Complex infrastructure projects inherently contain significant risk. As a result, it benefits the owner and design-builder to minimize overall risk.
A major advantage for owners in design-build procurement is the flexibility to optimize overall project risk that impacts cost and schedule. Design-bid-build, on the other hand, limits owners with contracting hurdles and regulations that separate design and construction responsibility and minimize overall performance value. Design-build’s single-source responsibility allows owners to transfer risk to the design-builder to integrate all design-builder furnished equipment, material, labor and professional services and achieve facility operating performance defined by the contract documents, which include the owner request for proposal, design-builder proposal, final design-build contract and subsequent amendments. In a design-bid-build approach, the owner inherently has this integration risk.
Within the design-build framework, however, owners still can find ways to further optimize risk to reduce overall cost and schedule.
In developing a project’s technical scope and contract documents, owners assign risk for certain performance items. Risks assumed by the owner may reduce design-builder costs and contingencies, but can create additional owner costs that increase final project cost. Too much risk assigned to design-builders, however, causes higher bid prices and potential claims that increase overall project cost.
The more balance that owners provide in defining and assigning risks — so that each party believes it can effectively manage their risk — will result in less overall risk in the project.
A balanced risk approach requires focus on several major risk areas:
Unforeseen Site Conditions Risk — Assign unforeseen risk to the site owner to eliminate unnecessary bid cost contingencies. Create a specified contingency that, if not required, stays with the owner.
Geotechnical Risk — The owner should conduct an early geotechnical investigation and provide a report to proposers in the RFP. Subsequent to the contract award, the owner should provide the design-builder a specified time to supplement — at its discretion — the initial investigation and substantiate any changes that impact cost and schedule.
Schedule Performance Risk — Owners should require key milestone dates throughout the project and require that the design-builder meet proposed resource levels. This provides a focus on performance rather than detail schedule sequences, which should reside as means and methods of the design-builder. Schedule bonus incentives and liquidated damages to stimulate performance without increasing owner liability.
Quality Performance Risk — The design-builder should assume all quality risk, including any environmental quality risk, except for any owner-provided equipment, material and services, which are assigned to the owner.
Hazardous Materials Risk — The design-builder should also assume risk for items it brings to the site, while the owner should assume risk for materials previously on site.
Process/System Performance Risk — Except for owner-provided items, the design-builder should be responsible for plant process/system performance. Upgrades to existing plants may create pre-existing conditions, which the owner should assume.
Cost Escalation Risk — If the owner expects price bids to be valid for any significant time, some relief from unforeseen pricing changes should be included and applicable to both parties. Also, bid price contingencies can be reduced if the owner specifies escalation under certain formulas for selected major procurement items.
Uncontrollable Circumstances Risk (“Acts of God”) — This should be assigned to the owner who has the long-term benefit of the project. Any cost risk to the design-builder should be limited to avoid unnecessary bid contingencies.
Change of Laws and Regulations Risk — Assign such risks to the owner, since this is uncontrollable and unpredictable.
Indemnification Risk — Require indemnification of the party that does not cause, or contribute to, the damages.
Warranty Risk — Commence warranties after “substantial completion,” normally at the completion of performance testing, and/or initial operation of the facility. The owner’s beneficial use of plant performance capability is tantamount to substantial completion, and warranties commence. Be selective on requesting longer-term warranties based on cost-benefit analysis.
Disputes & Claims Risk — Implement a partnering program from conception that involves both executive- and project-level personnel and require mediation early in the dispute process if issues are not resolved promptly. For projects exceeding $100 million, establish a dispute review board to mitigate disputes.
With owners providing a balanced approach, design-builders and their sureties can more effectively evaluate risks and eliminate unnecessary bid contingencies. In addition, all parties can better collaborate on minimizing overall risk during project execution so related disputes are eliminated, or significantly reduced.
Chuck Williams is senior vice president, AECOM, a member firm of the Design-Build Water Council: www.waterdesignbuild.org.