It's Time to Pass CM/GC Legislation for Transportation Projects!

Construction Manager/General Contractor (CM/GC) is a construction project delivery method that includes a qualifications-based selection for a designer, a qualifications-based selection for a contractor, and as the project scope is better defined, a lump sum price from that same contractor. A qualifications-based selection is a selection process based solely upon qualifications without consideration of price. The opposite would be a low-bid selection where as long as the contractors are pre-qualified to do that type of work the selection is entirely based upon the lowest bid. The designer and contractor are both procured near the start of the project.

In previous years most construction projects were completed using a process called Design-Bid-Build (DBB). Using this process, the designer was selected using a qualifications-based selection, a construction plan set was created, and the owner procured a contractor using a low-bid selection process.

More recently Design-Build (D-B) delivery methodology has been used on more projects in the northeast. In this case the designer and contractor team together and provide the owner a lump sum price. There are different formulas being used to incorporate some qualifications into the decision, but the cost is the predominant selection criteria.

One of the strengths of DBB is that for State Transportation Agencies this is the incumbent system. Their staff has been trained on this methodology throughout their careers, their systems and protocols are designed for this methodology, and through a contractual relationship with the designer, they have a great deal of control over the contract plans. The disadvantages are that there is little/no contractor interaction during the design process that can result in constructability issues and that federal construction dollars can not be secured until the design is completed, the advertisement period is completed, and a contractor is under contract. With the fluctuation of federal funding and unforeseen delays on other projects, using this method requires States to have more projects "on-shelf". On-shelf projects are projects where the design is completed, but construction is not funded. These projects can be built if there is an influx of unanticipated money, but there is a risk of having these projects need to be updated if left on-shelf for too long.

D-B is a delivery method with a strong track record for expediting delivery on mega-projects, typically projects of more than $100 million dollars. Due to bonding requirements, these teams are almost always led by contractors with designers in a subcontractor/subconsultant role. Advantages include continuous contractor feedback throughout the design process, maximization of the contractor's staff and equipment in the design, and the ability to secure federal construction funds at about the 30 percent design stage.The disadvantages include a significant loss of control by the owner of the final product. Specifications will still need to be met, bu,t for instance, final aesthetics of a bridge could vary radically. Hidden disadvantages include taking the designer away from their traditional  business model. A great example is insurance. Owners often require designers to increase their insurance requirements for D-B projects, but in many cases that is wasted expense. The reason is that Owner/Contractor contracts, which D-B contracts generally follow, are warranty-based. The contractor is warranting the product meets the contractual provisions. Their bonds follow suit. Designer's professional liability insurance is fault-based. As long as designers followed a reasonable standard of care, then their insurance doesn't kick in. The difference between a product warranty and an engineer's standard of care is very significant and could have significant ramifications for contractor, owner, and designer if the project goes poorly.

During the stimulus and period following the on-shelf projects dried up.  To ensure federal construction dollars were spent D-B delivery was elected to spend the money, instead of only selecting the best delivery method for the projects.

Lastly, I cited the effectiveness of D-B methodology on mega-projects (exceeding $100M). The jury is still out about how D-B scales down to smaller projects. I suspect that the effective cutoff for construction costs is somewhere between $30-$50 million where the process routinely works well. At lower cost projects, designers are becoming almost an irrelevant commodity, but even contractors lose economies of scale to the process. There will always be projects that fit the process better or well-oiled teams that can make the difference on these smaller projects, but I think over time it will be proven that lower dollar D-B projects are not effective. Initially many companies are willing to take a loss to have D-B experience, but it is not reasonable to think that once these companies have this experience they will continue to chase projects that do not provide a reasonable return on investment.

I think the middle ground between DBB and D-B can be taken up by CM/GC. This process can be scalable down to smaller sized projects, maintain the owner control of the design process, provide constructability reviews by the actual contractors, and will allow federal construction dollars to be secured earlier in the process. The disadvantages include the need for legislative authority, the learning curve for owners and contractors, and getting contractors on board with qualifications-based selection.

Contractors had less of a learning curve with D-B, while the designer's business plan was turned on its head. CM/GC is the designer's revenge. The process will be very familiar for the designer, but the contractor will need to reform their marketing strategies, likely to include hiring new staff. The phrase often used is a "beauty contest". Some of the larger D-B firms I have worked with had marketing departments compatible with those of a design firm, but especially if CM/GC is scaled down to smaller projects many very competent contractors have non-existent marketing staffs and could require significant changes in their business philosophy.

