INNOVATIVE PROCUREMENT

INNOVATIVE CONSTRUCTION PROCUREMENT

Gives the client more input into cost and quality Client needs a management with strong leadership and teamwork qualities in order to produce what is expected. Such procurement was introduced to accommodate forever increasing diversity, complexity and standardisation of building techniques Direct involvement of the manufacturer in terms of design, costing and logistics

INNOVATIVE CONSTRUCTION PROCUREMENT (CONT.)

The management structure of this form of procurement is organised hierarchically according to the stages of product development. Use of non-traditional delivery system can create greater risk of misunderstanding Scope of work / compensation are changing continuously Innovative project delivery systems can blur the traditional roles and responsibilities of participants

EXPLANATION OF PROCESS
Owner established budget and building criteria Owner selects the design team During the design-development phase, owner advertises for and selects a construction firm based on predetermined criteria to join the owner/design team. Firm assists in completing the design and establishing a guaranteed maximum price (GMP) All trade work is bid competitively by the CM/GC

PROJECT CHARACTORISTICS
High risk projects High level of technical complexity Strict budget constraints Complex phasing Significant scheduling constraints Complex site constraints such as unusual topography Value engineering that would result in substantial cost savings

TO ACHIEVE...

TWO STEPS SOLICITATION PROCESS

MANAGEMENT-ORIENTATED PROCUREMENT SYSTEMS

Defined as a process whereby an organisation, normally construction based, is appointed to the professional team during the initial stages of a project to provide construction management expertise under direction of the contract administrator

MANAGEMENT-ORIENTATED PROCUREMENT SYSTEMS

KEY POINTS

The contractor is appointed on a professional basis as an equal member of the design team providing construction expertise Reimbursement is based on a lump sum or percentage fee for management services plus the prime cost of construction The actual cost is carried out by works or package contractors who are employed, co-coordinated and administered by the management contractor

COMPARISON OF PROCUREMENT SYSTEMS, SOURCE OF RISKS AND CONFLICTS

Responsibility for decision

Preparation Design
Tender

Cost

Traditional system

Construction is being started knowing the construction costs

Construction
Start

Preparation

Design Tender

Cost

Modern managerial typed system

Construction
Start

Constriction is started without knowing the construction costs

Construction Management CM
Client Inspector Supervisor Construction Manager

Management Contracting MC
Client
Inspector Supervisor

Designer

Management Contractor Contractors Designer

Contractors

MANAGEMENT CONTRACTS (CM, MC)

Characteristics

Management team is involved at early stage Design can be influenced (buildability) Claims can be solved, delays reduced Save time series of tenders, work packages Flexibility in design

to suit the client to suit the budget

More risk in design higher requirement in design No assured final cost at the start of construction

CONSTRUCTION MANAGEMENT

Many owners engage construction managers (CMs) to assist in developing bid documents and overseeing project construction. CM:

Is a professional or a firm trained in the management of construction processes. Is generally interposed between the owner and some or all of the other participants. Agency Construction Managers (ACM) Construction managers-at-risk (CM-at-risk)

There are two general types of CM:

AGENCY-CONSTRUCTION MANAGER (AGENCY-CM)

ACM acts as an agent of the owner and extends the owners internal capabilities in performing traditional owner responsibilities. The level of service by the ACM can range from oncall advice to full project management. In some cases, the owner hires the ACM before design begins and ACM may participate in the selection of and contracting with the designer or might even be the designer.

AGENCY-CONSTRUCTION MANAGER (AGENCYCM)

Agency-CM (also known as Program Management for multiple contracts or programs) is a fee-based service in which the construction manager (CM) is exclusively responsible to the agency and acts as the agencys representative at every stage of the project. The CM is selected based on qualifications and experience, similar to the selection process for design services. CM responsibilities may include providing advice during the design phase, evaluating bids from prime contractors, overseeing construction, and managing project cost, schedule, and quality. The CM may work with the designer or contractor to reduce the cost, but does not guarantee price or take on the contractual responsibility for design and construction.

AGENCY-CONSTRUCTION MANAGER (AGENCYCM) - CONT.

Objective Supplement in-house staff with independent professionals having expertise in project management, scheduling, and cost control Time savings by fast-tracking construction

Project Types/Selection Criteria Agency must supplement its internal resources and management expertise given the projects size or complexity Large, complex (multi-season) projects with multiple phases or contracts Fast-tracked construction (using phased packages) is possible

PROS & CONS

Pros
Earlier involvement of CM (constructor) bridges design and construction phases Furnishes construction expertise to designer Provides the opportunity for fast-tracking or overlapping design and construction phases faster than traditional design-bid-build system

Cons
High agency involvement (in comparison to other innovative delivery systems) CM not at risk for construction cost Unlike CM at-Risk, Agency-CM services are not regulated by state licensing laws for contractors or A/E firms

