Collaboration is critical in today’s complex construction world. The Utah State Capitol Restoration and Base Isolation project was a very complex and difficult project. I required that all worked closely, communicated with one another, and respected each other’s decisions. Developing a structure that allowed for an open, honest, and trusting collaborative relationship was critical to the overall success of the project.
The first step in the development of a collaborative relationship is taken by the owner. The owner or owner project representative must be open to working in a new environment, one where all communication is valued. The owner must understand that knowledge does not just exist in one location but is located throughout the construction industry. The trick is to get the knowledge as well as the best and the brightest people working on your side of the table. For this to occur, trust must be developed. It all starts in the contract. Too often, owners will say they want an open working relationship, but then they force the contractor and architect to accept contract provisions that are adversarial.
Recognizing the need for collaboration as the executive director for the Capitol Preservation Board, I took the following steps to ensure that all contributions were valued and that we were all working on the same side.
1. Selecting all major players—architect, engineers, and construction manager—through a qualifications-based selection process.
2. Each contract was discussed, reviewed, and agreed upon in a collaborative environment from the start. There was no sending it to the attorney for review because the attorney and all decisions makers were in the meetings, and resolution to issues were determined together with the goal of developing a collaborative agreement that would last throughout the job.
3. Each discipline leader of the team participated in the selection of next team member. For example, the CM was the first team member selected. They joined with the owner in selecting the architects. Then the CM, architects, and the owner joined together to select the structural engineers, and so on. Each team member in that regard relied upon the other to join the team, which developed instant respect and a desire to work together.
4. As the owner, we felt it important that everyone have the same understanding and opportunity for input. We developed workshops around the established design guidelines that we, the owner, had developed. Everyone from the architect and CM to trade subcontractors, installers, fabricators, and engineers participated. Each was allowed—in fact, encouraged—to question and find solutions to problems. Everyone was encouraged to respect each individual’s contribution.
In the end, these four simple steps saved many hours of disagreement that could have infected the project. As it was, for more than five years, the team worked as a team to solve very difficult and challenging problem, all in the spirit of keeping the project focused on what became known as “Capitol Quality” while staying on time and within the budget.
Friday, March 13, 2009
Sunday, March 8, 2009
Managing the Contingency Allowance
SUMMARY
A contingency is a predetermined amount or percentage of the contract held for unpredictable changes in the project. A contingency is a helpful tool that financially prepares owners for budget escalations. Contracts provide for contingencies to pay for unknown conditions such as price escalation of a product; design changes in scope or due to errors and omissions; or necessary construction changes that are realized on site during construction. If managed properly, a contingency can provide a safeguard for the designer, contractor, and owner to complete the project on budget. Contingency management is as important as the decision of the amount of a contingency.
Why A Contingency Allowance?
The Architect’s Handbook of Professional Practice clarifies a contingency allowance as the amount, or percentage, included in the project budget to cover unpredictable changes in the work or items of work. It serves three core purposes:
· To account for errors and omissions in the construction documents
· To modify or change the scope of the project
· To pay for unknown conditions
Each project includes designer’s, owner’s, and construction contingencies, all with the same objective: to complete the project on budget. Each type addresses different aspects of the project.
The owner’s contingency
There is no such thing as a one-size-fits-all amount for the owner’s contingency. Applying a standard amount to each project can lead to cost overruns, accusations, and litigation. It is highly recommended that owners develop an internal process to evaluate project contingency needs. It is important to adequately establish an allowance of the right size, neither too low nor too high.
It is nearly impossible to produce a perfect set of construction documents, leaving room for errors and omissions. Frankly, it is amazing how few errors and omissions are in any given set of documents. In my observation, most errors and omissions amount to less than 5 percent of a project’s budget. An owner’s program inevitably changes, if only slightly, during the life of a project, and changes or modifications to the scope of work probably occur in response to programmatic changes. The contingency is one way to prepare for changes in scope or errors and omissions.
Another aspect important to the owner’s contingency is to account for risk. Risk is created when some aspects of the project are unknown or when certain project elements are likely to cause concern.
A case in point: the Utah State Capitol
The level of risk depends on the number of unknowns when the project is budgeted and/or any project-specific issues such as the prospect of political entanglements, as noted in the Utah State Capitol project.
In this case, the owner’s contingency was based on the users’ (state legislature’s and executive branch’s) needs and the volatility of the project program. Before selecting the architect and the construction manager (CM), the owner (the Architect of the Capitol) carefully defined the project scope using project definition documents. Based on these documents, the Architect of the Capitol determined 3 percent as the factor for the program/design portion of the contingency.
The soil was fully identified in previous explorations, so by the time the guaranteed maximum price (GMP) was presented, unknown conditions had been greatly reduced and 2 percent was an adequate contingency for the risk portion. The owner added 1 percent to account for possible political factors. The total owner contingency, therefore, was 6 percent (3 percent possible scope changes + 2 percent risk + 1 percent politics).
Next steps: Good contingency management
Once the owner determines the contingency, the next step is to manage it appropriately. All three parties—owner, contractor, and architect—may view the contingency differently, causing management concerns. The issues can be limited if all parties understand the purpose of the contingency and how it relates to their respective roles in the project.
Contingency funds are to be used, first, to complete the scope or deal with unknown conditions. Many owners make the mistake of adding scope with their contingency. Architects should make sure the documents are as complete as possible and understand that the contingency is not a method for addressing late design decisions.
The owner’s primary management risk is from the contractor. Once the contract is signed and the work begins, the creation of change orders is the most contentious act on any construction project. This is where hurt feelings develop and where litigation stems from. Owner contingency not managed properly during construction can result in cost overruns and unnecessary losses.
