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FMI Quarterly/June 2014/June 1, 2014

Project Delivery: An Eclectic Menu

workingplans18_imageIf the menu of project delivery methods has left you with a bit of heartburn, you are not alone. Digesting the challenges of project delivery is a difficult task.

There is more than one way to skin a cat. While it is hard to doubt the veracity of this idiom, you may call into question why someone would skin a cat in the first place. Perhaps, before the domestication of our furry little friends, felines provided commonplace table fare in the form of stew or other savory dishes. Hence, the meal preparation would require the skinning of a cat, for which there are many methods.

And when it comes to project delivery, there is more than one way to skin a cat, such as:

  • IPD (Lite)
  • CM At-Risk
  • Design-Build
  • Design-Bid-Build

Contractors do not have direct control over the delivery method used by owners. If there is a preexisting relationship with a customer,  contractors may have a slight opportunity to advise, nudge and provide delivery options to their clients. However, contractors can control which projects they select to compete for and in which delivery systems they participate. If a construction firm does not have the luxury of blackballing prospective clients based on their preferred delivery method (which most do not), at the very least, it is important that it participates in various project delivery methods in a manner that reduces risk and increases reward opportunity. By understanding common pitfalls, contractors can better prepare to face the challenges inherent in project delivery, regardless of method.

IPD

There is little doubt that the future of construction project delivery revolves around increased collaboration by entities party to a particular project and contract. Integrated Project Delivery (IPD) is the hallmark of information sharing, design coordination, value engineering, cost savings and ultimate project success. However, true IPD has yet to establish itself as a commonplace delivery method. As the industry limps along the learning curve for this nascent delivery path, many firms question whether the downstream synergies and efficiencies justify the front-end investment.

Without question, IPD requires significant investment. Participating entities have to be vetted and qualified in order to establish the trust necessary to drive collaboration. Processes have to be implemented to ensure accountability and incentivize a “project-first” mentality. Overhead must be allocated by all to provide resources that will adequately support the methodology. It is no wonder that the sentiment around the water cooler is that IPD is reserved for large, complex projects driven by highly sophisticated firms — i.e., the “big leagues” of pre-construction services and project coordination.

APPETIZER: IPD LITE

Whether IPD can be applied to comparably smaller work in less sophisticated markets remains to be seen. The challenges of today’s construction environment remain, nonetheless. More and more of the design onus is being placed on the contractor. Much of the detail work in today’s plans and specifications is drafted by contractors instead of architects and engineers. The central point of design control has been disaggregated. With design being formulated across multiple parties, increased communication is vital. But, what if the project is not IPD, contractually? One could argue that it is just as, if not more, important for project managers to  foster and embrace collaboration in this scenario. With IPD, there exists mutual interest and motivations are aligned. In the absence of IPD, contractors are left up to their own devices to put forth good faith efforts in coordinating design and, ultimately, construction. However, collaboration does not happen without trust. Therefore, building trust becomes the starting point for contractors who are seeking higher value for clients and mutual rewards.

The key is design coordination. Contractors are already controlling a large portion of the design input. However, the constructability of most, if not all, trade packages relies on the ability of those designs to come together in concert. Trades that depend on one another, especially the MEP packages, must have a heightened sense of responsibility to drive collaboration forward, regardless of the contract structure. More and more, firms are leveraging technologies such as BIM and teleconferencing to make design integration as efficient and cost effective as possible. But collaboration does not happen by accident and accountability does not occur without standard processes.

Leadership
2014q2_project_delivery_ex1From many a pulpit, FMI professionals have preached the tenets of the “Three C’s” of project leadership — communication, cooperation and collaboration (see Exhibit 1). They are sequential, hierarchal orders of human interaction. Properly sown, the seeds of the communication sprout into mutual trust on our projects, leading to the ability to cooperate. Effective communication and strong cooperation allow teams to flourish in highly complex, volatile environments. A collaborative sense of “team” is necessary to deliver a quality-finished product, regardless of delivery method.

It is easy to talk the talk of the Three C’s model, but which member of the team goes first? That is, who extends the olive branch of trust? Quite simply, project managers must be the first on the scene to drive collaboration. Their leadership will have a ripple effect throughout their respective organizations and inspire a team-first mentality. Who knows? It may even rub off on the designers as well.

