Design-Build: It IS a Better Mousetrap
Thom L. Neff — Dec 01, 2009
Design-build, as a project delivery system, is not new. It has had a long and commendable history. In the old days, it was essentially the only system because it was the simple way to get a project built. But, as our collective knowledge base in virtually everything grew, and as specialists became more numerous, it lost favor to what we now commonly refer to as design-bid-build, and the number of players (specialists) has grown almost exponentially. The resulting complexity has bothered more than a few owners, and in recent years, design-build has had a resurgence, especially in the private sector. While it remains somewhat controversial, it appears to be growing. The author contends that design-build is simply a better delivery system, when done properly. This paper will make this point by taking a brief look at its history, list the common pros and cons, explain the problem of complexity, and review important risk management issues.
The paper will also describe why financial matters are so important, and offer a brief list of key performance indicators (KPIs) to successfully manage and control design-build projects. A summary will present a challenge to owners to take more control of the process, and create successful design-build projects.
Historical Perspective
Prior to about 1900, much construction in the developed world was accomplished via the design-build model. An owner would contract with a “master builder” for a facility; they would agree upon the details of the project, sign a rather simple contract, and the builder would then perform the work (to an agreed budget and schedule), hiring and managing the many assistants, subcontractors, specialists, etc., but retaining the single point of responsibility and contact with the owner. For a variety of reasons, owners began to separate the design function from construction, i.e., design-bid-build was born and became quite common. At the same time, there was a huge growth in knowledge taking place throughout the industry regarding new materials; new processes; new regulations; new tools and equipment; and in analytical, design and management methods. One could say complexity was increasing on a massive scale, and the “age of the specialists” was born. Controversy exists today as to the wisdom of this change in project delivery.
Alexandre Eiffel was a premier master builder of his era, and was the sole contractor for the Eiffel Tower. Although he had assistance from other architects, builders and engineers, he had a single contract with the owner – the French government. He had won a design competition to obtain the contract. The project was completed in two years and two months (in the 1890s), and utilized 18,038 separate pieces of high-quality wrought iron. The complex erection drawings were largely done by Eiffel (by hand, of course), and the project must be judged a success today by any standards.
In recent years, a number of owners, particularly in the private sector, have returned to the design-build model, largely for reasons of speed of project completion, but with consideration of several other potentially advantageous factors.
Pros and Cons of Design-Build
For any project delivery system, there will, of course, exist generally accepted pros and cons. No single system is preferable for a specific type of project. The author’s experience suggests that more than a few projects are both poorly conceived, and poorly executed, for a variety of reasons. Thus, pros and cons take on a somewhat fictional aura, and need to be carefully evaluated when planning a new project.
The commonly cited pros for design-build are:
- shorter schedule
- lower costs (or cost growth)
- single point of contact and accountability
Time saving can come from eliminating the bidding schedule, and fast-tracking the design and construction (getting an early start on long-lead items and starting field construction before the design is 100 percent complete). Compressing the total project schedule leads to generally significant cost savings (less inflation, quicker on-line income stream, reduced owner management costs, and streamlined submittal and review processes). The single point of contact encourages engineer and contractor collaboration and cooperation, the avoidance of overly prescriptive and conservative specifications, and the contractor’s greater freedom to innovate (but, within the overall project performance criteria). The owner’s involvement in project details may be less, but not to the point of losing control.
It’s the owner’s money and he must put in place a process that serves his interests, but includes both incentives, and means and methods flexibility for his chosen design-builder; i.e., let them perform in an efficient and cost-effective manner.
The commonly cited cons are:
- uncertain regulatory and/or financing issues
- unresolved environmental issues
- unknown site conditions
- third-party constraints
- unrealistic risk definition and allocation
While these cons are realistic, it is noted that they all can be mitigated to a great extent by careful and thorough actions by the owner and his agents during the preliminary design.
These actions, of course, will take time and it is the owner who must initiate the required actions as early as possible, and endeavor to reduce the total level of project uncertainty to the lowest possible point when the procurement of the design-build team begins. Design-build is not a magic means to transfer risk to the design-build team. A successful design-build project demands that the owner resolve uncertainties associated with these five noted cons. Those that cannot be resolved, must be clearly and completely defined in the bid documents, and the resulting risk (Note: risk results from unresolved or unknown uncertainties) must be clearly and fairly allocated to the appropriate project players during the bid process.
The Problem of Specialization
The importance of this issue is difficult to communicate, because we live in the age of rampant specialization. The world is a more complex place than it was a 100 years ago, but the fundamentals still apply, and can be easily overlooked if one has an incorrect philosophy. As the industrial revolution spread, and a whole system of advanced education and training came into being, it was natural to specialize, to concentrate on doing one, or a few things, well, and focus on being the best in your area. This approach was rewarded in all areas of endeavor and thus was self-reinforced. Gradually better management and control systems were also created to make sure everything fit together and moved forward smoothly. However, the pieces of the management systems themselves became more and more complicated and specialized. With the advent of computers, this approach could reach new levels of sophistication and inter-connectedness. In general, when one of the specialists did very well, he was promoted to being a manager, but often retained the narrow outlook that he developed in his specialist education and early real-world experience. Of course, the MBA became a badge of a good manager, but this training often entailed merely stringing together a collection of specialist courses. The MBA mantra became:
“A good manager can manage anything.” Really?
