Construction Manager-at-Risk Project Delivery for Highway Programs (2010)

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5BACKGROUND The Construction Manager-at-Risk (CMR) (also termed Con- struction Manager/General Contractor or CM/GC in several states’ enabling legislation) project delivery method is an integrated team approach to the planning, design, and con- struction of a project; to control schedule and budget; and to ensure quality for the project owner. The team consists of the owner; the designer, who could be an in-house engineer; and the at-risk construction manager. A CMR contract includes preconstruction and construction services. The CMR is usu- ally selected early in the design process and collaborates with the owner and designer during all phases of the project, includ- ing but not limited to planning, design, third-party coordina- tion, constructability reviews, cost engineering reviews, value engineering, material selection, and contract package devel- opment. The CMR and the designer commit to a high degree of collaboration. This is especially vital when the agency is using CMR to implement new construction technologies. A guaranteed maximum price (GMP) is established when the design of a specific feature of work is nearly complete (progressive GMP) or when the entire design is at a point where the CMR can reduce the magnitude of necessary contingencies. The CMR warrants to the owner that the project will be built at a price not to exceed the GMP. The CMR thus assumes the risk of meeting the GMP. After design is complete, the CMR acts as the general contractor during the project construction phase. Strang (2002) describes the relationship change like this: “The construction manager is an agent of the Owner in managing the design process, but takes the role of a vendor when a total cost guarantee is given.” A number of state and local transportation agencies have undertaken or experimented with CMR project delivery, including the Alaska, Arizona, Florida, Oregon, and Utah departments of transportation (DOTs). Additionally, Maricopa, Pima, Pinal, and other Arizona counties as well as the Ari- zona cities of Flagstaff, Glendale, Phoenix, and Tempe have implemented CMR project delivery on major transportation projects. The Michigan and Rhode Island DOTs have over- seen CMR projects for local airport and seaport authorities. The California DOT is looking at CMR as a potential project delivery method and has completed a study of the method (Trauner Consulting Services 2007). CMR is widely used in the airport, transit, and water/wastewater industries, as well as in the building construction industry where it first evolved. Several transit megaprojects in Utah and Oregon have been successfully delivered using CMR (Touran et al. 2009b). Large and small airport projects in Colorado, Florida, Georgia, Massachusetts, Ohio, Tennessee, and Texas have also been delivered using CMR (Touran et al. 2009a). In a 2008 presentation to the Western Association of State Highway and Transportation Officials by Jane Lee of the Oregon DOT (ODOT), she expresses the essential moti- vation for this synthesis by listing Oregon’s six reasons for using CMR project delivery: 1. Collaboration and cost control; 2. Concurrent execution of design and construction; 3. Well-suited for complex projects, tight time frames; 4. Owner, A/E [architect/engineer], CM/GC [CMR] have mutual project goals; 5. Risk management: Team identifies—Owner controls; and 6. Collaborative process minimizes risk of construction and design disputes (Lee 2008). Lee uses the words “collaboration” and “control” twice in her description. The Utah DOT (UDOT) confirms Lee’s focus on collaboration and control and adds “to introduce innovation and new technologies” as another reason for using CMR (Alder 2007). Previous research has found that owners in the transit and airport sectors choose CMR project delivery for the same three reasons (Touran et al. 2009a,b). The aspect of owner “control” usually extends to the three salient aspects of project delivery: control over the details of design (i.e., quality), cost control, and schedule control (Scott et al. 2006). One early study of alternative project delivery methods found that owners’ main goals for using design-build (DB) project delivery were compressing the schedule and control- ling cost (Songer and Molenaar 1996). However, another study found that DOTs were often reluctant to use DB project delivery because they lost control over the details of design (Scott et al. 2006). Taking the essentials from these four studies and combining them with Lee’s reasons for using CMR project delivery leads to the inference that CMR may furnish a project delivery method that satisfies owners’ need for control over cost and schedule without losing control over the design. Additionally, the collaborative nature of CMR may provide added value through the fundamental structure of the contractual relationships. One report stated that this value is usually in the form of risk reduction to the owner: The collaborative approach of CM/GC also reduces risks to the owner. The CM/GC firm becomes an ally of the owner through independent evaluation of project costs, schedule, and overall CHAPTER ONE INTRODUCTION