Accountability
How do you hold people accountable if there are no financial repercussions? Barring formal doctrine, contractors are left to muddle through project challenges on their own. If a team member decides to break rank and sacrifice project success for individual gain, are there recourses available to the patriots? Fortunately, if all or the majority of parties to the contract buy into the concept of collaboration and the notion that a rising tide floats all boats, very seldom does one rogue contractor attempt to crash the party. Call it social responsibility or moral guilt, but peer pressure is often more intimidating than contractual obligations. People want to do right by others when they feel that others have their best interests in mind.

Pre-job Planning
The best opportunity to set the table for project expectations and goals is before mobilization. Pre-job planning is often achieved through a series of kickoff meetings, where tactical approach and schedule coordination is discussed amongst participating contractors. However, seldom does the conversation reach the level required to build the trust necessary to collaborate effectively. Most will talk about the “what” that needs to be communicated, but rarely do the “how” and the “why” receive the attention deserved. Significant value results from discussing communication channels and general expectations for collaboration. By addressing these matters up-front in the pre-job planning phase, contractors can gain consensus long before communication becomes an issue downstream.

Setting Goals
Goal setting is extremely important. Having a destination to strive for makes all the difference in the productivity of teams. However, goal setting can become an exercise in futility if goals do not meet the following criteria:

  • Specific
  • Measurable
  • Meaningful
  • Results-Oriented

“Do a great job, reduce costs and accelerate schedule” is not a specific goal. Goals can and should be unique to the project, and specific enough to drive tangible results. Additionally, goals must be measurable in order to maintain focus and urgency. If goals are only assessed at the end of the project, the ability to correct course and alter outcomes goes out the window. By tracking measurable goals, project teams can ensure that they do not lose sight of the initially agreed upon objectives. Ultimately, achieving the goal is less important than having the goal and striving for it. The mere presence of specific goals helps bring a new level of accountability to the job. Like all things, the task of goal setting is conducted best through collaboration. If all parties buy into the goals set forth, the likelihood that the collective will be motivated drastically increases.

SOUP OR SALAD: DESIGN-BUILD

In truth, design-build is not remotely a novel concept. The method has been used for thousands of years by master builders, who provide design and construction services under one shop. We doubt, however, that the master builders of the Renaissance, for example, were subject to the same contractual risk exposures as are contemporary builders. Nonetheless, the modern interpretation of design-build has brought tremendous value and opportunity to the construction industry.

Intended to be a panacea for all owner stress and frustration, design-build offers a single point of contact and ultimate risk deferral. Theoretically, by reducing the number of contractual parties involved in the delivery process, the overall markup on costs of services is reduced. Additionally, design-build absolves the owner of arbitration responsibilities when designers and contractors disagree.

Arguably, the greatest advantage of design-build is the ability to accelerate project schedules by overlapping the design and construction phases. The so-called fast-tracking of projects enables construction activities to commence before the complete design is finalized. In modern economies, when time-to-market is a pivotal fundamental of business pro forma, the ability to accelerate project schedules is of great value to construction purchasers.

Detractors of design-build would argue that the method eliminates the checks and balances system inherent in traditional design-bid-build deliveries. With design and construction under one roof, there is potential for contracting firms to make decisions in the interest of project budget and schedule that inadvertently undermine the quality of the finished product.

The loss of owner involvement is also a risk related to design-build. Fast-tracking and value engineering can steer the project down a road not destined for the client’s ultimate wishes. It is extremely important that contractors continuously engage the customer throughout the design-build process. The master builder may have the best of intentions, but inviting owner participation and creating buy-in is essential for ultimate client satisfaction.

CM AT-RISK

Guaranteed Max Price (GMP) contracts have created many win-win situations for owners and contractors. However, the jury is still out on the overall cost savings for owners. CM At-Risk relies on the premise that the designer, in consultation with the CM firm, has sufficient incentive to mitigate construction cost. While the CM At-Risk typically raises the overarching value delivered to owners, the final price tag may be greater as well.

The final gross margin realized by CM At-Risk firms is invariably greater than the contract fee for which competing firms are partially measured during the selection process. Construction managers achieve mark-up on direct costs buried in the overall project budget. While such pricing strategies are more the rule than the exception, contractors should educate the customer about their profitability models. Transparency in construction costs drives trust between the owner and the contractor, increasing the likelihood of repeat business.

