Alternative Construction Delivery Models For Prop G Program Projects

1. Grossmont Healthcare District Alternative Construction Delivery ModelsFor Prop G Program Projects April 2009

2. What is a Construction Delivery System? • A process designed to achieve the satisfactory completion of a construction project from conception to occupancy. • Construction delivery systems distribute risk amongst team members • Risk is any negative outcome affecting time, quality or cost. Risk has a value. The assignment of risk involves a substantial cost that is sometimes hard to quantify.

3. Examples of Construction Delivery Systems • Design/Bid/Build (the “traditional” system in the public sector) • Negotiated GMP (the “traditional” system in the private sector) • Design/Build (AB 405, proposed) • Design/Build (Lease/leaseback) • CM at-Risk (CM/GC) • CM—multiple prime

4. How Delivery Systems Differ

5. Venus and Mars? Or Vars? Construction Is production intensive, with defined needs for labor and materials and a predetermined sequence of activities Preconstruction Is decision intensive requiring study, analysis and often redesign to optimize value

6. 37% Poor Project Average Project Good Project Definition Definition Definition Project Definition • Projects that begin construction with excellent project definition cost 17% less than the average. Those that begin with poor project definition cost 20% more than the average.** Edward C. Merrow, President and CEO, Independent Project Analysis, Inc.

7. Changes • The cost of changing something increases by a factor of about 10 each time the project changes its state. Written requirements Sketch drawings Detailed design Construction drawings Construction

8. What is Design/Bid/Build (DBB)? • An system in which an owner retains a designer under a professional services contract to prepare complete construction documents and then bids the work, awarding a lump sum contract for construction of the facility to the low bidder • The “traditional” method in public construction Owner Architect/Engineer Contractor

9. Design/Bid/Build – Issues Owner Contractor’s incentive is to maximize job profits through ambiguities, errors and changes. No incentive for repeat work. Architect/Engineer General Contractor Poor collaboration S U B S Late news on cost Design Construction $ PD Takes too long

10. What is Design/Build (DB)? • A system in which an owner contracts with one entity to perform both design and construction under a single contract Owner Design-builder Architect Contractor Engineers Subcontractors Contractual Communication

11. Design/Build Owner Design/Build Contractor Architect/ Engineer S U B S Design Construction $ PD

12. Design/Build Risk Strategies Owner Design/Build Contract S U B S Design and Management PD Construction $ Shop drawings $ Construction Construction $ GMP

13. Design/Build Benefits • Single responsibility point for performance and project outcomes • Simplified administration of single contract for design and construction • Owner avoids most disputes between A/E and Contractor • Accelerated project delivery possible • Possible to accommodate changes by Owner/Code Officials on an actual-cost-basis

14. Design/Build Benefits • Early fixed cost or GMP (recommended) possible • Minimum exposure to unexpected change orders; Requires careful project definition and understanding by Owner of the project scope • Possible to select D/B proposals from multiple Design/Build teams • Maximum innovation possible for design & construction processes • Promotes non-adversarial team environment from Owner’s perspective

15. Design/Build Issues • More difficult for Owner to judge value-for-cost comparisons • Not currently permitted for district hospitals • Discretionary changes are very expensive • May limit competition • Potential for limited creativity & innovation if contractor and A/E do not collaborate successfully • Owner may lose some control over project outcome if project not carefully defined • Requires detailed review of Design/Build proposals and understanding of content of proposal • (Bridging approach is possible to minimize this concern)

16. What is Lease/Leaseback? • A system in which a third party (often a developer) leases the property from the district, constructs and finances the facility, and then leases it back to the owner • Design may be contracted directly by owner or through leasing entity • Authorized under Health and Safety Code for certain projects • Ownership of facility reverts to district at end of lease term

17. What is CM at-Risk? • Design is completed by an architect under a professional services agreement • A CM is chosen by a qualification-based selection process (Govt. Code 4525) • Subcontractors bid directly to the owner • After bid, subcontracts may be assigned to the CM, who guarantees the total construction cost

18. CM at-Risk Owner CM firm Architect Contractor Engineers Subcontractors Contractual Communication

19. CM at-Risk Strategies Owner CM (Design Phase) Architect/Engineer CM at-Risk T R A D E S Design P Bid Pack 1 (site, steel) $ Shop Drawings Bid Pack 2 (shell and core, MEP) $ GMP and start of construction $ Bid Pack 3 (fit out)

20. CM at-Risk Benefits • Reliable cost estimating early in design • CM/GC bears construction risks for cost if Guaranteed Maximum Price (GMP) required • True open-book cost accounting is possible • Owner expends only actual cost of project (recommended) • Shared savings can be used as incentive (not recommended)

21. CM at-Risk Benefits • Construction Manager input into design, including constructability, benefit/value based design process, building systems and scheduling input. • Accelerated project delivery/phased construction possible • Generally results in reduced change orders, reduced risk of claims/litigation • Construction Manager can self-perform trade work (generally not recommended)

22. CM at-Risk Issues • Best for complex/large projects • May reduce competition • Early GMP, prior to completion of A/E documents can result in scope gaps, lack of technical design review • Requires more involvement from Owner to make prompt decisions • Requires skill set for conceptual estimating, design management skills and experience in CM at-Risk to be successful

23. CM at-Risk Issues • Potential for conflict of interest; increases if self-performing construction • How are the trade contractors selected • Who owns the contingency? • How does the CM make its money? • Fee • Mark-ups? • Sub buy-out? • Shared savings?

