In this article, you will read about the most typical delivery models for commercial construction projects across complex industries, such as healthcare, semiconductors or pharmaceutical manufacturing.
Design Bid Build
Design Bid Build is very common in Public Works and with many private owners. Early in my career, the majority of my work was Design Bid Build with a lump sum contract. This is probably the most common delivery model today with the owner hiring a design team. This team will design the entire project without input from a build team. At some point, the owner will send out tenders or bid documents to multiple construction firms asking for bids. Generally, from all the incoming proposals, the one with the lowest price will be picked. The contract works on a lump sum basis for the plans and specifications.
Where this model lacks is when the owner starts making any changes to the design and when the design is incomplete and not coordinated well. Every single one of those changes throughout the project will become a change order or an additional cost to the owner because, in this model, the owner has a contract with the design team and a separate contract with the construction team. Additionally, the owner often has to play the role of a mediator between design and construction and manage Requests for Information (RFIs) which are formal requests to complete and/or fill in gaps in the drawings.
The lack of construction input during the design phase is challenging. I didn't have luck with these models; one of my inpatient hospital projects of $4 million had a $2 million claim in the middle of the job. We had to value engineer (remove) the last phase of the project because we couldn't afford to build it, and the job was delivered a year late, eventually going to mediation
Design Bid Build works well if the scope is known and the project does not require lots of changes or coordination between multiple trades and disciplines. It also doesn’t work well when the owner makes many changes during construction or when there is a possibility of differing site conditions (i.e. discovering after demolition that the actual conditions don’t make the as-built drawings).
Image via Pexels Pixabay
Another common model used by many public agencies is called Design Build. The owner will sign a contract with one primary entity, usually the builder but it could also be the design firm. They will often provide a guaranteed maximum price.
Alternatively, a Design Build contract could also be offered on a lump sum basis. To do that, the owner will hire a separate design firm to create a set of scoping or bridging documents that the builders will then bid on and provide a fixed price.
So in either case, the owner contracts with one entity which carries all of the coordination risks.
Disadvantages of this model emerge as soon as the owner wants to implement changes to the project. Especially in healthcare, but in many other highly complex industries such as semiconductors or pharmaceutical manufacturing, Design Build starts to fall short because technology is moving faster than design and construction can keep up.
Construction Manager at Risk (CMR) model
For large construction projects, the more sophisticated model, integrating pre-construction, would be a Construction Manager at Risk model. The difference here is that once the design phase starts, the owner will engage a construction partner who will bring on other trade partners.
As the design develops, all parties will be providing continuous feedback and often cost updates at specific design milestones. This allows the builder and trade partners to be involved during the design process. In other words, the owner has a construction manager or general contractor who takes the risk for the price of the construction contract.
In most cases, for specific design milestones, the construction team will provide an updated budget during the schematic design or design development phases. Similar to the first model, the owner is contracting separately with design and construction, being caught in between discrepancies in the design and construction phases.
Guaranteed Maximum Price
CMR often establishes a Guaranteed Maximum Price (GMP), that is negotiated between the CM and the Owner. This means there is usually an open book development of costs and a contingency that the builder will apply on top of these costs. The CM will guarantee the cost for the owner (as long as there are no changes or major differing site conditions).
Unfortunately, in my experience, this doesn’t always work. Often, the owner, especially on large hospital projects, does not get a guaranteed maximum price.
Overall, GMP works very well for projects that do not have many changes and is more suited for larger projects than Design Bid Build.
Integrated Project Delivery (IPD)
The only model that helps to handle big project changes throughout the project is IPD (Integrated Project Delivery). In this model, the owner is contracting with the design and construction teams within a single agreement. So the designer has a contract with the builder, but they're not subcontracted to the builder and they have an equal vote in a multi-party contract, which means that it has at least three signatories.
Additional parties can sign what's called a joining agreement through the primary designer or the primary builder. And in that case, many parties participate at an equal decision level with the owner. A poly-party agreement means that all of those parties are primary signatories. During my career, I have seen some contracts with up to 17 or 18 signatories.
I found that IPD contracts are very effective because they are open-book and have fixed profit and risk-reward structures. So the design and construction teams and the owner are aligned for the same outcomes. And through this alignment, the projects get much better results. Changes during the project are done in an open-book fashion with adjustments to profit and risk-reward plans as appropriate. Often, owner changes can be covered by shared savings returned to the owner at the completion of the project.
Feature image: Scott Graham via Unsplash
James is an expert in the set-up and structure of large, complex capital projects using Lean and Integrated Project Delivery to drive highly reliable results.
He has negotiated IPD contracts and delivered over $650M in complex healthcare projects as an Owner's Representative with multiparty contracts, aligned team incentives and collaborative delivery models.