March 3, 2005 - From the February, 05 issue

Legislative Analyst's Office Releases A Promising Design-Build Report

Design-build, a construction delivery method in which a single contractor is hired to oversee design and construciton, is relatively new to state and local government. MIR is please to present excerpts of a report prepared by the Legislative Analyst's Office that examines the advantages and disadvantages of the design-build method in comparison to the traditional design-bid-build method. The LAO concludes that design build may be an attractive alternative for some construction projects.

DESIGN-BUILD: AN ALTERNATIVE CONSTRUCTION SYSTEM

For most of the last century the state-like all sectors of government across the nation-accomplished construction work using a system called "design-bid-build."

... In the 1990s, the state began to experiment with awarding and managing construction contracts using the "design-build" system. ...

... This report contains the LAO's consolidated findings on design-build to date. Specifically, the report describes the differences between the primary construction delivery and procurement processes, and discusses their advantages and disadvantages. The report then reviews public sector experience using design-build in California, and makes recommendations regarding design-build authority for state and local agencies. ...

Delivery

There are two primary construction delivery systems used in the public and private sectors. These are (1) the traditional design-bid-build and (2) the increasingly common design-build approaches. ...

Under the design-bid-build system, the public agency first awards an architect/engineer contract to design the project based on subjective criteria of qualifications and experience of the architect/engineer. This contract generally accounts for a relatively small portion of the project's total costs-about 5 percent to 10 percent. After detailed project plans and drawings are completed, a contractor is selected to perform the construction work, which accounts for 90 percent to 95 percent of the project's costs. In almost all cases, contracts for construction work are awarded objectively based on competitive bidding.

With design-build, the public agency contracts with a general contractor to both design and build the project. The agency does not separately contract with an architect/engineer for design. That is the responsibility of the general contractor. The general contractor in turn subcontracts, through competitive bidding or otherwise, for an architect/engineer and various construction trade work. Design-build delivery methods have a number of variations, but most can be placed in one of two categories-stipulated price and construction management.

... With stipulated price design-build a public agency specifies how much it will pay for construction of a particular building. For example, the agency might provide only a programmatic description of the building it wants by specifying the size of the building, types of spaces, and perhaps some acceptable construction materials. The agency then asks competing firms to present proposals that illustrate a conceptual design and provide specifications for materials and building systems that it is willing to construct for the price stipulated by the agency.

... With construction management design-build the public agency awards a contract to a "construction manager" (frequently a construction firm, but sometimes an architect/engineer firm) on the basis of a fee. The construction manager designs the project and solicits bids from subcontractors and suppliers. The total of these bids plus the construction manager's fee determine the total price the agency pays for the building....

Procurement

There are two principal construction procurement systems. These are: (1) procurement by competitive bidding; and (2) procurement based on experience, qualifications, and best value. The construction procurement system defines the process used to select and award contracts for construction projects.

Procurement by competitive bidding means a public agency awards contracts for construction or construction-related work objectively, based on bids. Bids are offers to perform the work for a specific price, with the contract going to the lowest bidder. This is the way construction contracts are awarded under design-bid-build. Competitive bidding also is used to procure most of the construction work when construction management design-build is used. Competitive bidding may or may not be used when stipulated price design-build is used. ...

Procurement based on the experience and qualifications of competitors, or a judgment that a competitor will provide best value to the project, is subjective. It is used to award most design-build contracts, as well as architect/engineer contracts in design-bid-build. Although these are subjective criteria and bidding is not used, this procurement system has competitive elements because contractors compete to show they have the most experience and are best qualified. ...

Each of the construction delivery processes has advantages and disadvantages.....

Design-Bid-Build Advantages

... With design-bid-build, the facility the agency wants is fully defined by detailed working drawings and specifications before bids are solicited. This means there is little uncertainly about what the agency wants and what the contractor is required to deliver.

... With design-bid-build, the contract is awarded to the bidder who offers to construct the building for the lowest price. This competition motivates bidders to offer the lowest price they can because they know price is the only basis for award of the contract. Also, since the building the agency wants is fully defined by detailed working drawings and specifications, bidders do not need to increase their bids to cover contingencies that might arise if a building is not fully defined.

... Quality in a construction project is controlled using detailed working drawings and specifications, which are the basis of the contract between the agency and a construction contractor. This allows an agency inspector to compare the materials and workmanship of the project under construction with what are required. If the requirements are not met, provisions of the contract can compel the contractor to correct the work. Without detailed working drawings and specifications, there is little an agency can do to control the quality of the contractor's work.

... Awarding construction work, which represents about 90 percent to 95 percent of the building cost, by competitive bidding, uses an objective criterion of lowest cost. This reduces the opportunity for bias and inappropriate influence to play a part in awarding the construction contract. The smaller architect/engineer contract (representing about 5 percent to 10 percent of the building cost) is awarded based on subjective criteria of experience and qualifications because it is for professional services that cannot be defined in detail before the building is designed.