construction performance, including similar evaluation of changes. Additionally, the structure of the CM/GC process offers a system of checks and balances to assure that owner’s decisions and the decisions of the A/E are prudent (Gambatese et al. 2002). Introducing new technologies is a means to leverage the collaborative atmosphere by bringing the owner, designer, and builder together to create the means and methods neces- sary to implement something new in the given market. It also allows the agency to ensure that the designer and builder are qualified and perhaps experienced with the new technology by selecting both on a basis of qualifications. Finally, the GMP process furnishes an opportunity for the agency to negotiate the allocation of specific risks before the contractor is required to commit to a price. Thus, this project delivery method becomes an option for those DOTs that may be reluctant or not legislatively authorized to implement DB (Strang 2002). This aspect is succinctly summarized by the following quotation from the transit sector: CM at-risk (or CM/GC) is assessed as more desirable than design-build on an urban light rail project because the engineer [designer] and construction contractor are carried under separate contracts. One can think of it as the engineer acting as the design agent for the owner and the CM at-risk as the owner’s construction agent, which means the owner still has a great deal of bargaining power when problems are encountered because it has not given away complete control, basically because the owner still controls the engineering (Venturato and Schroeder 2007; italics added). The previous discussion demonstrates the need for this synthesis and the potential benefits of CMR project delivery to public transportation agencies. Hence, the report will explore these and other aspects of this project delivery method. SYNTHESIS OBJECTIVE This synthesis was conceived from the need to review the nation’s experience in CMR project delivery in transportation. Therefore, the objective of this synthesis is to capture the var- ious ways in which state DOTs and other public engineering agencies are applying CMR project delivery to their highway construction projects. The synthesis will identify different approaches, models, and effective practices recognizing the differences in each of the different case study delivery methods. The synthesis will also address how the agencies in the study evaluate project characteristics and requirements to make the decision to use CMR project delivery. PROJECT DELIVERY METHODS For the past two decades, public owners have been demanding that the design and construction industries enhance quality, decrease cost, and compress the delivery period for public projects. As a result, both the owners and the industry have experimented with various forms of project delivery methods. As alternative project delivery methods have proliferated, the industry has coined various names for variations on the basic 6 themes, some of which have been codified in enabling legis- lation. For example, CMR is also called CM/GC and GC/CM in various states’ codes. The Veterans Administration calls it “construction manager as constructor (CMc)” to differentiate it from “construction manager as agent (CMa),” also called Agency CM, which is actually a management method not a project delivery method (Bearup et al. 2007). This terminology confusion makes understanding the definitions for alternative project delivery methods a substantial challenge in choosing the method most appropriate to the owner’s needs and desires, especially if an agency is new to alternative project delivery. To address the issue of varying terms of art, this synthesis uses the same set of standard project delivery definitions used in other TRB reports (Scott et al. 2006; Touran et al. 2009). These definitions will be used to communicate the technical contractual aspects of the commonly used project delivery methods. The report will not change the specific term applied to CMR in quotations cited to preserve the integrity of the information. Project delivery method is a term used to refer to all the contractual relations, roles, and responsibilities of the entities involved in a project. The Texas DOT (TxDOT) defines project delivery methods as follows: A project delivery method equates to a procurement approach and defines the relationships, roles, and responsibilities of project team members and sequences of activities required to complete a project. A contracting approach is a specific procedure used under the large umbrella of a procurement method to provide techniques for bidding, managing, and specifying a project (Walewski et al. 2001). The Associated General Contractors of America (AGC) defines the project delivery method as “the comprehensive process of assigning the contractual responsibilities for design- ing and constructing a project . . . a delivery method identi- fies the primary parties taking contractual responsibility for the performance of the work” (Project Delivery Systems for Construction 2004). The different methods are distinguished by the way the contracts between the owner, the designer, and the builder are formed and the technical relationships that evolve between each party inside those contracts. The Construction Industry Institute (CII) posits that there are really only three fundamental project delivery methods: Design-Bid-Build (DBB), DB, and CMR (“Owner’s Tool for Project Delivery . . .” 2003). Although there are a multitude of names for project delivery methods throughout the industry, CII has simplified the categorization process by focusing specifically on the contracts. Therefore, this report will focus its information in those three categories. The AGC also distinguishes between the delivery method and the manage- ment method. The management method “is the mechanics by which construction is administered and supervised” (Project Delivery Systems for Construction 2004). This function is either retained by the owner agency or is outsourced. An example of out-sourcing the management process is to hire

