New Trends in Project Delivery
As the overall market continues to grow in the U.S., so has the market for alternative project delivery. Owners increasingly have been looking for means to squeeze conflicts and inefficiencies out of the construction process and see the old system of looking for the lowest first costs in the traditional design-bid-build procurement process as failing to address these concerns. This dissatisfaction with the old delivery systems is shown by the growing volume of state legislation authorizing public agencies to use alternative project delivery methods.
The market for alternative project delivery in 2015 also mirrors the global construction market, as can be seen in the rankings of ENR’s Top 100 Construction Management-at-Risk (CMR) Firms and Top 100 Design-Build (DB) Firms. The Top 100 CMR firms had a combined revenue from CMR of $102.97 billion in 2015, down 1.0% from the $103.98 billion reported by the group in 2014.
But what is striking in the numbers is that CMR revenue from international projects in 2015 for the Top 100 dropped 40.2%, to $10.30 billion from $17.21 billion, in 2014. In the domestic market, CMR rose 6.8%, to a record $92.67 billion, in 2015.
The DB list provides a similar contrast between domestic and international project delivery: Overall, the Top 100 DB firms had total revenue of $107.21 billion in 2015, down 2.2% from 2014; revenue from domestic DB projects grew a healthy 5.0%, rising to $72.74 billion, in 2015. On the other hand, international DB revenue dropped 14.6% in 2015, thanks in part to a falloff in huge engineering-procurement-construction projects in the international mining, power and petroleum markets.
Alternative project delivery options such as design-build and public-private partnerships continue to be an evolving part of construction. “Inevitably, it is all about creating partnerships that share in a risk-reward scenario that drives everyone to do their best work. We are regularly partnering with contractors to pursue large-scale opportunities,” says John Jastrem, CEO of Arcadis North America. He notes that Arcadis was part of the team that delivered the massive Carlsbad Desalination Plant using a design-build-operate-finance project delivery approach (see ENR 10/21/13 p. 32).
Many firms comment that alternate project delivery is getting increased attention from owners—especially in the public-sector markets, long bastions of traditional design-bid-build. For example, legislation authorizing alternative approaches to project delivery by public agencies has flourished over the past decade. Transportation agencies have been particular beneficiaries (see p. 24).
Agencies in a broad variety of sectors have gained from this enabling legislation. In 2015, 70% of the state bills to expand the use of design-build in the public sector that were supported by the Design-Build Institute of America, Washington, D.C., were passed, says Lisa Washington, DBIA’s CEO. “Missouri just became the 25th state to pass a law granting full authorization for public agencies to use design-build,” she notes.
The long-term lack of a federal highway bill and uncertain infrastructure funding has forced public agencies to seek ways to streamline their procurement and project delivery processes. These factors have created more opportunities for alternative delivery methods, such as public-private partnerships (P3s) and design-build, and forced all parties to work closer together. “Stronger relationships with contractors, concessionaires, the financial community and other stakeholders are no longer an option but a requirement,” says Nick DeNichilo, CEO of Mott MacDonald, North America, an Iselin, N.J.-based engineering firm.
While many designers resisted what they perceived as design-build’s usurpation of their traditional role in shaping the project’s concept and overseeing construction, many have embraced the team concept associated with alternative project delivery. “With the fact that design-build and CM-at-risk have dominated the delivery process for the past 15 or 20 years, the contractor has necessarily become a strategic partner,” says Mike Medici, president of Detroit-based architect-engineer SmithGroupJJR. “I truly believe that focusing on collaboration is head and shoulders above the traditional design-bid-build process,” he says.
These enabling laws have paid dividends to firms experienced in alternative project delivery. “In Ohio, our clients have many delivery methods to choose from. We see this as a positive for clients and our organization,” says Brian Burgett, CEO of Kokosing Inc. Kokosing currently is building a $98-million wastewater facility for the city of Euclid, the largest-ever CMR treatment facility to be let in Ohio, he says.
