Understanding the myriad of options available for structuring the construction and design aspects of project development at an early stage in development can give an owner or developer maximum flexibility in setting up the project in a way that will maximize that project’s success – success being defined as consistency with the owner’s expectations and needs. These options are generally referred to as project delivery methods, or systems. Some of these methods go well beyond just construction, and may encompass project planning, design, financing, operations, maintenance, and other aspects of the development and completion of a particular facility. There are often three primary delineations:
(a) where privity (contractual relationships) is established,
(b) how risk (and potentially reward) is allocated, and
(c) the timing of involving key players.
In addition to these differences, there can also be differences in the payment provisions. One contracting method may be used in conjunction with a variety of payment options, although some methods more typically use certain types of payment arrangements.
This series of postings will discuss some of the more common methods for project delivery and their advantages or disadvantages, starting first with design-bid-build, the focus of this posting. The next part will discuss design-build and engineer-procure-construct, and the third part will discuss construction manager at risk contracting.
Design-bid-build is generally recognized as the most traditional delivery method. In this approach, the owner contracts directly with the architect. After completion of design, the owner then enters into a construction contract. The architect might or might not have any involvement once the project entered the construction phase. This method is generally very sequenced, which impacts the timing of completion.
The owner is the primary point of privity with the architect and, separately, with the contractor.
This type of scheme can give the owner a great deal of control. For example, it oversees the design and can dictate what the final product should be to a very finite level of detail if it so desires. The owner is responsible for financing the project and, after construction, maintaining and operating the facility (although the contractor would typically provide certain warranties for a limited period of time following completion of the project).
However, with control comes risk. In most jurisdictions, these contractual lines dictate some amount of risk and liability. For example, in many jurisdictions, the contractor cannot sue the architect directly for economic losses suffered by the contractor as a result of the architect’s design – instead, the contractor must seek recovery against the owner under the rights and restrictions set forth in the construction contract. The owner can then decide whether to try to pursue recovery of any amounts it pays the contractor from the architect. Under the particular law in a jurisdiction, the standard which the owner must meet vis-à-vis the contractor may be greater than the general standard of care owed the owner by the architect.
One of the most common payment methods for design-bid-build is referred to as lump sum or stipulated sum. Because the design is complete (or should be complete), the contractor can provide set pricing for the construction. This puts both the risk and reward on the contractor of unexpected costs. The contractor may not recover additional costs simply because it cost more than planned; conversely, if the contractor is able to do the work for less than anticipated, the contractor gets to keep those additional profits. The contractor is typically paid draws throughout the construction based upon the percent of the work complete and irrespective of the actual costs incurred during that payment period.
Alternatively, the contractor might be paid based on the cost of the work. Unless capped, this puts the risk of increased costs on the owner, but also gives the owner the benefit of underruns.
Design-bid-build can be a very effective contracting method when
(a) the owner wants or needs to retain control,
(b) the owner has time for a sequenced approach, and
(c) the owner is comfortable with the standard risk allocations or modifies those allocations by its contract documents.
No matter your perspective on particular projects, there can be no question that the ability to finance and fund projects will continue to be a challenge. One contracting method developed in part to address those kinds of concerns is referred to as P3, or public private partnership. The P3 method allows major projects to move forward by combining both public and private funds.
Just four months into 2013, several P3 bridge projects have reached significant milestones. In February of this year, the Ohio Department of Transportation selected three teams to provide P3 proposals for a new I-90 Innerbelt bridge – Ohio’s first use of the P3 method. Just last week, the Port Authority of New York and New Jersey authorized the award of a $1.5 billion contract to the NYNJ Link Partnership for the replacement of the Goethals Bridge.
However, not all the news is of projects moving forward. A proposed new bridge over the Knik Arm (the KAC or Knik Arm Crossing) in Anchorage, Alaska, hit a significant hurdle in the form of an audit prepared by the Alaska Joint Legislative Budget and Audit Committee. That audit suggests the project may have significant feasibility concerns – including “unreasonably optimistic” toll and revenue projections – projections that are a key component to a successful P3 project. Although KABATA, the Knik Arm Bridge and Toll Authority, disputes the audit, it is indicative of yet another challenge facing this potential project.
Similarly, the Columbia River Crossing – a new bridge for Interstate 5 connecting Portland, OR, to Vancouver, WA – has seen funding challenges so far this year. Oregon passed necessary funding for its portion of the costs to construct a new bridge over the Columbia River for Interstate 5 relatively quickly. Washington, however, was not so quick – and only last week came to a compromise that allows some of the funding to be issued, with much of it contingent on a USCG review. Final construction financing is still not approved.
Major infrastructure plays an important role; it comes with a significant price tag. While innovative methods have been developed to increase the financial feasibility of these projects, it is clear that additional education, study, and creativity is needed to continue moving toward development of successful projects that support the logistics of today’s economy.
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