If the contract stipulates shared savings between the owner and the contractor, transparency and trust are evermore paramount. Because these contracts can become quite lucrative for the CM, there is potential for the owner to feel sandbagged by the construction manager. Therefore, it is important not to give the impression that the contractor is reaping windfall benefits by virtue of the owner’s “savings.”

MAIN COURSE: DESIGN-BID-BUILD

Commonly referred to as “plan and spec,” design-bid-build is the most ubiquitous form of project delivery. Ironically, it is arguably the most frustrating and inefficient delivery system. Design-bid-build inherently invites conflict, redundancy and inefficiency. The details of these challenges are explored below:

The Design
Contractors largely are left out of the design conversation on the front-end. All clarifications and adjustments are made ad hoc, after the bid solicitation. Instead of collaborating with the design team from the start to improve the overall quality of design, contractors become the quality control agent for the designer(s). A contractor’s natural inclination is to comb through the bid documents in search of mistakes, and rightfully so. Any stones left unturned before the submittal of the bid represent potential risks and margin erosion for the contractor in the construction phase.

Unfortunately, many contractors have an innate aversion to designers, and vice versa. The communication and triage of design deficiencies often become contests of wit and construction know-how. Instead of collaboration to resolve issues, the two parties jockey for position to look good in front of the owner. All the while, the best interest of the owner has been abandoned.

It is important for both parties to put aside engineering hubris and strive to resolve issues amicably. Contractors should refrain from playing “gotcha” with designers, realizing that no set of plans is ever perfect. The best way to build trust between the two parties is to overcommunicate from day one. By fostering a strong working relationship from the start, contractors and designers can set the stage for downstream success on the project.

The Bid
Constructability flaws in the design lead to an extremely cumbersome RFI process. There are multiple dilemmas facing contractors that discover design deficiencies in the bidding process:

  • If you submit an RFI, all competitive parties receive a response to design deficiencies to which they may otherwise be oblivious.
  • If you price in the potential extra work to safeguard against future contract changes, your bid may be noncompetitive.
  • If you provide pricing for alternates, the selection process may not allow for those options to be considered.

These frustrations are not news to contractors that play in the “plan and spec” space. One could argue that contractors have an ethical obligation to announce the findings of deficiencies through the RFI process. Regardless, the larger risk for contractors lies in potentially overlooking design deficiencies and suffering significant ramifications after award.

Therefore, it is extremely important for contractors to have a purposeful, standardized bid review process. Every estimator goes through the process of reviewing bid documents to make sure that everything gets “picked-up” in the estimate. However, in a company that employs five estimators, there may be seven different ways of reviewing the bid package. Every contractor should establish a companywide, standard process for reviewing bids. Many firms make use of checklists to ensure that all potential areas of exposure are addressed before the bid is stamped on bid day.

Adverse Selection
The majority of contractor selection processes used in design-bid-build rely heavily on the lowest (qualified) price. “Qualified” is in parenthesis because most of our readers know that price ultimately reigns supreme in most design-bid-build arenas. The resulting challenge occurs when a minimum standard of due diligence is not performed by the owner entity, and the lowest price is accepted at face value. The caveat to such a cavalier approach to contract procurement is that low price does not equal a grand bargain. Potential ramifications range from low quality product to contractor failure, claims and mechanics liens.

Many construction firms bemoan the administrative hoops they have to jump through to prequalify for bid opportunities. However, contractors should want to work for owners that have highly sophisticated, comprehensive selection processes. This ultimately protects the most qualified contractor with the best number from being scuttled on bid day by a gunslinger that clearly misunderstood the scope, has ulterior motives or is plain crazy. Most would agree that bid day losses to irrational bidders sting more than closely contended losses to respected, legitimate competitors.

Go/No-Go
The quality of the selection process is just one factor that contractors should explore when examining design-bid-build opportunities. Ultimately, contractors should have a detailed, systematic approach to defining the opportunities best suited for their competencies, market position and strategic direction. Factors to be considered in a go/no-go process include, but are not limited, to:

  • Manpower
  • Bonding capacity
  • Strategic fit
  • Likely competitors
  • Owner sophistication and experience
  • Geography
  • Etc.

