1. Procurement and Construction Management and Oversight
What Board Members Need to Know
Jerry Smiley, AICP July 2013
Good afternoon.
I would like to take a quick survey? Think of the largest contract you have ever voted on in your capacity as a Board member for a transit agency. How many have ever approved $1M, $10M, $50M, $100M, $500M, $1B?
How did that make you feel? Did you feel like you know what you voting on? Did you feel like you understood the obligations that you were committing the agency to? Did you understand the risks?
As stewards of public funds and the public trust, approving contracts can be a daunting task. During today’s session, we are going to focus on contracts related to capital programs. My objective is to provide some basic understanding of the contracting approaches, their advantages and disadvantages, and what kind of questions that you, as Board Members, should ask your technical staff.
Following my presentation, Larry Hoy, Board Director of Denver RTD, will offer insights on their most recent Eagle P3 Project.
Ed Mortimer, URS Government Affairs, will then wrap up the session by summarizing activities on the Hill and how they will impact your agency’s procurement decisions.

2. Major Capital Projects Alternative Contracting Approaches
Pre-Planning and Acquisition
Finance
Design
Construction
Operations
Maintenance
When an agency begins development of a major capital project it has multiple contracting approaches to consider. If you walk out of here with nothing else, you need to understand that every capital project is unique – and there is no one size fits all approach. It’s specific to each agency - what works in one area may not work in another.
In simpler times the Design-Bid-Build approach was the standard. Today, contracting is more open to innovative processes and is influenced by multiple factors such as funding, the agency’s capability and capacity to manage the project, cost, schedule sensitivity and how much risk the agency is willing to take. As the contracting alternatives move from Design-Bid-Build to alternative approaches, greater risk is shifted to the Contractor and the role of the Contractor shifts from “hired help” to “partner.”
RTD Union Station
DART Orange Line

3. Major Capital Projects Alternative Contracting Approaches – Risk Allocation
Contractor’s Risk / Contractor’s Control
Owner’s Risk / Owner’s Control
Design-Bid-Build/CMGC
(DBB/CMGC)
Design-Build
(DB)
Design-Build-Operate-Maintain (DBOM)
Public Private Partnerships
(DBOM+F/BOT/BOO)
As the Board, your agency’s technical staff will bring a recommended contract approach to you to approve.
Risk allocation is a major concept that Board members should understand. If things go wrong, ultimately, staff will return to you to approve a contract modification.
In capital programs, risks cannot be eliminated, but they can be managed. However, they need to be identified, quantified and understood. Contractors will assume more risk to the extent they can quantify the risk and to the extent they are allowed to manage their risk. This illustrates the risk/control relationship of the major contracting approaches.
Given our time and focus for this session, I will not go into every nuance for each alternative contracting approach, but I will provide a brief overview of how they are structured and the pros and cons of each.

4. Design-Bid-Build Project Structure and Approach
Owner
Architect/
Engineer
General Contractor
Traditionally, agencies utilized the three step design-bid-build method of procuring design and construction services for most of their capital projects. This approach allows the owner to determine the exact product before it begins construction.
The first step is an AE defines the client's needs, designs the project, prepares construction drawings and specifications, and administers construction. The project is not bid on by contractors until working drawings are completed. The important deliverable here is the drawings and specifications because they serve as the contractual definition of what the contractor is to build.
At the end of this process you have an engineer’s estimate of costs.
During the contractor procurement process, contractors may be prequalified and short-listed. Typically, the low bidder is awarded the work. So, in this scenario, the AE is at the agent end of the spectrum, the contractor is at the vendor end.
Subcontractors and Suppliers $ $ $ $
PD&E PE
Final Design
Procurement
Construction
BUDGET
BUDGET
ESTIMATE
BID
Contractor Selected

5. Design-Bid-Build Overview
Pros
Standard contracting approach
Transparent procurement process
Public acceptance
Fairest to bidders, level playing field
Cons
Slowest method
Cost not established until bids received
Design change impacts
In some cases, fosters adversarial relationships and increases probability of disputes
Owner retains greatest control,
but assumes greatest risk
Until 15 years ago in the transit industry, this was the only long-standing, accepted approach. The process is easy to manage. Roles are clear, the process is universally understood. Since the owner has a defined requirement and a fixed price, it appears prudent.
However, it’s not the quickest route. There is not a fixed price for construction until much work has been done. If bids are over the budget, more time and money are lost for redesign. And there lies some of the risk to the Owner.
You can exercise the greatest control over the project, but the risk associated with project schedule and coordination amongst the parties rests with the Owner. If the construction cost exceeds the project estimate, the Owner may have to seek more funds, re-scope the project or redesign to the project’s estimate; costing more time and money. Often, agencies will hire a program management team to manage on their behalf the conflict, delays and claims, which are not easy to predict or quantify.
Ultimately, the owner retains all the risks.

