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2. A Primer on Standard Costing Methods for Construction Projects Presented by Tom Vaughn, CEO

3. Agenda • Defining Terms • Construction Cost Components • Four Common Contract Types • Definition/What’s Included • Delivery Methods Associated with Each • Pros/Cons • Best/Least suited projects • Market Forecasting

4. Defining Terms Management Options Selection Criteria Delivery Methods Contract Types

5. Defining Terms • Delivery Methods • Traditional (Design-Bid-Build) • Competitive Sealed Proposal (CSP) • Construction Manager at Risk (CM at R) • Design/Build • Job Order Contract (JOC) • Selection Criteria • Low bid • Best value • Qualification based • Contract Types • Lump Sum • Cost + Fee • Cost + Fee with GMP • JOC (unit price) Price Only Qualifications Only

6. Construction Cost Components • Four Basic Components • Preconstruction Phase Fee • Construction Fee • General Conditions • Contingency • Type of Contract dictates which of these components are included

7. Preconstruction Phase Fee • Preliminary Budget & Schedule • Constructability Reviews • Ongoing Scheduling – Design & Construction • Ongoing Budget/Cost Consultation • Coordination of Construction Documents • Bid Package Strategy • Obtaining Bids • Compensation: Lump Sum/Cost Plus or GMP

8. Construction Fee • Profit • Home Office Overhead Corporate Safety Executives Interest Cost Income Tax • Estimating • Accounting • Human Resources • Legal

9. General Conditions (Everyone’s Definition is Different) On-Site Project Management Bonds & Insurance Field Offices & Office Supplies Temporary Project Utilities • Safety Coordinator/ Assistant • Project Executive • Office Engineer(s) • Project Expeditor(s) • Asst. Superintendent(s) • CPM Scheduler • Superintendent(s) • Project Manager(s) • Project Support Staff • Out-of-State Project Specific Travel • Builder’s Risk Insurance • General Liability Insurance (unless ROCIP) • Payment & Performance Bonds • Other Project Insurance as required • Partnering Costs • Job Photos/Videos • Project Specific Signage • Postage/Special Shipping • Project/As-Built Drawings • Project Milestone Events • Move-In/Out, Office Set-up • Employee ID Systems • Small Tools, Storage Trailers • Monthly Trailer Rental • Mobilization/Demobilization • First Aid Supplies • Reprographic Services • Monthly Office Supplies • Remote Parking Expense • Project Reference Manuals • Security Systems/Watchman • Safety Material & Equipment Example • Dumpsters • Project Electricity • Monthly Phone/ Internet • Phone/Internet Install. • Street Rental & Barricades • Fencing • Covered Walkways • Temp. Water Distrib. & Meters • Temp Electrical Distrib. & Meters • Site Erosion Control & Project Entrances • Project Water • Temp Toilets • Temp Fire Protection

10. Contractor’s Contingency • Bidding • Cost Escalation • Ooops • Scope • Unforseen Conditions • Design • Owner

11. Lump Sum Contract Definition – Build X project for Y dollars. Bid is based on Contractor’s interpretation of the major items of work and quantity/scope of each item. Contractor paid only the lump sum dollar amount.

12. Lump Sum Contract What is Included? *Only what’s clearly on the plans & specs

13. Owner A/E General Contractor S u b c o n t r a c t o r s Design Bid Construct Lump Sum Contract • Traditional (Design-Bid-Build) • Owner selects the Architect/Engineer to design the project. • Once Construction Documents (CDs) are fully complete, the Owner requests lump sum prices from general contractors to perform the work. • Selection of the General Contractor is based on the lowest price submittal and award is made to a single contractor. • Characteristics • Delivery is in three linear phases resulting in the longest time duration.

14. Owner A/E General Contractor S u b c o n t r a c t o r s Design Bid Construct Lump Sum Contract • Competitive Sealed Proposal • Similar to Traditional, the Owner selects an A/E to design the project. • Once CDs are completed, the Owner solicits proposals from contractors to perform the work. • Selection is based on a combination of price and other factors that the Owner deems in its best interest, such as project team personnel, schedule, contractor’s past experience, etc. • Doesn’t always result in lowest price. • Delivery Scheduleis in three linear phases:

15. Lump Sum Contract Possible Selection Criteria Price Safety Record Quality Control Program Past Similar Projects References Management Team Sub Contractors Financial Strength (bonds) Value Added Services

16. Lump Sum Contract PROS CONS No design phase assistance Longer project duration Lack of flexibility Price not known until done Adversarial relationships • Easy – no cost accounting or confusion • Open, aggressive bidding • Single point of responsibility for construction BEST SUITED LEAST SUITED • Smaller projects • Simple projects • Completely designed • New projects • Multi-phase or complex jobs • Time sensitive

17. Cost Plus Fee/GMP Contracts Cost Plus Fee – Contractor is reimbursed for actual cost of labor and materials, plus charges a fee (typically an agreed-upon lump or % of total labor & material costs) for home office overhead & profit. Guaranteed Maximum Price (GMP) – The CMR or Design/Builder agrees beforehand that the cost of the work will not exceed a specific figure, known as the GMP. The CM is allocated some contingency to pay for construction changes within the design intent. Changes beyond design intent require approval of all stakeholders. *Can also be lump sum.

