In the new issue of Under Construction, Michael Sterling points us to some issues to watch for when negotiating agreements between a design-builder and designer on a PPP project.
This can present an interesting "chicken and egg" problem. The concessionaire needs design, scope, and cost information in order to model its financing requirements and complete its concession deal. The concessionaire, therefore, will put pressure on the design-builder to come up with this information. In order to provide such information to the concessionary, the design-builder may be looking for a fixed design cost from the designer. But providing certainty that the concessionaire can take to the bank may be easier said than done for a designer while the design, scope, and duration are still in flux.
How do the Design-Builder and Designer fix their contract while the upstream agreements are still in flux?
How can incomplete upstream documents be incorporated by reference into the Design-Builder/Designer agreement while those upstream agreements are incomplete?
How can the Design-Builder rely on pricing if those upstream agreements are not incorporated?
How is designer compensated if the project is ultimately not awarded to the Design-Build team?
How are they compensated if the Design-Build team is successful?
How is the schedule set at this early time? What provisions for adjusting the schedule?
How do the parties allocate ownership of intellectual property that might be developed at a time when they may not have any proprietary processes or copyrightable aspects of the design in mind?
Is the concessionaire to be made a third party beneficiary of the Design-Builder/Designer contract?
With the growing popularity of Public/Private Partnerships, or P3s, we thought it would be interesting and informative to have one of the most talked about P3 projects in the country as the topic of our Division 4 Lunch Program at the ABA Annual Convention at the St. Regis Monarch Beach Resort. The topic will be the new Long Beach Court Building, as it is only miles from our Dana Point location, and certainly has had its share of press coverage in the recent months.
Attending the lunch on behalf of Clark Construction Group, the design/build contractor, will be Chip Hastie, Jeff Fullerton, Karri Novak and Jim McLamb.
Mr. Hastie, a Vice President of Clark, runs the day-to-day operations of the project. Mr. Fullerton, a Director with Clark affiliate Edgemoor Infrastructure and Development, works very closely with the P3 aspects of the project. Ms. Novak, the Director of Preconstruction Services for Clark, worked on all preconstruction issues and programming at the outset of the project. Finally, Mr. McLamb is the Senior Vice President of Clark and maintains the day-to-day responsibility for Clark's Southern California project operations.
Project Overview:
This new Long Beach Court Building is the first social infrastructure project in the United States procured under the principles of Performance-Based Infrastructure (PBI) contracting. Total development cost is approximately $490 million, with design-build cost of approximately $343 million. Under the PBI agreement, the Judicial Council of California (JCC) will own the building, and the Superior Court of Los Angeles County will occupy approximately 80% of the space. The JCC will pay Long Beach Judicial Partners (private consortium) an annual, performance-based service fee for 35 years. The PBI delivery method will leverage the private sector’s access to financing, technological expertise, and management efficiency to quickly provide a high-quality facility that will serve the Superior Court of Los Angeles County.
The Long Beach Courthouse team was organized by Meridiam Infrastructure North America, a long-term equity fund based in the United States and focused on infrastructure development. Clark Design/Build is leading the design and construction of the Courthouse with AECOM as the architect of record. Other design team members include Syska Hennessey Group, MEP Engineer of Record and Nabih Youssef Associates, Structural Engineer of Record. The team also includes Facilities Operations & Maintenance Management by Johnson Controls Inc of Milwaukee.
When complete, the five-story 545,000 square-foot building will house 31 courtrooms, as well as court administration offices, Los Angeles County lease space, and retail leasable space. The building will include below-grade secure inmate transfer facilities, detention facilities, and separate secure parking areas for judges. A five-level great room atrium enclosed on two ends by a cable-supported glass wall system will serve as the single entry point for the public and provide access to a secured central courtyard. Clad in deeply-articulated curtain wall and elements of stone, the project will span two city blocks in downtown Long Beach and replace the functionally-obsolete courthouse one block away. In addition to the new building, the project team also renovated and expanded an existing 399,000 square-foot parking structure.
