When A Collaborative Delivery Firm Establishes a Price, It Is a Binding NumberMay 8, 2017 Water Design-Build Council News - by David Odell, UCI
Posted by David Odell, Vice President, UCI Construction on Mon, May 08, 2017 @ 09:56 AM
A savvy design-builder once said you should avoid giving a price for a project with an undefined scope of work.
The critical success factors that all design-builders consider are a well-defined scope of work, manageable schedule, fair allocation of risks, and strong collaborative relationship between the owners and the design-build team.
However, it appears that in most instances, owners establish their budget first and then must secure funding for a project before they begin the procurement process for a collaborative delivery team, whether they may desire to use either the fixed-price or the progressive design-build delivery method.
While owners may have developed technical criteria and prepared other basic information to support a competitive procurement, it is believed that a final price must be aligned with a clearly defined scope of work, and an agreed upon schedule, both of which will be incorporated into an agreement between the owner and the design-build team.
And here is where some of the challenges exist. First, owners’ budgets take on many names in the early planning stages of a project, including an approved low-to-high range, an estimate of probable cost, guaranteed maximum price (GMP), and a fixed price.
To address these said budgets, a built-in mechanism should exist for owners to either find ways to adjust their scope to match an agreed upon price, or have an approved contingency that affords them the flexibility to negotiate their pricing to match the scope agreed upon with a competitively procured design-build team.
Second, when an owner reverts to the approved budget and has no flexibility from their approving body to make changes, they may be on the path for a challenging project where lowest price wins, and the scope of work expectations may not be met; and “best value” is not used as the basis for selecting the design-build team.
More often than not, owners may be conditioned to expect the price for a project to move lower through the competitive process, not higher. Subsequently, a “low price” bid proposal may be successfully employed by owners for the advertised project when a prescriptive procurement approach is used which states that the owners know what they want, and they expect little to no innovation to be provided or offered by the selected design-build team.
However, low price may not provide the best solution for owners and is not considered a “best practice” in the industry for selecting design-build teams.
A comparable analogy exists in the automobile industry. Who pays the price listed on a car at the dealership? While this example has common characteristics – it is not a “best practice,” because the car dealer is providing a defined product and knows the basis of the raw cost and potential markup on a transparent basis.
Normally, as a project moves forward through the design phase, the design-builder may not have a completed scope but must provide final pricing. (Note, for progressive design-build, the final pricing is usually provided when the design is 60 to 90 percent complete.)
The design-build professional should be diligent when providing pricing in its proposal such that its defined scope has a direct relationship to the cost of work. If the project team anticipates scope growth that could result in additional costs, the contracted price (GMP or fixed price) should include either a shared contingency or allowance that can be used to cover such costs without the owners seeking approval for a price increase.
Communication of scope changes with price change should always be transparent and timely. Lastly, should none of the contingency or allowance be spent, those dollars would return to the owners and offer the opportunity for a deductive change order further reducing the final project price.
Successful projects have owners and design-builders establishing trust and collaboration throughout the delivery of a project with full cost transparency and continual communication.