Construction Project Delivery Methods – Part I
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There are many options for a Contractor to deliver a project to a commercial owner. As with each different project, the deliver method can change to suit the needs of the parties. Careful attention should be taken when analyzing which method works for the particular project. Each of these various project delivery methods carry differing risks for the parties involved (i.e. owner, contractor, subcontractors, etc.). This two-part blog will discuss some of the most common project delivery methods for commercial construction projects. Part I will discuss Design Build methods and Construction Manager at Risk.
Design-Bid-Build (“DBB”) is the classic project delivery method and is still probably the most frequently used delivery method in commercial construction. In the DBB method, the owner typically contracts with an architect to prepare the design for the project including the complete construction drawings and specifications. Once the design documents have been prepared, the documents are typically provided to interested contractors to submit a bid for the work. The owner often selects the contractor that submits the lowest bid that is responsive to the bid documents, particularly on public construction projects where the governmental entity typically must select the lowest responsive and responsible bid by law. Other times on private projects, however, the owner may use price as a key factor in selecting a contractor.
Once the contractor is selected, the owner and contractor typically enter into a construction contract, which is often part of the bid documents (again, particularly on public projects), and there is very little—if anything—to negotiate. If the construction contract is not part of the bid documents, then the selected contractor and owner negotiate the terms and execute a contract. The construction contract should require the contractor to construct the project in accordance with the bid documents, which typically become part of the construction contract. Usually, the contractor then contracts with subcontractors for the various scopes of work required by the construction contract. The architect may be further engaged for contract administration, including, but not limited to: responding to design questions on behalf of the owner pursuant to requests for information (RFIs), reviewing and approving submittals, reviewing work in progress, reviewing and certifying applications for payment, and resolving minor disputes between the owner and contractor.
In its simplest definition, Design-Build (“DB”) is a project delivery method that combines the performance of the construction work with the design under one contract between the owner and the DB contractor. In most situations, the DB contractor is a licensed general contractor that either performs all design services in-house or subcontracts the design services. One important consideration is that while the general contractor can contract for the design services, under a DB scenario, a licensed design professional must still perform the actual design work.
The DB project delivery method can be beneficial to an owner when the project requirements can be easily defined by the owner. In this instance, the one contractual contact can be easier to manage for the owner than a situation where the owner must manage a design contract and a construction contract and potentially the interplay between the two. If the design concept is more sophisticated, it may be a disadvantage for the owner to turn over so much control to the DB contractor. However, the design team and construction team for a DB contractor function more as a team than the conventional DBB approach. As a result, projects may be expedited under the DB approach, and costs may be reduced somewhat due to efficiencies in that there are fewer RFIs, shop drawings and submittals. Moreover, to the extent that there are change orders under the DB contract, they typically arise due to changes in the program requirements for the project. With the team-based approach on a DB contract comes more liability because the DB contractor becomes responsible for both the design and the construction performance. Accordingly, considerable attention must be given to the insurance and bonding requirements for the job on the front end of the project because the DB contractor will have liability for both the design and the construction.
Many different pricing models are used for the DB project delivery method. Depending on the program requirements established by the owner, the design and pre-construction costs are often based on a fixed-fee contract until a more detailed project budget can be developed based on a more complete design. At that point, the construction of the DB project can often be converted into a cost plus contract with a guaranteed maximum price (“GMP”). Under a cost plus contract with a GMP, the DB contractor’s fee is often calculated as a percentage of the total reimbursable costs under the terms of the contract and capped by the GMP. Other times the fee may just be a fixed fee on top of the reimbursable costs under the terms of the contract, but it is still almost always capped by a GMP to reduce the owner’s exposure. Depending on the sophistication of the owner, a DB project may still have a construction manager or design professional that works on behalf of the owner to review and inspect the quality of work by the DB contractor to determine whether payment should be issued in the amount requested under a pay application.
Construction Manager (At Risk)
With the Construction Manager (at risk) (“CMR”) project delivery method, the CMR acts as the contractor responsible for the contract performance under the construction contract. With the CMR project delivery method, the CMR also holds the subcontracts and is responsible for payment of the subcontractors. Accordingly, the construction manager is “at risk” under the CMR project delivery method because they are responsible for the contract performance, payment and management of the subcontractors as well as delivering the project for the agreed upon price which may be calculated in different ways including cost plus with a GMP as well as a fixed sum on some occasions.
Under the CMR project delivery method, the most common pricing structure is a negotiated price (either cost plus a fee based on either a percentage of the costs or a fixed fee) based upon the development of a GMP. The GMP is typically developed and provided to the owner before the design is completed and often when the project design is between 50-90% complete. Before the GMP is developed, the CMR often works for the owner providing pre-construction services on a fixed fee basis. The arrangement allows the CMR to assist the owner in selecting and specifying specific materials or requesting changes to the program requirements or design features on behalf of the owner to ultimately deliver a project that is better suited for the owner based on some factor such as price or performance.
Because the GMP is often developed by the CMR prior to completion of the design, the CMR project delivery method often allows the CMR to receive bids from subcontractors, award subcontracts and begin construction of the project prior to the completion of the design. This early start to construction can lead to the ability of a CMR to deliver a project in a more expedient or “fast-tracked” manner.
Owners often view the CMR project delivery method as advantageous because it allows for the CMR to act as an advisor during the development of the design in a more team-based role. Because the CMR will often have tremendous experience with factors such as constructability of a proposed design or value engineering for a process or function of the project, significant cost savings can be realized prior to the start of construction. However, because the CMR is necessarily “at risk” during construction, the same assistance or level of assistance is frequently not available during construction or after the development of the GMP. At this point, the CMR’s main risk and focus becomes delivering the project within the GMP as opposed to assisting the owner with benefits that may be realized ultimately to reduce costs. One means of addressing this change in focus to the mutual benefit of the owner and the CMR is to provide for shared savings, where the CMR will receive some portion of the savings for delivering a completed project for less than the GMP.
Construction managers may also work on projects “not at risk,” and this bears mentioning in comparison to the CMR project delivery method. However, this arrangement is perhaps more properly seen as a construction management method as opposed to a project delivery method because a construction manager “not at risk” does not bear the financial risk of paying the subcontractors and suppliers and does not perform any of construction work on the construction project. Instead, this arrangement is more of a pure advisory role to the owner. A construction manager “not at risk” may even be the owner’s agent on the project with the ability to contractually bind the owner depending on the contractual terms between the owner and construction manager, or other times, the construction manager may provide its services as an independent contractor and consultant. This distinction is of importance because an agency relationship may establish a fiduciary duty on the part of the construction manager depending on the influence and control of the agent. See generally Quinn v. Phipps, 113 So. 419 (Fla. 1927).
Part II of this blog post will discuss Multiple Prime, Integrated Project Delivery and Public Private Partnerships.