Documenting the change-order process
When a contractor receives a change-order fee equal to or less than the fee percentage they are earning for the project, they have little or no incentive to scrutinize the subcontractor’s change orders. It is difficult for anyone but the contractor to determine the price of a change order. Change orders can erode the contingency a little at a time unless the owner requires the CM or the contractor to provide consistent documentation.
The owner should establish a process to monitor the contractor to ensure that each change order is properly reviewed. A proposed change order (PCO) is a way to document this process. It gives everyone a chance to review the requested change. The PCO should state that all affected subcontractors have reviewed it. Once signed, the change-order amount is the only cost associated with that specific work. No additional cost can be presented to the owner. If there are additional costs, the contractor can use the contingency to pay for them, but not the owner.
A construction change directive (CCD) can be used when time is critical, the team knows the change will occur, and it is just a matter of determining the cost. This process should be priced as if it were a PCO and recorded in a PCO log.
The Construction Contingency
It is not unusual for a contractor to need to move a wall or an opening or to otherwise modify plans for a host of reasons. The construction contingency allows this type of flexibility, and the owner should not view it as lost cost but as a tool to complete the project within the budget. The use of a contingency for the contractor’s needs varies with the type of delivery method.
Design-bid-build
The contingency is most difficult to manage in the design-bid-build process. In fact, it is nearly impossible to manage with full control, due in part to the bidding process. The contractor who makes the most mistakes in the bidding process is typically low and may or may not have held onto enough contingency to complete the project. Therefore, the construction contingency should be higher for design-bid-build. One way to better handle this situation is to insert a contingency amount into the bid documents or tell the bidders in the bid documents that a contingency will be negotiated at the time of award.
Design-build
Depending upon how the design-build delivery is organized, the contingency can be negotiated with the contractor as a percentage of the work or as a lump sum. Design-build contingency structures depend on contractor selection, whether based on a bid or on a GMP determined during a qualifications-based selection (QBS) process. When determining a contingency for the contractor, the owner should consider the project’s level of risk. A range of 5 percent to 10 percent is common, based on the level of risk, difficulty, and complexity the contractor will face. The contractor should have full control of the contingency and should be able to use it as needed. Proper management would require the contractor to give the owner a quarterly report of how much of the contingency has been used and for what purpose. This level of accountability will keep everything on the up and up, especially in a public project.
CM/GC
The CM or general contractor (CM/GC) delivery methods are flexible and provide an excellent opportunity to work with the contractor to deal with a contingency. The contingency can be established in a number of ways. The CM or GC is typically selected using a QBS selection process involving a fee-based proposal. It can also include submittal of a management plan, schedule, and general conditions. The owner can request that the management plan include a budget estimate for the project; within the budget estimate, the owner can stipulate a healthy contingency amount based on risk assessment, communication with the contractor, and/or looking at similar projects within the industry.
Any remaining contingency is the owner’s, not the contractor’s. This gives the contractor incentive to use the contingency responsibly. The contract should require periodic reviews of the contingency to evaluate levels of risk and provide information regarding the release of the contingency back to the owner. This should be a mutually agreed-upon concept. The CM or GC should assess their risk on the job throughout the project. It makes little to no sense for the contractor to hold more contingency than needed. Both of these management tools—the review of the contract and the release of unused funds—should be spelled out clearly in the contract and understood by both parties.
Design Contingency
The design contingency amount usually ranges from 5 percent to 10 percent of the overall construction cost. The owner should include this cost directly in the project budget. The design contingency should not be created by reducing the project budget by 5 percent to 10 percent but should be an additional amount that the owner holds for the architect’s use to ensure that all desired scope is covered.
As the project evolves, the contingency is drawn upon by the owner and added to the project. This should be a process of checks and balances in which both owner and architect work together to determine when to use the contingency.
The design contingency should not be used to accomplish the original scope of the project unless it is clear to all concerned that the original budget
· Did not address all project needs appropriately
· Did not recognize the potential for price changes from the time the budget was finalized
· Assumed, as the project developed, that more would be known about the project than was known at the time the budget was established
The last issue—of project information availability—typically causes most project budget issues.
In general, the design contingency should be used
· To resolve unforeseen issues during the initial period of design
· To provide balance between the scope and initial budget if problems occur, thus eliminating “cost cutting” that can reduce both the scope and the quality of the project
· To enhance the project as recommended by the architect and agreed upon by the owner during the design phase to eliminate scope creep
Cost estimation is more of an art than a science. Seek advice, when needed, from a cost consultant or CM during the design and estimating phase.
After the design is finalized and as the architect is creating construction documents, if any project price issues arise, the owner should use the outside estimator or CM to assist the architect in valuing the cost of the work. During this phase, the design contingency should correct any budget deficiencies or unknowns—again, only with the owner’s approval.
Once the documents are complete, use of the design contingency should vary by delivery method.
Design-bid-build
The remaining contingency should revert to the owner to cover changes in the work that the contractor will identify. It can be used during the bidding phase to allow the architect flexibility in review and approval of submittals as well to accommodate for changes or problems identified in the documents by the bidders.
Design-build
If the design contingency is not fully used, it can either be returned to the owner to be used in managing the owner’s contingency or can be transferred (by contract) to the contractor’s contingency for the completion of the project.
CM/GC
In CM/GC delivery, the most flexible of the three basic delivery methods, the design contingency can be extended into the construction phase. Here, the contingency should be used to give the architect enough flexibility to work out design issues during construction.
