Managing Construction Costs: Things to consider in various project delivery methods

In this climate of rising construction prices, facility owners are weighing every option to determine the most likely scenario for an on-time, on-budget project. While, our Escalating Construction Costs webinar on Wednesday, August 19th will discuss a variety of causes and mitigation strategies for higher education institutions; one of the most important decisions for the institution is how a project will be delivered. Each option presents the facility manager with a unique set of cost considerations.

Design, Bid, Build

This is the traditional U.S. project delivery method, which involves three project phases: design, procurement and construction. One big cost management tool in this process is evaluating scope and scope creep. Before the design begins, all parties work together to establish a defined project program, budget, and quality expectations. These three items define project scope. When owner, architect, or builder go outside the bounds of these criteria, we see scope creep. Ways to mitigate scope creep include:

• Setting aside contingency funds for unforeseen cost decisions. We typically see an owner’s contingency of as much as 15 percent on large projects with 5 percent allocated to each of the design phases (SD, DD, CD). Design and construction teams often hold contingencies in cost estimating that reduce as the design moves toward completion.
• Doing scope checks at the close of each design phase. This can give ample warning that a project is going beyond expectations.
• Assess scope components and decide what is flexible. Another common technique for managing cost is to look at the three components of scope as a group and ask yourself which one of these is most flexible. If program and budget are fixed, then quality may need to be flexible and so on. We had a project recently with fixed budget and quality standards. The owner had a specific number and type of residential units in mind. However, this program would not fit within the square footage constraints. We worked together to adjust the units so that the quality and budget criteria could be met. 

CM at Risk

This is gaining in interest and use nationwide. The CM acts as consultant to the owner in development and design but assumes risk for construction performance. However, owners should:

• Balance cost efficiencies and quality together, not in isolation. We had a project recently where precast concrete was chosen as the load bearing structural system over concrete masonry units. At first, this seemed like a cost effective solution, eliminating the possibility of higher labor costs because of a local labor shortage. However, the precast manufacturer supplied a wall finish of inferior quality. This caused the owner to cover the walls in gypsum wall board. And that wall board had to be painted on an annual schedule. At the end of the day, this was an installation that didn’t meet the project objectives.
• Make CMs responsible for competitive cost estimates with clear contractual criteria. We had a large project where the CM confirmed the project was on budget at the close of Construction Documents but bids came back 11 percent over. Because of schedule, the owner had little recourse but to direct the design team to make minor cost saving changes and swallow the rest of the overage. This issue starts with contract management between owner and CM. The whole point of CM at Risk is that the owner is paying for competitive pricing and CM counsel from the outset of design. If bids are coming back over the target by a significant amount, say more than 5 percent, or, if much of the quality is being stripped from the job, then the owner should ask themselves if they are getting the intended value from this process. Contract language should stipulate how the CM actually takes on “risk” and how they compensate the design team (and perhaps the owner) for corrective measures.

Fast Track

• Fast Track usually involves design “packages” released in sequence for bid and construction before the Construction Document (CD) phase of design is  completed. For instance, a grading and foundation package may be released before CDs are finished. This approach puts added emphasis on early and accurate cost estimating and parties need to watch out for:
  • Multiple revisions to drawing sets. They can cause bidder confusion and, as a result, higher costs.
  • Stretched labor forces. Some bidders may not have the labor pool to deliver the project on schedule and will drop out, thinning the competitive pool.
  • Bidder premiums. The speed of construction can cause bidders to put a premium on their services.

Owners can take other steps outside of project delivery to contain costs. To do so, they should be:

• Aware of the construction environment. If there is a tremendous amount of local construction, local and regional bidders are less likely to provide a low or lean price. An owner can try a number of tactics including spreading out capital projects, incentivizing local bidders, and bringing in labor from other regions to avoid this circumstance.
• Open to review University standards, especially before a major project. Many universities have design standards that encompass recommended styles and products for campus architecture. These standards give owner, architect, and builder a baseline expectation for cost and design purposes. These standards help streamline maintenance and operations. At the same time, we recommend reviewing and opening those standards periodically to innovation, competition and improved performance. For instance, we introduced a new light fixture to a University client and showed how this fixture out-performed their standard fixture, could be installed at scale, and was less expensive than their current installation. But, the campus design standard was used as rationale for declining the product. The fixture eventually made its way into the project and everyone has been pleased with the performance.
• Open to incentives. In the AE industry, for instance, we have seen contracts that incentivize increased energy performance design. In effect, a design firm is awarded a percentage of annual utility savings in the operation of a new facility. Conceptually, the owner gets utility cost effectiveness each year and the design team shares in that reward.

For more strategies to keep projects on track and your budget intact, register for the Escalating Construction Costs in Higher Education, and ask your questions directly to experts from all sides of this issue.