Specialists tend to think their specialty is the most important, and are often not good team players. The literature is full of case histories of failures, small and large, in the infrastructure industry. In addition to the costly outright failures, there are countless claims, delays and surprises that increase budgets and schedules and cause owners to wonder if things could be better. In recent years, some owners have taken another look at design-build as a possible preferred project delivery system. This has happened, in particular, in the private sector where budgets and schedule are generally treated more critically.
The owner knows better than anyone what type of facility, or structure, he wants. To deal with a single entity that can deliver it, after carefully defining its design criteria and operational characteristics, has the appeal of simplicity. Done properly, design-build can eliminate many overlapping and redundant steps in the conventional design and construction process, and deliver a finished facility faster and cheaper. Successful design-builders have many qualities of the old-time master builders. They understand very well the 80:20 Rule. In almost any human endeavor, 80 percent of the problems will arise from 20 percent of the elements in the specific system. With advanced IT and computer systems, a competent manager can keep better track of the important 20 percent, and control work progress in an efficient and cost-effective way. Competent managers are not that easy to find, however, and in the fast-paced Internet age in which we live, some believe the 80:20 Rule has changed to 90:10. More challenges, more opportunities.
Risk Management Issues
The term “risk management” describes a relatively new discipline in infrastructure design and construction. In the old days, uncertainties were mitigated through appropriate insurance policies to cover potential losses. As projects became larger and more complex, and failures and claims increased, insurance premiums rose, and in some cases, losses were so spectacular that both projects and associated firms were threatened. Complexity often increases uncertainty, and the uncertainty results in real risk. Risk management, as a discipline, applies scientific and managerial principles to the task of defining all uncertainty associated with a particular project, and then allocating the resulting risk to parties in the transactions (projects) who are best able to manage (and control) the risk. Risk management also includes managing and controlling the project uncertainties as the work progresses. When this is done in a fair and reasonable manner, all parties benefit.
Some in the industry see design-build as a means for an owner to merely transfer all project risk to the design-build team, but this is a grave mistake. An experienced design-builder will properly price the risk in such an approach, and the owners will lose many, if not all, of the potential benefits of the design-build process. In a typical project, the most risk generally resides in a few particular areas, e.g., geotechnical (subsurface) issues that include potentially adverse contaminated soil, groundwater, or rock; third-party issues; limits of liability issues; and, QA/QC issues. Insurance is still a significant part of risk management on any infrastructure project, but it is thought of as one of a number of mechanisms for overall risk management. Many insurance firms, and law firms, now offer comprehensive risk management assistance to help project players better think through the definition and allocation of uncertainty and risk on their specific projects.
Fortunately, simultaneously with the rise of risk management protocols, there have also been significant advancements in IT and other computer hardware and software that permits better management, and actual control, of the uncertain elements in a project than was even thought possible just a few years ago. These advancements have been in: collaborative software, well-suited for the design-build process; and web-based, real-time monitoring of key performance indicators (KPIs) during the actual design and construction tasks. It is not uncommon for a risk register (RR) to be prepared for a design-build project, where the major uncertainties are defined in the planning stage, contingency measures prepared in advance, select critical parameters monitored in real-time, and the reduced and analyzed data made available via a web-interface to laptops or mobile devices to key managers for rapid decisions. In this manner, real and serious risks can be managed efficiently and cost-effectively.
Follow the Money
Any modern infrastructure project is complex. A design-build project is frequently thought to be more complex than a design-bid-build project, but this is a misconception. Done properly, the design-build project will be faster, cheaper and easier to manage, but this happy result will not occur without careful planning and execution by the primary players in the venture.
Frequently lost in the discussion of design-build is the fact that there are only two truly significant players: the owner and the contractor. For the owner, it’s all his money. Whether it comes from local, state or federal sources, 100 percent of the project’s dollars flow through the owner. For the contractor, 90 to 95 percent of the project budget flows through him. Because these two entities are responsible for almost all of the money, they, in turn, must also share the uncertainty and risk associated with the delivery of the finished project.
These facts need to be emphasized throughout the planning, procurement and execution of the work. The remaining players, e.g., consultants, suppliers, subcontractors, lawyers, designers, etc., play significant roles, but generally do not take significant risks. Obviously, the designer on the design-build team is very important, but his fee is a small percent of the project cost. The designer’s ability to work collaboratively with the contractor is also critical to any successful design-build project. A smart contactor on a design-build team will insert real incentives into the designer’s contract to ensure their effective collaboration on key constructability and construction sequencing issues.
The entire process needs to focus on the owner’s responsibility to clearly state what he expects during the procurement, during the design and construction period, and what the qualities of the finished facility must be; and, to give the design-build team (led by the contractor) sufficient freedom and flexibility in his means and methods to deliver the finished project in an efficient and cost-effective fashion.
