A Management How-To (Book Excerpt)

Recently published by the Construction Management Association of America (CMAA), PROGRAM MANAGEMENT: Concepts and Strategies for Managing Capital Building Programs takes a comprehensive look at program management and applies it to various aspects of building and construction.

Author Charles Thomsen, the first professional to become a fellow of both CMAA and AIA, according to a CMAA release argues that “organizations with continuous building programs build most of America’s buildings.” The book covers the basic to the complex.

This month, we present a chapter from the book that focuses on design-build, discusses its history and its impact on the industry.

Design-Build

Design-build in the United States flourished as the Industrial Revolution took hold. During the 20th century, it served well for building types such as factories, clinics, banks, and in recent years, for data centers. Design-builders who specialized in these kinds of facilities typically had an in-house staff of architects and engineers. They had an appealing story for clients who needed a standard building type. The design-builders could point to a project they had built and offer to build one like it for a fixed price.

Early in the 20th century, most design-builders were vertically integrated companies with both AEs and construction craftsmen as employees. Some had their own steelworks or cabinetworks. Today, design-builders are more apt to be an ad hoc assembly of specialized AEs and CMs formed for a single project, much like the movie industry assembles a unique set of artists and technicians for each movie.

In the past, most design-build contracts have been fixed-price lump-sum. However, a new form of design-build is emerging. It’s essentially a cost-plus contract with a GMP but the team includes an AE.

A course in the history of modern architecture typically begins with the onset of the Industrial Revolution and the design of William Paxton’s Crystal Palace. Built for the Great London Exposition of 1851, the Crystal Palace is a good choice to represent that moment in history. Queen Victoria and Prince Albert conceived the exposition to symbolize Great Britain’s industrial leadership. William Paxton, the architect, gets credit for the first industrialized building. Designed in 10 days, it was built with a cast iron frame and a million square feet of glass infill. It’s arguably the first use of curtain wall construction.

Samuel Austin, the founder of the Austin Company, was born in England in 1851, the same year as the London Exposition. Just as the Crystal Palace is a symbol for the beginning of industrialized construction, Austin’s company epitomizes the American design-build companies that were fuelled by an extraordinary period of American industrial growth.

Neither Paxton nor Austin had a smidgeon of architectural or engineering training. Paxton was a horticulturist; Austin was a carpenter. Austin came to the U.S. in his 20s and settled in Cleveland. His company grew from a builder of homes to a builder of factories. When his son joined the company and contributed the strength of an engineering education, the Austin company grew at an astounding pace.

The design-builder as building type specialist

The Austin Company people knew how to build factories. They designed prototypes and warehoused standard steel frames. Although they built other kinds of buildings, the explosion of industrialization and factory construction was the engine of their growth. They could quote a price before design and deliver a project faster and for less than the competition. They met a specialized need in the economic expansion of the U.S. As just one example, in the early 20th century, the Austin Company built 53 buildings for the National Lamp Company, a manufacturer of the new incandescent light bulb.

The Austin Company had a critical asset - a prerequisite for a design-build company. Samuel Austin was a man of integrity. It takes a leap of faith to sign a design-build contract. There’s precious little documentation describing the product that the design-builder agrees to deliver. Austin’s personal reputation was as fundamental to the success of the company as the technical proficiency of his prototype designs.

Architects, of course, demonized the Austin Company and other design-builders. Architects insisted that standard building designs were bad. They argued that owners needed an architect to design a unique building (and incidentally earn a complete fee). In addition, they needed an architect to protect them from unscrupulous contractors. The AIA, 43 years old at the turn of the century (Samual Austin himself was 49), developed a code of ethics that barred architects who built their designs from membership.

However, Austin knew his clients’ needs and served them well. His company was typical of a series of 20th century design-build companies such as Marshall Erdman, Haskill or Bank Building Corporation of America that focused on building types: medical clinics, banks, food processing plants, data centers, etc. Specialization meant that the design-builder could quote a price with little or no design and show potential clients a similar building to give them an idea of what they would be getting. That’s an appealing process for someone who is in a hurry - or is busy running a business and doesn’t have time to deal with the design-bid-build process. So design-build grew in the private sector.

