Industry Watch – Contracting Models – How Ignorance and Bias Breeds Misinformation and Cast Good Contracting Models in a Bad Light.

Two weeks ago we reviewed an article from the Richmond Times reporting that a particular procurement method was “a major factor driving…higher costs” of construction on a new school.

In my response to that article we discussed how the basic premise of the argument was unfounded and that improper use of terminology was twisting the facts.

The article credits Jack Dyer (president of the alliance group quoted in the article) with the statement, “had Richmond used competitive, sealed bidding, the city could be building four schools for what it’s spending to build three.”

The article also includes a number of cost comparisons from other schools in adjacent geographies.

According to the authors, the cost of construction for schools in neighboring Chesterfield City was an average of $250/sf.  That cost was compared to Richmond’s current construction budget of $324/sf.  Other numbers cited show the overall cost of construction in Richmond to be substantially higher than the cost of schools in Chesterfield.

So does this prove that CM at Risk costs more than a traditional lump sum quote?

The contracting model that the article favors is a design-bid-build stipulated sum.  The contracting model that Richmond is using is a design-bid-build cost plus.  The article uses the phrase CM at Risk, but there are variations to CM at Risk so I am going to make some assumptions as we go on.

Let’s go back to the beginning and ensure that we understand the fundamental differences between these two contracting models.

Design-bid-build stipulated sum

Under a design-bid-build stipulated sum contract you have one company providing the design work (under a separate contract).  The drawings are completed and then submitted to the building department for plan approval.  While the plan is under review a bid package is prepared and a solicitation for construction services is released.  The solicitation will request qualifications and a stipulated sum quotation from each bidder.

In public sector bidding, the government is obligated to award the contract to the lowest qualified quote.  Note the use of the word “qualified”.  This give the city leeway to disqualify suppliers and not accept bids that are deemed unresponsive or in some way fail to demonstrate the ability to perform the work.

This is a very delicate thing and disqualifying a bidder is not done without a compelling reason.

Design-bid-build Cost Plus

Under a design-bid-build cost plus contract you also have a separate company providing the design work (under a separate contract).  The difference here is that you do not have to wait until the drawings are complete before releasing a solicitation for construction services.

With this contracting model you can solicit quotations using Schematic level drawings.  This allows procurement to engage the contractor early and because the model also allows for early mobilization, construction can begin sooner.

This model allows for a number of other advanced concepts to be applied.

Pre-construction Services

One of the advanced concepts that this model allows is for the Construction Manager to begin scheduling, budgeting, and procuring sub trades before the drawings are complete.  During Pre-construction the CM can participate in drawing reviews that further refine and improve the design.  This early level of involvement facilitate value engineering exercises that the CM can lead to ensure the costs are controlled.

Procurement Policy

Under this contracting model, the contract can include a procurement policy that governs how the CM performs procurement of sub-trades.  Note, I advocate always having a procurement policy in your contract, but with this model this provision has more teeth and is fully enforceable.

Open Book bidding

The model also allows for the use of open book bidding which gives the Owner the ability to see the quotes from sub-contractors and participate in the selection process.  This provision is probably one of the most beneficial aspects of this model as it allows for full transparency of the construction costs.

Fast-Track Construction

I hesitate to add this, because this is very hard to pull off and rarely done, but this contracting model also allows you to execute portions (or perhaps the whole project) in a fast-track model. I wrote an entire article on this, so I wont go into details, but this provision is not possible with a stipulated sum contract.

The differences between design-bid-build stipulated sum and design-bid-build cost plus

As you can see the design-bid-build cost plus model is a far more flexible and complex contracting method.  If used correctly, this model promotes greater; speed, quality, cost efficiency, and transparency as compared to a design-bid-build stipulated sum contract.

So why do the numbers from the article seem to suggest higher costs?

The truth is that these numbers are not comparable.  The figures that are used from the City of Chesterfield are from more than 2 years ago and there is no context on what technology, construction methods, or site complexity was faced at Chesterfield.  Conversely, we have no context on what technology, construction methods, or site complexity is present at Richmond.

You cannot use historical pricing without significant adjustments being made for any of these factors.  Also, we don’t know if these were the costs that were quoted or the actual cost of construction after all change orders.

The fundamental problem with design-bid-build stipulated sum contracts is that you have to have confidence in the quality and completeness of the drawings.  Without that you are subject to additional cost through change orders and have little room for error.  Design-bid-build cost plus contracts are more forgiving. If the CM is engaged while the drawings are in development (and presumably they are active contributors during design) they are more vested in design decisions which also reduces changes.

Closing

I feel like I have beaten this article to death, but there were simply too many inaccuracies and misconceptions being thrown around.  This kind of simple-minded reporting casts otherwise good contracting models in a bad light and create negative impressions that persist well beyond the context of this project.

There are circumstances where design-bid-build stipulated sum contracts work best and there are circumstances where design-bid-build cost plus contracts work best.

You must use the context of the project and the circumstances of the Owner to determine which one to use.

What about you?  Do you favor one contracting model over another?  Have you used any of the advanced concepts described?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

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