“We continue to see significant change in project delivery in the water and wastewater-treatment market,” says Kevin McCarthy, CEO of PC Construction. He says these markets used to be dominated by design-bid-build projects, with owners seeking out the lowest cost. “Now, they are seeing the benefits that design-build and construction management-at-risk delivery provide.” PC Construction is working as a CMR contractor for the city of Atlanta’s water-supply program, the Charleston, S.C., water system and infrastructure projects for Paulding County, Ga.
Many firms formerly thought of primarily as designers have developed their own in-house construction capabilities and now are embracing their role as an integrated design-builder. “Our ability to merge the traditionally separate build and design roles into a seamless integrated team has proven to be a valuable service for our clients,” says Greg Carlson, vice president of Burns & McDonnell. Since these services are from a single source, the firm is able to provide the flexibility to quickly adapt and expedite critical-path items—design decisions, permitting and staffing needs, for example—to achieve aggressive schedules and budgets, Carlson says.
Alternative project delivery has raised concerns. Some design firms say that, when developing a project, owners are looking more toward contractors, rather than design firms. “In certain market sectors and in certain regions, clients go to contractors first, and then design teams work through contractors,” says Kevin Hydes, CEO of Integral Group, an Oakland, Calif.-based engineering firm. “Typically, a lot of clients in the tech sector go that route.” To ensure their continued impact on projects, it is important for design firms to develop strong ties with contractors and owners, he notes.
Design firms worry about the legal implications of design under processes such as design-build. The potential shift in responsibility for design services from the traditional design consultant to the contractor under design-build and the emerging integrated project delivery models create “contractually gray areas that are presenting themselves and require cooperation and creative solutions,” says Philip M. Davis, senior vice president of architecture for Fishbeck, Thompson, Carr & Huber Inc., a Grand Rapids, Mich.-based architectural and engineering firm.
Many owners see alternative project delivery as a means of limiting their risk on a project. However, risk-shifting is a double-edged sword. Alternative project delivery may help to mitigate some risks by fostering teamwork, but no process can eliminate all risk. Owners may not understand that shifting risk to the contractor or the design-build team comes at a price.
Many firms engaged in alternative project delivery say owners need to understand the cost of risk. “A troubling trend is that owners are trying to get more sophisticated, getting into P3s or other alternative methods of procurement that they don’t understand. What happens is, the risk is all getting shoved down to the contractor level … with onerous contract terms like consequential damages and the like. Then, when you try to price that risk, the owner says your price is too high. We need to find a balance between price and risk,” says Bob Alger, CEO of Lane Construction.
Washington of DBIA stresses that understanding the process is the key to making design-build successful, particularly for owners. “It’s all about education. People have to understand the elements of design-build done right,” she says.
To address the issue of education, DBIA has introduced a series of best-practices guides, says Washington. She notes that DBIA produced a general guide to design-build best practices early in 2015 but now is issuing a series of market-specific guides. “We came out with our best-practices guide for the federal sector last August, then one for the water and wastewater markets in January and one for transportation in March.”
Many firms note the increased use of design-assist, a process that brings in the contracting team early to assist the design team in planning out the project. “We are finding that the increasing need for design-assist or other very early trade input on projects is promoting much deeper relationships with the subset of subcontractors that are able to successfully collaborate within teams and add value during the preconstruction and planning phase,” says Steven F. Roznowski, CEO of The Christman Co.
Washington of DBIA says there is a growing trend to extend this design-assist concept into the use of design-build; this method is called progressive design-build. A design-build team is brought in early in the design process to work closely with the owner on specification and equipment selection. Once the design is about 35% complete, the design-build team offers a guaranteed maximum price.
“This approach has become more common in the water and wastewater sectors, where complicated equipment selection is required early on,” says Washington. She says this approach gives owners greater input into the design without sacrificing the collaboration and single point of responsibility inherent in design-build. “It also requires a qualifications-based selection process to be the most effective,” she says.