TWENTY-FIRST CENTURY PROJECT DELIVERY SYSTEMS

by Val S. McWhorter and Mark E. Hanson
Smith Pachter McWhorter PLC¹

NORTH AMERICAN TUNNELING 2000 CONFERENCE

I. Introduction

With the advent of the Industrial Revolution two centuries ago, the role of local and central governments grew to include responsibility for developing, executing and maintaining the infrastructure to support changing population centers, new modes of transportation and expanding commerce. Public agencies developed and executed, and collected taxes to finance, major public infrastructure projects in this country such as dams, railroads, bridges, tunnels, highways, water and wastewater treatment facilities, telecommunications networks and power generation and transmission facilities. The benefits to this country as an emerging economy, and to other developing modern nations, were certainly the increased mobility, enhanced commercial opportunities and protection of property such investments secured, but also the ability to enter, maintain and take on a significant role in national and world commerce. Infrastructure became the foundation for economic development and sustained economic growth in the nineteenth and twentieth centuries.²

Throughout this period, government increasingly secured design and construction services necessary to deliver these infrastructure projects, and operated and maintained the facilities. Although most so-called "modern" project delivery systems have appeared before on the stage, many of the most significant infrastructure projects built in this country in the twentieth century were delivered using the mechanism of design-bid-build, frequently on the basis of competitive bidding. The current trend toward use of construction management, design-build, and privatization or public-private partnerships, all have emerged because of the infeasibility of government continuing in its traditional role as the sole provider of infrastructure and related services. To a great extent these alternatives have emerged because of budgetary restraints. But intertwined with a decreasing share of tax revenues devoted to capital projects is a desire on the part of the public and public officials alike for efficient use of limited funds along with the firmly held belief that in many cases the private sector may do the job better.

Several aspects of traditional design-bid-build delivery have contributed to the belief in the efficacy of the private sector. Fragmentation of the construction process in traditional design-bid-build into a series of largely unrelated phases led to greater specialization and segregation of the design, management and constructor roles necessary for construction projects. In part this occurred because many viewed construction as a tangible product or commodity, not as a professional service, and did not recognize until relatively recently the critical management component that the qualified constructor brings to a project. This trend over time reduced the level of interaction and information sharing amongst the participants in the construction process, a critical element to success where, unlike most other endeavors, there are many participants, requiring a high level of coordination and cooperation for success, in a poorly defined management structure. As information sharing and ongoing communication waned, adversarial confrontation rose as the participants focused on maximizing their opportunities from the process rather than contributing to its success.

Other changes, such as reductions in the staffs of owner entities to exclude those skilled in managing the construction process, and corporate refocusing on core businesses, which typically have not included constructing facilities, have contributed to the decreased efficiency of design-bid-build methods. Some aspects of the development of alternative systems have actually been fostered by government as we increasingly recognize the mammoth investment required for constructing capital facilities, and the long term operating and maintenance costs necessary to achieve the projects’ optimum useful lives.³ The private sector’s access to sizeable amounts of investment capital and better management skills have led governments to solicit private participation in a number of infrastructure projects, and to alter regulations to permit such participation and the use of alternatives to traditional design-bid-build.

Each type of "project delivery system" allocates the risks of project cost, quality and timely performance differently. An understanding of these differences, together with available data about the results obtained using traditional and non-traditional delivery systems is critical to successful capital projects. While much of the experience to date with alternative delivery systems has been in construction other than heavy civil and underground construction projects, the encouraging results achieved through their use in industrial, high technology, bridge and highway projects indicates the likelihood of their application to these projects.⁴

II. Design-Bid-Build: Past Its Prime?

Under the traditional design-bid-build system, an owner first contracts with a design professional to prepare a complete design consisting of plans and specifications. The owner then issues the complete design to prospective bidders who are expected, in general, to accept the design documents at face value and develop a bid for constructing the project detailed in the plans and specifications. Expecting to perform no more than what is called for in the plans and specifications, unless they receive additional compensation, bidders generally offer to perform the project for a lump sum, with the job going to the lowest responsible bidder. After this bidding process, the owner enters into a separate contract with the low bidder to construct the facility. The owner takes possession of the facility upon substantial completion of construction. The bidding process often consumes a major portion of overall project delivery time. This process developed in large part due to statutory requirements associated with the process of appropriating funds for construction, to provide greater equality in working on the public treasury, to reduce favoritism and because it has been thought to result in the least cost.

