Besides altering the way a construction company, a general contractor, or a builder gets selected and paid, there is also a shift in the risk between the owner, the designer, and the contractor in alternative project delivery methods (APDMs) as compared to the design-bid-build method of project delivery.
- A contractor takes on risk when they sign any contract to build a project. It's what we do. If there were no risk, there would be no reward, no profit, or money to be made. It's the nature of the business. Identifying the risks we're assuming and taking measures to mitigate or control those risks is one of the things that makes a contractor successful. Some of the risks we manage remain unchanged across any of the project delivery methods. Things like job site safety, theft, or destruction of project property and resources, a trade contractor's ability to complete the job, adherence to plans and specs, these are all risks that are assumed by the general contractor under, virtually, all methods of project delivery.
Some risks, though, get shifted among the different parties, depending on the type of project delivery method being utilized. In Design-Bid-Build, remember that the contractor has a right, rooted in much legal doctrine, to assume that construction plans are correct and buildable. They don't have an obligation to work in the best interest of the owner. They can bid the plans presented to them and then come back and request additional money if changes are needed due to plans that don't work.
This leaves the owner to go between the designer and the contractor, and it puts that owner at risk for absorbing any additional costs. You see, the contractor is probably most likely legally entitled to any costs associated with plan changes. They're under no obligation to point out errors during the bid process. Now, in Design-Build, the owner is shedding this risk, that risk that they assume when they have a contract with one party for design and another party for construction.
They transfer that risk over to the Design-Build team. Depending on the makeup of that team, it's up to them to fight this kind of thing internally. And the owner will expect the project to proceed, uninterrupted. Under a CMAR delivery method, things also change a little bit for the contractor. They're initially hired under an agency contract to help the owner with the design. They're being hired for pre-construction services though, not design services, so they'll typically not carry the professional liability or errors and omissions insurance required of the designer.
But, nonetheless, they are expected to provide accurate information and assistance. Failure to properly track and communicate ongoing cost estimates during the design phase can result in an owner receiving a guaranteed maximum price that's over budget or over what they anticipated. This will tend to result in an unhappy owner, since this is one of the things that they hired the contractor to get right. They expect very accurate costs and very accurate schedule estimates as the design progresses.
Failure to be accurate can result in the CMAR not receiving the construction contract. In other words, the contractor risks undertaking the pre-construction or design-assist services contract only to see the much larger and more lucrative construction contract awarded to another general contractor, and I've seen this happen, and it can usually be traced back to some sort of lack of communication. Sometimes the breakdown comes between the general contractor and their potential subcontractors that are helping them price out the project.
A general contractor needs reliable trade contractors to help them accurately estimate those construction costs, and they need good relationships with them to help foster proper communication. It's also not always the contractor that's to blame for a breakdown in communication. Sometimes the owner just doesn't communicate well during the process, and they're surprised by something they probably should have already been aware of. These are the risks that a contractor takes on in this arrangement. There are no absolute guarantees of getting that second construction contract, even though that is certainly the goal to begin with.
The other risk that I believe transfers at least somewhat to the contractor under CMAR is related to the fact that the contractor, at some point, provided design-assist services, and, therefore, there is some reasonable expectation that the final construction documents will be buildable, and that it won't contain errors that should've been caught under the contractor's agency contract. In other words, the contractor can't just overlook errors and bill for the changes that they would be entitled to under Design-Bid-Build.
In CMAR, they are expected to catch and correct these things during the design phase, and these types of change orders are not expected in a CMAR delivery method. Now, change orders for real changes in the scope of work are certainly legitimate under any delivery method. But, in CMAR, the contractor needs to ensure and be able to document that these changes are truly unanticipated scope changes, and not items that should've been included in that reasonable allowance for anticipated work.
I think this puts a little additional burden on the CMAR contractor to properly document meetings and progress, and to effectively communicate with the owner and the designer. When it comes to the construction contractor's assumption of new risk, the key to properly managing and mitigating these risks is to be educated and prepared. The CMAR contractor needs to be properly staffed to handle the tasks involved in pre-construction services, and they need systems in place to support these functions.
The Design-Build contractor needs to understand the risks of assuming the design role, and they, obviously, need to employ or contract with the proper design professionals, and be aware of the liabilities involved in these types of arrangements. Integrated project delivery presents a whole new model and it's really difficult to have the same types of conversations surrounding risk and reward, because the inherent nature of the delivery method itself is to assign risk to the party best equipped to handle it while rewarding all parties based on project performance, and not individual company performance.
This really requires a thorough understanding of that multiparty agreement that we discussed earlier and the legal language that it contains. Hopefully, now that we've discussed the different delivery methods, we've talked about payment and procurement methods, and looked at some of the ways that risk can be shifted among the different parties, you can begin to see that no one delivery method is right for every project. If you're an owner, you have different methods to choose from to suit your needs and goals.
If you're a general contractor, you should be able to talk to your prospective clients about each of these methods, even though not all of these methods may be completely suited to your company. With all of these different delivery methods available and more projects willing to move away from the familiar Design-Bid-Build method, let's take a look at the future.
- Payment and procurement methods
- The design-bid-build method
- The design-build method
- Construction manager at risk (CMAR)
- Integrated project delivery (IPD)
- Selecting a project delivery method
- Procurement laws
- Delivering the best value to the owner
- Qualifications-based selection
- Changes in the way you are paid