7an Agency CM. Theoretically any management method may be used with any delivery method. As an example, the owner may hire an Agency CM to manage a DBB, DB, or even a CMR project on its behalf. This is a common practice in the transit sector (Construction Project Management Handbook 2006; Touran et al. 2009a). The standardized definitions and a brief explanation with a graphic displaying the contractual relationships are included here to assist the reader in putting the contents of this report into proper context. Note that the lines of communication shown in the figures represent the ability to exchange infor- mation through the use of formal and informal requests for information between various entities in the project. The lines of contractual coordination designate contract requirements to exchange information and other services during design and construction. Design-Bid-Build DBB is the traditional project delivery method in which an owner either completes the design using its own design pro- fessionals or retains a designer to furnish complete design services. It then advertises and awards a separate construc- tion contract based on the completed construction documents. In either case, the owner is responsible for the details of design and warrants the quality of the construction documents to the construction contractor. Figure 1 shows that the owner is squarely situated between the designer and the builder in the project delivery process. In DBB, the owner “owns” the details of design during construc- tion and as a result is financially liable for the cost of any errors or omissions encountered in construction, called the “Spearin Doctrine” (Mitchell 1999). Public DBB projects are generally awarded on a low-bid basis. There is no contractual incentive for the builder to minimize the cost growth in this delivery system. Indeed, there can be an opposite effect. A builder who has submitted a low bid may need to look to post-award changes as a means to make a profit on the project after bidding the lowest possible margin to win the project (Scott et al. 2006). DBB projects can also be awarded on a negotiated basis and a best-value basis. In both cases, the probability that the project will be awarded to a builder who has submitted a mis- takenly low bid is reduced (Scott et al. 2006). Additionally, the motivation of the builder in both cases is to complete the project in a manner that will get it invited back to do the next negotiated contract or that will reflect well in the next best- value selection. Regardless of the award method, DBB is dis- tinguished by little builder input to the design. Thus, the owner relies on the designer alone for constructability review, if there is any, and trusts the designer to ensure that the design does not exceed the budget. Construction Manager-at-Risk CMR projects are characterized by a contract between an owner and a construction manager who will be at risk for the final cost and time of construction. In this agreement, the owner authorizes the construction manager to provide input during project design. The owner will either complete the design with its own design personnel or outsource the design work to a consultant. The UDOT does it both ways depending on project requirements. It reported that the major issue with using in-house designers is ensuring that they can commit to a design schedule in the same way as consultants. The original idea of CMR is to furnish professional manage- ment of all phases of a project’s life to an owner whose orga- nization may not have those capabilities internally (Strang 2002). CMR project delivery involves two contracts. The first is for preconstruction services during design and the second is for the construction itself. Typically, CMR contracts con- tain a provision in which the CMR stipulates a GMP above which the owner is not liable for payment if the project’s scope does not change after the GMP is established. Often these contracts include incentive clauses in which the CMR and owner can share any cost savings realized below the GMP. Some states, such as Oklahoma, take the GMP and convert it to a firm fixed-price contract and administer the construction as if it were a traditional DBB project thereafter. CMR con- tracts can contain provisions for the CMR to handle some aspects of design. For example, a CMR stormwater improve- ment project in Florida required the CMR to hire licensed design professionals and conduct a formal technical peer review of the design consultant’s construction documents (Kwak and Bushey 2000). However, most commonly, the owner retains the traditional responsibility by keeping a separate design contract and furnishing the CMR with a full set of plans and specifications upon which all construction subcontracts are based, as seen in Figure 2. According to AGC (Project Delivery Systems for Construction 2004) the defining characteristics of the CMR are the following: • The designer and the CMR hold separate contracts with the owner (as opposed to DB), and • The CMR is chosen based on criteria other than just the lowest construction cost (as opposed to DBB). Owner *Designer Builder Contracts Communication * in-house or consultant FIGURE 1 Design-bid-build (adapted from Handbook on Project Delivery 1996).