Effective management of the design contingency
When using a design contingency, the owner should appropriate approximately 20 percent in the design phase, 30 percent in the design development phase, and 50 percent or less in the construction document phase of the original amount of design contingency. This should be spelled out in the contract between the owner and the architect or design-builder.
When the design contingency is managed properly, the owner is involved in the decision making of the project and can address all project needs while also encouraging the architect to pursue environmental design, sustainability of materials, and other intangible elements of a project. It gives the designer flexibility to explore ideas that will add value to the owner as well as the ability to complete project scope, all within an approved budget.
A contingency is a predetermined amount or percentage of the contract held for unpredictable changes in the project. A contingency is a helpful tool that financially prepares owners for budget escalations. Contracts provide for contingencies to pay for unknown conditions such as price escalation of a product; design changes in scope or due to errors and omissions; or necessary construction changes that are realized on site during construction. If managed properly, a contingency can provide a safeguard for the designer, contractor, and owner to complete the project on budget. Contingency management is as important as the decision of the amount of a contingency.
Why A Contingency Allowance?
The Architect’s Handbook of Professional Practice clarifies a contingency allowance as the amount, or percentage, included in the project budget to cover unpredictable changes in the work or items of work. It serves three core purposes:
· To account for errors and omissions in the construction documents
· To modify or change the scope of the project
· To pay for unknown conditions
Each project includes designer’s, owner’s, and construction contingencies, all with the same objective: to complete the project on budget. Each type addresses different aspects of the project.
The owner’s contingency
There is no such thing as a one-size-fits-all amount for the owner’s contingency. Applying a standard amount to each project can lead to cost overruns, accusations, and litigation. It is highly recommended that owners develop an internal process to evaluate project contingency needs. It is important to adequately establish an allowance of the right size, neither too low nor too high.
It is nearly impossible to produce a perfect set of construction documents, leaving room for errors and omissions. Frankly, it is amazing how few errors and omissions are in any given set of documents. In my observation, most errors and omissions amount to less than 5 percent of a project’s budget. An owner’s program inevitably changes, if only slightly, during the life of a project, and changes or modifications to the scope of work probably occur in response to programmatic changes. The contingency is one way to prepare for changes in scope or errors and omissions.
Another aspect important to the owner’s contingency is to account for risk. Risk is created when some aspects of the project are unknown or when certain project elements are likely to cause concern.
A case in point: the Utah State Capitol
The level of risk depends on the number of unknowns when the project is budgeted and/or any project-specific issues such as the prospect of political entanglements, as noted in the Utah State Capitol project.
In this case, the owner’s contingency was based on the users’ (state legislature’s and executive branch’s) needs and the volatility of the project program. Before selecting the architect and the construction manager (CM), the owner (the Architect of the Capitol) carefully defined the project scope using project definition documents. Based on these documents, the Architect of the Capitol determined 3 percent as the factor for the program/design portion of the contingency.
The soil was fully identified in previous explorations, so by the time the guaranteed maximum price (GMP) was presented, unknown conditions had been greatly reduced and 2 percent was an adequate contingency for the risk portion. The owner added 1 percent to account for possible political factors. The total owner contingency, therefore, was 6 percent (3 percent possible scope changes + 2 percent risk + 1 percent politics).
Next steps: Good contingency management
Once the owner determines the contingency, the next step is to manage it appropriately. All three parties—owner, contractor, and architect—may view the contingency differently, causing management concerns. The issues can be limited if all parties understand the purpose of the contingency and how it relates to their respective roles in the project.
Contingency funds are to be used, first, to complete the scope or deal with unknown conditions. Many owners make the mistake of adding scope with their contingency. Architects should make sure the documents are as complete as possible and understand that the contingency is not a method for addressing late design decisions.
The owner’s primary management risk is from the contractor. Once the contract is signed and the work begins, the creation of change orders is the most contentious act on any construction project. This is where hurt feelings develop and where litigation stems from. Owner contingency not managed properly during construction can result in cost overruns and unnecessary losses.
Documenting the change-order process
When a contractor receives a change-order fee equal to or less than the fee percentage they are earning for the project, they have little or no incentive to scrutinize the subcontractor’s change orders. It is difficult for anyone but the contractor to determine the price of a change order. Change orders can erode the contingency a little at a time unless the owner requires the CM or the contractor to provide consistent documentation.
The owner should establish a process to monitor the contractor to ensure that each change order is properly reviewed. A proposed change order (PCO) is a way to document this process. It gives everyone a chance to review the requested change. The PCO should state that all affected subcontractors have reviewed it. Once signed, the change-order amount is the only cost associated with that specific work. No additional cost can be presented to the owner. If there are additional costs, the contractor can use the contingency to pay for them, but not the owner.
A construction change directive (CCD) can be used when time is critical, the team knows the change will occur, and it is just a matter of determining the cost. This process should be priced as if it were a PCO and recorded in a PCO log.
The Construction Contingency
It is not unusual for a contractor to need to move a wall or an opening or to otherwise modify plans for a host of reasons. The construction contingency allows this type of flexibility, and the owner should not view it as lost cost but as a tool to complete the project within the budget. The use of a contingency for the contractor’s needs varies with the type of delivery method.
Design-bid-build
The contingency is most difficult to manage in the design-bid-build process. In fact, it is nearly impossible to manage with full control, due in part to the bidding process. The contractor who makes the most mistakes in the bidding process is typically low and may or may not have held onto enough contingency to complete the project. Therefore, the construction contingency should be higher for design-bid-build. One way to better handle this situation is to insert a contingency amount into the bid documents or tell the bidders in the bid documents that a contingency will be negotiated at the time of award.
