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Design-Build, Part 2: Alternative Delivery Methods

NovBlog#1

Back in March, we discussed the need to make better decisions now, concerning new and rehabilitated physical infrastructure in the Water/Wastewater industry, than those who came before us. We acknowledged that today’s technology can see much farther into the future than ever before, and today’s information systems gives us more ready access to historical data, allowing us to make much better sense of past events and decisions.

This reality makes it incumbent upon our generation and current government administrations to act responsibly toward future generations by making better long-term fiscal decisions. We proposed that the best way to do this would be changing the entrenched “price” mindset to a “best value” mindset, beginning with the premise that what we’re shopping for is not price, but desired outcomes.

We believe that Design-Build is the solution in most cases. Some D-B projects have higher initial price tags because they’re done on a planned, sustainable basis. But in our experience, over each year that goes by, the rate of return-on-investment goes up until the overall annual cost for operation actually goes down when compared to a pure low bid basis. Design-Build may not be the best approach for every project, but often, it provides sensible, strategic, long-term value solutions rather than price-based, short-term fixes that can end up not only disappointing in performance, but being far more costly in the long run.

That original post ended with civil engineer Doug Herbst positing that, “We need ownership to ask if there’s a better way than the traditional design-bid-build. We need to ask about Alternative Delivery Methods.”

In this post, we explore just what those Alternative Delivery Methods are, how they work, and why they may be a better fit for the many infrastructure projects that will inevitably be needed soon. We offer this look at one way to ensure a safer, cleaner and more sustainable future for America, and for other nations whose physical assets are aging out.

A New Paradigm in the Water/Wastewater Management Industry

According to the Design-Build Institute of America, there are five challenges unique to our industry for delivering a Design-Build project:

  1. Authority – Procurement authority can be complex for the local owners of most water/wastewater infrastructure, due to numerous levels of regulation. Limited capital programs and heavy reliance on outside advisors for project development assistance can complicate this. Such asset owners usually have significant plant/systems operation expertise, leading to strong views on desired technologies and processes.
  2. Highly specialized considerations – Water/wastewater projects differ greatly from other public sectors. Most are very specialized in nature, precluding most from using standardized approaches that save time and money.
  3. Organizational structures – The design-build team for the execution of a water/wastewater project is typically structured differently than in other public sectors. Generally, the design-builder for most transportation and building projects is led by a contractor, with the lead design professional serving as a sub-consultant. With water/wastewater, a fully integrated design-build firm is commonly in the lead over subcontractors, with or without some amount of construction self-performance. The design-builder is often a joint venture (JV) between a general contractor and either an engineering firm or the construction subsidiary/affiliate of one. Such JV approaches can create major opportunities for delivery of a design-build project.
  4. Progressive Design-Build vs. Fixed-Price Design-Build – Given procurement authority, many water/wastewater owners bring the design-builder to the project very early in the design process. A qualifications-driven procurement process selects the design-builder to work in collaboration with the owner to define the scope and its quality, budget and schedule, and to execute the project, all as approved by the owner.
  5. Varying Approaches – In the water/wastewater sector, the term “alternative project delivery” commonly includes
    1. Construction Management At Risk (CMAR)
    2. Fixed Price Design-Build (FPDB)
    3. Progressive Design-Build (PDB).

These forms of project delivery have become widely used and accepted, so the DBIA believes they should no longer be considered “alternative.” They propose the term “collaborative project delivery” as more appropriate.

Contrasting Methodologies

Procurements for Fixed Price Design-Build (traditional bid-based project awards) are based on either a prescriptive approach or a purely performance-based approach. In each case:

  1. Owners and their design consultants develop detailed documentation that defines the project’s technical requirements.
  2. Proposers provide technical proposals based on this documentation.
  3. Price is often the major factor in deciding upon which proposer will be selected as the design-builder.

Under either approach, the owner will commit major time and money to advance documentation. Potential design-builders carefully evaluate the return on investment of their marketing dollars when evaluating whether to pursue a Fixed-Price Design-Build procurement, given that price is a major factor in selection.

The prescriptive approach enables the owner to control the design, as the RFP’s documentation contains a detailed design, but this severely constrains the design-builder’s ability to offer innovative and cost-effective design solutions. It may also create potential owner/design-builder conflict over who should bear the financial risk of any mistakes in provided documentation.

A performance-based RFP will identify performance requirements, with few (if any) prescriptive design elements. Proposers are challenged to propose the best technical solution at the lowest cost over the entire life cycle of the asset. While performance-based procurements allow design-builders to innovate and develop cost-effective design solutions, they may meet the owner’s performance requirements but not its preference. Performance-based procurements are typically limited to owners who don’t require a clear project definition when initiating procurement.

Progressive Design-Build works much differently. Its overall objective is collaboration between the design-builder and the owner and its team of in-house personnel and outside advisors to develop the design basis. Progressive Design-Build also waits until the design is developed to a point where the project and scope of work are well defined to negotiate overall project price. To accomplish this, the owner will procure the design-builder either fully or primarily based on execution qualifications. Price-related factors such as compensation for preliminary design services and/or design-builder fees carry relatively little weight.

This process leads to optimum life cycle costing and equipment selection, and even selection of key trade subcontractors—benefits generally not available in the Fixed-Price model. More importantly, the collaborative development process enables design decisions to be made in an open-book cost environment, giving the owner real-time information about design/price trade-offs. This approach also enables the owner to decide the optimal point at which to obtain a price proposal from the design-builder. Price proposals are typically obtained at some point between 50% and 90% of the overall design completion, and are typically based on a guaranteed maximum price (GMP). A GMP is a cost-plus fee arrangement, in which cost and fee are defined. Some owners at this point choose to convert the GMP into a lump sum (i.e., fixed price).

Now that we’ve defined alternative delivery methods, next time we’ll take a look at a typical design-build procurement process you can use as a model for future projects.

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