Enhanced constructability, real-time construction pricing capability, and speed of implementation are the major reasons why an owner would select the CMR method. Additionally, transportation agencies use it to implement new and innovative technologies and to create an environment of rich collaboration in which to deliver complex projects. Unlike DBB, CMR brings the builder into the design process at a stage where definitive input can have a positive impact on the project. In CMR, the construction manager essentially becomes the general contractor at the time the GMP is established. In some markets, the term Construction Manager/General Contractor (CM/GC) is used to distinguish a contract where the contractor self-performs some portion of the work from the CMR where the prime contract holder subcontracts all the construction work (Project Delivery Systems for Construction 2004). However, as both variations would conform to the contractual relationships shown in Figure 2, this report will use these terms interchangeably. The CMR can and is expected to provide realistic project cost estimates early in the project life cycle. 8 It is anticipated that after an adequate amount of design is complete to sufficiently define the project’s scope of work, the owner will enter into a contract with the CMR for providing construction services. Many states reserve the right to go out for bid if they think that the CMR’s price is not competitive (Minchin et al. 2007). There are two types of CM arrangements, namely Agency CM and CM-at-risk. This synthesis focuses strictly on CM-at-risk. In Agency CM, the CM is not contractually responsible for the project costs or schedule. Its role is purely consultative and not to be confused with the CMR who ulti- mately delivers the project within contractually set time and cost limits. Thus, Agency CM is not a project delivery method but rather a project management method (Bearup et al. 2007). Design-Build DB is a project delivery method in which the owner procures both design and construction services in the same contract from a single, legal entity referred to as the design-builder. The method typically uses request for qualifications (RFQ)/ request for proposals (RFP) procedures rather than the DBB invitation for bids procedures. There are a number of variations on the DB process, but all involve three major components. The owner develops an RFQ/RFP that describes essential project requirements in performance terms. Next, proposals are evaluated, and finally, with evaluation complete, the owner engages in some process that leads to contract award for both design and construction services. The DB entity is liable for all design and construction costs and normally provides a firm, fixed price in its proposal (Graham 1997; Ibbs et al. 2003; El Wardani et al. 2006). Figure 3 clearly shows that from the owner’s standpoint the project’s chain of responsibility is considerably simplified. As in CMR, the builder has early constructability input to the design process. As the owner no longer owns the details of Owner *Designer CM-at Risk Trade Subs Contracts Communication Contractual Coordination Requirements * in-house or consultant FIGURE 2 Construction manager-at-risk (adapted from Handbook on Project Delivery 1996). Designer Builder Owner Builder Contracts Communication Contractual Coordination Requirements FIGURE 3 Design-build (adapted from Handbook on Project Delivery 1996).

