Sources of Changes in Design-Build Contracts

for a Governmental Owner

Dr. Robert A. Perkins, PEAssociate Professor, Dept. of Civil and

Environmental Engineering, University of Alaska Fairbanks, 907 474 7694. ffrap@uaf.edu http://www.faculty.uaf.edu/ffrap/

William M. Tweed

1858

• New York county allocated $250,000 for a new courthouse.

• Escalated to $13 million• Boss Tweed and his gang got a 30%

Commission on all contracts • Siphoned off $9 million

– ($135 million in 2007 dollars.)

Government Procurement Virtues

• Public Confidence – underpinned by attributes of accountability, transparency, equity and fair dealing in relation to procurement processes

• Efficiency and effectiveness – in use of pubic monies to achieve value for money and efficiency of delivery of procurement outcomes; and

• Policy compliance and consistency – of both the processes and outcomes of procurement in relation to public welfare objectives and expectation of the public sector such as environmental issues, training and apprenticeships, international obligation and especially business and regional employment impacts

Government Contracting

• Orville and Wilbur Wright’s contract to build the first military aircraft was three and half pages long.

• 19 different agencies surveyed 1978 and 1979– 877 different sets of procurement

regulations, including directive, bulletins, and instructions

– 64,600 pages of regulations, of which– 29,900 pages of which were promulgated

or revised annually.

Construction

• A 1970 federal survey found government building projects took 59 months to design and build while equivalent private sector projects took 24 months

• 1986 through 1988, eight federal entities completed 268 building projects valued at more than 10 million each. 44% of those projects experienced time delays over 6 months and 23% experienced cost increases over 10%

Contracting Strategy for Procurement of Construction

• Project Delivery System• Procurement Method

– QBS– Low bidder

• Contract type– Lump Sum– T&M

Project Delivery Systems

• Design-Bid-Build• Design-Build• Construction Manager at Risk• Job Order Contracting• PPP, Public Private Partnerships

– BOT, Build Own Transfer– BOOT, Build, own, operate, transfer– DBFO, design, build, finance, operate

DBB = Traditional

• Owner hires A/E• A/E designs and produces a “bid

package”• Owner advertises for sealed bids• Opened publicly• Lowest bid gets the job• Must provide bond• “Qualified” = bondable

Advantages of DBB

• A/E designs what owner wants• Competition assures lowest price

– Sufficient bidders

• Transparent process• Fair process• No discretion = no favoritism• Bonding can force performance

Disadvantages of DBB

• Bids may come in over budget• Changes, Always changes

– Design errors– Differing site conditions– Owner changes– Third party issues– Access, permits– Acts of God

Changes

• Advantage goes to contractor• Essentially non-performance or

breach by the owner• Contract clauses cover, but

asymmetrical negotiations• Risks, i.e., schedule• Grey Areas

Opportunistic Bidding

• Bid low just to get the opportunity• Contingency• Equipment

Design Build

• Owner develops “design criteria”– Bridging design

• Advertises for proposals• Two envelope proposals• Qualifications and Outline of Design• Price

Best Value

• Might have presentations• Select best value for government• Most building for money

Criteria for a 46.6 Million Bridge

• Durability 20• Quality of Design 17• Maintenance of Traffic 15• Maintainability 12• Quality of Construction 10• Understanding the Scope of Work 10• Quality of Schedule 5• Community Impacts 5• Aesthetics 5• Navigational Vertical Clearance 1• Total 100

Advantages of DB

• Can consider contractors past business practices

• Can compare actual price with outline design

• Contractor and A/E work together to assure constructability

• Innovation• Faster• Changes due to “design errors” reduced or

eliminated

Disadvantages of DB

• Design not entirely under Owners control

• Can still have changes

Governmental DB

• Prior to 1990, DBB was the preferred project delivery system

• Could use DB and others, but needed special permission – often required a finding that DBB “was

not practical”

• Started to change rapidly in the 1990’s

• 1990, Federal Highway Administration SEP-14

• 1996. Clinger-Cohen Act, 10 USC §2304,. • 2000 revision of the Model Procurement

Code• Today about half the states have laws that

allow some sort of “best value” procurement and design-build delivery.