Augments the agencys own resources to help Agency continues to hold construction manage cost, time, and quality contracts and retains contractual liability Procuring separate design and construction contracts is less change for agency Provides an independent point of view regarding constructability, budget, value engineering, and contractor selection (No inherent bias towards design or construction) Potential to fast-track early components of construction prior to completion of design Reduces the agencys general management and oversight responsibilities Added project management cost for CM services Agency cedes much of the day-to-day control over the project to the CM, adding a level of bureaucracy in the field

CONSTRUCTION MANAGER AT RISK (CM AT-RISK)

CM-at-risk arrangement increases significantly owners delegation of control and risk. CM-at-risk typically contracts with the owner in two stages. First, CM-at-risk manages and undertakes services during conceptual & preliminary design phases with the design professional. When design is complete, owner and CM-at-risk then agree on a price and schedule for the completion of the construction work. CM-at-risk is popular for owners of private projects.

CONSTRUCTION MANAGER AT RISK (CM ATRISK)

With CM at Risk, the agency engages a construction manager (CM) to act as the agencys consultant during the pre-construction phase and as the general contractor (GC) during construction. During the design phase, the CM acts in an advisory role, providing constructability reviews, value engineering suggestions, construction estimates, and other construction-related recommendations. At a mutually agreed upon point during the design process, the CM and the agency will negotiate a Guaranteed Maximum Price (GMP). The GMP is typically based on a partially completed design and includes the CMs estimated cost for the remaining design features, general conditions, a CM fee, and construction contingency.

CONSTRUCTION MANAGER AT RISK (CM ATRISK)

The construction contingency can be split into CM and agency components. The CM contingency will cover increased costs due to unavoidable circumstances, for example material escalation. The agency contingency would cover cost increases from agency-directed or agency-caused changes. The construction contingency can be handled in different ways under the contract. Unused CM contingency can be returned to the agency, shared by the agency and CM, or given to the CM.

CONSTRUCTION MANAGER AT RISK (CM ATRISK)

Agencies are increasingly experimenting with sharing the contingency pool with the CM to provide the CM with an incentive to control cost growth associated with change orders to meet the GMP. The agency may elect to remove pricing of some material or work items as part of the GMP if pricing of these items results in an excessively high CM contingency or GMP. For example, if the price of steel were too volatile to achieve an acceptable GMP, the agency could establish a separate bid item and pre-pay or pay for the steel directly under this item at actual cost. After the GMP is established, the CM can begin construction, allowing for the overlap of the design and construction phases to accelerate the schedule. Once construction starts, the CM assumes the role of a GC for the duration of the construction phase. The CM holds the construction contracts and the risk for construction costs exceeding the GMP.

CONSTRUCTION MANAGER AT RISK (CM ATRISK)

Objective Time savings by fast-tracking design and construction in phased packages Transfer performance risk to CM

Performance Outcomes CM at-Risk costs 1.5% less than DBB, completes 5% faster than DBB, and performs equal to or better than DBB in most quality measures. (Sanvido and Konchar 1999)

Project Types/Selection Criteria Large projects with multiple phases and contracts Fast-tracking Staged construction Limited internal agency management resources and expertise Limited time or funding constraints

PROS & CONS

Pros
Allows for innovation and constructability recommendations in the design phase, yet the agency still retains significant control over the design CM holds construction contracts, transferring performance risk to GC

Cons
Once construction begins, the CM assumes the role of a general contractor, leading to possible tensions with the agency over project quality, budget, and schedule GMP approach may lead to a large contingency to cover uncertainties and incomplete design elements

GC puts more investment in cost engineering and constructability review than with CMAgency
Fixes project cost and completion responsibility earlier than Design-Bid-Build

Incentive split of savings scheme may create perception of inflated GMP

CM input may not be included by designer

Use of a GMP with a fixed-fee and opportunity Use of a GMP may lead to disputes over the for shared savings provides an incentive for completeness of the design and what CM to control costs and work within funding constitutes a change to the contract limits
Reduces agencys general management and oversight responsibilities Potential to fast-track early components of construction prior to complete design Agency retains design liability

THE PORTLAND METHOD

Named after the City of Portland, Oregon where it was used, is a hybrid CM at-Risk delivery method using a cost-reimbursable, fixed fee approach to compensation. The delivery is structured into three phases, procurement, pre-construction, and construction. In the first phase, the agency procures the contractor using a best-value process. The proposer is selected based on qualifications and a fixed fee bid covering the contractors off-site and onsite overhead, including superintendents, management staff, other general conditions costs, and profit, for the life of the project. In the event that differing site conditions increase overall contract time or extra work is ordered in writing by the agency, this fixed fee may be renegotiated accordingly.

