Standing Up for Design-Bid-Build: Tough Duty but Someone Has to Do It!

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

Portland, OR

The Story of Hoover Dam

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.

Georgia Moving Towards D/B for Road Projects

The Atlanta Business Chronicle has an article this week alerting us that the Georgia Senate unanimously  passed a bill that would pemit the Georgia DOT to proceed with best value design build projects for road, rail, bridge, and building projects.  The bill is off to the House.

“It will enable DOT to produce better projects quicker and less expensive,” said Sen. Steve Gooch, R-Dahlonega, chairman of the Senate Transportation Committee and the bill’s chief sponsor.The legislation also would provide more flexibility in contracting by doing away with a requirement that contracts go to the low bidder. Instead, the agency could award design-build contracts based on “best value.”

Gooch said the best value approach considers factors besides price. For example, he said the DOT might approve a bid calling for more expensive but longer-lasting building materials.

“Sometimes, the low bid does not result in the lowest price because of the number of change orders,” added Sen. Judson Hill, R-Marietta.

The measure also would add technology systems to the types of projects that could be developed using design-build. Electronic message boards using fiber optics have been cropping up along interstate highways with growing frequency.

The bill, part of the DOT’s agenda for this year’s legislative session, now moves to the state House of Representatives.

Is anyone monitoring this bill in Georgia?  Tracy Vann, I'm looking at you.  

The Bite of Sequestration: State by State

Wells Fargo Securities has compiled a useful state-by-state tally of the effect of sequestration.

Excluded from the sequestration process are Social Security, Medicaid, civil and military employee pay or veteran benefits.

The report analyses where reductions in defense spending will fall (Hawaii and Alaska head the list) and where non-defense spending cuts will take the biggest bite (DC, Maryland, Virginia and New Mexico head the list). 

February Presentation: Profit Strategies on Cost Plus Contracts

Join us for our February Presentation on February 26, 2013, Noon Eastern Time. 

Joel Rhiner sets the table: 

Construction managers operate in a fragmented marketplace with numerous competitors, none of which possesses a significant share of the overall market.  Historically, the high level of competition has created a low margin environment for construction management firms.  Recently, construction managers have contracted on projects with stated fees that are even lower than historical standards.  Is this just a product of a weakened economy creating an even more competitive environment; or have contractors developed additional ways to create margins outside of the traditional stated fee?  Several different ways that contractors can bill for “costs” that enhance returns beyond the stated fee will be discussed.  A focus on the different contractual clauses that may either allow or disallow these costs will provide attorneys a better understanding on how construction managers are enhancing their returns.  In addition, an analysis of the allowable cost language within the contract will provide insight into the best ways to protect their client’s interests when drafting contracts.

John Bailey of the Veritas Advisory Group in Dallas will be our presenter. 

Aba february 2013_presentation from Roland_Nikles

"Two-Step Design Build"

The January 28, 2013 issue of ENR Magazine includes just two women in its list of top 25 newsmakers for 2012.  One of these is Lisa Washington, DBIA Executive Director.  Lisa earned the honor for spearheading an effort with the U.S. Army Corps of Engineers and other federal agencies to adopt a two-step proposal process for projects. 

The two-step design build proposal process first short-lists three firms rather than five or more, and uses performance-based rather than prescriptive requirements to evaluate competing proposals.  The process also encourages payment of meaningful stipends to offset proposal preparation costs for competing entities. 

[Under single step RFP's firms devote significant time and money on their designs with less chance of winning the work.  It stands to reason that under those conditions pricing will build in more contingencies and margins for error]

"More creativity at less cost is the real intent of design-build," Washington says.  "Some [owners] say single step is faster--it isn't--or that a [low-bid] number up front offers them best value--it doesn't"   

DBIA says design-build is now used on 40% of all U.S. projects, so the goal is to get industry to use it correctly.  Washington has been pushing design-build best practices during her nine-year DBIA tenure.  Revenue from DBIA's "Education Tour" program has grown to $1.4 million in 2011 from $30,000 in 2004.

20 Year Anniversary of DBIA!

The Design Build Institute of America celebrates its 20 year anniversary this year.  The Forum and our Division 4 was on the forefront of this development with the publication of our Design-Build Deskbook, currently in its fourth edition (2010), Kerry Kester, John Heisse, and James Schenck, IV editors. 

 DBIA

When DBIA was established in 1993, design-build authority at the state level was confined to Virginia. Today, only eight states limit public agencies' use of design-build procurement and there is not a single state in which design-build is not permitted in some limited fashion

Milestone: Bringing Design-Build to the States

When DBIA was established in 1993, design-build authority at the state level was confined to Virginia. Today, only eight states limit public agencies’ use of design-build procurement and there is not a single state in which design-build is not permitted in some limited fashion.

During DBIA’s first 12 years, members lobbied each statehouse to expand the delivery methods available to their agencies . Many within industry were wary of or resistant to this new method. From 1993 to 2001, the number of bills introduced in the states surged from just a few in the early years to 49. Even if these bills failed on the first or even the second attempt, visibility and awareness of design-build and DBIA was building.

In September 2002, DBIA released its first legislative tool kit for DBIA chapters and members. At that time, the delivery method was fully authorized in only a handful of states. The number of state bills exploded: In 2002, 143 were introduced and 52 passed. This trend continued until 2005, when 250 bills were introduced and 82 were enacted. By 2005, design-build was fully authorized in 16 states and widely permitted in 12 others.
While most states fully authorized design-build or widely permitted its use on building projects by 2005, the opposite was true in the transportation sector. In 15 states design-build was not authorized at all and in 13 states design-build was a limited option.

Design-build continued to lag in the transportation sector until 2009. At that time, DBIA made a concerted effort to expand design-build in the transportation sector and aimed its advocacy efforts at both the state and federal levels. Adding strength to DBIA’s push was passage of the American Recovery and Reinvestment Act (ARRA). It’s “shovel ready” mandate spurred statehouses into action. A record 100 design-build bills were enacted that year, the majority of which expanded design-build in the transportation sector. In January 2009, there were 13 states where design-build was not authorized and another 12 where it was a limited option. Within 10 months, the number of states without any DOT design-build authorization dropped to just eight.

Read the rest at DBIA.