The low bidder is responsible for performing construction in accordance with the plans and specifications and managing its forces and subcontracted trades to achieve timely completion. The most important legal principle for risk allocation in design-bid-build delivery systems is the owner’s warranty of the design. Established by the United States Supreme Court’s decision in United States v. Spearin, the warranty allocates to the owner the risk of cost and time increases that result from deficiencies in the design. In simple terms, as long as the contractor attempts to build the project as required by the plans and specifications, he is not responsible for the project not functioning as the designer intended or for increased costs and delay that may result from problems with the design.⁵

Design-bid-build depends primarily on cost competition and has failed in many instances to achieve cost effective and timely project delivery because accountability for errors and omissions on the one hand and rework and cost overruns on the other may not be clear. Thus, in addition to the owner’s responsibility to adequately define the project’s scope, select a designer experienced with the type of construction, administer the entire process, make timely decisions and carry the risk of design defects in its contractual relationship with the contractor, the owner faces a potential train wreck as the designer and constructor each blame the other when problems arise, costs increase and the schedule slips. Construction of a federal courthouse for the General Services Administration suffered a year’s delay over design defects that caused just such finger pointing.⁶

III. The Rise of Managers

In reaction to the problems associated with traditional, competitively bid project delivery, the reduction in owner staffs and the segregation of design and construction responsibilities, the retention of professional construction managers became increasingly common. In its simplest form, "agency construction management," the manager has no responsibility for the cost and schedule of actual construction, but is involved early in the process to assist the owner with designer selection, the design process, the bidding process, and construction itself. Design schedule management and constructability reviews to enhance realization of the design using common construction means and methods are among the potential benefits of construction management. Such constructability reviews can also lower the owner’s construction costs by ensuring that the need for novel and innovative construction means and methods are minimized. Rather than a type of project delivery system, construction management of this type is a professional service formerly provided by either the design professional or the constructor, which roles the fragmentation and specialization in the industry have eroded.

Construction management takes another form, more closely akin to the former role and function of the constructor or full service architect. This is often referred to as "at risk" construction management and is at the same time both similar to and vastly different from general contracting through design-bid-build. Construction management at risk is similar to traditional design-bid-build in that the construction manager and the owner contract separately from the owner’s contract with the design professional. It is similar in that the construction manager undertakes responsibilities for construction and its management as does a general contractor in the design-bid-build context. The construction manager at risk accepts responsibility similar to the general contractor for cost and schedule in the sense that he must secure subcontractors, manage his own forces and attempt to bring the project in on time and on budget.

There are several important differences, however, in the nature, timing and extent of the risks the construction manager assumes. First, the owner generally contracts with the construction manager simultaneously with the design professional, rather than after completion of the design and the receipt of competitive bids. The owner’s selection of a construction manager to provide management services and to construct the project typically involves a fee-based contract. The contract usually requires the construction manager to provide significant constructability input to the design early in the process. The construction manager may assume some risks of subsurface conditions to move the start of construction forward by avoiding full-blown subsurface investigations. When the design, or segregable portions of it, are at an advanced stage, the construction manager provides the owner a guaranteed maximum price ("GMP") for the project or the segregable portions. Actual cost savings from the guaranteed maximum price and project schedule through value engineering and effective management are either retained by the owner or shared with the manager.

