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October 30, 2014

D/B competitions: a high-stakes poker game you can’t win

  • If the design/build competition process becomes predominant, it will financially cripple many architectural and engineering firms.
    • By STEVE MCNUTT
    NAC Architecture

    mug
    McNutt

    Design/build competitions are becoming popular in the public sector.

    On the face of it, these competitions seem to have the advantage of a package deal with a happy team of contractors and designers, and a complete design with a final price. But behind the scenes, D/B competitions fuel many incentives contrary to owners’ best interests — mostly driven by the financial brinkmanship that the competitors must survive.

    One caveat before going further: Other versions of design/build, with selection based largely on qualifications, avoid the problems of D/B competitions and are not the subject of this article.

    Others wouldn’t touch this

    A D/B competition is like shopping among several accountants, doctors or lawyers and saying: “I’m shopping for the best professional service in your field and contacting several professionals. Here are the facts of my situation and the needs I foresee. Now meet with me a few times to clarify those needs. And then give me your best analysis of my situation, what my future needs will be, and a firm fixed cost for taking my situation to conclusion.

    “I’ll pay you some of your costs for this test-drive, even though it only represents a fraction of the cost it will require for you to be successful. And by the way, I know I am a big potential customer of yours, and I’m planning on doing all my professional business this way from here on out. So impress me.”

    Most accountants, doctors and lawyers would tell these potential customers “no thanks.” But, in lean economies with few opportunities for big design commissions, hungry architects and engineers allow themselves to be drawn in.

    The cost of participation is astronomical and the potential for success minimal. If the D/B competition process expands to become predominant in the marketplace, it will financially cripple many architectural and engineering firms and eventually dilute and degrade the quality of service in the design profession.

    Heavy-handed leverage

    To illustrate the dilemma and leverage a D/B competition exerts on a typical design team, think of it in these personal terms: you apply for a good job; you know that you are well-qualified; you are eager for the position because you know your present employment may end due to your current employer’s declining workload.

    This potential new job is very important. But the new employer can’t decide among three good candidates. So the new employer says it will give all finalists a trial run on the job for a few weeks, and pay all finalists for their time during the trial run — but only a fraction of the real time value.

    The finalists will all perform separately (and have homework) so that the new employer can compare and evaluate them based on criteria given in advance. In addition, the new employer may reserve the right to “negotiate” with the finalists about their salary to assess performance versus cost.

    Do you abandon the process and set yourself adrift without a job? Or do you compete to win — and go all out with effort well beyond the partial compensation to prove your worth?

    On one hand, you are certain the other finalists will do the same. On the other hand, you worry about asking for too much salary. But you sense that you have to try because this is a growing trend and many other potential employers will use this selection process.

    You conclude that you must compete or die, but the reality is you might compete AND die.

    Your chances of winning are one in three. You find yourself asking: Does this happen three times before you finally win a job? Or will you lose three times and find yourself in the unemployment line?

    A process with many pitfalls

    These D/B competition pressures result in a laundry list of overt and hidden disadvantages:

    • The wrong financial motivators. Financially, the winning D/B team will barely survive the competition. The D/B competition costs are typically about 5 to 10 times the cost of “normal” project pursuits based on qualifications. All the downstream incentives are to constrain services.

    • Honorariums are a mixed bag. Stipends or honorariums are frequently offered to shortlisted D/B finalists. The honorarium helps — but also has a downside. Generally it sets the competition bar higher and acts as a springboard to burn up the honorarium cost and go overboard even more.

    • Isn’t it the D/B team’s own fault for going overboard? Not really. D/B competitions inherently require the design to be sufficient for contractors to bid something tangible (versus something vague with non-competitive bids padded for unknowns).

    This requires about 30 percent complete design effort. Once the design team invests 30 percent design on the technical side, it simply has to go overboard and “sell” it. This effort is required regardless of lesser artificial completion targets set by the owner. If design teams don’t overspend, they will not be competitive.

    • De facto fee bidding. The pressure is on to reduce design fees to less than what would be paid in a “normal” setting. The D/B competition is judged on how much quality per dollar is offered in the D/B end product. This forces the D/B team to ramp up quality to the maximum — and not dilute quality with high-profit fees (or even “normal” fees).

