PERFORMANCE CONTRACTING DELIVERS ON PROMISES

PERFORMANCE CONTRACTING DELIVERS ON PROMISES

BY ART VERTNER
Abacus Engineered Systems

"Operational reality versus operational theory" is how Tim Heidlebaugh of Central Washington Hospital in Wenatchee describes the difference between the recently completed central plant upgrade project at his hospital and other projects in which he has been involved.

The process of delivering Heidlebaugh's new central plant -- which includes new gas-fired boilers, two new chillers, associated cooling tower, piping and pumps, as well as an addition to the plant building -- was a design and construction process known as performance contracting. Heidlebaugh characterizes the process as "application engineering as opposed to design engineering."

One of the most visible concerns of building owners and managers is the delivery of A/E services. According to a recent article in Engineering News-Record, "Alternative project delivery systems have been gaining wider acceptance as owners become familiar with them . . . This owner sophistication has led to a proliferation of variations on project delivery systems."

From local, state and federal agencies to private owners of office, industrial, retail and hospital facilities, clients have been turning increasingly to alternative methods of building design and construction. These methods include design-build, general contractor/construction manager, and performance contracting.

The top 100 firms in the nation chalked up design-build revenue of $36 billion in 1995 -- up from $32 billion in 1994 -- and design-build activity in all market sectors increased 103 percent from April 1995 to April 1996.

The visibility of performance contracting is reflected in a number of recent requests for proposals from the US Department of Energy, US Department of Defense, City of Seattle City Light, and King County. Even though several government agencies have been using design-build and performance contracting for several years as a means of meeting their facility needs, recent signing of the federal procurement reform bill by President Clinton ensures that alternative delivery systems will continue to absorb a large share of the market.

At the state level, the Department of General Administration (GA) has been providing energy performance contracting services for over 10 years. Clint Lougheed, energy services project manager in the GA's Division of Engineering and Architectural Services, said General Administration has developed a contracting process and the expertise to successfully manage energy performance contracts, which more than 30 state facilities have used in implementing over $21 million worth of projects. The projects are saving 350 BTU's per year and will save the state $30 million over the lifetime of the projects.

Abacus was one of the first Seattle-area firms to participate in the state program, providing energy service contracting to the State of Washington since 1986 as a means to create guaranteed energy savings in state facilities.

As clients' needs have changed, services have expanded to include not only guaranteed energy savings, but guaranteed construction costs and schedules through performance-based contracting as well. In the past three years, Abacus has completed more than $20 million worth of construction utilizing this method of project delivery.

Performance contracting attracts comparison with the more traditional public bid process, a process in which Abacus is also heavily involved. To clarify the difference, it is useful to define dynamic -- versus static -- building systems. Dynamic systems include heating, ventilation and air conditioning (HVAC) components and controls, lighting, communication, and electrical systems.

Under the traditional process, responsibility for coordinating dynamic systems operation is often vague: Does responsibility lie with the engineer, the owner or the contractor? Does the expectation of responsibility match the contractual authority of each party? Despite even the most concerted efforts to clarify expectations and assign responsibility, disappointment often results.

In performance contracting, responsibility and authority sit squarely on the shoulders of the performance contractor, who is responsible as both engineer and general contractor. Under Washington State law, when building a public project the performance contractor must provide: guaranteed maximum prices, competitive acquisition of labor and materials, open-book pricing and performance guarantees for periods of up to 15 years. If systems do not perform to expectations and guarantees, the performance contractor pays the difference.

Obviously, all projects are not suited to performance contracting. Exceptions include new construction -- where the existing delivery systems are generally meeting building owners' expectations -- and major 'gut and renovation' of existing buildings.

Key identifying features of a successful candidate for performance contracting include: energy conservation opportunities; tight design and/or construction schedules; building systems complexity; and the disruption endurance level of current building tenants (disruption to building occupants during construction is minimized under performance contracting).

In the case of the Central Washington Hospital project, Tim Heidlebaugh says the keys to success were "schedule savers like early equipment acquisition and engineered controls."

When asked about the difference between his project and similar projects performed under design-build contracts, Heidlebaugh speaks of exposure to financial risk.

"The owner is less exposed to risk," he said. "Because of the performance guarantees Abacus provided, if this thing (the central plant) doesn't work, it's Abacus's problem. They come and fix it."

"Fortunately," said Heidelbaugh, "from the time they threw the switch the plant has worked exactly the way it's supposed to. I like that."

Art Vertner is the president and owner of Abacus Engineered Systems, an engineering and construction services company based in Seattle.

Return to design '96 top page