Three important ways to help achieve this are:
Create a fair and reasonable risk definition and sharing mechanism, e.g., include a differing site conditions (DSC) clause, and accept that the ground is owned by the owner; and, largely leave means and methods to the contractor.
Create a number of real incentives (tied to performance) in the design-builder’s contract.
Create a reliable management and control system to track the project KPIs.
The Utah DOT has had successful experience with design-build. The department is about to complete a two-year, $214 million expansion of I-15 north of Salt Lake City that involves 9.5 miles of roadway and 24 bridges. The department has publicly stated that design-build has allowed it “to control the job while reducing costs and moving rapidly.” The current project will be under budget and ahead of schedule. It’s not brain surgery.
Key Performance Indicators
To take full advantage of the potential benefits of design-build, two important changes from convention must occur:
All project players, in particular the owner and the contractor, along with his design firm, must think (and act) differently.
Effective use of appropriate new technology must be employed to manage and control the critical project uncertainties.
Thinking differently refers to the collaborative and cooperative interaction of the design and construction staffs on the design-build team. In conventional design-bid-build, these two entities are typically adversaries, and it is often difficult for them to act as team players for design-build. Working together, they can find many items that can have an early start in a fast-track process, agree on long-lead-time early purchases, begin site work and preparation, and begin other tasks that will advance the schedule without affecting the overall quality of the completed project. In a collaborative manner, constructability and construction sequencing issues can often be optimized to find truly creative and efficient solutions.
Recent advances in IT, and computer hardware and software, have made it possible to better control complex systems. Risk management is now a common term, and is used on many larger works. Infrastructure has not grasped these new tools as commonly as other industries, although there is evidence that their employment is on the rise. The author has seen the following approach used on successful design-build projects.
During the bidding process, the design-build team puts together a detailed, fully integrated schedule for the entire project, i.e., including all design and construction tasks, as well as other important milestones (permits, subcontractor and supplier tasks, review and approval times, etc.). The interaction of the design and construction staff begins during bidding, and includes other team players. From the developed schedule, the team collectively selects the tasks with the most uncertainty and creates a risk register (RR) to manage these items. The RR is then linked to the overall schedule. From the items on the RR, the team works out solutions, or resolutions, of the uncertain events (should they occur during the execution of the work), and further, selects one or more key performance indicators (KPIs) for each uncertain item to monitor, or measure, as work progresses.
The RR is really an early warning system to control uncertainty, to detect any variation from the plan at the earliest possible time, and permit quick action to limit the potential damage. Some of the measurements can be done with sensors on-site in real time (stress, strain, pressure, deformations, vibrations, noise, etc.), and some of the information ( RFIs, permits, submittals, miscellaneous milestones, etc.) may be entered into the system via PDAs on site, or from the staff of any team member. All specific KPI input is strictly defined, and periodic review and modification of the KPIs, and their relationship to each other, is done to ensure that the overall project objectives of quality, cost and schedule are being met.
The system also permits all senior team members to obtain up-to-date assessments of the total project risk management status. It is likely the owner will wish to be able to track this data also, giving him more confidence that uncertainty and risk are really being managed and controlled.
Selecting the correct KPIs and managing the tracking system requires constant oversight by the team’s senior managers, but the payoff is well worth the investment. In this manner, complex problems can be managed effectively by relatively simple systems, but only if the available technology is employed correctly.
The Real Challenge
The preceding paragraphs have made a case that design-build is fundamentally a very efficient and cost-effective project delivery system. Further, it is rather obvious that the two most critical players in the process are the owner and the contractor. This conclusion flows from the logic that came out of the Watergate affair: follow the money. It’s the owner’s project, and it’s his money. The contractor, in turn, handles 90 to 95 percent of the money in carrying out the work. The owner must drive the bus. The owner must step up and take control, by giving up enough control to the design-build team. This sounds contradictory, but is essential. The design-build team can creatively collaborate with both the owner, and his own team members, and apply efficient and cost-effective means and methods only if a carefully crafted design-build contract permits this to occur.
Simple is better. A single point of contact has to be more efficient than two, or more, points of contact. The cons of design-build are all fixable. They can be mitigated with careful definition and allocation of the project risk to the players who are best suited to deal with them. Risk management is not brain surgery. If properly executed with available technology, it can give all players in a design-build project a level of comfort that the uncertainties will be both managed and controlled, with an early warning process that catches variations from the plan at the earliest possible time, and permits the pre-determined mitigation measures to be executed in a timely fashion.
The private sector is leading the way. Public infrastructure can, and must, do better.
Thom L. Neff, P.E., Ph.D., is president of OckhamKonsult. His professional career has included significant assignments in the planning, research, design, construction and operation phases of a wide variety of civil and heavy construction projects throughout the United States and overseas. He has also worked on design-build and public-private partnership (PPP) projects that have ranged over transportation, water/wastewater and oil facilities.