6. Design-Build Project Structure and Approach
Owner
Design-Builder
Architect/Engineer
In design-build projects, design work is performed by the same entity that constructs the project, and the design-build contract award is made in a lump sum. Consequently, there are no separate phases—or appropriations—for preliminary plans, working drawings, and construction. The Owner is responsible for providing a project definition which the design-build firm uses as the basis for its bid.
In this approach, multiple contractors will develop teams to prepare their bid. Innovation in design or construction methods can result in significant savings. However, the cost of developing the bid is much higher than the DBB process. Design services are often shopped and should they not be on the winning team, they are out of luck.
Under DB approaches the single most important shift in risk occurs when engineering, construction and major equipment supply are purchased through the Design-Builder. They are responsible for coordination of design and construction and errors and omissions.
Subcontractors and Suppliers $ $ $
PD&E PE
Procurement
Final Design
BUDGET
ESTIMATE
BID
Construction
Contractor Selected

7. Design-Build Summary Pros Project costs are determined earlier
Constructability and value engineering benefits accrue to Owner
Single point responsibility
Reduced claims exposure
Tends to be the fastest method
Cons
More complex contracting approach
Competition may be limited
Requires earlier project definition
Reduces design input by Owner
Changes are more costly
Substantial risk is shifted to the contractor,
contractor assumes more control
The advantage of the design-build approach is that the project delivery team has single-point responsibility for the project. This helps expedite construction time-frames and may reduce the number of change orders.
Under the DB approach there is a significant shift of risk to the Design-Builder, but along with the additional risk the Design-Builder assumes more control over the project.
This approach requires increased owner sophistication and dedicated staff that understand the nuances DB.
As a Board member, you should understand that DB can limit competition and, in some cases, be burdensome on the small business community. As the agency pushes risk to the contractor, the contractor in turn can push that risk to its subcontractors. This can include untenable insurance requirements or deferred payments. Should the Board or community desire a change in design post award, the costs are much greater.

8. Construction Manager/General Contractor Project Structure and Approach
Owner
Consultants
General Contractor
Construction Manager/General Contractor (CMGC) approach is similar to design-bid-build in that the owner holds two contracts – one with the designer and one with the contractor. It’s also similar to design-build in that the contractor is involved in preconstruction activities. So it’s somewhat of a hybrid approach. The thing that makes CMGC different from both design-bid-build and design-build is the Guaranteed Maximum Price (GMP) concept.
Under the CMGC approach the designer and contractor work together to develop the design and construction estimate. The CMGC prepares a construction estimate, which after negotiations becomes the GMP. The GMP includes contingencies for unknowns and any unused contingencies are shared or revert to the owner.
In CMGC (as well as the CM at risk variation), the construction manager works with the design team to help ensure that the design is something that can in fact be built for a reasonable cost and that the builders will be able to understand the design drawings and specifications. In this approach, the construction manager then becomes the prime contractor during the construction phase. The construction manager awards subcontracts much like a general contractor in a Design-Bid-Build project. Construction management projects are most frequently done through a guaranteed maximum price contract.
In a GMP contract, the contractor estimates the cost just like in a lump sum bid, but profit is limited to a specified amount. In the event that actual costs are lower than the estimates, the owner keeps the savings (although they can be shared as an incentive). In the event costs are higher, the contractor pays the difference and profit is reduced.
Subcontractors and Suppliers $ $ $
PD&E
Procurement PE
Final Design
BUDGET
BUDGET
GMP
Construction
Contractor Selected 8

