l6organization2

l6organization2 - Delivery Methods (cont'd), Payment and...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Delivery Methods (cont'd), Payment and Award Techniques Nathaniel Osgood 2/23/2004 Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding Design-Build How To: Design / Build Owner Develops early design (to communicate needs) Hires a design/build firm that will complete both design and construction This firm can be a design/build firm but also a joint-venture firm for this specific project DB company may hire subcontractors Work solicited via RFP (honorarium, phased) Can be good for complex projects but need phased design to shield parties from risk Back to the Future... Dominant method early in US history Recent drivers Time pressure (desire to fast track) Shortcomings of tightly defined architect role Constructability issues Limited A/E oversight of construction Downsizing of US corporations (outsourcing design) Desire for single source of responsibility Advantages DB Allows Fast Tracking May be good for some complex projects Close coordination within team Institutional knowledge build up Single source of accountability Owner need not mediate or be exposed to designer/contractor conflicts Easier incorporation of changes caused by field conditions Disadvantages DB Lack of fiduciary relationship with designer Risk of DB sacrificing design quality to protect profit Owner must assume responsibility for quality assurance Pricing not possible at the beginning Demands sophisticated owner (construction, quality, oversight of submittals, negotiation,...) Can be bad for many complicated projects Must stay on top of design so don't get surprise Package: Can't pick or get rid of individual team members (e.g. individual subcontractors) Very important for owner to be closely involved to specify important and complex aspects of design Design-Build Disadvantages II Need to make sure design goals stay foremost Fewer checks and balances Often contractor's interests within DB dominate Problems may be hidden until late (no A/E watch) May take direction that owner does not really want Design-build firm can give high quote for changes Responsible for everything! If fast tracked, changes can lead to Rework Iteration Delays Public Use Challenges Regulatory hurdles Federal use allowed Federal Acquisition Reform Act of 1996 allowed Many states still do not allow Special permission may be granted for formal request Major opposition from Architectural lobby Unions Bridge Designer/Engineer Serves as bridge between Owner Design-build team Performs preliminary design before DB team hired E.g. up to 30% design Monitors development of design and construction Fiduciary with owner DB Selection Considerations Timing tension for when to recruit DB firm Earlier recruitment: Hard to judge like beauty contest Later recruit: Less benefit from DB E.g. Lower ability to fast-track Limit creativity (closer to GC) Often have segmented pricing (cost-plus design, fixed price or GMP construction) More comprehensive selection process typical Design/Price/Schedule/Team Design competitions undertaken Example Design-Build: I15 Originally slated as DBB, but made DB to fast-track Hard deadline due to 2002 SLC Olympic Games $1.3B joint venture (Kiewit lead company) US DOT as owner agency Bidded project (with rights to use unsuccessful) Unsuccessful bidders became subcontractors Reputation foremost 200 Subcontractors Few reviews Finished 5 months ahead of schedule Modified CM Design/Build: Design Subcontracted CM Oversight Design/Build Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding Other Delivery Methods Turnkey (Like DB but Contractor Financed) Very common in residential housing Gives owner time to raise money during construct. Design-Build-Operate-Transfer (BOT) Long-term financing (vs. DBO) Can compete on size, transfer time, etc. Have different guarantees needed to entice Multiple Primes Phase construct.,hand-pick team,sophisticated owner Owner/Agent (owner does part of design) Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding Type of Relationships Among Participants Advantages of the 3 Most Common Delivery Methods Construction Type of contracts Advantages Legal and contractual precedent Cost determined before contract commitment Fast-tracked construction allowed Minimum owner involvement Cost benefit from competition Negotiation with quality contractor for unique expertise Allow adjustment to new conditions without changing agreement Single firm control of design/construct process X X X X X X X X X X X X X Management Design Build Traditional Approach Gould and Joyce, 2002 Disadvantages of the 3 Most Common Delivery Methods Construction Type of contracts Disadvantages Design does not benefit from construction expertise Design construction time is the longest Adversarial relationship owner/designer vs contractor Contract agreement affected by changes Few checks and balances Cost control occurs late in project Contract amount may be complicated by continual contractor negotiations Contract agreement affected by unforeseen conditions X X X X X X X X Management Design Build Traditional Approach ~x ~x ~x ~x Modified from Gould and Joyce, 2002 Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding Payment Schemes Extremes Payment method: Reimburseable Fixed Price Commodity Bidding Product Type: Award method Service Solicit based on Reputation and agree via Negotiation Key Idea Here: Risk Sharing Different parties have ability to manage or tolerate different types of risk Owner (or