Design-build
Depending upon how the design-build delivery is organized, the contingency can be negotiated with the contractor as a percentage of the work or as a lump sum. Design-build contingency structures depend on contractor selection, whether based on a bid or on a GMP determined during a qualifications-based selection (QBS) process. When determining a contingency for the contractor, the owner should consider the project’s level of risk. A range of 5 percent to 10 percent is common, based on the level of risk, difficulty, and complexity the contractor will face. The contractor should have full control of the contingency and should be able to use it as needed. Proper management would require the contractor to give the owner a quarterly report of how much of the contingency has been used and for what purpose. This level of accountability will keep everything on the up and up, especially in a public project.
CM/GC
The CM or general contractor (CM/GC) delivery methods are flexible and provide an excellent opportunity to work with the contractor to deal with a contingency. The contingency can be established in a number of ways. The CM or GC is typically selected using a QBS selection process involving a fee-based proposal. It can also include submittal of a management plan, schedule, and general conditions. The owner can request that the management plan include a budget estimate for the project; within the budget estimate, the owner can stipulate a healthy contingency amount based on risk assessment, communication with the contractor, and/or looking at similar projects within the industry.
Any remaining contingency is the owner’s, not the contractor’s. This gives the contractor incentive to use the contingency responsibly. The contract should require periodic reviews of the contingency to evaluate levels of risk and provide information regarding the release of the contingency back to the owner. This should be a mutually agreed-upon concept. The CM or GC should assess their risk on the job throughout the project. It makes little to no sense for the contractor to hold more contingency than needed. Both of these management tools—the review of the contract and the release of unused funds—should be spelled out clearly in the contract and understood by both parties.
Design Contingency
The design contingency amount usually ranges from 5 percent to 10 percent of the overall construction cost. The owner should include this cost directly in the project budget. The design contingency should not be created by reducing the project budget by 5 percent to 10 percent but should be an additional amount that the owner holds for the architect’s use to ensure that all desired scope is covered.
As the project evolves, the contingency is drawn upon by the owner and added to the project. This should be a process of checks and balances in which both owner and architect work together to determine when to use the contingency.
The design contingency should not be used to accomplish the original scope of the project unless it is clear to all concerned that the original budget
· Did not address all project needs appropriately
· Did not recognize the potential for price changes from the time the budget was finalized
· Assumed, as the project developed, that more would be known about the project than was known at the time the budget was established
The last issue—of project information availability—typically causes most project budget issues.
In general, the design contingency should be used
· To resolve unforeseen issues during the initial period of design
· To provide balance between the scope and initial budget if problems occur, thus eliminating “cost cutting” that can reduce both the scope and the quality of the project
· To enhance the project as recommended by the architect and agreed upon by the owner during the design phase to eliminate scope creep
Cost estimation is more of an art than a science. Seek advice, when needed, from a cost consultant or CM during the design and estimating phase.
After the design is finalized and as the architect is creating construction documents, if any project price issues arise, the owner should use the outside estimator or CM to assist the architect in valuing the cost of the work. During this phase, the design contingency should correct any budget deficiencies or unknowns—again, only with the owner’s approval.
Once the documents are complete, use of the design contingency should vary by delivery method.
Design-bid-build
The remaining contingency should revert to the owner to cover changes in the work that the contractor will identify. It can be used during the bidding phase to allow the architect flexibility in review and approval of submittals as well to accommodate for changes or problems identified in the documents by the bidders.
Design-build
If the design contingency is not fully used, it can either be returned to the owner to be used in managing the owner’s contingency or can be transferred (by contract) to the contractor’s contingency for the completion of the project.
CM/GC
In CM/GC delivery, the most flexible of the three basic delivery methods, the design contingency can be extended into the construction phase. Here, the contingency should be used to give the architect enough flexibility to work out design issues during construction.
Effective management of the design contingency
When using a design contingency, the owner should appropriate approximately 20 percent in the design phase, 30 percent in the design development phase, and 50 percent or less in the construction document phase of the original amount of design contingency. This should be spelled out in the contract between the owner and the architect or design-builder.
When the design contingency is managed properly, the owner is involved in the decision making of the project and can address all project needs while also encouraging the architect to pursue environmental design, sustainability of materials, and other intangible elements of a project. It gives the designer flexibility to explore ideas that will add value to the owner as well as the ability to complete project scope, all within an approved budget.
The Basics of Design-Assist Contracting
SUMMARY
Design-assist contracting is a construction management method to improve efficiency. It is most commonly used when a fabrication or building method requires a unique set of trade skills. Design-assist contracting is best suited for design-build or construction management at risk (CM@R) projects in which the architect and owner work with tradespeople to develop a budget and project schedule for a unique material or construction application, such as reproducing historic windows or finishing plaster walls.
THE STATUS QUO
Building materials, technologies, and construction techniques continue to change and become more complex, often leaving tradespeople and manufacturers the keepers of information. As a result, the construction industry has many experts and consultants to help architects and builders transcend the intricacies of building with unfamiliar products. The current process, however, can repeat steps and produce inefficiencies. Design-assist contracting can be more streamlined and effective when project aspects require high levels of specialty.
THE DESIGN-ASSIST PROCESS
There are four steps in design-assist contracting:
1. Formulate a budget.
2. The architect, owner, and contractor meet to review the project and determine aspects that are design-assist candidates. This list should include all complex building situations, critical project elements, or areas where a subcontractor or tradesperson is better versed on the subject than any member of the core team.
