The intent of this article is to further an owner’s understanding of the commonly used pricing approaches for either design-build or CMAR delivery methods. For additional information on these topics, please review the appropriate sections in the Water and Wastewater Design-Build Handbook (5th edition.
When discussing design-build projects, there are potentially two forms of final project pricing and compensation: guaranteed maximum price (GMP) or fixed price (FP). Owners and practitioners should be clear in their respective understanding of what each approach leads to in performance of services and responsibility for cost documentation.
Regardless of the compensation model used, the contents within the contract, such as the scope, schedule, and terms and conditions must be aligned. Having a clear understanding of these terms is essential.
Scope is the definition and quantification of all the items and activities to complete the project, including:
- Design conditions – Quantities, quality and redundancy requirements
- Performance requirements and owner mandated systems and equipment
- Interconnections with input and output such as water/wastewater supply, utilities (water, electricity, gas, others) and other infrastructure (roads, buildings, existing underground utilities)
- Architecture enhancements
- Regulatory requirements such as permits, environmental assessment, and federal, state and local approval
- Construction and commissioning of the project facilities
In the case of a fixed-price approach, the design basis and scope of work are set once a contract is awarded. In the case of a GMP, it too may be set upon a contract award or at a date when the owner and service provider believe the scope (and design) are of such clarity that a price can be set. This latter approach is applied near 60-90% completion of design for either CMAR or progressive design-build.
Schedule is the sequence of activities for all the work comprising the project starting with engineering and permitting through completion and final acceptance.
The terms and conditions live within a contract and define the commercial relationship between the owner and the service provider, establish the compensation approach, means of payment for services, and risk allocation.
When a guaranteed maximum price (GMP) is the basis of compensation, the service provider guarantees to the owner that the cost of the project will not exceed the agreed upon GMP. The GMP, simply stated, is the sum of the “cost of work” (as defined in the contract) + a fee that may be a percentage (%) mark up or a fixed dollar amount. Inherent in a GMP arrangement, the risk of exceeding the GMP almost always is the responsibility of the service provider unless a scope change is agreed to by an owner resulting in a modification of the GMP dollar amount. Use of an “open book” estimating approach, as described in the Water and Wastewater Design-Build Handbook (5th edition), allows the owner and the service provider to align on what the actual cost of the work will be.
For the fixed-price compensation approach, the service provider guarantees to the owner a fixed dollar amount (price) based on the agreed-upon scope, schedule, and contract terms and conditions. Application of a fixed-price approach leads an owner to understand that any overruns or underruns are the responsibility of, and goes to the account of, the service provider.