Specific presentation topics will include:
•Project procurement , including unique stakeholder involvement given performance-based infrastructure delivery
•Program/design highlights, including leasable office and retail spaces, as well as measures for future expansion of court/detention capacity within the provided envelope
•Project update, including an overview of the fast-track design-build sequence
•Case studies on the influence of Performance Based Infrastructure on the design-build process
A reminder that the lunch is on Friday, April 26th at 12:15 p.m. We look forward to seeing everyone there.
It's Spring Break Time, and we won't say "Design Build Gone Wild." But here is J. Mark Dugan's presentation Design Build Gone Wrong: Lessons Learned for Tuesday, March 26, 2013 at Noon Eastern time.
Come join us for Mark's presentation on Design-Build and some examples of what can go wrong. This will trigger fruitful thoughts in thinking about the relative merits of having the owner/architect be responsible for design vs. having the contractor team be responsible for design and construction vs. sharing risk and responsibility in an integrated model.
Our thanks to Tamara McNulty of Black & Veatch for connecting with Mark, and many thanks to Mark for his good work and coming to talk with us.
Cheryl Miller, of the California legal journal "The Recorder" has a follow up to our earlier posts on the Long Beach Courthouse. It's not good news for proponents of PPP.
SACRAMENTO — State Senator Loni Hancock is not usually given to verbal
fireworks. But the typically mild-mannered Berkeley Democrat did not hide her
anger with judicial leaders Thursday as she publicly quizzed the Administrative
Office of the Courts about the Long Beach courthouse financing fiasco.
"My question is, to the AOC: How did you let this happen?" Hancock asked, her
voice bubbling with exasperation.
The Senate budget subcommittee hearing provided the first real legislative
grilling the AOC has received over the controversial project. And it probably
marked the final nail in the coffin for judicial hopes that lawmakers will
change their minds and cough up state money for the Long Beach building.
The Legislative Analyst's Office recently concluded
that the judicial branch may overpay by $160 million for the new courthouse
because it relied on overly rosy projections when penciling out costs for the
untested public-private financing deal. "It turned out that the LAO's projections were correct," Hancock said at
Thursday's hearing.
Branch leaders assumed the state general fund would pick up the average $60
million annual payment for the building, even though a contract with the private
construction consortium never specified what public entity would ultimately
cover the tab. When lawmakers and the governor quashed those expectations last
year, the Judicial Council was forced to shelve four other courthouse projects
planned for Los Angeles, Fresno, Nevada and Sacramento counties to free up
enough internal construction money for Long Beach.
"I frankly think that every [court with a] courthouse that is delayed because
of this ought to raise some questions," Hancock said.
AOC officials, however, wouldn't concede that they made any mistakes with the
Long Beach courthouse, which will ultimately cost $2.3 billion over the life of
the contract. "I'm not sure this was letting anything happen," said Curtis Child, the AOC's
chief operating officer. "We're still quite confident ... this is a bargain for
the state."
Asked by Hancock if the branch had learned any lessons from the financial
deal's shortcomings, Child said it was too early to say, that an evaluation of
the building's quality after the life of the contract might be the best measure.
Hancock pointedly noted that neither she nor Child is likely to be active in
state government in 35 years. "It's not going to be particularly helpful," she said. Hancock instead said she'd push for language in this year's budget that would
stop state entities from using "unsubstantiated assumptions" when trying to
justify public-private partnership, or "P3" deals.
"We really can't be careless with one public dollar when we're closing
courthouses," she said. Any such statutory restrictions may not affect the judiciary, which
apparently has decided to stick to traditional construction financing methods in
the future.
We don't anticipate doing any more P3 projects," Child told the subcommittee
on Thursday.
So your investment advisor is telling you to invest in bricks. Global Sherpa explains:
The BRIC countries label refers to a select group of four large, developing
countries (Brazil,
Russia, India and China). The four BRIC countries
are distinguished from a host of other promising emerging markets by their
demographic and economic potential to rank among the world’s largest and most
influential economies in the 21st century (and by having a reasonable chance of
realizing that potential). Together, the four original BRIC countries comprise
more than 2.8 billion people or 40 percent of the world’s population, cover more
than a quarter of the world’s land area over three continents, and account for
more than 25 percent of global GDP. .... As early as 2003, Goldman Sachs
forecast that China
and India would become the first and third largest economies by 2050, with
Brazil and Russia capturing the fifth and sixth spots.
