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April 25, 2019
I recently sat down with Dan Chandler at OAC Services to chat about construction delivery methods for today's projects. OAC is a leading project and construction management firm in the Northwest that counts Microsoft, King County and GSA among its clients.
Here's what Chandler had to say:
Q: Tell us about yourself, your role, and your experience.
Chandler: 2019 marks my 40th year in the construction industry and my 23rd year at OAC. As a principal at OAC, I serve both public and private clients, using all construction delivery methods. I am also OAC's internal subject matter expert on alternative delivery methods for public clients.
Q: Three of the most common project delivery methods today are design-bid-build, GC/CM and design-build. What are the pros and cons of each?
Chandler: Design-bid-build is the traditional delivery method. The pros are that it's pretty simple and gets you to a single number, a single sum, to deliver a product. It creates competition that leads to the lowest cost you can pay for a basic project.
The cons are that it can drive adversarial behavior across the supply chain, so suppliers, subcontractors and the general contractor really are at odds with their customer. It can create tension between the architect and contractor as well. Because no drawings are perfect, DBB can trigger debate and occasionally significant disputes about the quality of the design document versus the bid sum.
The most important factor for successful design-bid-build is having the most complete, well-coordinated set of drawings that you can get, along with a reasonable time frame to build the building.
Q: How about GC/CM?
Chandler: GC/CM has been around since about 1994. It's built to mirror the way most private-sector clients deliver their projects — collaboratively, with a customer service ethic. Contractors are selected on a qualifications and fee basis. They serve as a consultant during design, broker during buyout and builder during construction.
The pros are a significant increase in the predictability about the outcome of cost and schedule. GC/CM aligns the interests of the architect, contractor and owner much more closely. Contractors are motivated to be collaborative and to help the owners meet their needs and build repeat business in the future. That's a big positive, particularly in today's busy market.
The biggest con with GC/CM is that it can drive down subcontractor procurement competition. GC/CM can add some inefficiency in subcontractor procurement and total aggregate pricing. There's a premium that owners pay in exchange for the predictability of outcome and cost. That's especially true today in a busy market where subcontractor coverage is minimum. It's difficult to get subcontractors to bid on some GC/CM procurements for our clients — they prefer design-bid-build or design-build.
Q: Is procurement a factor in how subs bid for GC/CM projects?
Chandler: The way subcontracts must be procured using GC/CM delivery can reduce competition. Any reduction in competition drives up price. Good general contractors recognize this fact and are as flexible as they can be. They are good partners with us and our clients in structuring subcontractor packages that are attractive to the marketplace. It's also important to make subcontracts not too onerous.
Subcontractors have a great deal of control over their scope, price and contract terms in design-bid-build delivery. A very competitive subcontractor can use this position to dictate the scope and contract terms to its favor.
Now fast-forward to GC/CM delivery. Subcontractors often face a very one-sided subcontract, a scope of work that may include unrelated items, the inability to qualify their bid in any way and the need to drop off a sealed bid in person. The subcontractors whose bids are over $300,000 must also provide a payment and performance bond. All these factors push subcontractors to other work when it's available.
That's an exaggeration, but not too far off. A challenge like that dissuades competition in GC/CM projects in a busy market. In a hungry market, subcontractors will do whatever it takes.
Q: What are some other factors that play a role in GC/CM delivery?
Chandler: One of the biggest challenges in GC/CM delivery recently is subcontractor coverage — generating subcontractor interest and getting competitive pricing on a subcontracted scope. It's difficult because of the delivery method and the nature of how subcontractors must be procured by statute. Anything that makes it more difficult for subs to bid or makes it less flexible is going to cost clients money. It's just hard-coded in the statutes.
There's another subset of GC/CM, which is heavy civil. That provides great opportunity for negotiated self-performed work that we've employed successfully. It removes some of the challenges around traditional GC/CM that have been mitigated with the implementation of heavy civil GC/CM, which started about three years ago.
The most important thing in GC/CM delivery is aligning incentives. That means creating a low-risk, high-service contract between the owner and the GC/CM contractor.
Q: How about design-build?
Chandler: Design-build in the state of Washington is the most flexible of all the delivery methods available to public owners. That flexibility is a huge benefit to owners, particularly in how and when subcontractors and suppliers are procured on behalf of clients. Subcontractors can be design-build, like mechanical contractors. Or they can be fixed-price and procured later in the design cycle, such as painters and drywall subcontractors. Or they can be a design-assist contractor brought on to provide consulting early in the design process and then they can negotiate via a bid at the completion of design.
