(Excerpted from the Water and Wastewater Design-Build Handbook, 4th edition, and Education Program)
Several of our industry’s best collaborative-delivery methods—particularly CMAR and progressive design-build—rely on an open-book process for developing cost and pricing during preconstruction. This process is used to achieve agreement on cost and then a price for the construction effort to proceed. In turn, the price is typically implemented either as a guaranteed maximum price (GMP) or a fixed-price contract provision.
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Although this approach is straightforward in principle, we often get asked, “What, exactly, is an open-book approach?” The answer comes down to defining “cost” and “price.”
- Cost-is-cost-is-cost. Construction estimates should be based on the actual cost of work. This can mean actual labor, expenses, materials, equipment, and production rates for the self-performed scope, combined with stand-alone subcontractor quotes obtained via a best-value, competitive bidding approach. All of these documentable expenditures are set forth without any add-ons—with all the assumptions underlying them clearly stated—to equal a project cost estimate.
- Price includes everything else. Once a cost estimate is set forth, anything that gets added to it for the delivery firm’s or contractor’s overhead— operating costs, burdens, encumbrances, profit, turnover, mark-ups, fees, charges, levies, incentives, and any other relevant items—is extra money that is added on top of actual cost to create a price estimate.
CMAR and progressive design-build are popular delivery methods because they allow projects to proceed on a collaborative basis in advance of a completed design or even a full project definition. Both delivery methods are typically procured on the basis of qualifications, in conjunction with some form of as-bid fees for the pricing components. The cost is developed by the design-build or CMAR firm after project award based on several foundational principles.
- Transparency and validation. Costs must be developed in a completely transparent manner, with no hidden amounts or anything embedded or inflated. Transparency means full, confidential disclosure of all the details and can include third party verification, if required. The pricing process is truly an open book.
- Accuracy and completeness. In fairness to both owners and design-build or CMAR firms, the development of costs and price must include everything that everyone can reasonably think of — estimate line items, expenses, and indirect costs. Leave nothing out!
- Realism and fairness. Open-book pricing is often used to “design to budget,” but that does not mean “make it fit to budget.” Cost and pricing must be both realistic and fair to both parties. Sometimes it takes a bit of work to get there, but a realistic number means a complete and fair number.
- Risk and opportunity assessment. Not everything on a project is entirely predictable, especially in the early stages. Anything that is an undefined risk or opportunity should be quantitatively assessed and evaluated as a project contingency amount. The actual contingency should be seen as a project cost before any add-ons are included to create a price.
So what happens after everyone mutually agrees on a project’s cost, everything else is added, and the price is settled? The following two options are the most common actions:
- Moving forward under a GMP model means that actual spending during construction is monitored using the same open-book transparency principles. The savings from spending under the GMP are often shared between the owner and the design-build or CMAR firm (this incentivizes continued efficiency), and the risk of having to spend anything over the GMP is at the design-build or CMAR firm’s risk. This is a terrific way to share any unused contingency.
- In contrast to the GMP approach, a fixed-price implementation closes the books after the price is agreed on, and the design-build or CMAR firm proceeds with construction at its own risk—and opportunity—for meeting the price figure. This approach keeps things simple by eliminating the need for an ongoing auditing function during construction and offsetting risks by retaining any unspent contingency.
Of course, there are many details that accompany all of the points discussed above, but any effective open-book approach will be true to these principles. Mutual trust is the foundation of collaborative delivery—and open-book transparency is the building block.