Meanwhile, for most of the 20th century, the public sector stuck to design-bid-build. They needed to demonstrate competition and provide evidence that they were not engaged in a brother-in­law deal.

The ad hoc team - a movie model

In the last of the 19th century and the beginning of the 20th century, it was speed and an up-front price for a standard building type that motivated most people to use design-build. As the 20th century neared its end, another reason for design-build emerged and the public sector began to participate.

The traditional design-bid-build process began to fail. The use of manufactured building systems and the number of specialty subs grew. AEs, previously the masters of construction technology, could no longer master all the technology or know all the costs.

Specialty subs and manufacturers held an important part of the technical knowledge of design and construction. The design-bid­build process made their participation during design awkward; subcontractors are remarkably allergic to spending much time giving advice about their costs and their knowledge of building technology when they have no assurance they will get the job. Moreover, they sure don’t want to expose their prices if they must later bid against other subs.

So many public clients lobbied their lawmakers to change procurement regulations and turned to design-build to save time and facilitate collaboration among the AEs, specialty trade contractors and manufacturers.

A new design-build model emerged. While the traditional design-builder had architects and engineers on staff and typically worked primarily on a single building type, this newer form of design-builder assembles a unique team, cherry-picked for a single project.

This new approach is similar to the movie industry. A producer, a director, some actors, a costume designer, a photographic team, scriptwriters, recording engineers, set designers and others come together in a unique team. The team works together for only one movie. Even in a sequel, there will be different players.

The traditional design-builders had in-house AEs who were building type specialists. The salespeople could show a client a similar building to make the deal. This newer form of design-builder cherry-picks an ad-hoc, best-of-class team assembled from many sources and designs a unique building. This single-performance, all-star team can produce a great building. However, there’s a problem in making the deal.

The tough nut

The case for design-build is convincing. If there were no problem in making the deal, it would dominate the industry. With design-build, the people who build the building help figure out how to build it. What could make more sense? Furthermore, there’s a single point of responsibility. That idea is hard to beat too.

The problem with design-build is getting to the deal. The Austin Company, and similar design-build companies that specialized in a building type, could show a client a similar building and quote a price up front. But for a unique building, there’s no understanding of the product and no meeting of the minds until the design is done.

The client asks:
“How much will you charge to design and build my unique building?”

The design-builder replies:
“I don’t know yet - I don’t exactly know what you want. I need to design some of it first.”

The client says:
“I don’t want to pay you for design until I know what the whole building will cost. Who wants to buy a pig in a poke?”

The design-builder replies:
“I don’t want to spend a lot of money on design until I know I’m going to get the job to build it.”

It’s a chicken-and-egg conundrum. However, there are a couple of band-aid patches.

The spec design

Some design-builders simply absorb the cost of the design - risking the investment until they get the contract. In essence, they are saying:

“I’ll do the design for nothing because I know you’ll like it and give me the job and that’ll cover the cost of the design and then some.”

They may pressure an AE to do the work for little or no fee. Of course, that means that design gets short shrift. It may not be a serious problem when the project is simple or when there are similar buildings that provide the opportunity for a simple, repeatable design. However, for large or complicated projects, poor design funding produces poor designs.

The staged contract

Other design-builders say:

“Pay me for design. Then if you don’t like the price, you can have my drawings to use with another contractor.”

That sounds OK, but we’ve never seen a client use drawings produced by a design-builder with another AE and GC. I guess it could be done, and probably has, but other AEs are reluctant to assume responsibility for drawings they didn’t produce without review, checking and re-doing calculations.

CM-at-risk with design-build

As soon as we invent a new project delivery process, we tend to find ways to blend it with the beneficial attributes of other processes and morph into a third. A compelling evolution to this ad-hoc team “movie model” approach to design-build (and to Bridging) has surfaced with the wide-spread emergence of CM-at-risk and GMP (Guaranteed Maximum Price) contracts (see the chapters on CM). Although there’s not a common name, sometimes it’s called Integrated Services, sometimes Bridging/CMAR, sometimes just design-build.

