By Justin L. Weisberg, K&L Gates, Chicago
The construction industry is currently on the precipice of substantial changes impacting all participants involved in the design and construction of modern projects. Economic volatility has resulted in significant pressure on all participants to increase efficiency and deliver projects at reduced costs. New technology, including BIM, is impacting the very responsibilities and interactions of project participants. Over the past decade, environmental and sustainable design considerations have gone from nonexistent to a driving factor in the design and construction of numerous projects.
While Design Bid Build (“DBB”) was historically the leading method of project delivery, progressive methods have made substantial gains over the last decade. Progressive project delivery methods include Design Build (“DB”), Construction Manager at Risk (“CMAR”), and Integrated Project Delivery (“IPD”). These progressive methods take advantage of construction expertise during the design phase of the construction project.
Traditionally, the selection of the prime contractor for a construction project (“Contractor”) under the DBB process did not occur until the design was complete, requiring a Contractor in most cases to provide a competitive lump-sum bid. The DBB process did not provide for Contractor input during design and provided an incentive for the bidding contractors to capitalize on design errors. In contrast, progressive project delivery methods provide for the selection of the Contractor at the beginning of the design process. The early selection and retention of the Contractor allows the selected Contractor to provide input from a construction perspective before the design is complete. The architect or engineer of record for a given project (“Designer”) generally focuses on the project as it will exist when completed. Designers historically did not get involved in the means and methods of construction, which involved taking the concept on the drawings to reality in the field.
Construction sequencing, shoring, and hoisting were all left to the Contractor. The Contractor was responsible for the planning and administration for the scheduling delivery and storage of tons of materials and equipment on the project site. The Contractor was also responsible for the development of infrastructure to provide for access, transportation, drainage, water, power, facilities, offices, and shelter during construction. Finally, planning, scheduling, and estimating were significant activities generally within the province of the Contractor.
Selecting a Contractor before completion of the design allows the Designer to receive input from the Contractor of potential design decisions that can have a substantial impact on cost and schedule. For example, the decision to implement a uniform design of bathrooms for all patient rooms in a hospital can facilitate the efficient prefabrication of the bathrooms before delivery to the field.
The selection of the Contractor at the inception rather than after completion of the design process requires a different process from traditional DBB. A bidding process is not possible without drawings and a project scope. Consequently, selection of the Contractor for a progressive delivery project cannot be based upon the lowest qualified bid. Instead, the the party procuring the design and construction services (“Owner”) must analyze the capability of the DB, CMAR, or Contractor, including any existing relationship, the DB’s, CMAR’s or Contractor’s relative experience, and its reputation.
The compensation of the DB, CMAR and Contractor under a progressive construction method also differs from a traditional DBB project. Given that there is no defined scope at the time the Contractor is hired, a realistic and fair lump-sum contract is simply not achievable. Therefore, negotiated contracts that are based upon the Contractor’s actual cost plus a fee are being utilized with greater frequency. In addition, at some point during the design phase of a project, there is enough information about the anticipated scope for a price to be set for the project. A Guaranteed Maximum Price or GMP, agreed to by a DB, CMAR or Contractor that is compensated on a cost plus fee basis, can provide an Owner with a specific price limit for a given scope of work. A profit pool established for an IPD project can set the maximum risk shouldered by the Contractor and Designer, marking a change to a concept of sharing risk between project participants as compared to the risk-shifting concepts of traditional project delivery systems.
Cost-based compensation systems result in more information required in payment applications and require greater scrutiny by the Owner. Where a GMP has been agreed upon, a determination of the lower amount of allowable cost, versus the value of completed work under the GMP, must be determined. Given the ongoing administration required by the Owner from selection of project participants to project close out, an Owner might consider the use of consultants or dedicated employees to administer a project that utilizes a progressive project delivery system.
In sum, industry-wide changes in construction along with progressive delivery methods are driving significant changes in the ways project participants communicate, fund, are compensated and allocate risk on a project. A practical understanding of the shift in project delivery systems will assist Owners, Designers, DB’s CMAR’s and Contractors in surviving and even thriving in the modern era of construction.