3. Issue a request for qualifications (RFQ) and request for proposals (RFP) for each of the specific design-assist project portions. When issuing the RFP and RFQ, be sure to include the project budget and scope of services required.
4. Identify a short list of subcontractors from the RFQ and RFP submissions. Ask those on the short list to develop a project management plan that includes their won budget and scheduling.
Finally, choose a trade subcontractor for each design-assist portion of the project. With the trade subcontractor now part of the team, the architect and the tradesperson can work together to finalize specifications. This process helps the architect develop documents that can be used for as-built documents and documents for other trade subcontractors to use if the design-assist project affects their work.
As more information is learned, the owner may need to make critical decisions regarding the cost and the commitment of the trade subcontractor. This may include some budget modifications.
RECOMMENDATIONS
Before proceeding with design-assist contracting, the owner must clearly define the scope of the project and design priorities and communicate these to the design and construction team.
Design-assist contracting has been successfully used for
· Exterior enclosure systems that are stone and highly detailed
· Terra cotta, both old and new
· Historic lighting restoration and replication
· Custom windows for new or historic applications
· Decorative finishes, painting, fabrics, and plaster
· Custom furniture
By using the methods described above, the owner, architect, and contractor should be able to deliver a project on schedule, with fewer requests for information and fewer changes.
Design-assist contracting is a construction management method to improve efficiency. It is most commonly used when a fabrication or building method requires a unique set of trade skills. Design-assist contracting is best suited for design-build or construction management at risk (CM@R) projects in which the architect and owner work with tradespeople to develop a budget and project schedule for a unique material or construction application, such as reproducing historic windows or finishing plaster walls.
THE STATUS QUO
Building materials, technologies, and construction techniques continue to change and become more complex, often leaving tradespeople and manufacturers the keepers of information. As a result, the construction industry has many experts and consultants to help architects and builders transcend the intricacies of building with unfamiliar products. The current process, however, can repeat steps and produce inefficiencies. Design-assist contracting can be more streamlined and effective when project aspects require high levels of specialty.
THE DESIGN-ASSIST PROCESS
There are four steps in design-assist contracting:
1. Formulate a budget.
2. The architect, owner, and contractor meet to review the project and determine aspects that are design-assist candidates. This list should include all complex building situations, critical project elements, or areas where a subcontractor or tradesperson is better versed on the subject than any member of the core team.
3. Issue a request for qualifications (RFQ) and request for proposals (RFP) for each of the specific design-assist project portions. When issuing the RFP and RFQ, be sure to include the project budget and scope of services required.
4. Identify a short list of subcontractors from the RFQ and RFP submissions. Ask those on the short list to develop a project management plan that includes their won budget and scheduling.
Finally, choose a trade subcontractor for each design-assist portion of the project. With the trade subcontractor now part of the team, the architect and the tradesperson can work together to finalize specifications. This process helps the architect develop documents that can be used for as-built documents and documents for other trade subcontractors to use if the design-assist project affects their work.
As more information is learned, the owner may need to make critical decisions regarding the cost and the commitment of the trade subcontractor. This may include some budget modifications.
RECOMMENDATIONS
Before proceeding with design-assist contracting, the owner must clearly define the scope of the project and design priorities and communicate these to the design and construction team.
Design-assist contracting has been successfully used for
· Exterior enclosure systems that are stone and highly detailed
· Terra cotta, both old and new
· Historic lighting restoration and replication
· Custom windows for new or historic applications
· Decorative finishes, painting, fabrics, and plaster
· Custom furniture
By using the methods described above, the owner, architect, and contractor should be able to deliver a project on schedule, with fewer requests for information and fewer changes.
Understanding Fixed Limit of Construction Cost
SUMMARY
Fixed limit of construction cost (FLCC) is a project management tool which all parties work together to complete a project within a predetermined budget. The FLCC defines the budget for each member of the project team: architect, owner, and contractor. Using the FLCC can ensure a collaborative working relationship.
FLCC in Practice
The FLCC works best in a collaborative team setting. It is best applied to design-build and construction management at risk delivery methods.
Include an explanation of the FLCC process in the RFQ or RFP. Once the FLCC has been discussed and agreed upon have the architect and contractor sign to indicate they understand the parameters of, and are willing to enter, an FLCC arrangement.
The owner should be cautious when establishing the budget for an FLCC. If it is set too low it’s difficult to meet the project goal and scope. The owner wants to set a price and project program that meets all project requirements. Project Definition, a tool that utilizes design guidelines and imperatives to identify all aspects of the project including program, square footage, aesthetic needs, and building materials, is ideal in this situation.
Using the FLCC
When using the FLCC, the owner should require budget and scope reviews with the architect and the contractor. Reviews should be held at the end of schematic design, design development, and toward the end of construction documents phases. Once construction begins the owner, contractor, and architect should attend all meetings where the budget is discussed.
The contract amount can be equal to or less than the FLCC but can not exceed it unless the owner approves the change in writing. If the owner decides to make a change to the project’s scope the budget and FLCC should adjust accordingly. At that time, the FLCC is retired and the contract is adjusted to reflect the new budget.
The owner shall
· Review recommendations and suggestions from the architect and the contractor
· Work with the architect and the contractor to reduce the scope as required to conform to the FLCC or, if necessary, increase the FLCC to maintain the scope
The contractor shall
· As required by the owner, prepare estimates and analysis based on the budget
· Provide constructability reviews and provide information to the architect on ways to accomplish the same design or concept using different materials, construction techniques, and methods
· Perform estimates as needed by the architect and provide information to the architect in a format that is understandable
· Provide all above said services until the owner defines the program in compliance with the FLCC
The architect shall
· Design based on the program and imperatives so the FLCC can be met
· Work with the owner and the contractor to create a project that is within the FLCC
Fixed limit of construction cost (FLCC) is a project management tool which all parties work together to complete a project within a predetermined budget. The FLCC defines the budget for each member of the project team: architect, owner, and contractor. Using the FLCC can ensure a collaborative working relationship.