24. What is Multiple-Prime CM? • Several specialty contractors are engaged to do specific portions of the work • Each contractor has a direct contract with the owner • Breakdown of work may be by phase, by trade, or both • Each prime contractor may also have subcontractors • Work is managed for the owner by a CM firm Owner Contractor CM firm Subcontractors Architect Contractor Engineers Subcontractors Contractor Contractual Subcontractors Communication

25. Multiple Prime Contractors Owner CM Architect/Engineer T R A D E S Design PD Construction $ Construction $ $ Construction

26. What are the typical risks on a construction project? Conflict of Interest Risk

27. Primary Components of Owner’s Risk • Budget • Cost • Schedule • Design deficiencies • Code compliance • Unforeseen conditions • “Force Majeure”

28. Budget • Initial budget must include all project costs including “soft” costs, appropriate contingencies, and an allowance for construction cost escalation (inflation)

29. Cost • Bid price may exceed budget • A project awarded within budget may encounter excessive change orders • Program changes (user’s) • Unforeseen conditions • Design errors or omissions

30. Schedule • Delays may come from many causes, both natural and man-made • Contract will define who assumes risk for various types of delay • Owner may incur additional collateral costs if occupancy is delayed

31. Design Deficiencies (“The Gap”) • Owner warrants that documents are complete and accurate (Spearin doctrine) • Contractor is entitled to rely on completeness and accuracy • Design professional is held to negligence standard • Owner cannot be unjustly enriched • AE standard of care not the same as OSHPD requirements

32. Code Compliance • Is related to design deficiencies • Responsibility generally follows same principles • Public agencies cannot shift this responsibility to contractor (PCC 1104) • Variable code interpretations between jurisdictions

33. Unforeseen Conditions • Accuracy of as-built drawings • Importance of adequate site investigation • Statutory restrictions on risk transfer

34. Force Majeure • Risks un-anticipatable by definition and beyond the control of either party • Includes: • “Acts of God” • War • Strikes • Unusually severe weather • Unavailability of materials

35. How do various project delivery systems allocate/mitigate risk?

36. Design/Bid/Build • Owner takes risk for: • Design deficiencies (“the Gap”) • Costs and delays for owner-initiated changes • Delays due to design schedule • Costs and delays due to unforeseen conditions • Costs and delays due to unexpected code interpretations • Contractor default

37. Design/Build • Owner is no longer responsible for design deficiencies, but still at risk for: • Quality of program information supplied • Effectiveness in defining performance requirements and quality standards • Delays and costs due to deficiencies or changes in above • Loss of control over project design

38. Design/Build – Common Misconceptions • May not be faster – a reasonable effort is needed for thorough project scoping in pre-design • Not all project problems go away • Elimination of design-related change orders is not the same as “No Change Orders” • The designer’s professional responsibility does not change

39. Bridging – A Variation of Design/Build • Owner hires “bridging architect” to prepare conceptual design documents and possibly to advise during balance of process • Design/Build entity completes design documents and constructs the project • Slower delivery, but greater control • Delays cost commitment

40. Bridging Owner Bridgingarchitect Design/Build entity Design team Construction team Contracts Communication

41. Bridging – Appropriate Uses • Owner requires formal, competitive selection of design-build entity • Owner desires assistance in planning, programming or other pre-design activities • Project is not well defined • Controlling risk is a high priority for owner

42. Lease/Leaseback • Risk of design deficiencies follows design contract (i.e., may be owner or leasing entity) • Most other construction risks move to leasing entity (cost, schedule , but probably not unforeseen conditions or force majeure) • Task and risk of proper program definition still goes to owner (similar to Design/Build)

43. CM at-Risk • Owner’s risks are: • Same as design-bid-build, but may share risks of design defects if CM provides preconstruction services • May share some risk through contingency • May require increased administrative cost to track project billings & payments

44. Multiple-Prime CM • Owner’s risk is similar to Design/Bid/Build, but may increase due to multiple direct contracts • May require increased administrative cost to track project billings & payments • Owner is at risk for CM’s ability to coordinate various contractor’s work

45. Selecting a Project Delivery System Window, Glass & glazing Window wall Structural steel Window covering Concrete formwork Signage Security systems Fire protection Landscaping and Planning Painting Striping Stucco Hardware Glass & Glazing Toilet compartment & accessories Pools and fountains Termite control Skylights Sealants & caulking Demolition Insulation Drywall Lockers Site sprinklers Grading & excavation Doors and frames Soil treatment Fire stopping Electrical Mechanical Tile Rough framing Elevators Fencing Casework Metal fabrications Building insulation Ductwork Metal wall & roofing panels Mold Control RO water Erosion control Paving Acoustical ceilings Wall covering Architectural woodwork Flooring Moisture protection Compressors and fan units Flagpoles Food service Roof and site drainage Block and brick Flashing & sheet metal Ornamental Iron Clearing & stripping Network wiring Millwork Roof hatches Vacuum systems Carpeting Plumbing Roofing Code consultant Cleaning Food service consultant Acoustical consultant Sanitary engineer Control wiring Building specialties Structural engineer Design architect Telecommunications consultant Architect of record Concrete reinforcement Audio Visual consultant Civil engineer Counter tops Network cabling consultant Electrical engineer Lighting consultant Concrete Supply Construction Graphics and signage consultant Mechanical engineers Testing and Inspection Design Hardware consultant Life Safety consultant

46. What drives selection of the delivery process? • Project characteristics • Client goals/objectives • Organizational constraints • Political concerns • Process flexibility

47. Sources of Further Information • Design-Build Institution of America: • http://www.dbia.org/ • Guidelines published by California Healthcare Foundation: • http://www.chcf.org/topics/hospitals/index.cfm?itemID=119899