By fine-tuning the above criteria, contractors can ensure that the projects that leak out the other side of the go/no-go sieve are realistic opportunities for which they have strong ability to win and certainty to perform.

THE BUILD

Continuous Planning
For design-bid-build projects, planning is inherently reactive. Until notice of award is issued, contractors have little to gain by planning for a project that may never come to fruition for their firm. Once the project is awarded, the project intelligence gathered by estimators has to be translated to and absorbed by the operations team. The conveyance of project information from bidders to executers takes many forms.

Due to the velocity of bidding cycles and organizational capacity, the “handoff” of information is often just that, a handoff. A binder or folder of sorts is hurled across the organization chart from estimating to operations, with little discussion or collaboration. In the defense of estimators, project award can occur months after the compilation of an estimate, long after the bid team has moved on to shinier objects. The details of a project that was bid last quarter begin to fade in memory and the bid book is the only artifact that remains of countless estimating hours invested. Best-of-class contractors work diligently to avoid this tendency by forcing their people to engage in purposeful dialogue about the idiosyncrasies of the project. By obligating estimators to collaborate with operations, contractors can reduce the redundancy in efforts aimed to discover project challenges. The transfer of information from estimating to operations is just the first step in properly planning a job.

In the weeks that follow the project handoff, contractors continue their efforts to hone project intelligence. No matter the risk involved in the project, contractors should always conduct a jobsite visit. This allows for a thorough assessment of existing conditions and the discovery of previously unforeseen challenges. During the jobsite visit, contractors can begin to formulate their site logistics plan and brainstorm how to attack the job.

Recasting Budgets
Bids are compiled in a vacuum, based on limited information. In the wake of award, more and more project details come to light. Additionally, operations has a completely different worldview of constructability and feasibility. For instance, estimators lack a realistic understanding of the resources it takes to execute a project properly. At the same time, if we let operations bid projects, we would never win a job. As the game plan of project execution begins to materialize, assumptions change and realities are defined. The breakdown of how resources are allocated in execution is often radically different from the way in which estimators projected. Translation: an estimate is not a budget. If managing costs is a fundamental measuring stick for success, costs should be recast into a sequence and format that makes sense in the minds of the operations team. By not recasting the budget, the field is held to unmanageable standards. When field operations feel as if it was set up to fail from the point of mobilization, the motivation to achieve the budget is extremely damaged. Conversely, if operations has the opportunity to massage the numbers into a breakdown that is logical for execution, field buy-in and enthusiasm to stay within budget becomes more feasible.

Managing Change Orders
No plan survives contact with the enemy. In the context of project execution, the enemy is the unforeseen challenges and changing conditions that materialize throughout the life of a project. Significant changes to assumptions may warrant a change to the original contract. More so than any other delivery method, design-bid-build relies heavily on the mechanism of change orders to facilitate job progress and maintain schedule integrity. If left unmanaged, a large number of change orders can quickly become a significant risk to the gross margin. Project managers must take great strides to ensure that outstanding change orders are tracked, monitored and managed. Accounting for the cumulative impact of change orders can be difficult. An endless stream of paperwork can develop into library-sized volumes of documentation that are daunting to review on a regular basis. The best way to manage change orders is to track outstanding change order dollars on an easy-to-read spreadsheet or project dashboard. This allows project managers to identify long outstanding items and take action before bargaining leverage is eroded at the end of the project.

DESSERT

If the menu of project delivery methods has left you with a bit of heartburn, you are not alone. Digesting the challenges of project delivery is a difficult task. Regardless of the delivery method in which contractors engage, it is prudent to work within the confines of that structure to maximize returns and decrease risks. This requires the identification of all sources of project risk and margin erosion.

The advice outlined in this article may or may not be applicable to every situation, but hopefully, we have shed some light on the pros and cons, opportunities and pitfalls of different delivery options. There is no one-size-fits-all solution to the navigation of project delivery. It will ultimately be up to the participating entities and respective management teams as to how they decide to play the game. After all, there is more than one way to skin a cat.


Tyler Paré is a consultant with FMI Corporation. He can be reached at 813.636.1266 or via email at tpare@fminet.com.

 

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