In the weeks since hurricanes Katrina and Rita devastated the Gulf Coast region, there has been widespread fear that they will have a major inflationary impact on the U.S. construction industry in the coming year. That is almost guaranteed, but it may also open the door wider for alternative project delivery methods, according to a construction survey completed just prior to Hurricane Katrina by PinnacleOne, a construction management and dispute-avoidance consulting firm in Phoenix, Ariz.

Results of the Pulse of U.S. Public Construction survey show that an overwhelming majority (92%) of public owners already had experienced significant price increases in construction project bidding before the hurricanes struck. The survey also indicates that owners increasingly are looking at alternative delivery methods, such as design-build, as a tool to reduce their costs.

According to the survey, project cost escalation over the prior year averaged 13.2% for the 167 owners interviewed. A majority (60%) of the owners reported average price increases of 10% or more, with better than a quarter (27%) experiencing an average increase over 15% and almost a fifth of respondents (18%) seeing their average bid price jump by more than 20% (see Chart 1). Click here to view

While there are many factors driving inflation on public construction projects, almost half (48%) of the owners said the cost of oil and natural gas (pre-Katrina) was the primary driver. Thirty five percent of the owners pointed to steel as the main culprit. Looking forward, almost two-thirds (64%) of the owners viewed oil and natural gas as the cost component that will increase the most over the next 12 months. Those energy costs affect every material and trade in construction.

Choices

The public owners in the study said they are increasingly considering using alternative project delivery methods. A majority (57%) said they need to reduce costs. More than a third (38%) also cited the need to shorten project schedules (see Chart 2). Click here to view

Design-build project delivery was the most popular of the alternative project delivery methods. More than a third (37%) of public owners either currently use or are planning to use design-build on some of their projects in the coming year. Design-build appears to be especially popular in the municipal/government sector where 45% of the owners are using or plan to use it.

While design-build is the most commonly used alternative delivery method among the owners, it was not the only one. Almost one-third (30%) either currently use or plan to use job/task order contracting on their projects. This method of procurement is particularly popular in the transportation sector, where almost half (47%) of the owners said they are currently using or planning to use it. In the West, 43% are taking similar action.

One-quarter of public owners said they currently use or plan to use construction management at risk on projects in the next year. CM at risk is more popular in the education sector, where more than a third (35%) of the owners say they are currently using or planning to use it. It is less popular in the municipal/government sector, where only 10% of the owners use or plan to use it.

The least popular of the alternative methods are public finance/leaseback arrangements, currently used or planned to be used by 20% of public owners. CM with multiple prime contractors also is less popular, with only 17% of public owners using it or considering it for the near future (see Chart 3). Click here to view

Although only 5% of the public owners surveyed identified claim reduction as the primary reason to pursue alternative project delivery methods, a majority view some of these methods as effective tools to reduce the level of risk they assume on construction projects. Two-thirds (66%)– more than for any other method–consider design-build effective in reducing project risk.

A majority of the owners (52%) also consider job/task order contracting and CM at risk (51%) as effective in reducing risk. Public finance/leaseback arrangements and construction management multi-prime were the only two delivery alternatives deemed to be ineffective in reducing risk by a majority (52% and 55%, respectively) of participants (see Chart 4). Click here to view

Misconception

Overall, these findings seem to support a common fallacy about alternative project delivery systems–that they inherently eliminate or reduce the risk of claims. This simply is not true. Alternative project delivery systems do not eliminate risk, they reallocate it. All methods have advantages and tradeoffs, and each method reallocates risk in a different fashion. Owners should choose a delivery method that shifts the risk to the party that is best able to control it. When choosing a project delivery system, owners should consider the benefits, such as a shorter project schedule and certainty of project cost, but realize they come with trade-offs. Recognizing those trade-offs can be a key to avoiding problems down the line.

	DAHILL

Choosing design-build can have several advantages for the public owner. First, the design-builder is a single source of responsibility and it generally results in the project being designed and constructed in a shorter period of time. Because they are together by choice and form one team, the designer, builder and subcontractors should work well together, at least in theory. Errors and omissions in the construction documents are the design-build team’s responsibility and that risk is not passed on to the owner.

But two major trade-offs need to be considered with design-build–the owner’s loss of control during design and the lack of architect representation of the owner’s interest. Design-build also puts tremendous pressure on an owner to know and clearly define criteria and quality for the project at the very start. Failure to do so can result in a disappointing outcome or result in a facility inconsistent with the owner’s needs or expectations. When that happens, the owner may have to pay more to get what it wants by issuing change orders to the design-builder. This potentially increases the project cost before construction even begins.

In order to correct problems indigenous to the design-build process, the owner can use a consultant or CM advisor to "bridge" the gap between the owner and the design process, without losing all the advantages of the design-build delivery system. According to the survey, a majority (53%) of the public owners believe agency CM/CM advisor is an effective way to reduce the risk the owners face on projects. A bridging consultant or CM advisor allows the owner to maintain control over important design issues–usually to the 30% construction document phase, or schematic design phase. Through the consultant/advisor, the owner maintains direct communication with the design-builder during the design process.

The existence of a conceptual design that is more compatible with the owner’s objectives usually will result in project proposals from design-builders that are easier to compare, which also makes it easier to select the best one. The selection process should take into consideration price, schedule, quality and scope.

Conclusion

Given the increased project costs reported by public owners, it is not surprising that they are exploring alternative delivery methods, such as design-build, that can reduce their costs and save time, or may reallocate risk to another party. But risk is an inherent component of the construction process and can never be eliminated completely, regardless of the delivery method chosen.

It therefore is essential that public owners use agency CM (CM advisor) to manage the risk they assume on their projects and to avoid and mitigate claims on projects using these alternative delivery methods.

Chuck Dahill is president of PinnacleOne, Phoenix, Ariz., a construction management and dispute avoidance consulting firm. He can be
reached at 480-394-0335 or cdahill@pinna cleone.com.