It's true for construction. Many of the coolest projects are happening in BRIC's. Here are some recent and ongoing projects in these emerging countries; and since it's construction, we'll throw in South Korea, so we get BRICK! Lot's of cool stuff to be built there.
Not a yellow brick road, not a yellow ribbon, but a highway in the rainforest outside Sao Paulo, Brazil. Is it real, or photoshopped; first couple of pages on my google search don't reveal the answer?
If you look for building projects in Russia, you come up with a lot of grandiose plans, including this building planned as the centerpiece for Gazprom City in St. Petersburg. It was intended as the first supertall (463 meters) skyscraper in the city. The plans for Lakhata Center included a
scientific and educational complex, sports and leisure facilities, and an
outdoor amphitheater. In 2008, Arabtec,
the construction company involved in construction of the world’s tallest
building in Dubai, won a contract to build this 60 billion-ruble ($2.56
billion) complex. At the moment it looks like the project has St. Petered out in the wake of the world financial crisis.
In the meantime, in Mumbai, India, Mukesh Ambani (CEO of Energy and Materials conglomerate Reliance Group) has built what is said to be the world’s first
billion-dollar home. ["Let's see .... should we start the Ambani Foundation, or build a billion dollar home?" I'm sure they had lively discussions around the dinner table] Construction was completed in late 2010. The 27-story house includes three helipads, a health club, dance studio, 50-seat movie theater
and underground parking lot with enough room for 160 cars...and a waitstaff in excess of 500.
In Bejing, they built the iconic Terminal 3 at the International airport in time for the Olympics. Two years ago ENR reported that China had overtaken the U.S. as the world's largest construction market. Anyone know where to get good current numbers on Chinese construction?
And last, our B-R-I-C-K add on, construction has started on the Lotte Supertower in Seoul, South Korea. From Wiki
[T]he Lotte World Premium Tower, is a 123-floor, 556
metres (1,824 ft) supertall skyscraper currently under construction ... in Seoul, South
Korea. Upon
completion in 2015, it is expected to become the tallest skyscraper in the developed
world, surpassing One World Trade Center in New York City and housing
the tallest observation deck in the world on its
123rd-floor at 497.6 metres (1,633 ft).
(I've edited out a lot of "strategic thinking response" marketing speech references, leaving us with two):
Reflecting upon more than 30 years’ experience with Design-Build, I am offering five major reasons why owners and design and construction professionals choose a Design-Build project delivery system:
(1) There is a greater focus on quality control and ... project innovations can be uniquely developed by integrating the skills of the designer and contractor.
(2) It saves time and money through the use of a strategic thinking ...from the start of the project. Early contractor involvement ... enhances the constructability of the plans... enables fast-tracking of the design and construction... (allows for) continuous cost updates using construction costs from current projects and communication efficiencies and integration between design, construction engineering and construction team members throughout the schedule.
(3) It ... minimiz(es) the probability of adversarial relationships and potential legal issues. Fewer change- and extra-work orders result from more complete field data and earlier identification and elimination of design errors or omissions that might otherwise show up during the construction phase.
(4) It provides a strategic thinking response to demands for risk management. ...
(5) It provides ... the ultimate level of flexibility through a truly integrated team that is able to take on very challenging and complex building projects.
John Bailey's February Presentation on strategies adopted by contractors to create hidden profits, prompted an interesting email from Gerald H. Williams, Jr., PhD, P.E.. Gerald is a principal at Construction Research, LLC in Portland, Oregon. He wrote his PhD thesis on comparing the efficiency of different project delivery systems. His research and experience have left him a skeptic on some of the "anything but DBB" happy talk that is current in the realm. Gerald relates his experience as the lone voice defending DBB on a recent Oregon Senate Committee looking to rewrite a portion of the Oregon public procurement law.