This project delivery method can clearly benefit an owner as the construction manager provides a professional service, early in the process when changes to design are the least costly and have the smallest impact on actual construction. Budgeting, cost estimating, scheduling, value engineering studies and constructability reviews are provided to the owner by the entity with the risk of performing and therefore the greatest incentive for accuracy. While the construction manager’s involvement in the early design stage substantially benefits the owner, and therefore enhances the potential for successful (on time and budget) delivery of the project, the construction manager must be aware that the rights and obligations he assumes differ significantly from those of a contractor under a design-bid-build system. The construction manager’s involvement in the early phases of design generally means the owner does not warrant the design, and that the construction manager actually warrants much of the design to the subcontractors with no ability to pass claims based on design defects through to the owner.

Construction management at risk can speed project delivery over that achieved through design-bid-build because it permits overlap of design and construction. The construction manager has the opportunity to lead the project team through constructability reviews, value engineering, market-based estimating and can schedule and assist in maintaining realistic design schedules.⁷ Key owner responsibilities for success are adequate definition of the project scope, the ability to make timely decisions and promoting a high level of communication amongst team members.⁸

IV. Design-Build Comes of Age

Design-build project delivery involves a single entity performing design, engineering and construction. Many centuries ago, a system much like design-build, the "master builder," was the dominant project delivery system. The master builder controlled all aspects of the process. Design-build has risen to prominence once again after a rebirth in the 1960s. By 1997, design-build accounted for roughly thirty percent of non-residential projects and is estimated to comprise fifty percent of non-residential construction by 2006.⁹

The benefits of design-build justify its reemergence as an effective project delivery system. As both design and construction duties rest on the shoulders of a single entity, an owner only has to deal with one single source of responsibility for quality, costs and schedule compliance, eliminating an owner’s exposure to designer-constructor conflicts that have plagued many design-bid-build projects. Design and construction duties are integrated fully and overlapped temporally so that the owner can achieve significant savings through omission of the bidding phase and more rapid delivery of a completed project. Significantly, owners assume less risk due to the absence of a warranty of the design.

As the design-build entity is in charge of design and construction, it may more accurately predict project cost at an early stage, lowering the chances of subsequent cost escalation. The design-build contractor takes on the significantly greater risk of warranting that its services will provide the owner a facility that meets certain parameters the owner established in the scope document it issued to solicit design-build proposals. This may lead to significantly greater exposure to higher damages for the design-build contractor than under traditional contracting methods.¹⁰

Both construction management at risk and design-build, with the early involvement of the constructor in the design process, provide opportunities to use fast track construction. Fast track construction permits the start of construction prior to completion of the design and results in delivery of a project in a shorter period of time. Critical supplies and equipment may be ordered and received earlier in the process, and earlier project completion reduces the owner’s interim financing costs.

One of the key factors influencing the outcome of a design-build project is the design-build entity itself. There are only a few companies that combine architect/engineer and constructor functions, so the combination of these separate skills must be achieved to enter the design-build market. Typically, this involves a contractual arrangement, in many cases achieved through a written joint venture agreement. While joint ventures are sometimes used to perform large, traditional lump sum projects, it is sometimes used to create a design-build entity. Of course, any business structure can be used to create an entity to seek and perform design-build projects, including a corporation, limited liability company or partnership. Obviously, these are important legal and business planning decisions. A design-build entity can be lead by a contractor, with the design element either established in-house or subcontracted to a design professional team member. Architectural and engineering firms, recognizing design-build as a lucrative part of the construction industry, have typically not led design-build entities, but are developing ways to take on the risks of such projects.

The legal ramifications of design-build can be significant and include the potential compromise of the design professional’s traditional professional and ethical obligations to the owner.¹¹ The design professional in a design-build context is not the owner’s consultant, but the contractor’s teammate, with its loyalties and financial interests linked to the success of the design-build venture. A few cases have involved the issue of whether a design professional involved in a design-build venture acted in its own self-interest and did not represent the owner’s interests fairly.¹² Although this situation is more likely to result when the design professional is a direct employee of the design-build entity and has a financial stake in the success of the project, these issues can and should be dealt with through the contracts between the design-build entity and the owner.