The approach is simply to form a team that combines a CM­at-risk with design as part of the services working under a cost-plus GMP contract. Often an AE is a subcontractor to a general contractor. But sometimes an AE leads. Ellerbe, Parsons and other similar companies have provided Integrated Services. Here’s how it works:

Step 1: Selection

The owner selects the AE and CM team - typically based on qualifications and a fixed fee that includes the design fee. Compensation for the CM/AE team is often a lump-sum and can be fixed from the start. (See the description of CM services, page 150.) The owner also agrees to reimburse the CM/AE for General Conditions construction and the cost of the subcontracts.

With a fixed fee for design, overhead and profit, the team can’t profit from cheapening the design or construction. And since they’ve been selected with qualifications as a major component, there’s the classic incentive that a professional brings to the project to do a good job and get repeat work.

Some owners are worried about hiring the team and starting the project before the project cost is known and, of course, the CM/AE doesn’t want to guarantee the cost of an undefined project. So a new wrinkle is added. The owner and the CM/AE team may agree to design to a Fixed Limit of Construction Cost (FLCC). This is a contractual “design-to-budget” clause.

The FLCC states that the design-builder understands the general scope of the work and believes the building can be built within the budget. The FLCC is not a Guaranteed Maximum Price; instead it stipulates that the design-builder will design to the budget. If, when the design-builder takes sub bids, the cost exceeds the budget, the design-builder must redesign without extra fees, but the owner must collaborate with the design-builder to make adjustments in scope or quality.

Sometimes the design-builder agrees that if the budget can’t be met, the owner doesn’t have to pay for design. At any rate, there’s a bit of mutual confidence that’s required from both the design-builder and owner that everyone is acting in good faith and will work together to make the project happen.

Step 2: Definition:

As described in the previous paragraphs, the owner may require the design-builder to agree to an FLCC at the start of Project Definition. Frankly, it’s a good idea. It’s remarkable how often there’s confusion about what is in and what is out of the budget. An FLCC helps focus everybody’s attention.

Then the design-builder determines the project requirements and defines them for the owner’s approval. (See the chapter on Project Definition, page 39.)

The definition fee varies but it may be about 2% of construction cost. The contract may state that the owner doesn’t have to pay if the price exceeds the FLCC - unless the owner has increased the scope. Of course, it’s always wise for owners to stipulate that they can stop the job, pay for services to the point of termination and hire someone else anytime they want.

The difference between an FLCC and the GMP is this:

•  If the cost of the project exceeds the FLCC, the design-builder must redesign and absorb the cost of the redesign - with the owner’s collaboration.
• If the cost of the project exceeds the GMP, the design-builder must build it anyway and absorb the cost of the overrun.

Typically the GMP comes later - after the scope is fixed. The project starts with an FLCC and progresses through design, the CM takes bids from major subs and then provides the GMP.

Step 3: Construction Documents and Procurement

Instead of a hectic bid period that commits the entire project cost over a telephone in a few hours before the bid is due (as in the design-bid-build process), the design-builder talks with the subs and then takes bids in a business-like, methodical way as the construction drawings progress.

A glaring inefficiency common to the traditional design-bid­build process is the large amount of Construction Documents discarded and replaced with shop drawings produced by manufacturers.

With the traditional design-bid-build process, the AE doesn’t know what subcontractor will get the job, so the AE details steel frames, curtain wall, elevators, cabinetwork, doors and windows, ceiling lighting systems and so on.

When the AE finishes the drawings, the project is bid and subs are chosen. Then the subs do shop drawings that represent that sub’s manufacturing process and products. The stuff that the AE did is put on a shelf and forgotten. The effort is wasted. That wasted effort may cost about 2% of the total construction cost.

With design-build, the design-builder can call in these subs and manufacturers for a conversation about their product. The design-builder will get focused attention from subs because they know the design-builder is the buyer. Then the design-builder can use a variety of methods to procure the system competitively. He or she can use performance specs, finish drawings and specs in phases or ask the sub to propose a system. When there’s a meeting of the minds on the appropriate technology, the design-builder gets priced proposals from the subs who meet the requirements.