I recently served on an Oregon Senate Committee looking to rewrite a portion of the public procurement laws here in Oregon.Just a short history: my doctoral research measured the efficiency of traditional Design Bid Build, (DBB) and Construction Management / General Contractor (CM/GC or CM@Risk) project delivery systems, which were becoming real popular in the late 1990's.By 2012, nearly every building project in Oregon, is being delivered as a CM/GC.The actual intent or goal of the rewrite was not particularly clear to me, because the committee consisted of public agency directors, CM/GC contractors, design professionals, a couple of subcontractors, one full time academic and me.
The committee was formed because there was the belief that some agencies were misusing the CM/GC process, a non-low-bid, Request for Proposals, interview - beauty pageant - process.(Which I have no doubt was, is, and will in the future, be the case.)But the interesting thing to me was to listen to the CM/GC contractors on the committee constantly claim that the CM/GC process gives the owner the: "Best Value."At one point, a CM/GC's Vice President claimed that the preconstruction services they perform routinely save the owner as much as their (meaning the CM/GC's) entire fee.
CM/GC's offer fees that are low by comparison to the DBB jobs I've estimated and bid when I was in that business, and those jobs I audited during my research.But, as noted by the presenter, there were a lot of ways to augment their fee.More importantly, in the past 20 years of CM/GC work in Oregon, there have been NO CLAIMS between public owners and CM/GC's, NONE.
And, the reason is pretty simple, the budgets set by the CM/GC along with the owner and CM/GC controlled contingency create enough of a cushion that the CM/GC can settle just about any subcontractor claim.Furthermore, a study in Washington state found that CM/GC was "superior" to DBB project deliveries because they were almost always under budget, whereas DBB's often exceeded their original bid costs.Set aside the fact that the study compared about 200 CM/GC jobs against only 9 DBB jobs, the fact is that the CM/GC jobs actually exceeded their Maximum Allowable Construction Cost (MACC) quite frequently, but were still generally "under budget" because the budgets were so much more than the MACC's.In one case the original MACC was about $20 million, and the actual costs were $30 million, but the building was deemed "Under Budget" because the original budget was $60 million!I took 16 projects and found that combined, they exceeded their MACC's by $750 million!But most of them were considered "Under Budget!"
Ultimately, the work of the committee, my objections notwithstanding, was to make CM/GC the default project delivery system to be used in Oregon in the future.It's not hard to see how this decision was made according to my old professor Harold Lindstone, who developed a method for understanding decisions he named "Multiple Perspectives of Decision Makers."In short:CM/GC's like the process because it reduces their risk (even though they deny it) and makes the job more enjoyable (not having to fight with an owners rep over the cost of a piece of flashing).
Owners love it because: 1) nobody likes shotgun weddings - they get to pick who they are going to work with over the next several months or years on the job; 2) they can construct a budget that, even if it goes 100% over the MACC, can still be "Under Budget" - and thus they avoid the worst thing a bureaucrat can suffer - "bad press" - nobody ever got fired for bringing in a job under budget.
Design professionals love it, because having the CM/GC on board during the early phases of final design, they can claim that their Spearin Doctrine warranties are either shared with the CM/GC or simply non-existent.And, since the designer is usually part of the selection committee that choses the CM/GC, he gets a say in who he's going to have to work with over the next couple of years.
What's not to love?Well, if you're a trade contractor (sub) you can easily get screwed.In the bad-old DBB days, a General got work by being good to his subs.In the CM/GC era, you get work by being good to your owners.A complete paradigm shift.In our discussions, I argued for more transparency in subcontractor bidding, like public bid openings.Both the CM/GC's and the owners objected.The CM/GC's claimed that they are under no obligation to award a subcontract to a particular bidder just because they are low.
One told the committee, that as long as a number of sub bidders were under budget, he can pick and choose whichever one, in his opinion gave the job the "best value."I pressed him, saying: are you telling me that if you have five bidders all under budget, but one bidder is a million dollars higher than the low bidders, you can choose that guy?And he answered, "of course, if I think it's the best value for the job."This includes self-performed work, according to that CM/GC representative.And nobody gets to know which sub bid what.
