Within the design and construction industry, we are all well aware of the fact that all major projects have significant risk exposure. Who manages the various risk factors? Who pays for such risk? What is the impact on the project costs and schedule? How can risk liability be minimized? Why should owners be focused on risk allocation?
The above questions are pertinent to each and every project most of us have been associated with over the years. However, rather than discuss “risk allocation” in the traditional manner (about which volumes have been written) I am going to confront the subject from another angle, i.e., integration.
I’m referring to “deep” collaboration within the design-build team, not simply assigning tasks to the various sub-consultants and trade partners. Many of today’s construction projects are more and more sophisticated, with various levels of complex systems incorporated into the project. It is not unusual for over 90 percent of the actual work to be performed by the trade partners and sub-consultants. Additionally, substantial portions of the work are being performed off-site. How (and equally important, when?) are these vital team members, (e.g., manufacturers, suppliers, subcontractors) integrated into the process?
All projects require some degree of design from the builder and their trade partners, subcontractors, manufacturers and suppliers. Understanding this critical link among the key participants can greatly reduce project risk and add value for the owner. Perhaps no other entity(ies) are as keenly aware of current market conditions as the trade partners, sub-consultants, manufacturers and suppliers. These folks typically operate face-to-face on a daily basis with the labor and commodity markets. Including this knowledge and expertise into the planning, programming and design arena can lessen the project uncertainties, which can lessen the risk to the design-build team.
During this past year, I have had the extraordinary opportunity to work with two very innovative public owners seeking to add critically needed detention space to a dangerously overcrowded correctional system. Both owners concluded that the traditional design-bid-build delivery model would unlikely meet their goals for speed, cost, quality and innovation, in particular, an innovative way of maximizing the budget and incorporating waste-minimization techniques into the project delivery model.
One of the projects was the Goose Creek Correctional Center design-build project in Alaska. This was a 1,536-bed medium security facility financed and procured by the Matanuska-Susitna Borough and leased by the Alaska Department of Corrections. Driven by concerns over inflationary erosion of the legislatively authorized budget, and the desire to benefit from the partnering that is gained through integrated design and construction, the borough and the state agreed to utilize design-build project delivery methodology.
The project’s RFP, and those who administered the competition on behalf of the owner, addressed risk management in numerous ways:
Cost management
- The maximum awardable contract was stated in the RFP;
- Several forms of deviation(s) from RFP requirements were allowed:
- Deviations described in the RFP as “Owner’s Prioritized List of Potential Deviations”;
- Deviations requested by proposers and pre-authorized by the owner prior to the deadline for submission of technical and price proposals; and
- Unilateral deviations included by proposers at the time of submission of technical and price proposals.
- The owner met privately with each proposer in four rounds of proprietary meetings to discuss design concepts and the balance of scope and price.
Contract time management
- Though the RFP stated a required completion date, the reasonableness of this time allowance was discussed both in an open meeting at the start of the competition and then privately with each proposer in the proprietary meetings. In the end, the winning proposer offered to complete the work three months earlier than the required date.
Scope management
- While the RFP defined the desired scope in terms of quality, quantity and design features, it also openly invited innovation from the proposers. This resulted in open dialog within the proprietary meetings with innovative concepts brought to the owner for consideration prior to extensive design investment. The major trade partners were at the table for these discussions, along with the architects, engineers and the prime contractor.
The second major project I have had the privilege to participate is the California Prison Health Care Receivership Corp. (CPR) in support of their mission to raise the level of medical care delivered to adult inmate patients incarcerated in California prisons to constitutional standards. Acting on the authority of the federal court, the CPR will make the structural, clinical, budgetary and organizational changes necessary to create a safe and secure clinical environment in which correctional and medical staff together can guarantee that quality of and access to care in California’s adult prisons is constitutionally adequate.
Accordingly, the CPR developed a turnaround plan of action that included design and construction of up to 5,000 medical and 5,000 mental health beds statewide. Pre-planning activities included:
- Site assessment and selection
- CEQA review and evaluation
- Infrastructure review and development of remediation plans
- Facility planning
- Program delivery
- Obtaining funding
- Development of a program management plan
The CPR concluded that the traditional design and construction delivery model would unlikely meet its goals for speed, cost, quality and innovation.
The CPR project delivery methodology incorporated leading edge best practices throughout to include: design-build; lean construction innovative waste-minimization techniques; Integrated Project Delivery (IPD) agreement; BIM; incentive/award fee provisions; and LEED® sustainable design.
The acquisition approach involved short-listing three design-build teams to engage in a “co-opetition” to develop a prototype correctional/medical facility (approximately 1,500 to 2,000 beds) that could be site-adapted at various locations within the state. The process included substantial training to enable new thinking and practices to make better decisions. The design-build teams embraced lean strategies, i.e., continuous improvement; listening, trust, commitments, value, waste elimination, value stream mapping, A-3 reports (the Toyota Way), last planner system, pull scheduling, target value design, study action teams and structured problem solving.
In essence, integrating lean construction institute best practices with design-build very early in the acquisition process enabled all components of the project team to help those partners unfamiliar with these unique methods to deliver the project with less waste and higher value for the owner. As a result, CPR conducted an intensive preliminary design and validation phase in which the design-builders actively participated in finalizing the programming and creating the preliminary design that will ultimately be selected for the project(s).
