand how the pricing process works for a PDB or CMAR project using a collaborative approach.
Collaborative Delivery vs Design-Bid-Build
One of the primary differences between design-bid-build (DBB) and collaborative delivery is the outcome of the cost. DBB always involves a lump sum price that is offered through a public bidding procurement process, with the “bid price” then being set as the “contract price.” The result is that owners are led to believe that the low-bid competitive process will ultimately get them the best price for the project. However, the public bidding procurement process is predicated on awarding a contract to the “lowest responsible bid,” which in some circumstances means the low-bid winner may then seek to make up for an artificially low bid by using the change orders and claims process during construction.
The obvious question to ask is that if the bidders knew the price was low, why didn’t they bid more for the project in the first place? The answer is that while the low-bid price is important, it is the final price that determines the owner’s satisfaction with the construction cost and value achieved. Finally, it should be understood that in the design-bid-build approach, cost elements of the bid price such as general conditions, materials, equipment, labor, contingency, and fees are not evident or seen by the owners but are actually included in the final lump-sum bid.
Collaborative-delivery projects are almost always priced on a cost reimbursable basis, up to and including the guaranteed maximum price (GMP). In either a PDB or CMAR procurement, there may be a limited cost proposal which would contain various cost elements, including pre-construction services for CMAR, design through an agreed upon completion percentage for PDB, and the CMAR or PDB fee or markup on the construction. The GMP is the price to construct the project (and finish the design for PDB). It is the cost provided to the owner on an “open-book” basis, typically when the project design is 60% to 90% complete. Throughout the design phase of the project, the construction firm provides input to the design team, with the intent being that the design will align with a construction cost within the owner’s budget.
In contrast with a DBB procured project — no such opportunity exists. In fact, in a DBB project, there is no negotiation over the price; it is simply accepted by the owner as the bid and contract price for the project. While DBB has many positive attributes for specific types of projects, most notably the transparency related to public bidding, the collaborative-delivery approach revolves around the value for the final price, correlated with owner decisions during design, including project scope and quality, to reach a guaranteed maximum price (GMP). Moreover, collaborative delivery incorporates a negotiation process over the project scope, quality, and price. Clearly, the negotiation of the project price is the biggest challenge with CMAR and PDB.
An overall best practice is to become knowledgeable about the differences between collaborative-delivery approaches and design-bid-build. With a collaborative-delivery project, the design-builder must provide continual cost estimates throughout the design phase that addresses the trends, quantities, and features of the project. This essential practice allows the owner to decide which scope elements and quality considerations they would like to have and can afford within their approved budget.
If both the owner and design-builder employ best practices throughout the delivery of either a PDB or CMAR project, they will have taken a key step toward avoiding surprises associated with the final GMP while increasing the likelihood of successful GMP negotiations. These practices are addressed in WDBC education sessions in the procurement and management process.