If you’ve ever attended one of the WDBC education sessions, you’ll recall that instructor Mark Alpert likes to immediately inform you that there are some key terms he is going to be persistent in getting you to remember: GMP, RTFC, off-ramp, and a few others. The reason he is so persistent is that without a good contract in place, and understanding what the terms in the document mean, the project is definitely going to encounter unforeseen issues. But we also learn in these sessions that there are often numerous misunderstandings about how to approach the contracting process and the dynamics that occur, potentially leading to the “off-ramp.” When an organization attempts to “retrofit” their existing contracts or doesn’t know where to locate a good template or model, the problems begin.
This past year the WDBC produced a Progressive Design-Build contract template to accompany the PDB Procurement Guide that was published in 2014 and updated in 2016 and worked with the DBIA to include it in their series of contract documents. All contracts include “Commercial Concepts” which establish the Cost/Cost of Work to be done by the contractor. To address these concepts or terms, best practices dictate using an “open-book” process to develop the costs to complete the project. Open book is a process in which the development of the price (labor, material, equipment, and subcontract costs) is transparent to the owner. In an open-book process, the owner is also party to agreements on contingencies, allowances, overhead, and profit. Once the owner and the DB or CMAR firm agree on the price, the project can be implemented using the open-book approach, or the book can be closed and the project administered as a fixed-price contract with all financial risk for overruns, as well as benefits for under-runs, going to the design-builder. This approach involves a meeting or series of meetings between the owner and design-build teams focusing on the project’s technical requirements, as well as the essential topics involving pre-construction services, construction fees, shared savings, and even incentives.
It is also during this open-book process between the owner and the design-build teams that the critical dynamics of trust and openness are established. In our education sessions, we continually emphasize that it is through this specific dynamic that evolution of the productive relationship emerges – both in the discussions about the project and its technical requirements and how the teams work together. But talking about money is often an uncomfortable subject. In some organizations, managers have been led to believe that the contracting industry is all about profit and making money, which results in an underlying attitude of distrust. Yes, design-build firms and contractors do have to be concerned about costs. They must be concerned about the costs both within their own organization and that of their client. If they didn’t, they wouldn’t be in business – and their reputation for providing quality services would not exist.
However, if the design-builder and owner cannot agree on price or other matters during the design phase, the “off-ramp” comes into play and the owner has the option to terminate the existing contract, and either negotiate with another design-builder, or take the partially completed design and proceed with a DBB procurement. The use of an “off-ramp” in the project’s evolution results in two unwelcome scenarios: (a) project delays and often even greater costs, or (b) a restart and reconfiguration of the project due to additional circumstances. However, the “off-ramp” can be avoided altogether through an effective contracting process where trust and mutual respect are the cornerstone establishment.
Building that bond of trust and respect occurs by agreeing on specific technical aspects and valuing each other’s differences. One critical component in the contracting process that impacts trust is that a realistic understanding of the project’s priorities and availability of financial resources must exist among both parties. There are occasions when the project’s costs were developed in the owner’s capital improvement program and they may need to be revised. Providing concrete examples of where and how these costs have changed is important upfront knowledge. Being able to proceed in developing the project’s costs on a realistic basis that keeps within the owner’s defined budget often requires compromises or suggested alternatives. All of these factors need to be addressed before the final contract is signed and the project gets underway.
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