big contractor) often better: Geotechnical risk, weather risk Contractor better: Risk of slow teams, equipment quality, procurement, quality of supervision Divide risks within an agreement to Save money on contract price Provide incentive to contractors to finish early, in budget, good quality Fundamental Ideas Contractors are often highly risk averse Recall risk premiums: Contractor willing to "pay" owner (charge less for contract) if owner takes on risk if have to For risks that contractor can't control, may be willing to pay a risk premium to owner to take over Contractor here will lower costs if owner assumes certain risk (essentially, paying the owner a risk premium) For risks that contractors can control, cheaper for a contractor to manage risk than to pay a risk premium Fundamental Ideas II Structure contract so that Risks contractor can better handle are imposed on contractor (i.e. contractor will lose $ if don't control) To be competitive, will have to manage these Risks owner can better handle are kept by owner "'Risk can be better handled by A vs. B" here means that the risk premium that would be charged by the A for taking on this risk is smaller than would be charged by B Fundamental Balance Impose high enough risk incentive to get contractor do job efficiently within the specifications of the contract E.g. Incentive to finish on time, incentive to stay within budget E.g. better team assignment, equipment provision, mgmt Impose low enough risk to have reasonably low bid Impose according to contractor ability to tolerate Derivative Results of Risks I: Accountability/Monitoring Consider parties A and B in an agreement The greater the risk on party A The more incentive on party A to manage this risk The less incentive on party B to manage this risk More incentive on A to monitor the relevant factors so B can't claim the risk is responsible for a problem More incentive on B to make sure that A's means of risk management falls within the agreement E.g. that not "cutting corners" or otherwise cheating to shield from risk Derivative Results of Risks II: Impact on Construction Timing Both parties must agree on cost to move forward In general, more risk on one party, less that party is willing to move forward More risk on contractor, the longer will delay construct. Given uncertainty, contractor will charge more up front Owner doesn't want to pay a huge amount up front As uncertainty is lessened in design, prices converge Owner can expedite by paying higher price (risk premium) to contractor or by shouldering risk Remember; delay can have major costs but so can wrangling over change orders! Note on Change Orders Changes contract (cost/schedule/scope/etc.) Can lead to costs beyond contract specification Anticipated costs incorporated in "contingency" Often 1-3% on top of agreed upon price Often only paid for additional direct costs Big problem if disruption in work Source of very large risk Contractual Risk Allocation RISK SHARING METER Modified from Kerzner, 2000 100 % Lump-Sum (Fixed Price) Fixed-Price w/ Economic Price Adjustments Fixed-Price Incentive 0% CONTRACTOR'S RISK Cost-Plus Incentive Cost-Plus Award Fee Cost-Plus Fixed Fee Cost-Sharing 0% RISK Allocation Cost-Plus Percentage OWNER'S RISK 100 % Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding (Courtsey of John Macomber. Used with permission.) Cost Versus Price for Lump Sum Macomber, 1989 Lump Sum ("Fixed Price") Contractor required to achieve the project at the negotiated contract value All risk of cost, schedule fall on contractor The owner knows the actual cost of the project before it begins Minimizes risk for the owner if the project is well estimated, contractual documents accurate and project clearly defined High incentive for contractor to finish Early (so can move on to other jobs) Low cost (so can make a profit) Lump Sum Required for many public projects Good for some well-defined projects Good price competition in commodity metric Bad for ill-defined projects Adversarial relationship over responsibility and payment for of changes High contractor risk means typically start late Very different from typical meaning of "Fixed fee"! Ways to Save Money: Effect on Owners Helps: Efficiency within construction Best teams Appropriate equipment Careful management Quality workmanship (to avoid risk of rework) Hurts: Cutting corners, distortion, charge orders Substitution of materials Distortion of quantities used Distortion of progress Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding (Courtesy of John Macomber. Used with permission.) Cost Versus Price for Cost Plus Macomber, 1989 Cost Plus Fixed % Owner is paying the actual cost plus a fixed percentage Contractor agrees to do his best efforts to achieve the work Contractor shoulders very little risk Typically select contractors based on reputation and comfort (service rather than commodity) Cost Plus + Fixed %: Advantages Maximum flexibility to the Owner No fighting over change orders contractor gets paid for any extra work required Permits to collaborate at the early stages of the project Minimal negotiation time Minimal fear of commitment by contractor Only have to pay for what actually costs If manage closely, can save money vs. fixed-price Cost Plus + Fixed %: Disadvantages Owner shoulders all risk Little incentive to reduce costs and overtime salaries can even increase costs Cost unknown until contract completes Owner needs to oversee construction closely Speed up slow crews Identify management problems Contractors have incentive to grow