... By awarding contractors based on price, the design-bid-build process provides the best opportunity for qualified small and new contractors to obtain government contracts. Small and newly established contractors may be able to perform work at a lower cost than large competitors because of lower overhead and more efficient operations.

Design-Bid-Build Disadvantages

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... Design and construction of a building is a complex and difficult undertaking. There will always be conflicts and disputes that can lead to time-consuming and expensive legal action, no matter what construction delivery process is used. One major source of conflicts is errors and omissions in the working drawings and specifications prepared by the architect/engineer. In the design-bid-build process the public agency hires the architect/engineer directly, and the law holds the agency to be the guarantor of the completeness and accuracy of the architect/engineer's work. This draws the agency into disputes between the designer and builder and frequently subjects it to significant liability because of its perceived "deep pockets."

... With design-bid-build, the builder is not known until after the design work has been completed, bids have been submitted, and a construction contract awarded. This means the design cannot incorporate any input by the construction contractor on construction materials and methods that could improve the building's design, functionality, and cost.

... The design-bid-build process is usually slower than the design-build process, mainly because of the sequential nature of the process. In contrast, under design-build, design and construction work may be undertaken concurrently. (This difference, however, may not be significant in the case of larger projects because procurement using subjective criteria of experience, qualifications, and best value often requires substantial time to allow competitors to prepare proposals and agency officials to evaluate them.)

... With design-bid-build, the architect/engineer firm prepares cost estimates as the design work progresses, typically when the working drawings and specifications are about 10 percent, 35 percent, and 100 percent complete. While this gives the agency an early indication of the project's cost, there is no cost certainty until design is completed and construction bids have been received.

... Design-bid-build requires the completion of detailed working drawings and specifications before bids are solicited, and then a substantial inspection and quality control effort during construction. This may require an agency to employ a substantial number of technical staff to manage larger design-bid-build projects.

Design-Build Using Stipulated Price: Advantages

... With the "stipulated price" method of implementing design-build, an agency has the best certainty of the cost of the building at the outset of the project. This is because the agency specifies what it is willing to pay for a building before it solicits proposals from design-build contractors for the configuration, features, and materials they are willing to provide for the specified price. The risk with this approach is that the agency may not get the best quality building for the price it pays.

... Because the designer and builder are part of the same design-build entity, and the public agency is not the guarantor of the completeness and accuracy of the work of the architect/engineer, the agency may avoid conflicts and disputes that can arise between the architect/engineer and construction contractor.

... The construction contractor is involved in the design process from the beginning and can provide helpful insights on construction materials and methods that can make the design more efficient and less costly to construct.

... By overlapping design and construction to some extent, and by potentially reducing conflicts between designer and builder, design-build can usually deliver a project faster than the design-bid-build approach. With large projects, however, this may be less of an advantage because of the extra time needed for competitors to prepare their statements of qualifications and technical proposals.

... Under design-build, the public agency does not have to review the accuracy and completeness of the architect/engineer's work. Thus, the agency may have less need for in-house technical staff to manage projects.

Design-Build Using Stipulated Price: Disadvantages

... Because the building the agency wants is not defined in detail at the time it enters into a contract with a design-build contractor, there is limited basis for enforcing a contract and the agency may have little control over the quality of the construction work.

... With design-build, the design and construction work generally is awarded based on subjective criteria such as experience, qualifications, and best value. Agencies have established contractor evaluation and selection processes and policies to try to mitigate the risks of subjective judgments, but drawbacks still exist. ...

... Because design-build contracts mostly are awarded based on qualification and experience, this method may tend to work against small, newly established contractors, who do not have the range of experience of large, long-established firms. As a result, access to design-build contracts, especially the large contracts, may be limited for these contractors.

Design-Build Using Construction Management

The advantages and disadvantages of design-build construction delivery using construction management methods are similar to those for design-build using a stipulated price, with two main exceptions:

... The public agency has far less price certainty under this method than if the stipulated price approach is used. Even so, construction management still provides more certainty than design-bid-build, where the total price is not known with reasonable certainty until design is finished and bids have been received. With construction management, a series of trade contracts is bid over time. This provides partial cost information earlier, and allows design changes to be made in subsequent trade packages to control costs and keep the project within budget.

... With the construction management approach to design-build delivery, the savings resulting from competitive bidding for subcontracts and supplies benefits the public agency rather than the design-build contractor. This is an important advantage construction management has over stipulated price. ...

Conclusion

Design-build can provide state and local agencies with a useful alternative to the more commonly used design-bid-build process to deliver construction projects. However, to the extent design-build contracts are awarded based solely on subjective criteria, there is an opportunity for compromising the public procurement process. Thus, it is important that statutory changes that make the design-build process more widely available to state and local agencies also preserve the public's confidence in the procurement process. Using construction management with competitive bidding of subcontracts or a two-envelope system can achieve that. ...

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