Potential problems under design-build also exist. If an owner is indecisive, disputes may arise if an owner issues a scope document providing a design-builder with a set of performance specifications to price a project, but then changes the design criteria after design work begins.

The scope document the owner issues must not only adequately define the project, but must yield most control over the design to the design-builder. Failure to do so can result in the owner re-establishing the warranty of the design or exposing itself to liability for interfering in the design-builder’s right to execute to the stated requirements rather than the owner’s mutable preferences. The owner and its internal clients must recognize the design-build contract is a performance-based contract not a collection of prescriptive specifications, and that they are obtaining engineering, not engineering the project themselves.

V. Comparing the Effectiveness of the Different Systems

Recently, efforts have been made to determine whether and how organizations and methods of implementing project delivery can achieve better results than traditional methods. These studies have attempted to quantitatively analyze "cost, schedule, quality and other key project attributes of various project delivery systems . . . ."¹³ Of some 300 projects surveyed a few years ago, cost and schedule growth of 5% or more occurred in nearly one-half of the projects in which traditional design-bid-build was involved. Only slightly more than 40% of projects using construction management at risk experienced cost increases of 5% or more and slightly less than one-third of such projects experienced more than 5% schedule growth, while design-build projects saw 5% increases only about one-third of the time.¹⁴

While this research did not examine responsibility for cost and schedule growth from a liability standpoint, the survey interviews established that the most common perceived reason for achieving contracted cost and timely completion was early involvement of the constructor in the design process.¹⁵ Such early involvement is the hallmark of both construction management at risk and design-build. More recent research confirms these trends, although construction management at risk unit costs in the 350 projects most recently studied are about 7% greater than those in design-bid-build.¹⁶ The research data does not explain this difference, although one possibility is that use of contingency occurred on a higher proportion of the studied projects than in previous studies. Again, although researchers have identified such trends, the causes of cost and schedule growth were not identified.¹⁷

While many owners still view lump sum contracting through design-bid-build as the solution to cost and schedule growth, this system places the most risk on the constructor. In turn, such greater, but generally less manageable or controllable risk, has resulted in some of the less desirable aspects of lump sum contracting: contingencies, and a "change order" focus, with the focus on extras carried into post-project litigation.¹⁸

VI. "Beyond Construction" Alternatives: Privatization and Public/Private Partnerships

Traditionally, governments were the sole providers of large infrastructure projects

such as tunnels, bridges, dams, telecommunications networks, power generation facilities, waste storage and disposal facilities and railroads. The need for such projects has not abated, and in fact, will require investments of enormous magnitude in the near future. Just a few years ago, the World Bank estimated that developing countries invest $200 billion each year in infrastructure, and that in the next 20 years, South Korea will invest $400 billion, Taiwan, $245 billion and China almost $100 billion by 2000.¹⁹ In the United States on our highway system alone the Department of Transportation has said it will need to spend $52 billion annually to maintain the Federal Highway System and almost $17 billion annually to improve it.²⁰

Today, private developers have access to large amounts of investment capital and better management skills than governments and have begun to take on, with government encouragement, primary roles formerly fulfilled by government through Build-Operate-Transfer ("BOT") or Design-Build-Finance-Operate Maintain ("DBOM") delivery systems. Congress has enacted first the Intermodal Surface Transportation Efficiency Act ("ISTEA"), and subsequently the Transportation Equity Act for the 21^st Century (commonly known as "TEA 21"). TEA 21 provides federal assistance in the form of credit to major transportation investments of "critical national importance." By providing this type of financial assistance, Congress intended to fill market gaps and leverage substantial private co-investment to help meet the nation’s infrastructure needs. ISTEA also permits states to receive federal funds although they enter contracts with private entities for roads, bridges and tunnels to be designed, built, operated and maintained.²¹ At its essence, these systems involve a private entity, usually a consortium of private sponsors, which designs, finances, constructs, operates and maintains the facility for public use for a specific period of time. The entity is able to collect revenue from the users of the facility.²²