scope, price Terrible with turnkey delivery type! Applicability Requires sophisticated owner to manage Uses if the pricing could not be performed in any other way and if it is urgent Emergencies (civil, military) Ill-defined, risky scope e.g. historic building renovation with unknown cond. Unknown technologies Either scope or construction method unknown Confidential projects (limit public knowledge) Cost Plus Fixed Fee ("Fixed Fee") Cost may vary but the fee remains firm The fee is independent of the duration of the project Like Cost + fixed % except some shared risk Less time risk: High incentive to finish early Less risk of contractor growing size of project Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding Agreement on the price charged per unit between the contractor and the owner Interesting example of risk sharing Owner: risk for uncertainty in quantity Contractor: risk for unit price (efficiency, procur) Unit Price Contract Contractor overhead must be integrated in the units price Necessity of an owner presence on site to measure the actual quantities Typically renegotiate if quantity 20% off Quantity influences price b/c economies of scale Unit Price Contract Highly dependent on the accuracy of the estimation of the quantities given by the Owner/Designer Risk of unbalanced bidding If contractor believes actual quantity will differ, case increase and/or decrease the unit price Contractor can make profit because payment is based on actual quantities but he can also lose money in the same way A contractor can be excluded if its bid is very unbalanced The total cost for the owner can be greater than planned Example: Pile Driving Too risky to just charge fixed price Geotechnical uncertainties make length of piles uncertain Piles can be highly expensive Risk allocation Price risk more under contractor control (efficiency, crew and equipment selection): to contractor Length out of contractor control: to owner Owner must precisely monitor length used Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding (Courtesy of John Macomber. Used with permission.) Cost Versus Price for GMP Macomber, 1989 Guaranteed Maximum Price or GMP Variation of the Cost Plus a Fee but GMP can be a cap on direct costs After a certain point, the "floor" or "ceiling", the contractor assumes any additional costs Often start in cost plus fixed fee and then impose GMP at e.g. 90% design Best: GM Shared Savings: Below Guaranteed Maximum, savings shared (60-40% or sliding) Very good for turnkey, well-defined scope GMP: Advantages Permits easier financing Can fast-track Owner keeps savings below GMP Often can get started quickly on construction Particularly if contractor already involved w/design Contract may be higher than for fixed price b/c design often not complete when contract set GMP: Disadvantages Contractors may still spend lots Owner must monitor contractor spending Can be fights over what is direct vs. indirect cost i.e. what must fall below GMP Bad if unclear scope after GMP agreed to (must renegotiate) Just as for CPFF, quality may be sacrificed whereas without GMP, cost and/or schedule would have increased Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding Relative Costs of Construction Contracts E= contractor's original estimate of the direct job cost at the time of contract award M = amount of markup by the contractor in the contract B = estimated construction price at the time of signing contract A = contractor's actual cost for the original scope of work in the contract U = underestimate of the cost of work in the original estimate (with negative value of U denoting an overestimate) C = additional cost of work due to change orders P = actual payment to contractor by the owner F = contractor's gross profit R = basic percentage markup above the original estimate for fixed fee contract Ri = premium percentage markup for contract type i such that the total percentage markup is (R + Ri), e.g. (R + R1) for a lump sum contract, (R + R2) for a unit price contract, and (R + R3) for a guaranteed maximum cost contract N = a factor in the target estimate for sharing the savings in cost as agreed upon by the owner and the contractor, with 0 N 1. Chris Hendrickson, 2000 Original Estimated Contract Prices Type of Contract Lump sum Unit price Cost plus fixed % Cost plus fixed fee Guaranteed max cost Markup M = (R +R1)E M = (R + R2)E M = RA = RE M = RE M = (R + R3)E Contract Price B = (1 + R + R1)E B = (1 + R + R2)E B = (1 + R)E B = (1 + R)E B = (1 + R + R3)E Chris Hendrickson, 2000 Owner's Actual Payment with Different Contract Provisions Type of Contract Lump sum Unit price Cost plus fixed % Change Order Payment C(1 + R + R1) C(1 + R + R2) C(1 + R) Owner's Payment P = B + C(1 + R + R1) P = (1 + R + R2)A + C P = (1 + R)(A + C) P = RE + A + C P=B Cost plus fixed fee C Guaranteed max cost 0 Chris Hendrickson, 2000 Contractor's Gross Profit with Different Contract Provisions Type of Contract Lump sum Unit price Cost plus fixed % Cost plus fixed fee Guaranteed max cost Profit from Change Order Contractor's Gross Profit C(R + R1) C(R + R2 CR 0 -C F = E - A + (R + R1)(E + C) F = (R + R2)(A + C) F = R (A + C) F = RE F = (1 + R + R3)E - A - C Chris Hendrickson, 2000 Principles of Incentive Contractslowering cost Additional profits are possible by Customer and contractor share cost savings OWNER PAYS 80 % OF OVERRUN CONTRACTOR PAY 20 % OF OVERRUN EXAMPLE TARGET COST: $20,000 TARGET FEE: $1500 SHARING RATIO: 80/20 % PROFIT IS $1500 LESS CONTRACTOR'S 20 % OWNER KEEPS 80 % OF OVERRUN CONTRACTOR KEEPS 