After the design-builder selects a particular sub, the sub or the sub’s manufacturer does shop drawings and the AE can paste them into the Construction Documents. That saves a lot of time and effort and produces an integrated set of drawings that represent the way the building will actually be built. Errors are reduced: if the sub’s CAD shop drawings don’t fit the AE’s CAD drawings, it’s obvious. Meanwhile, the worm turns. Not only is the AE checking the sub’s shop drawings, the sub is checking the AE’s work. That reduces errors.

The design-builder can finish the construction drawings in phases, bidding and negotiating subcontracts in a competitive process that is transparent to the owner. Phased bidding allows the design-builder to bid subcontracts methodically and competitively so the client benefits from good prices and reliable subs, better technology and tighter contracts. The CM/AE can monitor the design and the cost as bidding progresses and make on-course corrections. If market conditions jeopardize the budget, there’s early warning.

When the design-builder has selected most of the subs, the design-builder provides a GMP, signs the subcontracts and starts construction.

Step 4: Construction

Just think. When construction begins, most of the shop drawings have been checked and cut sheets approved. Since the designer and contractor are part of the same organization, there are no RFIs for the owner to worry about!

Construction can start before the design is complete. Assume a 6% AE fee, a 4% CM fee and 10% for General Conditions construction and a 5% contingency. That’s 25% of the cost that’s known at the start. Then assume two-thirds of the subs have been selected. Two-thirds of the 75% for subcontracts is 50%. Now 75% of the cost is known. The 5% contingency is now a 20% contingency on the unawarded portion of the subcontracts (assuming everything has been bought out within the estimate). The design-builder can comfortably provide a GMP. (See discussion of a GMP on page 193.)

An owner may wish to retain an outside consultant to review the design-builder’s work to make sure he or she is doing what was promised. In those circumstances, construction administration can be conducted in the traditional manner for things like payment approvals, inspection and acceptance of work and change orders.

The argument for Design-Build/CM-at-risk

Most public sector clients who work with complicated buildings have recognized the value of considering qualifications in selecting a CM and the value of having a CM on board during design. So the CM-at-risk process is growing. It’s only a short time until the idea of integrating an AE as part of the CM-at-risk team takes hold. The value of centralizing responsibility is too great to ignore.

Here are the advantages that are frequently cited:

Single responsibility

With design-build, an owner doesn’t have to watch the AE and the contractor point fingers at each other. The legal triangle of client, AE and contractor in the traditional design-bid-build process becomes a legal tangle when something goes wrong. The separate responsibility for design and construction often makes it difficult to determine who is responsible for errors. Design-build eliminates this avenue of litigation.

Better cost control

The FLCC approach to design-build provides some comfort for the owner on day one. Then a staged procurement process provides good feedback during Construction Documents.

Faster delivery

Of course, with design-build, construction can start before the AE finishes all Construction Documents. However, that does not eliminate the fundamental risks inherent in fast-track. (See the discussion of fast-track on page 45.)

Better technology

AEs and CMs understand construction technology, and many of our clients have knowledgeable construction staffs. But we all have much to learn from the people who make and install building systems. What could make more sense? Getting the people who design building products to participate in their practical application saves money and makes good buildings.

The Renaissance ideal was a person who understood everything - music, literature, art, architecture, engineering. Leonardo da Vinci was an artist, architect, engineer and artisan - a master builder. Today, even after narrowing the field to just construction, there’s too much for one person to know. The master builder has become a big team.

Imagine a perfect team - a collaborative expert for each job. AEs are there because they know design. Builders are there because they know what’s practical to build and what things cost. There’s close contact with subs and manufacturers who know the most about the latest building systems. The client is on the team because the client is the expert on requirements and budget.

Imagine that the contracts have been arranged to minimize the tendency of self-interest to bias attitudes. The AEs aren’t trying to increase fee or escape liability. The contractor isn’t plotting for claims and change orders. No one is trying to get something for nothing. What one person knows is available to all. Communications, documentation and costs are transparent. It sounds like nirvana.

We’ll never get there, but we can get close.