18. Cost Plus Fee/GMP Contracts What is Included?

19. Select Design Construct Cost Plus Fee/GMP Contracts Owner • Used with CM at Risk • Owner selects A/E separate from CM. • CM is selected based on fees, general conditions costs and qualifications. • CM provides preconstruction phase services and works in a cooperative relationship with A/E. • CM guarantees construction price at some point during design. • Pricing/costs are open book. CM Agent A/E Sub Sub Sub Sub • Delivery Schedule is three phase non-linear:

20. Cost Plus Fee: CM at Risk PROS CONS Price is not guaranteed at time of selection Owner must have more involvement in the process Selection is more difficult • Builder Selection Flexibility • CM provides preconstruction services and works in team concept with A/E & Owner • Opportunity phase/fast track job • Team concept • Better opportunity to maximize MWBE subcontractor participation through bid package initiatives • Change flexibility BEST SUITED LEAST SUITED • Larger new or renovation projects that are schedule sensitive, difficult to define, or subject to change • Smaller projects

21. Example Cost Plus Fee (CM at Risk) Project Emerging Technology Center, Texas A&M University

22. Example Cost Plus Fee (CM at Risk) Project Emerging Technology Center, Texas A&M University

23. Why it Worked Well at Texas A&M University • Complex Project • High End Design • Fixed Budget • Early Packages • Utility Re-Route • Earth Work

24. Select Design Construct Cost Plus Fee/GMP Contracts • Design/Build Delivery Method • Design and Construction are accomplished through a single entity. The Design/Build entity includes a builder, architect and engineer. • Selection is based on best value determination. • Pricing at selection may be fee and general conditions based or lump sum. Owner Design/Builder Sub Sub Self-Perform Sub • Delivery Schedule is two non-linear phases:

25. Cost Plus Fee: Design/Build PROS CONS Speed No check and balance between A/E and Contractor More difficult for Owners to manage Potential adversarial relation-ship between Design/Builder and Owner (if lump sum) • Speed • Selection flexibility • Single point of responsibility • Team concept BEST SUITED LEAST SUITED • Projects that are schedule sensitive • Projects that are difficult to define • Projects that are less schedule sensitive

26. Example Cost Plus Fee (Design/Build) Project MD Anderson Cancer Center Mid Campus Building 1 and Parking Garage

27. Example Cost Plus Fee (Design/Build) Project MD Anderson Cancer Center, Mid Campus Building 1

28. Why it Worked at MD Anderson Cancer Center • Accelerated Schedule • Known and Trusted Builder and A/E Team • Known Owners Expectations • Not just what was in writing • Proactive, Daily Owner Involvement

29. What is GUARANTEED about a GMP? YES NO Design changes Added scope Design errors Unforeseen conditions Natural or man-made disasters • Estimate errors • Market fluctuations • Normal weather delays • Construction mistakes • Quantity errors • Subcontractor performance “A Guaranteed Maximum Price on aparticularscopeofwork”

30. Unit Price Contract • Predetermined price for major items of work. The Contractor’s price per unit multiplied by the total quantity to create the total cost for each major item of work. • Based on the Contractor’s interpretation of the major items of work and the quantity of each item. • Contractor is paid based on the actual quantity constructed of each major item of work.

31. Unit Price Contract What is Included? *Only what’s clearly on the plans & specs

32. Owner A/E or Consultant JOC Contractor S u b c o n t r a c t o r s o rE m p l o y e e C r e w s Unit Price Contract • Job Order Contracts • A process for contracting for the minor construction, repair, rehabilitation, or alteration of facilities when the work is of a recurring nature but the delivery times, type, and quantities of work required are indefinite. • Orders are priced based substantially upon pre described and pre-priced tasks contained in an Owner’s specified Unit Price Book. • The prime contractor bids a “coefficient” or multiplier which is applied to these unit prices to determine the actual rates. • Selection is based upon the combination of experience, qualifications, past performance, technical ability, financial stability, reputation, and price which provides the overall “best value.”

33. Unit Price Contract PROS CONS Difficult to manage Difficult to compare proposals • Flexible • Fast BEST SUITED LEAST SUITED • Small projects • Repeat work • Schedule sensitive • Large projects • Poorly defined scope

34. SUMMARY: Comparison of Different Contract Types

35. Market Factors: What Contractors Consider • Perceived Risk • Perceived Quality of Owner & A/E • Quality of plans • Paid on time • Prompt resolution of changes • Difficulty/Complexity of the Project • Time • Retainage & Payment Terms • Location – Availability of Manpower & Materials • Cost of Materials & Labor

36. Materials Costs* (Last 10 Years) • Diesel 246% • Asphalt 124% • Iron Ore / Steel Scrap 164% • Lumber 4-9% • Copper Ore 309% • Gypsum 28% • CPI 24.5% vs. PPI for Construction 52.1% *Source: AGC, Bureau of Labor

37. Labor Costs Industry Facts • The average craft worker is 47 • The average entry age into the industry is 29 • Craft training is at an all-time low • Construction productivity was at an all-time low • 20% of the workforce is expected to retire within 3 years • Future building growth is projected to exceed anything seen in previous generations The Bottom Line While the construction workforce is aging and less productive due to lack of training, the demands on our industry increase and become more technical every year. We must do more to recruit, train and retain craft workers to meet the demands of our industry.

38. Pick the Right Contract Type & Delivery Method • Before starting the selection process, determine which contract type and delivery method will provide “best value” • Factors to consider: • Project size and complexity • Time allocated for the construction • Competitiveness of the current/local construction market • Desired flexibility • Availability of contractors and subcontractors in the local market • After deciding on key factors, evaluate the various delivery methods and formally adopt the method you deem “best value.”

39. Resources / Credits • Dorsey, Robert W., Project Delivery Systems for Building Construction, AGC of America, 1997 • AGC National, Project Delivery Methods

40. Thank You Tom Vaughn 713.243.8300 tvaughn@vaughnconstruction.com