9. Owner retains significant control, owner retains significant risk
CMGC Overview
Pros
CMGC participates in developing design, budget and schedule
Design assistance reduces E&O
Allows for fast-track (non-linear) construction
Reduces uncertainties (change orders)
Owner knows costs upfront
Cons
No significant input by Owner in design
Complex process requiring qualified staff
CMGC’s role changes from CM to GC once construction starts
Owner does not transfer E&O risk
In some areas, relatively few true construction managers
Owner retains significant control,
owner retains significant risk
The great advantage of construction management is its emphasis on teamwork, and the fact that a builder is involved in the design and decision making process almost from the start. Another advantage is that the owner can often be more involved in the selection of sub-contractors, if so desired.
The disadvantages are that the builder must be paid for his participation in design and that there may be some blurring of the lines of responsibility. The CM is allowed a contingency for the normal mistakes in construction. If later bid packages come in above the amount allowed for them in the GMP there is pressure to reduce the scope of the work so that it’s the cost to the CM fits within his guarantee.
Another problem with construction management is that there may be few qualified true construction managers currently working in an area.
Under CMGC, the contractor’s primary risks are still cost, schedule and warranty. But it is possible to transfer some utilities and differing site conditions if the GMP is established after significant design has been completed. The Owner’s major risk still includes errors and omissions. Any Owner change has the potential to become a claim that effects cost and/or schedule. 9

10. Public Private Partnerships Project Structure and Approach
Owner
Concessionaire
Design-Builder
O&M Contractors
Architect/Engineer
There is a great deal of nuance not reflected in this illustration. PPPs can be quite complex and vary greatly in their structure. In this Public Private Partnership, we have an equity partner that brings capital to the project. The ROI can be made through availability payments, value capture, or number of revenue streams. This concession gives a private operator responsibility not only for operation and maintenance of the assets but also for financing and managing all required investments.
Subcontractors and Suppliers $ $
PD&E
Procurement
Design
Construction
and Testing
Revenue
Operations
BUDGET
BUDGET
Maintenance
Partner Selected 10

11. PPP Overview Pros Advance infrastructure projects years in advance
Value for money through optimal risk transfer and risk management
Accountability through performance incentives
Operational and project execution risk is transferred to the private sector
Cons
Contracts are much more complicated
Difficult to anticipate all possible contingencies that could arise in long-term contract
Re-negotiation of contracts can be high
Performance enforcement
Owner only controls what is negotiated,
risk depends on skill of negotiators
Given the difficulty in estimating financial outcomes over such long periods, there is a risk that the private sector party will either go bankrupt, or make very large profits. Both outcomes can create political problems for the government, causing it to intervene. An example is Melbourne’s train services, contracted out in Patronage didn’t increase to the levels expected, causing the operator to threaten to fail. The government agreed to increase the operating subsidy.
Risk can be reduced by including in the contract loss sharing or profit sharing provisions. But such provisions reduce the extent of risk transfer, and therefore the advantages of PPPs.
But I am going to let Larry tell you their story. 11

12. What Questions Should You Be Asking?
Capacity
Risk
Capability
The top two circles have to do with your staff.
Implementing innovative project delivery methods and contracting approaches are process changes that require a commitment from staff and senior management. Alternative project delivery methods require different skills than administrating traditional DBB contracts. Employees involved with innovative project delivery methods and contracting approaches need adequate training to understand and perform these duties.
The bottom circle has to do with your risk tolerance – what risk do you want to assume and what risk are you shifting to the contractor through the contract terms.
The sharing of risk is a critical element when selecting project delivery methods. Your staff should undertake a risk assessment appropriate to a project’s size and complexity, and risks should be assigned to those best suited to undertake them.

13. Risk Allocation Principles
Risks are unavoidable
Risk should be allocated to maximize probability of success
Assessing who is best able to manage risk
Optimum risk shifting should be the goal – not maximum risk shifting
Shifting unreasonable risk to the contractor
Reduces competition
Increases contingencies
Increases project disputes
When Owner and Contractor share risk on an equitable basis, their working relationship becomes more cooperative and less adversarial
All agencies should have appropriate expertise to manage any project that employs alternative delivery or alternative financing. The expertise can be on staff or hired as external expertise.
A good example of this is on the Eagle P3 in Denver. Hazardous materials estimate $9Million – just an estimate, you never know what you are going to find. In DBB, this would be known and sometimes even mitigated prior to hiring the contractor. Because of the unknowns, contractor wanted $25M. RTD decided to manage that risk themselves. Actual hazardous materials costs ended up at $7M. It ended up being a win-win for everyone. Contractor did not have to assume the risk and RTD had a ”savings” of $18M.

14. What Questions Should You Be Asking?
Why are we choosing the selected procurement model?
Would the project be able to move forward using another model?
Is this model in the agency’s best long-term financial interest?
Do we have the staff to properly execute this model?