Offloading the risk on overruns
Letting contractors know upfront what their profit will be minimizes litigation and change orders.
Cape Coral, Fla., is one of the nation's fastest-growing cities. Incorporated four decades ago, population within its 119-square-mile service area is expected to surge 130% by build-out.
Having seen the city lose $17 million on litigation related to utility expansion using design-bid-build, City Engineer Ernie Lemmerman, PE, watched with interest when a new city hall was built using construction-manager-at-risk (CM@R).
CM@R is a project delivery method in which a third party provides consultation to the owner regarding construction during design and through construction, sometimes serving as general contractor. The consultant agrees to complete the project at a guaranteed price, eating any cost overruns and either returning to or splitting with the owner any underages.
The $30 million city hall project, which was only 60% developed when the city released its request for proposal (RFP), was completed within 18 months. When Lemmerman heard that, he decided to apply CM@R to an aggressive road-building program using Balfour Beatty Construction as construction manager.
In the three years since, owner and consultant better understand the other's motivations.
“If the contractor is focused on getting the job through lowest bid, he may or may not make a profit; and he's going to look at ways to make that up,” says Jeff Zalkin, Balfour Beatty's business-development director. “Let's take profit and money out of the equation, and bring the builder in up front as part of the team to effectively solve the problem. And it all starts at the selection process.”
- The more descriptive the RFP, the more thorough the response. Explain your department's strengths and weaknesses, discuss staffing levels and capabilities, and explain how involved you expect the construction manager to be.
- Clearly state your intent to allow the firm to provide a tailored response.
- Develop and provide a selection matrix before the preproposal conference.
- In addition to finding out if the firm has worked on a particular type of project, make sure that experience is on a project of similar scale to yours.
- Ask references if the firm did what it said it would do.
- Stifle the overwhelming urge to include anything about fees; the selection process is qualifications-based and the guaranteed maximum price is negotiated after the construction manager has been chosen.
- When that time comes, agree to liquidated damages rather than consequential damages.
“Bundling the work logically allows for phased funding,” says Lemmerman, who says that CM@R makes it easier to provide capital estimates during annual budget discussions. Balfour Beatty bills him monthly and holds all contracts with subcontractors. It provided some concrete formwork, but later subcontracted it out.
To elected officials who claim it isn't a cost-effective use of taxpayer dollars, a Pennsylvania State University study shows that 82% of CM@R projects are competitively bid. Projects are delivered 13% faster than design-bid-build; built 6% faster; and have 8% and 9% less cost and schedule growth, respectively.
The Construction Management Association of America sells model contract documents at $50 for hard copies and $500 for an interactive CD.