• But

Inertia

Select

• Quality • Schedule• Cost

Quality

• Pretty Good

Schedule

Cost

• Terms:• Construction Phase Cost Growth

– Actual vs. planning

• Construction Contract Cost Growth– =changes– AKA “delivery contract cost growth”

• A 2002 study by the National Institute of Standards and Technology and CII– Not statistically significant on construction phase– DB significantly better in changes– Not enough public projects

• A 2003 study of 67 projects, mostly domestic but some overseas,– DBB had less cost growth– DB and DBB had similar changes– Government and non-governmental not

distinguished

• The 2005 Design-Build Effectiveness Study (USDOT 2006)

• Paired 11 similar DB and DBB transportation-related projects and compared the cost growth and changes – the average project size was about $50 million.

• Contract cost growth was 6.0% for DB and 4.3% for DBB.

• DB projects averaged 16 change orders with a total average cost of $837,000 per project, while DBB had 22 change orders that had an average of $588,000 per project.

• DB had fewer change orders but they cost more. • None of the results statistically significant.

Causes of Changes DB vs. DBB

• Controllable vs. Non-controllable– Owner Project Manager’s Viewpoint

• Controllable– Design Errors

• Should have less

• Uncontrollable– Differing site conditions

• Same

– User Changes• Could have more????

Schedule vs. Contracting

A/E works for Contractor

• In DBB, the owner/user select the A/E• A/E has many design reviews with

chances to “sell” features to the owner• A/E is trying to please owner, happy to

make minor changes • In DB, the A/E works for the contractor

and is reluctant to change• May lead to more changes

Causes of Changes

• Owners change vs. Design error– 65% design review– User notices fixture is not optimum– Contractor says his design conforms to

design criteria he bid on– If owner’s PM was in charge of design

criteria, he will tend to see this as a user change rather than a design error.

Methods

• Corps of Engineers• Northern and Southern Alaska Area

Offices• Military Construction Projects• Resident Management System

Question

• Are the causes of change different between the DB and DBB governmental contracts?

• Specifically, were there more owner/user requested changes in DB than DBB.

No. of DB No. of DBB

Housing 2 4

Barracks/Dormitory

2 5

Industrial 5 4

Utilidor 3 4

Other 2 3

Total 14 20

34 DB and DBB Combined

Average Cost $ 15.9 Million

SD $ 11.8 Million

Method

• RMS, Resident Management System• Has all contract changes and causes• Type 1, Design Errors• Type 4, User Changes• Type 7, Differing Site Conditions• Others: value engineering,

miscellaneous changes, administrative changes, and construction changes, suspension of work, government furnished equipment

Construction Contract Cost Growth, %

Average No. of Changes

Average Growth Cost, $

DBB 6.6% 25 1,069,882

DB 3.1% 14$480,046

“p” value 1.7% 1.5% 4.6%

Controllable vs. Uncontrollable

Controllable Changes Uncontrollable Changes

No./average contract

$/average contract

No./average contract

$/average contract

DBB 17 739,6677 330,215

DB 6190,791 9 290,539

“p” value 0.1% 3.8%30.5% 40.3%

Source of ChangeType 1,

Engineering Changes

Type 4, User Changes

Type 7, Differing Site Conditions

No./avg contract

$/avg. contract

No./avg. contract

$/avg. contract

No./avg. contract

$/avg. contract

DBB 15 482,513 1 5,033 5 226,020

DB 4 195,714 5 71,514 3 221,524

“p” value

0.1% 5.1% 0.4% 2.4% 27.1% 49%

But, from raw data

• 12 of 14 DB contracts had user changes• Only 9 of 20 DBB had any user changes• More user changes were work/cost

reduction in DBB• Average DB change was $48,000 while

average DBB change was -$32,000• Absolute value of changes was similar,

DB was $53,000 and DBB was $59,000

• There were no significant differences between the housing and industrial groups

• There were no type 4 changes in the first few months of DB contracts.

Answers• There is clear advantage in DB in

construction/delivery contract cost growth• This is primarily in reduced cost of design

errors• There were statistically significant increase

in number of user changes in DB over DBB• There were statistically significant increase

in cost of user changes in DB over DBB, but• Cost difference may be anomaly

Conclusions

• Construction contact cost growth is less with DB

• Strong evidence there are more owner/user changes in DB

• Advantage in design error cost growth outweighs disadvantage in owner/user changes

• Future work should explore why there are more user changes (they did not occur early in the project).