Permitting private companies to develop and operate infrastructure facilities for public use is not new. Government granted "concessions" have been occurring for several centuries.²³ One of the first in the modern world was the Suez Canal. The ultimate concessionaire, the British government, increased its investment tenfold in about 30 years.²⁴ In the United States, the practice of permitting privately built and operated toll roads, ferries and jails was common during the Revolution.²⁵

The Build-Operate-Transfer method rose in popularity along with the decline in international construction in the late 1970s. Global construction companies teamed with engineering firms to approach investors and developers, not only to form a consortium, but to actually propose specific infrastructure projects to various governments.²⁶ Such worldwide public/private infrastructure partnerships grew from 115 projects valued at $58 billion over the period from the mid-1980s to late 1993, to 788 projects at various stages of development one year later with a value of $534 billion.²⁷

In terms of financing the project, there are several methods. In many Build-Operate-Transfer projects, the host government provides no financial or other form of assistance to the private-sector sponsors. Sometimes sponsors will provide equity financing from 10 to 30 percent of the total project cost and seek debt financing for the remainder. In other cases, the host government may provide the land required for the project or offer tax subsidies to the sponsors. In cases of debt financing, sponsors will seek assistance from commercial banks, international financial institutions, or bilateral government lenders. While it has been the talk of the 1990s, even in the United States such projects are difficult to put together as they involve complex financing, economic and legal arrangements.²⁸

Governments have begun to use Build-Operate-Transfer to obtain necessary infrastructure projects of recognized importance to be funded where other priorities would have meant no funding. Little administrative staff is required to handle a large-scale project created in this way. Governments do not incur a large amount of risk due to required bonds and letters of credit that ensure completion of the project in the case of default by a sponsor. This delivery method shifts delay and cost overrun risks from the government and taxpayers to the developers. Also, the method fosters profit-motivated efficiency and productivity in design and construction to allow for quicker delivery. Quality of work is not a concern, as the sponsors have an obligation to operate the facility upon completion for periods of 30 to 40 years and will utilize the latest technologies to deliver a top-notch work product to minimize future investments in rehabilitation work.²⁹

The potential disadvantages of build-operate-transfer are that project costs may be higher in the private sector because of the need for sponsors to turn a profit, risk of project failures and defaults requiring the government to assume some operational and maintenance costs or shut the project down, political instability, increased costs to taxpayers through the use of governmental subsidies and popular resistance to a proposed project where it may convert what was once a free service to a service for which a toll is levied.

VII. Conclusion

The future of construction project delivery involves a variety of delivery systems, but far less reliance on design-bid-build as the dominant project delivery system. Construction management at-risk has overcome conflicts between the contractor and the design professional and created an environment in which the manager and the architect/engineer constructively collaborate to achieve a sound design. The use of design-build will increase as the single point of responsibility, faster delivery times and more predictable costs attract more adherents. The scant empirical evidence and short history of build-operate-transfer projects in the United States and abroad have yet to prove its viability as a routinely used alternative project delivery system. But with shrinking budgets and the advantages of working with the private sector, governmental entities are increasingly looking to privatization, public-private partnerships and other creative arrangements to help meet future infrastructure needs.

Although there is some indication other methods have outperformed design-bid-build, no one would contend that any one method can be used to perform all projects, particularly those to meet our infrastructure needs. Given that much of the impetus and significant capital for the use of alternative project delivery methods through ISTEA and TEA-21 has been provided by government, it is far more likely that we will witness a shift toward the flexible use of all delivery methods.³⁰ Implicit in this prospect is the proposition that both the public and private sectors can deliver projects in acceptable fashion.

ENDNOTES

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