FLCC in Practice
The FLCC works best in a collaborative team setting. It is best applied to design-build and construction management at risk delivery methods.
Include an explanation of the FLCC process in the RFQ or RFP. Once the FLCC has been discussed and agreed upon have the architect and contractor sign to indicate they understand the parameters of, and are willing to enter, an FLCC arrangement.
The owner should be cautious when establishing the budget for an FLCC. If it is set too low it’s difficult to meet the project goal and scope. The owner wants to set a price and project program that meets all project requirements. Project Definition, a tool that utilizes design guidelines and imperatives to identify all aspects of the project including program, square footage, aesthetic needs, and building materials, is ideal in this situation.
Using the FLCC
When using the FLCC, the owner should require budget and scope reviews with the architect and the contractor. Reviews should be held at the end of schematic design, design development, and toward the end of construction documents phases. Once construction begins the owner, contractor, and architect should attend all meetings where the budget is discussed.
The contract amount can be equal to or less than the FLCC but can not exceed it unless the owner approves the change in writing. If the owner decides to make a change to the project’s scope the budget and FLCC should adjust accordingly. At that time, the FLCC is retired and the contract is adjusted to reflect the new budget.
The owner shall
· Review recommendations and suggestions from the architect and the contractor
· Work with the architect and the contractor to reduce the scope as required to conform to the FLCC or, if necessary, increase the FLCC to maintain the scope
The contractor shall
· As required by the owner, prepare estimates and analysis based on the budget
· Provide constructability reviews and provide information to the architect on ways to accomplish the same design or concept using different materials, construction techniques, and methods
· Perform estimates as needed by the architect and provide information to the architect in a format that is understandable
· Provide all above said services until the owner defines the program in compliance with the FLCC
The architect shall
· Design based on the program and imperatives so the FLCC can be met
· Work with the owner and the contractor to create a project that is within the FLCC
Benefits of a Satisfaction Fee in Public Architecture
SUMMARY
A satisfaction fee differs from a performance-based bonus in that it is a percentage of the construction manager’s overall compensation that is held until project completion. It is earned along with other fees for completing the project. Used successfully by contractors to offset the desire for cost cutting in a design-build or construction management contract, the satisfaction fee has proven to enhance communication and collaboration throughout the design and construction process.
Concept
A satisfaction fee is an incentive an owner can invoke to encourage open communication and collaboration on the part of the architect and contractor. A satisfaction fee is based on three core concepts. When viewed separately, these concepts work in opposition, but when performed together, they can add to the success of a project.
Shared Savings Clause—A shared savings clause found in most design-build contracts is simply a way for a construction company to reduce quality while increasing profit. This type of fee is a negative incentive to the architects who work hard to design a building that is on budget or to a program. Owners, out of a desire to save money, are then easily persuaded to change the design to a less-expensive and usually lower-quality item to save money. Because the contractor proposed the savings, he shares in the savings (60 percent owner, 40 percent contractor, nothing to the architect) and increases his profits. This process develops distrust for the contractor in the mind of the architect and increases greed in the contractor, who presents changes to an uneducated owner to boost profits. And, in the long run the owner will be dissatisfied in both the architect and the contractor, who built a lower-quality building.
Communications—Typically the owner, contractor, and architect only communicate at weekly job-site meetings. After these meetings, all go their own way. The other choice is written communication, which all parties use to protect themselves from the possibility of litigation. Because communication is not as open as it once was, the situation is ripe for misunderstandings and disputes. The contractor is focused on building the project. The architect has other projects to complete, and construction administration is typically not his or her highest priority. The owner is focused on the project and wants to get it done. Poor communication combined with differing priorities creates anxiety.
The contractor can get frustrated with the architect who is busy working on other things and falling behind on the contractor’s needs. The architect can get frustrated because of changes, proposed by the contractor and accepted by the owner, that have lowered the quality of the project. The owner can become frustrated with change orders and schedule changes and may not understand why the project has decreased in importance for the involved parties. This scenario often results in increased written communication where positions are taken, resulting in poor communication, anxiety, and possible litigation.
Collaboration—To achieve true collaboration all parties must have a stake in what everyone else is doing. They must want to see the other person succeed because they understand that they themselves will only achieve success through that of others. Because feelings are reciprocal, we tend to give what we get, and get what we give. True collaboration rarely takes place in the construction industry. This lack of collaboration begins with the negotiation of the contract and the discussion of remedies, the usual result being lawsuits and arguments. Things have reached the point that on most projects it is no longer a question of if the project will go to court, rather when the contractor files the lawsuit. This attitude fosters an environment of protectionism and fear by all parties. No one is free to act with complete integrity since all must worry about the penalty that may be imposed.
Although having these three elements in any contract does not necessarily foster success when they are viewed separately, when viewed together as a model satisfaction fee, success is possible.
Solution
The concept of a satisfaction fee grew from the desire to have a highly collaborative team from start to finish.
To accomplish this goal, a special environment must be created to allow all parties to feel comfortable speaking openly and honestly. Communication is critical from the very beginning. A culture of open, constructive communication needs to be formed early in the project and should not be implemented during the heat of the battle. There must be a specific time and place where all team members can focus on the big picture (30,000-foot elevation view) of the project. Although a seemingly easy concept, putting theory to practice is more difficult. The question is how to make it happen and happen in intervals that are productive to the project.
