Sources of Changes in Design-Build Contracts for a Governmental Owner

1. Sources of Changes in Design-Build Contracts for a Governmental Owner Dr. Robert A. Perkins, PE Associate Professor, Dept. of Civil and Environmental Engineering, University of Alaska Fairbanks, 907 474 7694. ffrap@uaf.edu http://www.faculty.uaf.edu/ffrap/

2. William M. Tweed

3. New York county allocated $250,000 for a new courthouse. Escalated to $13 million Boss Tweed and his gang got a 30% Commission on all contracts Siphoned off $9 million ($135 million in 2007 dollars.) 1858

4. Government Procurement Virtues • Public Confidence – underpinned by attributes of accountability, transparency, equity and fair dealing in relation to procurement processes • Efficiency and effectiveness – in use of pubic monies to achieve value for money and efficiency of delivery of procurement outcomes; and • Policy compliance and consistency – of both the processes and outcomes of procurement in relation to public welfare objectives and expectation of the public sector such as environmental issues, training and apprenticeships, international obligation and especially business and regional employment impacts

5. Government Contracting • Orville and Wilbur Wright’s contract to build the first military aircraft was three and half pages long. • 19 different agencies surveyed 1978 and 1979 • 877 different sets of procurement regulations, including directive, bulletins, and instructions • 64,600 pages of regulations, of which • 29,900 pages of which were promulgated or revised annually.

6. Construction • A 1970 federal survey found government building projects took 59 months to design and build while equivalent private sector projects took 24 months • 1986 through 1988, eight federal entities completed 268 building projects valued at more than 10 million each. 44% of those projects experienced time delays over 6 months and 23% experienced cost increases over 10%

7. Contracting Strategy for Procurement of Construction • Project Delivery System • Procurement Method • QBS • Low bidder • Contract type • Lump Sum • T&M

8. Project Delivery Systems • Design-Bid-Build • Design-Build • Construction Manager at Risk • Job Order Contracting • PPP, Public Private Partnerships • BOT, Build Own Transfer • BOOT, Build, own, operate, transfer • DBFO, design, build, finance, operate

9. DBB = Traditional • Owner hires A/E • A/E designs and produces a “bid package” • Owner advertises for sealed bids • Opened publicly • Lowest bid gets the job • Must provide bond • “Qualified” = bondable

10. A/E designs what owner wants Competition assures lowest price Sufficient bidders Transparent process Fair process No discretion = no favoritism Bonding can force performance Advantages of DBB

11. Disadvantages of DBB • Bids may come in over budget • Changes, Always changes • Design errors • Differing site conditions • Owner changes • Third party issues • Access, permits • Acts of God

12. Changes • Advantage goes to contractor • Essentially non-performance or breach by the owner • Contract clauses cover, but asymmetrical negotiations • Risks, i.e., schedule • Grey Areas

13. Opportunistic Bidding • Bid low just to get the opportunity • Contingency • Equipment

14. Design Build • Owner develops “design criteria” • Bridging design • Advertises for proposals • Two envelope proposals • Qualifications and Outline of Design • Price

15. Best Value • Might have presentations • Select best value for government • Most building for money

16. Criteria for a 46.6 Million Bridge • Durability 20 • Quality of Design 17 • Maintenance of Traffic 15 • Maintainability 12 • Quality of Construction 10 • Understanding the Scope of Work 10 • Quality of Schedule 5 • Community Impacts 5 • Aesthetics 5 • Navigational Vertical Clearance 1 • Total 100

17. Advantages of DB • Can consider contractors past business practices • Can compare actual price with outline design • Contractor and A/E work together to assure constructability • Innovation • Faster • Changes due to “design errors” reduced or eliminated

18. Disadvantages of DB • Design not entirely under Owners control • Can still have changes

19. Governmental DB • Prior to 1990, DBB was the preferred project delivery system • Could use DB and others, but needed special permission • often required a finding that DBB “was not practical” • Started to change rapidly in the 1990’s

20. 1990, Federal Highway Administration SEP-14 • 1996. Clinger-Cohen Act, 10 USC §2304,. • 2000 revision of the Model Procurement Code • Today about half the states have laws that allow some sort of “best value” procurement and design-build delivery. • But

21. Inertia

22. Select • Quality • Schedule • Cost

23. Quality • Pretty Good

24. Schedule

25. Cost • Terms: • Construction Phase Cost Growth • Actual vs. planning • Construction Contract Cost Growth • =changes • AKA “delivery contract cost growth”

26. A 2002 study by the National Institute of Standards and Technology and CII • Not statistically significant on construction phase • DB significantly better in changes • Not enough public projects • A 2003 study of 67 projects, mostly domestic but some overseas, • DBB had less cost growth • DB and DBB had similar changes • Government and non-governmental not distinguished

27. The 2005 Design-Build Effectiveness Study (USDOT 2006) • Paired 11 similar DB and DBB transportation-related projects and compared the cost growth and changes – the average project size was about $50 million. • Contract cost growth was 6.0% for DB and 4.3% for DBB. • DB projects averaged 16 change orders with a total average cost of $837,000 per project, while DBB had 22 change orders that had an average of $588,000 per project. • DB had fewer change orders but they cost more. • None of the results statistically significant.

28. Causes of Changes DB vs. DBB • Controllable vs. Non-controllable • Owner Project Manager’s Viewpoint • Controllable • Design Errors • Should have less • Uncontrollable • Differing site conditions • Same • User Changes • Could have more????

29. Schedule vs. Contracting

30. A/E works for Contractor • In DBB, the owner/user select the A/E • A/E has many design reviews with chances to “sell” features to the owner • A/E is trying to please owner, happy to make minor changes • In DB, the A/E works for the contractor and is reluctant to change • May lead to more changes

31. Causes of Changes • Owners change vs. Design error • 65% design review • User notices fixture is not optimum • Contractor says his design conforms to design criteria he bid on • If owner’s PM was in charge of design criteria, he will tend to see this as a user change rather than a design error.

32. Methods • Corps of Engineers • Northern and Southern Alaska Area Offices • Military Construction Projects • Resident Management System

33. Question • Are the causes of change different between the DB and DBB governmental contracts? • Specifically, were there more owner/user requested changes in DB than DBB.

35. Method • RMS, Resident Management System • Has all contract changes and causes • Type 1, Design Errors • Type 4, User Changes • Type 7, Differing Site Conditions • Others: value engineering, miscellaneous changes, administrative changes, and construction changes, suspension of work, government furnished equipment

37. Controllable vs. Uncontrollable

38. Source of Change

39. But, from raw data • 12 of 14 DB contracts had user changes • Only 9 of 20 DBB had any user changes • More user changes were work/cost reduction in DBB • Average DB change was $48,000 while average DBB change was -$32,000 • Absolute value of changes was similar, DB was $53,000 and DBB was $59,000

40. There were no significant differences between the housing and industrial groups • There were no type 4 changes in the first few months of DB contracts.

41. Answers • There is clear advantage in DB in construction/delivery contract cost growth • This is primarily in reduced cost of design errors • There were statistically significant increase in number of user changes in DB over DBB • There were statistically significant increase in cost of user changes in DB over DBB, but • Cost difference may be anomaly

42. Conclusions • Construction contact cost growth is less with DB • Strong evidence there are more owner/user changes in DB • Advantage in design error cost growth outweighs disadvantage in owner/user changes • Future work should explore why there are more user changes (they did not occur early in the project).