In a recent posting on the AIA’s project delivery forum, an architect in Nebraska wanted help understanding how to solicit a quote for a construction manager at risk.
His question was, “How do I put together an RFP for construction manager at risk?”.
In the posting, he mentions that his client specifically asked for the construction manager at risk model.
In order to answer this question, we need some additional clarity and we need to better understand the Owner’s goals.
To better understand this delivery model, we first need to dissect the term “Construction Manager at Risk”.
This term has two parts. The first part “Construction Manager”, refers to a specific type of service provider. The second part “at-risk” suggests pricing and contracting provisions that require careful consideration.
A Construction Manager is a white collar provider of construction management services. Construction managers provide services that include pre-construction planning and ongoing cost and schedule reporting. These services are performed in addition to the phasing, sequencing, and coordination of trades. Construction managers do not perform any of the trade work themselves. All work is sub-contracted.
In contrast, General Contractors provide only the basic service of subcontracting and managing trades. Additional reporting, project phasing, and pre-construction services are generally not included. In some cases, the trade work may be performed by the general contractor’s own forces.
We don’t know from the question what stage of development this project is in.
A construction manager is typically brought in before the design has been completed. This allows the construction manager to participate in pre-construction activities such as developing a construction budget and preparing a preliminary construction schedule. These are services that a general contractor would not expect to perform.
So the project phase and the Owner’s intent are relevant in determining our supplier profile. We want to make sure that we are pursuing the right kind of supplier. A general contractor will lack the sophistication to develop the kind of reporting a construction manager can, but a Construction Manager could cost more than a General Contractor.
The second part of the construction manager at risk model is the “at risk” part.
There is a construction manager “agent” model where the additional services described above are provided by a construction manager acting as an independent third party agent.
In a construction manager agent model the construction manager does not hold any subcontractor contracts. In this model all of the subcontractor agreements are direct to the owner. These are called multi-prime agreements. Multi-prime agreements give the owner of great deal of visibility into the cost of the work.
Introducing the term “at risk” into the CM model transfers the risk of sub-contractor agreements to the construction manager. This has the net effect of also adding cost for the Owner. The construction manager is unlikely to accept the risk of holding the subcontractor agreements without being compensated for the additional risk. Therefore it is important to understand whether the owner is simply interested in the additional service of a construction manager, or if the transferred risk is worth the additional cost.
There are a number of variations on the “at-risk” model.
These variations have to do with the pricing model.
The cost-plus pricing model solicits a construction management fee plus reimbursement for incurred expenses. The fee in a cost-plus contract can be solicited either as a fixed fee or as a percentage of cost of work. There are pros and cons to both of these models. A fixed fee works better with the agent model. Whereas a percentage of cost of work fee works better with the “at risk” model.
If your solicitation is being done prior to completion of the design, cost-plus pricing may be the only way for you to solicit a quote.
Guaranteed maximum price (GMP)
A lot of time when people reference a construction manager at risk delivery model, they are really talking about a guaranteed maximum price.
It is important to understand that a guaranteed maximum price is a contract modifier that can be applied to any form of cost model. This means that you can take a cost plus price and trigger a conversion to a guaranteed maximum price at a specified time.
Even in the standard language of an AIA agreement there is no specified time for when a guaranteed maximum price will be established. This is something to be negotiated and agreed upon in advance.
If the intent is to solicit a guaranteed maximum price and the additional CM services are not a driving factor, a GC may be the best supplier for you.
Keep in mind that in order to solicit a GMP, your drawings will need to be 100% complete prior to your solicitation.
It is important to understand that guaranteed maximum price does not mean there will be no change orders. If you solicit a GMP, the quality and completeness of the drawings will be strictly scrutinized. Changes from the Owner may still result in change orders under a guaranteed maximum price contract.
It is important to note that under a guaranteed maximum price your quote must also include a line item for GMP contingency. This is not the Owner’s contingency. This is strictly a fund for the CM or GC to manage the added risk transferred under a guaranteed maximum price agreement. An Owner may not add or change the work with the expectation that the GMP contingency will absorb the cost of the change. The percentage of GMP contingency should be strongly negotiated between the parties.
Another way to solicit a construction manager at-risk contract is to include an open book provision.
In this model the construction manager is required to follow a procurement policy for all subcontractor awards.
The procurement policy may state that no contract may be awarded without being competitively bidding to three qualified suppliers. Typically the owner will have the ability to review all of the trade bids. The owner may reject specific bids if he has cause to do so.
Open book provisions relieve both parties of risk. The Owner gets great visibility into the cost of work and construction manager is relieved of award decision by including the Owner in the award.
The way to solicit an open book bid is similar to cost-plus.
With all of these examples it’s always important to define what costs will be classified as fee, which costs will be classified as general conditions, and which costs will be included in Cost of Work. It’s also important to solicit pricing for allowances and change order rates.
It should go without saying that your construction contract needs to reflect the pricing model selected.
Provisions such as a guaranteed maximum price or open book must be specifically addressed in the agreement.
Before proceeding with a solicitation such as this, it is necessary to make sure we understand exactly what the owners goals are. All of the different pricing models described have pertinent applications, but selecting the wrong model could have detrimental affects on the project.
It is also important to describe all of these options to an owner. Even a sophisticated owner may not fully comprehend the implications of their request. Don’t assume they know the nuances of each option.
I hope this helps our Nebraska Architect and that you are all a bit more comfortable with the concept of a construction manager at risk.
I’m curious about your experience. Have you used these models in your projects before? What was your experience?