Just to show you that the insanity was not limited to the CM/GC's the representative of the corrections department claimed that they had to use CM/GC because (and honestly, he said this) "we have to know that the prison doors are going to work!"And going with a CM/GC is the only way you can accomplish that?I didn't know that in the first 130 years of our state's existence, that we had a major problem with prison and jail cell locks not locking.
No matter what you do, all businesses, contractors included, are profit seekers - and profit finders.It's patently absurd to think otherwise.
Gerald H. Williams, Jr. PhD, P.E. Construction Research LLC
Colossus: Hoover Dam and the Making of the American Century (2010) (Free Press, 496 pp.)
Michael Hiltzik
Michael Hiltzik is a Pulitzer price winning investigative reporter for the Los Angeles Times. He has reported on the economy, corruption in the music industry, and has worked as a foreign correspondent. He previously has published books on Kenya, the history of Xerox, and the "plot" to undo Social Security. In Colossus he draws on the full range of these experiences in expanding on the tale of the building of Hoover dam. This wide ranging book offers time well spent for any construction lawyer broadly interested in project delivery in the United States.
Hiltzik starts with the earliest recorded discoveries of the Colorado river, he lingers with the early development of the great Imperial Valley in Southwestern California; land politics straddling the U.S. Mexico border involving the Chandlers and their Los Angeles Times, and early attempts to exploit the river by land speculators, who proved no match.
The Chandlers, Southern California Edison, and Herbert Hoover started as fierce opponents of a dam on the Colorado. The seven western states that share the river could not agree how to allocate its potential bounty until Hoover, on assignment as Warren Harding's Commerce Secretary, was able to forge a compact that ultimately allowed the political forces to align behind building what was then the largest domestic civil works project undertaken by the United States.
The dam was built by a joint venture, Six Companies, led by iconic personalities and companies that endure, and that were in many ways defined by their construction of the Hoover dam: Marriner Eccles and Utah Construction, Warren A. ("Dad") Bechtel, Morrison-Knudson, Henry J. Kaiser, J. F. Shea, Pacific Bridge. These founding fathers and iconic construction companies are colorfully brought to life, along with their project manager, Frank Crowe, the Bureau of Reclamation's Elwood Mead and Frank Young, and many others.
There is labor politics. The dam was built during the Great Depression, 1930-1935. Frank ("Hurry Up") Crowe finished the project two and one half years ahead of schedule. Six Companies was exempted from the newly enacted prevailing wage law, and from most federal regulations. They operated Boulder City that was constructed for the project as a company town and paid their workers partly in script. Safety conditions were not what they are today. Temperatures in the gorge were 130 degrees in the summer. Deaths were deceptively tracked. Officially there are 96 accidental deaths recorded on the project, but this does not include others who died of heat-stroke, and about 40 or more who appear to have died of carbon monoxide poisoning during tunnel construction--but were reported by company doctors as dying of pneumonia. [Take a look at the video, below, and you'll get the picture] Deaths from "pneumonia" were not subject to workers' compensation. Interestingly, the rate of worker's compensation depended (by a factor of three or four) on whether an accident occurred on the Nevada side of the Project or the Arizona side of the Project. The wobblies made a stand and lost. Wages were cut by substantial margins as the pool of available workers rose in the depth of the depression.
The job may have been hard on workers, but it was a huge success for Six Companies which cleared an $8 million fee on a final construction cost of $54 million. Six Companies persuaded the government to take possession of the dam early and finish the punch list, which took years. The government patiently corrected construction defects, including a dam-threatening defect in the grout curtain extending below the base of the dam. This grout curtain was designed to prevent water from pushing under the dam and jeopardizing the dam's stability. This defect was partly a design issue, and partly a construction issue because Six Companies failed to fill many bore holes with required grout. Apparently there was no litigation over this.
There were false claims with respect to overtime and Six Companies paid a $300,000 fine. There are colorful tales about litigation by workers over conditions, which includes one hung jury, one bought jury, and finally an undisclosed settlement.
The book is not perfect, but who is. Pick up a copy of Colossus; it's People Magazine for construction lawyers. It rounds out The Department of the Interior's propaganda, below. Also worth watching.