Two recent projects I have been familiar with would have been great uses for the CM/GC methodology. One project was a D-B and one was a DBB. The D-B was a small project (under $10M) with significant risk from environmental, railroad, and Right-of-Way. Given the limited profit margins inherent on these low dollar D-B projects the risk was too great so we walked away. The CM/GC process would have allowed these risks to be better defined while still meeting deadlines for federal construction dollar allocation.  Using D-B inappropriately will ultimately drive some good contractors from the market and lead to higher costs as competition diminishes. The second project was a DBB where the designer's approach and the contractor's approach were equally sound, but so different that the owner paid for design not used, effort to evaluate the contractor's methodologies, and a lot of time was lost from the schedule while ultimately ending up somewhere in the middle of the two approaches. Had this been CM/GC, the designer and contractor could have collaborated on the effort while securing the owner's blessing. With the knowledge of the means and methods of the contractor early items such as geotechnical borings, permitting, and right-of-way could be more strategically targeted to the contractor's approach. The result would have been a more efficient design targeting the contractor's strengths.

In summary each procurement methodology has its strengths and weaknesses, every project has its unique challenges, and owners, designers, and contractors have their own strengths, weaknesses, goals, and aspirations. By seeing each of these procurement options as only a tool as effective as the appropriateness of its use, a lot of very positive results can be obtained. D-B and DBB need to have CM/GC added to the tool box to provide State Agencies the right procurement methods to maximize limited transportation funding.

Is it time to consider CM/GC on New England Transportation Projects?

In New England the primary procurement methodologies being used on transportation projects are Design-Bid-Build and Design-Build. Design-Bid-Build is the incumbent methodology best understood by state officials and the general public. It offers the owner control of the project, and allows more control of the risks such as utility relocations and right-of-way since the design is completed before the contractor is procured. Design-Build is gaining more acceptance with most states now having an established program. This methodology sacrifices some of the owner’s control of the design in exchange for more risk passed on to the contractor. These projects are generally completed more quickly, allow constructability reviews by the contractor as the design progresses, and allow State Agencies to secure federal construction dollars earlier in the process

With the state of the economy there are signs that Design-Build projects are not performing as intended. Contractors more desperate for work or trying to break into the Design-Build market are not requiring the financial compensation commensurate with their labor expended, materials costs, reasonable profit, and reward for the additional risk undertaken. In the short term this may be in the favor of the public good, getting projects built at bargain prices, but this is not a sustainable strategy and may ultimately injure the transportation market.

There is also some concern on the projects that are being selected for Design-Build. Some projects appear selected less for the advantages incumbent in the Design-Build process, and more to meet federal guidelines and deadlines for the allocation of construction funding. It is important on Design-Build projects that there is sufficient flexibility for innovation and that risks are identified and assigned to the party that can best mitigate those risks. Some projects are simply passing risks over to the contractors with minimal regard to their ability to mitigate those risks.

CM/GC is short for Construction Manager/General Contractor. CM/GC has a few different variations since it began in building construction with variants occurring as the process has been expanded into the Transportation market. The general framework is that the owner hires the design engineer using Quality Based Selection (QBS). The owner next hires the CM/GC (Contractor) also through QBS. At an agreed upon stage in the design, the CM/GC provides a Guaranteed Maximum Price (GMP). The advantage of this methodology is that the owner retains more control over the design, the contractor is involved in constructability reviews, risks can be better mitigated before the GMP is solicited, and once the GMP is received federal funding can be secured.

CM/GC may be particularly effective on those projects with smaller construction costs that would otherwise be a good fit for Design-Build. It is difficult for traditional practitioners of Design-Build to make a sustainable profit on projects with a construction cost of less than $10 million dollars. This isn’t necessarily to say that the successful Design-Build can’t make a profit. Most designers and contractors that have committed to Design-Build pursue multiple Design-Build projects. At the $10 million dollar or less construction value, even with a success rate of winning one out of every three or four Design-Build projects pursued, the profit of the single victory is not enough to offset the cost of the unsuccessful efforts. This may also be a function of the current procurement documents where smaller projects still often require the same level of effort as some of the larger projects. Since the bulk of the effort required is expended in the RFP phase, another factor is the selection of more than three firms on the short-list also affects overall profitability.

Before CM/GC can be implemented, it will be important to verify that current laws will allow this procurement methodology. This will need to include securing a waiver to procure a contractor through means other than low bid. Ironically it may also be an adjustment with the construction community switching to a QBS selection and working more closely with a designer outside a direct contractual relationship. Currently FHWA is encouraging the use of CM/GC as part of an overall study. States such as Utah and Oregon have been using the procurement methodology for several years.