20 % OF OVERRUN PROFIT IS $1500 PLUS CONTRACTOR'S 20 % Note: limitations may be imposed on price or profit Kerzner, 2000 Conclusion When market is not very good, clients insists on fixed price bids whereas when the project offers are numerous, it is more difficult to obtain those conditions The contract type choice must depend on: The accuracy of the estimation The ultimate cost know since the beginning or at least the maximum The desired risk If quick completion of work is wanted Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Negotiation Bidding Award Methods: Contractor Selection Extremes Payment method: Reimburseable Fixed Price Commodity Bidding Product Type: Award method Service Solicit based on Reputation and agree via Negotiation Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Bidding Negotiation Bidding Variants Low bid Multi-parameter bidding Low bid plus arithmetic combination of other factors Low bid divided by ranking of other factors Fixed price low bid is win-lose Typically associated with lump-sum contract Prequalifications critical Bidding Tradeoffs Time provided to bidders to review documents Too long: Construction delayed Too short: Bids low-quality because too little time to review contract docs(incorporate high risk premium or unrealistically low) Few bidders willing to participate Bid count Too many bidders: Scare away best contractors Too few bidders: Bid not competitive Bidding Tradeoffs Advantages Can get good price Transparency Disadvantages Can set up win-lose situation Competitive pressures can eliminate profit from bid Try to make up with change orders, cutting corners Can lead to combatative relationships Insufficient consideration of design before pricing Bidding Metrics Most common: Price alone Bidding "cap": Bid on how far can go with set amount of money Multi-parameter bidding (increasingly popular) Consider non-price items(time, quality, qualification) A+B Additive measures Price+($/day)*days (common for retail), Price+qualification+design rank, price+design rank,... A/B (e.g. B scoring along some metric: Design, etc.) Issues with Bids Low bidders can be unreliable Prequalify aggressively! To allow for fast-tracking may bid early (30%) Don't try to force delivery from low bid Growing Frequency: innovative bidding method Pressure for lowest bid can create Cutting corners Low-quality personnel Bad feelings Bidding Process A/E oversight typical Publicity (specifies qualification requirements) Provide bid documents Typically include fair cost estimate, sample contract Answer RFIs Pre-bid conference Explain scope, working conditions, answer questions, documented in writing) Public vs. Private Bidding Public Bidding Must be publicly advertised (posting in newspapers, public building, etc.) Qualification occurs after submission of bids Typically 60 day period in which can submit bids Private Bidding May be by invitation only Qualification occurs before submission of bids Dealing with Way-Out Low Bids Forcing collection from unrealistically low bids is dangerous Construction highly contentious, poor morale Risk of extreme corner cutting Default is possible Disruption Insurance companies fulfilling performance bonds very difficult to work with Subcontracting Bids GCs push subs for lowest possible price before GC bids GC not obligated to use sub who gave bid Can lead to serious predatory behavior Bid shopping (before and after GC wins bid) Bid peddling (unsolicited calls from subs to GCs after GC wins bid) Some owners/states require listing of chosen subs at bid time or assign based on sub-bidding Qualifications Common items for qualifications Bonds/Insurance (bid, performance, payment) Safety record Reputation Financial strength Total/Spare capacity Licensing Background in type of work Experience in local area/labor market Management system (QA, planning, estimation, control) Interest, adaptability shown Negotiation Typically selected based on reputation, qualifications Typically used for two cases Very simple Use trusted, familiar party Very complex/big Get contractor involved in design, start work early Requires relatively savvy owner Evaluate proposals, monitor performance Important even for DBB for post-bid changes Project Organization Project Delivery Systems (most common) Design / Build Others Summary Payment Schemes General points Lumpsum Cost plus fixed fee/% price Unit price Guaranteed maximum price Award Methods General points Bidding Negotiation Negotiation Considerations Can get win-win because of differences in Risk preferences Relative preferences for different attributes Goal is to find a pareto optimal agreement Key skill in negotiation: Ability to find win-win options Negotiation Tips Try to maintain clear sense of reservation price Price or conditions under which will accept offer Want to adopt some objective basis for position Without this impersonal criteria, other party can take disagreements personally as arbitrarily demands Discuss multiple issues at once Permits trading off issues flexibly Formal exposure goodbut experience gives edge Negotiation Tips 2: Major Sins of Negotiation (Thomson, 2001) Leaving money on the table: Failing to identify and use win-win opportunities Settling for too little: Unnecessarily large concessions Walking away from the table: Rejecting terms that are favorable, often due to pride Settling for terms worse than existing alternative: Pressure to reach some deal leads to opportunity less attractive than opportunity cost ...
View Full Document

Ask a homework question - tutors are online