It is critical during contract negotiations to remove where possible any and all clauses that foster a lack of trust or create anxiety in team members. The shared saving clause is immediately identified as one that fosters a lack of trust among the architect, contractor, and the owners. In discussing this problem, it became evident that money is too great a motivator. Rather than rewarding negative behavior, which results in lower quality, the desire was to find a solution that would motivate the right type of action (communication and collaboration). At first the team explored the idea of a bonus; however, a bonus implies a penalty for non-performance. It also is a negative because it introduces a reward for doing what they had all ready agreed to do for a fee. A fee on the other hand, has to be earned and the money set-aside for this intended use. If it is not earned, then there is no payment. Not a penalty or argument. The final decision was to identify how this fee should be earned.
The satisfaction fee then became a part of the compensation package for the architect and/or the contractor.
Implementation
A satisfaction fee remains a new idea for construction companies and architects. We recognize that education and training are required to understand and embrace the concept. Once educated, contractor and architect need to become comfortable with the idea that the owner has the right of judgment based on his or her satisfaction with how the project progresses. That concept, based on the owner’s satisfaction, determined how much is to be awarded to each. For a satisfaction fee to work, the owner must have a desire for collaboration and communication, which is the first step; there could be no collaboration if this arrangement were dictated. Thus the implementation became a part of the contractual negotiations to which each party ultimately agreed.How did you determine the method below? You say it is a new process that people are getting used to and then below is the break down of fees, how were the fees determined? Did you speak to architects, survey people, compromise…?
To begin the negotiations we asked the following questions of the contractors and architects:
How much of your fee would you put at risk?
To start we recommended the contractor determine what he or she would have made in shared savings. For the architects we discussed an amount they would feel good about earning or losing from their fee. Ultimately, we found out that the amounts were not large. The amount did not matter. They needed to be enough to bring each of them to the table and that is all. For estimating purposes the range should be between 0.5 percent and 1 percent of the contract amount.
How would you like to be judged?
All agreed quickly on five basic elements:
· Budget and recovery
· Schedule and recovery
· Quality
· Safety
· Owner satisfaction
These elements were then ranked by most important to least important. A scoring breakdown was developed that totaled 100. For example, budget and schedule were determined to be most important and received 30 points each, quality was allotted 20 points, safety was given 10 points, and owner satisfaction was agreed to be worth 10 points as well.
The standard breakdown for payment is as follows:
91 to 100 points = full payment
81 to 90 points = 90% payment
71 to 80 points = 80% payment
61 to 70 points = 70% payment
51 to 60 points = 60% payment
below 50 points = no payment
If the architect or the contractor lost a payment or portion of payment for poor performance or unsatisfactory activities, they have one period to solve the problem and earn it back. In all cases owner judgment is final.
How often should reviews be conducted?
Through our negotiations it was decided that quarterly reviews were work best. Quarterly reviews allow enough time to notice trends, to correct problems, and to have meaningful discussions. Thus the fee is divided by the number of quarters with in the project and the result is the amount for distribution each quarter.
What is the environment that works the best?
All agreed that it would not be done on the construction site, in an office, or at lunch. Ultimately all agreed to hold individual meetings and then meet as a group over lunch (where we all took turns buying each other lunch) and discussed the review.
What if the owner decides not to participate?
If the owner fails to attend or does not participate fully in the process, the fee should still be awarded to the architect and the contractor without discussion.
Results
The results, which have been remarkable, include the fact that the team
· Collaborated fully—there was no fear of acting with full integrity and speaking openly and admitting fault or asking for support from the other team member
· Worked together as one unit to help each other succeed; no one was greater than the project
· Communicated in an open, honest, and forthright way
· Completed a very complex project without litigation, on budget, and on schedule
Currently we are working to complete a $200 million renovation, and similar results are being achieved; the entire fee has been awarded.
A satisfaction fee differs from a performance-based bonus in that it is a percentage of the construction manager’s overall compensation that is held until project completion. It is earned along with other fees for completing the project. Used successfully by contractors to offset the desire for cost cutting in a design-build or construction management contract, the satisfaction fee has proven to enhance communication and collaboration throughout the design and construction process.
Concept
A satisfaction fee is an incentive an owner can invoke to encourage open communication and collaboration on the part of the architect and contractor. A satisfaction fee is based on three core concepts. When viewed separately, these concepts work in opposition, but when performed together, they can add to the success of a project.
Shared Savings Clause—A shared savings clause found in most design-build contracts is simply a way for a construction company to reduce quality while increasing profit. This type of fee is a negative incentive to the architects who work hard to design a building that is on budget or to a program. Owners, out of a desire to save money, are then easily persuaded to change the design to a less-expensive and usually lower-quality item to save money. Because the contractor proposed the savings, he shares in the savings (60 percent owner, 40 percent contractor, nothing to the architect) and increases his profits. This process develops distrust for the contractor in the mind of the architect and increases greed in the contractor, who presents changes to an uneducated owner to boost profits. And, in the long run the owner will be dissatisfied in both the architect and the contractor, who built a lower-quality building.
Communications—Typically the owner, contractor, and architect only communicate at weekly job-site meetings. After these meetings, all go their own way. The other choice is written communication, which all parties use to protect themselves from the possibility of litigation. Because communication is not as open as it once was, the situation is ripe for misunderstandings and disputes. The contractor is focused on building the project. The architect has other projects to complete, and construction administration is typically not his or her highest priority. The owner is focused on the project and wants to get it done. Poor communication combined with differing priorities creates anxiety.