You really get a lot of flexibility regarding how and when you procure your subcontractors with design-build. It's not constrained by subcontractor procurement statutes that are hard-coded into GC/CM statutes.
The most important aspect of design-build delivery is the same as GC/CM: aligning the incentives of the owner, contractor and architect — the latter two being one team. By aligning incentives, I mean establishing a contract and a relationship and risk allocation that encourage collaboration. If you shift too much risk to the contractor, the behavior you get is different than what you want. They will spend more time protecting their fee. You want them incentivized to always be thinking about good ideas to solve project challenges.
Some of the biggest challenges with design-build delivery stem from the relative inexperience of general contractors who are very good at a product type but not good at managing architects or the design process. They don't have the experience of negotiating fees and understanding how design evolves. They don't have experience managing an artistic process. Contractor project managers are trained to procure subs and manage subcontractors. There is a big difference between a steel erector and an architect.
Q: Design-build has changed the interview selection process. How do you help owners determine who is the right contractor/architect team?
Chandler: The procurement structure in design-build delivery is critical. We structure the procurement process to meet the statute requirements and give solid feedback to the marketplace through a point system while keeping it simple and flexible.
Our procurements always include three key topics: proposed team, relevant experience and project approach. The approach is a homework question or questions that reveal the team's creativity and their understanding of our problem. The proposed team and project approach are really explored deeply in our interviews. We do extended interviews and often go to the contractor and/or architect's office or jobsite and get to know the teams very well.
Q: With so many factors, how do you help clients choose the right delivery method?
Chandler: Understanding the risks and opportunities of each delivery method and then choosing the one that aligns with the client's priorities is key. If schedule is the highest priority, it's going to steer you to GC/CM or design-build. If it's the lowest price possible for a relatively simple project that is not schedule driven, then design-bid-build is probably the way to go. As a project moves forward, aligning the incentives for all parties and executing the delivery really well is so important to the overall success. It's all baseball, but it's the difference between Little League and Felix Hernandez.
Q: How do you view and manage risk that is part of every project?
Chandler: In its broadest terms, risk and construction delivery is asking, “When am I going to get my building, and how much is it going to cost at the end of the day?” You can't predict long-term unknowns like steel tariffs, interest rates, weather, sub availability or how many other buildings a client will build. But predicting two, three, four or five years from now … am I going to get my building — open my school or move people into my new office — for a hundred million dollars? You don't know that until the last check is written and the last dust mop goes out the door.
Q: The Microsoft campus renovation you're working on has multiple stakeholders and teams. What are some lessons that public clients could apply to their large projects?
Chandler: A great serial builder like Microsoft has really refined their procurement and execution process and built an incredibly smart, loyal pool of vendors who compete for all their work, whether it's GC/CM or design-build. These repeat vendors start off each project with a high level of understanding and ongoing relationships that benefit Microsoft.
The public sector now has the opportunity to do the exact same thing — build a pool of vendors who want to work for them. That's an aligned incentive. What business other than design-bid-build is a vendor motivated to harm their customer? So, design-build and GC/CM provide public-sector owners with the opportunity to build a very strong and loyal vendor pool that makes their projects more productive.
Q: Are you using progressive design-build, and, if so, how is it working?
Chandler: Progressive design-build, if executed well, is a great opportunity to align incentives across the project team. It can provide the flexibility in subcontracting procurement that increases competition and takes advantage of the expertise throughout the supply chain. We love PDB and we see it growing more in the future, overcoming some of the challenges of GC/CM and tapping into cross-team talent. We are bullish on PDB, especially for higher education, K-12 and governme0nt buildings.
Q: Where do you see project delivery for public owners going?
Chandler: I see continued refinement in the public works statutes thanks to the good work of the Capital Projects Advisory Review Board and others that advise the Legislature on these somewhat complex and arcane issues. Flexibility in procurement, while maintaining transparency, benefits taxpayers, public clients and the AEC industry. As buildings continue to become more sophisticated and complex, the public will be well served by ensuring the most qualified contractors and subcontractors are selected to execute the work. I am optimistic for our industry.
Scott Johnston, Associate DBIA, is a principal at Johnston Training Group, which offers interview coaching, presentation skills and business development training programs for AEC firms.