There is probably no more important decision a project owner team is faced with than what delivery method they will select for their capital project. So, what does “project delivery method” mean? Most people are familiar with the primary roles necessary to accomplish the designing and constructing of a new project; at a minimum an architect and a contractor will be needed, both of whom will have a direct contractual relationship with the owner. Every other organization or source of design expertise, labor, or material could be (and often is) subcontracted through either the architect or the general contractor. Not as commonly understood are the multiple ways these project team members can contractually work together (project delivery method) and the pros and cons of each approach. Considering recent global supply chain disruptions, record inflation, and lack of skilled labor in the construction trades, it has never been more important to select the best delivery method.
Lump sum bidding
It’s common for owners to invite at least three General Contractors to bid a project to the owner with all bids being received by the owner on the same day at the same time. For many years, this was the most common method of seeking a price to construct a project. The problem is, for a contractor to bid a project (often called lump sum bidding) they must do it from a complete set of documents (collectively the plans and specifications). It must also be a really good set of complete documents that makes all project expectations very clear. A set so good in fact that there are hardly any ambiguities regarding what is to be built. A set of plans that good would minimize and could (at least in theory) eliminate change orders resulting from ambiguities and inconsistencies in the project documents. The problem is that few architects have the expertise anymore to create such a thoroughly detailed and coordinated set of documents. This is because owners are not willing to pay architectural design fees sufficient to allow architects to produce bid documents detailed and clear enough to truly meet the standard necessary for lump sum bidding. When construction documents are not as good as they should be and owners use them for a lump sum bidding anyway, the change order and cost overrun avalanche begins. All this is true in normal times without the global supply chain and inflation challenges we face today. These current factors conspire to make a lump sum bid approach even more challenging.
So what’s the answer?
In short, select your design team and your construction team on their qualifications and experience rather than a lump sum bid price. Bring the whole team on board at the very beginning of the design process so that the entire project team is aligned on the cost, quality, and schedule objectives for the project and the project can be designed around cost effective and readily available materials. This is known as Construction Management which is the most common form of qualification-based selection. Architects have come to rely on the market expertise and relationships that contractors possess through the construction management delivery method. They trust construction managers to steer them towards readily-available materials and equipment and away from selections that could crush schedules and budgets.
So does this mean that price does not matter if selections are made on qualifications? What assurance is there of getting the best price if the project is not lump sum bid?
What’s important to realize is that the price a contractor charges an owner to construct a building is comprised of about 85% subcontracted labor, materials and equipment and 15% general contractor overhead, project management labor, temporary onsite trailers, and contractor profit. If a contractor is selected based on qualifications rather than low price this allows the owner to negotiate in an “open book” fashion all aspects of that contractor’s 15% cost of doing the work. This 15% commonly includes reimbursables and allowances for risks and unknowns which, if not all necessary in the end, are savings to the owner at the conclusion of the project. In addition, the owner has real input into who the project manager and the superintendent will be. This is critical as these individuals are absolutely essential to the success of the project and the owner should seek to select them based on their resume and capabilities. In a lump sum bid environment the owner has no influence on who these individuals will be. That is the bidder’s business as he seeks to submit the lowest bid while minimizing his staffing costs.
So what about the other 85% of the contractor’s price? That is commonly known as the “cost of the work”. It is comprised of all the direct costs of the work including earthwork, concrete, masonry, drywall plumbing, HVAC, etc. – all typically work a general contractor subcontracts out to others. In a construction management delivery method all the trades and suppliers that comprise the cost of the work (the big 85% chunk of project costs) are competitively bid in an open book fashion through a collaborative process involving both the construction manager and the owner. A key advantage of this over lump sum bidding is that the owner can KNOW how much competition there is in the pricing of each element of the work. Were there three electrical bids or just one? Were there NO BIDS in any categories?
In a lump sum General Contractor process the owner is totally in the dark on both the quantity and quality of the trade constructors and their bids. It’s not uncommon for a General Contractor to submit a lump sum bid to an owner with no bids in hand for various portions of the work based on the assumption that they will “buy it out later”. This is extremely risky as it leads to the contractor including a “best guess” for the value of work for which he received no bids. If he guesses too low, he will probably try to make up the difference with change order requests to the owner later. If he guesses too high, then he pockets the difference that the owner never knew about resulting in the project costing more than it otherwise should have.
A third major option for project delivery method is Design-Build. This method requires the owner to establish some “bridging documents” or a well-defined scope of work as the basis for multiple design-build firms to propose their “all in” design and construction solution. Though no more transparent than the lump sum method regarding who the construction subcontractors will be, the owner does have a lot more control and influence over the design intent and who the key design and construction personnel will be than in a lump sum bid approach. Though some design-build firms have both design and construction expertise in-house, it’s common for architects and contractors to team up in a Joint Venture (JV) as a design builder on a project-by-project basis. These JVs are often (but not always) contractor-led.
The total project cost is rarely, if ever, the initial or bid day cost reflected in the commonly-used lump sum bid approach. With change orders being inevitable, wise owners realize that transparency, clear expectations, a clear scope of work and fair and reasonable risk assumptions are the best tools at their disposal to minimize change orders and overall project costs while expediting the completion schedule in the complex and volatile market conditions we see today. Making their project attractive and unambiguous goes a long way toward attracting the very best contractors who will deliver the best value at the conclusion of the project.
Delivery Method Advantage Disadvantage Design-Bid Build (Lump Sum) Most well-known. All General Contractors can do this. Can be quickest process to get under contract. Requires excellent documents. No incentive for GC to save costs for owner. Owner has no visibility to trade coverage, qualifications, or bids. Highly susceptible to change orders. COST MOTIVE Construction Management Owner selects based on contractor and staff qualifications, experience, and fees. CM is onboard early to advise design team on materials, equipment, and budget. All trades bid competitively with owner involvement. RELATIONSHIP MOTIVE Requires managing allowances and contingencies to realize some savings. Requires more sophisticated owner representation. Selection process requires time for proposals and presentations Design Build Owner selects based on team and design ideas and project construction approach. Maximizes creative solutions often leading to a project that incorporates the best of all D-B team ideas. DESIGN & COST MOTIVE Requires owner creation of bridging documents and detailed scope up-front before consultants are on board. Longer selection process to allow for all team’s proposed designs and presentations. Can lose some design control
Steve Kuhn is the founder of ShareBuilt, a nonprofit organization, that directly connects those in need of new/renovated facilities to AEC organizations with resources to meet those needs and professionals called to serve their communities.