The contractor can get frustrated with the architect who is busy working on other things and falling behind on the contractor’s needs. The architect can get frustrated because of changes, proposed by the contractor and accepted by the owner, that have lowered the quality of the project. The owner can become frustrated with change orders and schedule changes and may not understand why the project has decreased in importance for the involved parties. This scenario often results in increased written communication where positions are taken, resulting in poor communication, anxiety, and possible litigation.
Collaboration—To achieve true collaboration all parties must have a stake in what everyone else is doing. They must want to see the other person succeed because they understand that they themselves will only achieve success through that of others. Because feelings are reciprocal, we tend to give what we get, and get what we give. True collaboration rarely takes place in the construction industry. This lack of collaboration begins with the negotiation of the contract and the discussion of remedies, the usual result being lawsuits and arguments. Things have reached the point that on most projects it is no longer a question of if the project will go to court, rather when the contractor files the lawsuit. This attitude fosters an environment of protectionism and fear by all parties. No one is free to act with complete integrity since all must worry about the penalty that may be imposed.
Although having these three elements in any contract does not necessarily foster success when they are viewed separately, when viewed together as a model satisfaction fee, success is possible.
Solution
The concept of a satisfaction fee grew from the desire to have a highly collaborative team from start to finish.
To accomplish this goal, a special environment must be created to allow all parties to feel comfortable speaking openly and honestly. Communication is critical from the very beginning. A culture of open, constructive communication needs to be formed early in the project and should not be implemented during the heat of the battle. There must be a specific time and place where all team members can focus on the big picture (30,000-foot elevation view) of the project. Although a seemingly easy concept, putting theory to practice is more difficult. The question is how to make it happen and happen in intervals that are productive to the project.
It is critical during contract negotiations to remove where possible any and all clauses that foster a lack of trust or create anxiety in team members. The shared saving clause is immediately identified as one that fosters a lack of trust among the architect, contractor, and the owners. In discussing this problem, it became evident that money is too great a motivator. Rather than rewarding negative behavior, which results in lower quality, the desire was to find a solution that would motivate the right type of action (communication and collaboration). At first the team explored the idea of a bonus; however, a bonus implies a penalty for non-performance. It also is a negative because it introduces a reward for doing what they had all ready agreed to do for a fee. A fee on the other hand, has to be earned and the money set-aside for this intended use. If it is not earned, then there is no payment. Not a penalty or argument. The final decision was to identify how this fee should be earned.
The satisfaction fee then became a part of the compensation package for the architect and/or the contractor.
Implementation
A satisfaction fee remains a new idea for construction companies and architects. We recognize that education and training are required to understand and embrace the concept. Once educated, contractor and architect need to become comfortable with the idea that the owner has the right of judgment based on his or her satisfaction with how the project progresses. That concept, based on the owner’s satisfaction, determined how much is to be awarded to each. For a satisfaction fee to work, the owner must have a desire for collaboration and communication, which is the first step; there could be no collaboration if this arrangement were dictated. Thus the implementation became a part of the contractual negotiations to which each party ultimately agreed.How did you determine the method below? You say it is a new process that people are getting used to and then below is the break down of fees, how were the fees determined? Did you speak to architects, survey people, compromise…?
To begin the negotiations we asked the following questions of the contractors and architects:
How much of your fee would you put at risk?
To start we recommended the contractor determine what he or she would have made in shared savings. For the architects we discussed an amount they would feel good about earning or losing from their fee. Ultimately, we found out that the amounts were not large. The amount did not matter. They needed to be enough to bring each of them to the table and that is all. For estimating purposes the range should be between 0.5 percent and 1 percent of the contract amount.
How would you like to be judged?
All agreed quickly on five basic elements:
· Budget and recovery
· Schedule and recovery
· Quality
· Safety
· Owner satisfaction
These elements were then ranked by most important to least important. A scoring breakdown was developed that totaled 100. For example, budget and schedule were determined to be most important and received 30 points each, quality was allotted 20 points, safety was given 10 points, and owner satisfaction was agreed to be worth 10 points as well.
The standard breakdown for payment is as follows:
91 to 100 points = full payment
81 to 90 points = 90% payment
71 to 80 points = 80% payment
61 to 70 points = 70% payment
51 to 60 points = 60% payment
below 50 points = no payment
If the architect or the contractor lost a payment or portion of payment for poor performance or unsatisfactory activities, they have one period to solve the problem and earn it back. In all cases owner judgment is final.
How often should reviews be conducted?
Through our negotiations it was decided that quarterly reviews were work best. Quarterly reviews allow enough time to notice trends, to correct problems, and to have meaningful discussions. Thus the fee is divided by the number of quarters with in the project and the result is the amount for distribution each quarter.
What is the environment that works the best?
All agreed that it would not be done on the construction site, in an office, or at lunch. Ultimately all agreed to hold individual meetings and then meet as a group over lunch (where we all took turns buying each other lunch) and discussed the review.
What if the owner decides not to participate?
If the owner fails to attend or does not participate fully in the process, the fee should still be awarded to the architect and the contractor without discussion.
Results
The results, which have been remarkable, include the fact that the team
· Collaborated fully—there was no fear of acting with full integrity and speaking openly and admitting fault or asking for support from the other team member
· Worked together as one unit to help each other succeed; no one was greater than the project
· Communicated in an open, honest, and forthright way
· Completed a very complex project without litigation, on budget, and on schedule
Currently we are working to complete a $200 million renovation, and similar results are being achieved; the entire fee has been awarded.
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