    It’s a classic double whammy: incur extraordinary costs to compete, and give up compensation downstream to be competitive. An underpaid design team will be an underperforming design team.

    • Stifled innovation and creativity. D/B competitions encourage the designers to narrowly solve owner problems within competition parameters. They limit exploration of “what if” possibilities that might benefit the owner because doing so may be a competitive disadvantage. And, if the competition is won, the motivation is to survive not excel.

    • Conditions ripe for change orders. Within a D/B competition the designers meet with the owner two or three times to dialogue about the implications of the owner’s never-perfect program. These few interchanges represent maybe 10 percent of the discussion necessary to refine a multi-million-dollar building design. Even so, at the end of this incomplete process there is a 100 percent guaranteed maximum price.

    The project scope and price are now frozen. If the owner wants or needs to change something, it’s a change order.

    • Complexity breeds risk. Simple D/B projects make sense (a cookie-cutter warehouse, for example). But as project complexity ramps up, so does the risk. An exhaustive 2012 FTA-sponsored study of seven huge transit projects illustrates this point: three didn’t finish on time, five were over budget, and two ended with multi-million-dollar claims.

    • Impossible cost targets. Sometimes, either naively or intentionally, the owner sets an unachievable construction cost target. It can take tens of thousands of uncompensated dollars spent by multiple D/B teams to discover this fatal flaw. This is at least unfair, if not exploitive.

    • Lack of transparency. D/B competitions don’t encourage transparency. If a D/B team discovers hidden risk, there is an incentive to keep it concealed. It’s a competitive disadvantage to address risk that other D/B teams may not see. And there is little incentive to reveal the risk to the owner when solving the problem can be more profitable as a downstream change order.

    • Imperfect team marriages. A happily partnered contractor and design team is not guaranteed. These marriages are the result of mad-scramble matchmaking. A first-tier contractor can end up with a second-tier design team, or vice versa. In these circumstances, the quality of the process is dragged down to the level of the team’s poorest performer.

    The post-competition financial pressures and unknown problems of birthing a multi-million-dollar building are just the kinds of problems that often ruin a marriage — and cause a lot of collateral damage.

    • A squeeze on second-tier players (resulting in low quality and less competition). The best engineer or subcontractor will often get squeezed out. The best-qualified mechanical engineer can only compete effectively on one team (or die financially doing multiple designs).

    Similarly, a good electrical subcontractor might have the competitive edge of having worked for the owner in the past and being mobilized nearby ready to go. But this advantage can only reside in one D/B team (it is impossible to bid multiple designs). If that team loses for other reasons, then the D/B competition didn’t land on the best buy for electrical work.

    • Financial brinkmanship. The difference between design/build and “normal” selection by qualifications is like the difference between low-stakes and high-stakes poker. Designers can afford to play penny ante poker and compete for lots of projects based on qualifications. With D/B competitions they’re playing a high-stakes game — and you can go broke if you lose too many times. Unfortunately “the house” is setting up the games, and sometimes it’s the only game in town.

    No panaceas

    There is no perfect process for selecting a building designer or contractor. Fortunately for some owners who take the D/B competition route, many of the stresses of D/B competitions remain simmering below the surface. But if these tensions boil over, the results can be as bad as or worse than any other process.

    Instead of an optimal process for realizing a new building, D/B competitions are plagued with their own special flaws that can diminish quality, reduce competition, stifle creativity, exert significant adverse financial impacts on design teams, generate their own set of unique risks, and result in a solution that is less responsive to the real needs of the project.

    D/B competitions are a high-risk proposition from many vantage points.

    Reform is needed. Many within the Design-Build Institute of America agree. There is a groundswell of contractors, architects and engineers eager to find a better pathway to project delivery — by working with the Capital Projects Advisory Review Board, the DBIA and other stakeholders.

    Meaningful reform will serve the best interests of D/B competitors, owners — and ultimately the taxpayers.

    Steven J. McNutt, AIA, LEED AP, is a principal at NAC Architecture’s Spokane office.





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