THE PORTLAND METHOD

During the pre-construction phase, the contractor provides design reviews and construction planning, with a focus on constructability, value engineering cost and time reductions, and joint risk assessments. These efforts culminate in the development of an estimated reimbursable cost (ERC). The intent is to establish reasonable construction costs for labor, equipment, and materials, which factor in the costs of unknowns without establishing a separate contingency. After comparing the ERC with the Engineers Estimate, the contractor and agency negotiate a final ERC and combine this with the fixed fee to establish the contract amount. Finally, the contractor will submit a cost control program and subcontracting plan for construction. In the final phase, the general contractor will construct the project by self-performing work on a reimbursable basis and subcontracting work using firm-fixed-price agreements.

THE PORTLAND METHOD

The Portland Method differs from conventional CM atRisk in that it uses an ERC instead of a GMP. The ERC shifts less risk to the contractor to meet set funding limits. Also, the Portland Method places no limits on the amount of work that the prime contractor may selfperform, a common restriction found in CM at-Risk contracts. Objective Early contractor involvement (design and planning) to reduce cost and schedule. Time savings by fast-tracking construction

PROS & CONS

Pros Allows for innovation and constructability recommendations in the design phase, yet the agency still retains control over the design Cons Once construction begins, the CM assumes the role of a general contractor, setting up traditional contractual relationships with agency and designer, and potential for disputes over project quality, budget, and schedule Best suited to specialized work (e.g. tunnelling) with significant risk of cost and time growth Agency retains design liability and greater risk of differing site conditions

Fixes project cost earlier than DesignBid-Build Potential to fast-track early components of construction prior to complete design

In comparison to CM at-Risk with a GMP, reimbursable cost basis shifts less performance risk to the contractor
Provides no added incentive to motivate contractors to control costs

DESIGN SEQUENCING

With design-sequencing, the agency sequences design activities in a manner that will allow the start of each construction phase when the design for that particular phase is complete, instead of requiring the design for the entire project to be complete before allowing construction to begin. The agency delivers the remainder of the design by predetermined dates after construction has started. To implement design-sequencing, the agency develops plans and an estimate to a level sufficient to define the project scope and to allow the contractor to select anticipated subcontractors. The bid documents must contain all anticipated items necessary for the complete design, regardless if final quantities have been determined. Due to the potential for agency-caused delays in releasing subsequent design sequences, design-sequenced projects typically do not incorporate other time-saving contracting techniques, such as A+B bidding or Incentive/Disincentive provisions.

Objective Accelerate project delivery by allowing the agency to award a project based on plans that are, on average, 30 percent complete

PROS & CONS

Pros Faster project delivery Cons The agency retains the risk for variations in the bid quantities

Potential for construction inefficiency due to conflicting or overlapping work between the initial sequence and subsequent sequences Unanticipated site conditions or third party conflicts during construction may impact ability of a design-sequenced project to generate time savings

ADVANTAGES & DIS-ADVANTAGES

Pros
Contractor selected based on qualifications Contractor assists in design A GMP is established prior to bid

Cons
Requires knowledgeable and experienced owner Higher initial cost Elevation of the contractor to the status of a clients adviser/consultant with the result that the contractors contractual liabilities are limited, in the same way as other members of the professional team, to accepting responsibility of negligence in the performance of his management role Although the contractor/manager is responsible for supervising construction and ensuring that work is built to the standards identified by the design team, the fact that his obligations are limited to his management capabilities means the client is liable for the cost of remedying any defects. The whole issue of maintaining quality control is problematic when using this procurement system. The client may need to appoint additional site supervision to avoid difficulties in determining the responsibility for defects and to ensure that the specified quality is achieved. The client does not have a firm price tender available before commencing work although both private and public accountability can be partially satisfied as the

Early advice can be obtained from the contractor/manager on design, buildability, programming, materials availability and together with general construction expertise.
Fewer change orders fewer claims Since the financial structure of this system is fragmented, the monetary failure of any works contractor will only have limited effect overall process. Time savings (work can start prior to design completion) This system has a high degree of flexibility to allow for delays, variations and rescheduling of work packages. Less adversarial Commencement of the project is accelerated, which

ONE STEP TOWARDS A SUCCESSFUL PROJECT

To choose appropriate procurement system and appoint the manager as early possible for maximum benefit Characteristics of the delivery system have to be understood by the participants Contract has to contain reasonable allocation of activities, responsibilities and risk

All the participants have to recognise responsibilities, act in partnership

COMPARISON
Design-Bid-Build Statutes Preferred Lowest first cost Final cost ? A/E completes design Design Build Statutes allowed First cost on budget Final cost ? CM/GC Statutes allowed Higher first cost Final cost ?

Design firm and contractor Select contractor based selected as one based on on criteria criteria

Advertise

Owner has little or no input into design

Owner has no risk?

CM assists in design

Select low bid Owner risk

Prepare bid package Shared risk

PROJECT DELIVERY SYSTEMS

Proper choice and fully understanding of delivery system

PROCUREMENT
Can help to reduce conflicts on construction projects