The CPR’s approach attempts to balance risk allocation throughout the entire project team, with no individual participant solely responsible for the various risk factors. Accordingly, the key specialty contractors have direct impact on cost control and schedule, and perhaps more importantly, timely input into design and constructability. Hence, when accurate pricing information, labor and material availability and escalation information is readily available to the entire project team, not surprisingly, the level of uncertainty diminishes significantly.
As most of us know, each of the participants on a typical construction project encounters a degree of uncertainty. Such uncertainty translates into risk, which in turn translates into contingency. The overall cost of the project “unknowns” can be substantial. Since most public construction projects are lump sum (firm-fixed price) contracts, much of the budget can be wasted by each participant being forced to protect their self-interests to ensure adequate contingency for risk is accounted for in their pricing. This is not necessarily a bad thing, just a condition of survival within the industry. How can the owner’s budget be maximized and insulated (at least partially exempt) from the traditional model?
Identifying project-specific risk factors as early as possible, determining who can best manage AND developing a risk mitigation plan can directly provide enhanced scope and quality to the project. Conventional wisdom has noted that “one” of the team members can best manage the individual risk factors (e.g. the owner, architect or contractor); however, highly successful design-build teams have demonstrated that such strategy is frequently flawed, in that no one team member can truly manage the individual risk factors since they do not have the ability to control the drivers of the risk factors. For example, asking one party to bear 100 percent risk for “inflation” will most likely bear a heavy price. The Federal Acquisition Regulation (FAR) provides for owners to share inflation risk via the economic price adjustment clause – this factor can easily be a shared risk, thus mitigating the actual cost exposure to the project. Regrettably, few federal agencies take advantage of this provision of the FAR. Accordingly, most project risk factors should be collectively managed with each party sharing their appropriate portion.
Owners desiring to take design-build to a higher level may want to consider using a “target cost” methodology. Again, within the FAR, federal agencies are permitted to use a fixed-price with incentives approach, which provides for the government and the design-builder to share in the “gain” and the “pain” for project costs below or above the target cost. (Note: See Design-Build DATELINE, February 2005 – Diana Hoag and Nancy Gunderson for more details). The FAR target price/target profit model provides for a more balanced risk sharing between the owner and the design-build team. In summary, the acquisition strategy of the owner has a tremendous impact on risk allocation, particularly during the source selection process.
It has been my observation over the past several years that owners who are not satisfied with the results of their design-build projects should closely examine their source selection process. Most public agencies are permitted to use a “best value” source selection procurement process. Best value allows for the owner to select the design-build team based upon both qualitative (past performance, professionalism, experience, design effort, management approach, etc.) and quantitative (price) in which offerors provide competitive proposals in response to the agency’s criteria documents. However, in some instances, owners have chosen to select the design-build team based upon a price-driven process in response to detailed prescriptive specifications (bridging documents). Leaning on the side of prescriptive bridging documents as opposed to performance requirements results in less innovation, minimizes the design-build team’s effort to react to current market conditions and overall provides less value to the project. Again, it has been my experience that owners who have been unsatisfied with “design-build” have erred on the side of a source selection process that is price driven.
It is interesting to note that such owners think they are shifting risk to the design-build team (as we know all too well, the Spearin Doctrine may prove otherwise) without fully understanding the significant contingency costs associated with a risk averse position.
Recently, much has been written about Integrated Project Delivery (IPD). In my view, much of what IPD prescribes is what we at DBIA have been advocating for years, and that is collaborating throughout the design and construction process with ALL members of the Design-Build Team to include planning and managing the project; fostering an environment that rewards positive thinking; proactive problem-solving as opposed to “business as usual.” In fact, most of the principles of IPD (mutual respect and trust, collaborative innovation and decision making, early involvement of key participants, early goal definition, intensified planning, open communication, organization and leadership) are the bedrock foundation of the fundamentals of design-build project delivery.
Teaming is a critical function of highly successful design-builders. Fully integrated design-build teams do not happen by accident, nor is it a natural occurrence. Deep collaboration within the design-build team takes a concerted effort by each participant. Such collaboration requires strong leadership, commitment from the top of each organization, most notably the owner, keeping in mind the old adage that … “none of us is as smart as ALL of us.” Owners should not assume all design-build teams are fully engaged and working in a collaborative fashion, but rather should help drive the integration of the team, e.g., request co-location, BIM support, determine when (and how) trade partners are selected, etc.
So, what does all this have to do with “risk allocation?” We know all too well owners who approach their project(s) from a “risk averse” position, usually paying a hefty cost for such behavior. In order for the entire design-build team to be fully integrated, the owner must commit to a more robust engagement early in the process. Early involvement by the key personnel (particularly the trade partners) provides for the most opportunities to discover added value to the project.
In short, owners who want to maximize the utility of their budget (notice I did not write “save money,” which is a misnomer in our industry associated with the hard bid environment that somehow refuses to die) are better served by fully integrating the entire design-build team very early in the process. This collaborative practice not only adds true value to the project, but moreover, helps mitigate project risk, specifically in regard to cost, schedule and quality performance.
Design-build is the “original” integrated project delivery methodology dating back to the Master Builder of ancient times. It is somewhat comforting to experience the recent emphasis on IPD throughout our industry.