9design, its relationship with the design-builder is based on a strong degree of mutual professional trust. The design-builder literally controls this project delivery process. As a result, DB is the delivery method that has the greatest ability to compress the project delivery period and as a result is often used for “fast-track” projects (Alder 2007). Figure 4 is adapted from a FTA manual (Construction Project Management Handbook 2006) and summarizes the difference between variations on the three project delivery methods in terms of distribution of risk and control between the owner and its contractors. It places CMR on the risk/ control scale between the versions of DBB and variations of DB project delivery. The figure tracks with the Oregon and Utah DOTs reasons for using CMR cited by Lee (2008) and Alder (2007) as it shows CMR furnishing more owner control than DB, yet allowing an equitable sharing of the project risk with the contractor. Therefore, it confirms the inference that CMR may be used on projects where the owner desires a high degree of collaboration but wants to maintain control over the design and other salient aspects of the project. KEY DEFINITIONS As can be seen in the previous section, a precise definition of the common terms associated with CMR project delivery is essential to the ability to understand its advantages and disadvantages and put it in context with other project delivery methods in use by a public transportation agency. A glossary of all cogent terms is furnished at the end of this report. How- ever, to facilitate reading and understanding the synthesis key terms are defined here: • CMR contract: a contract between an owner and a construction manager who will be at risk for the final cost and time of construction. In this agreement, the owner authorizes the construction manager to provide input during project design. It may consist of two sepa- rate contracts: preconstruction services and construc- tion. It is also called Construction Manager/General Contractor (CM/GC), General Contractor/Construction Manager (GC/CM), and Construction Manager as Con- structor (CMc). This synthesis takes the approach that no matter what the specific term appears to imply, all of these designations are the same project delivery method because they involve separate design and construction contracts held by the owner and they involve the con- structor in the design process through preconstruction services. • Letter of Interest (LOI): Solicitation documents that merely ask contractors to indicate their desire to compete for a CMR without requiring them to submit a list of specific qualifications. Typically, these are used to nego- tiate a CMR contract with a GC based on the owner’s past experience with the respondents. • Requests for Qualifications (RFQ): Solicitation docu- ments requiring contractors to submit specific informa- tion on the qualifications, which may include but are not limited to the qualifications of key personnel, past experience on related projects, quality management and other plans, the details of their preconstruction services package, and other evaluation factors. RFQs do not require submission of cost or pricing information. • Requests for Proposals (RFP): Solicitation documents requiring contractors to submit specific information, which may include but are not limited to the qualifications of their key personnel, past experience on related proj- ects, quality management and other plans, the details of O w ne r Sh ar e of R isk a nd C on tro l DB-Operate-Own (Turnkey) 100% Contractor Share of Risk and Control Own Forces CM-at-Risk Design-Build DB-Operate-Maintain General Engineering Consultant CM-Agency Program Management Consultant DBB 100% 0% DB-Operate-Transfer DB FIGURE 4 Project delivery methods ranked by risk/control shares (adapted from Construction Project Management Handbook 2006).

their preconstruction services package, proposed sched- ule and cost or pricing information, as well as any other evaluation factors. • Preconstruction Services: The activities conducted by the CMR during the design phase. These include but are not limited to: – Cost estimates at predetermined stages of design development; – Preparing the schedule for the design phase, as well as a preliminary schedule for the construction phase; – Performing value engineering analysis; – Performing a constructability review; – Developing the construction logistics plan; – Preparation of [trade subcontractor] bid packages, bid evaluation, and, if required, preparation of rec- ommendations to the owner for the award of trade contracts; – Market surveys of construction materials and equip- ment that have relatively long delivery requirements; – Early purchase of . . . long-lead items (Martinez et al. 2007); and – Other services required in the contract. • Preconstruction Cost Model: A breakdown of the proj- ect’s scope of work in dollar terms. In CMR project delivery, the contractor’s first preconstruction task is typically the development of this tool in collaboration with the designer. Its purpose is to “validate the owner’s budget” (Ladino et al. 2008) and to be able to price various alternatives during design in a manner that directly reflects how and when they will be built (Van Winkle 2007). Additionally, the model evolves as the design progresses and is used to support required cost estimates (“Contract for Construction Manager at Risk Design Phase Services” 2007). • Guaranteed Maximum Price (GMP): A sum of money that represents the cost of work, overhead, CMR’s fees (profit), and a contingency in a CMR project (Kwak and Bushey 2000). 10 • Progressive GMP: An alternate way to establish a GMP by breaking the project down into phases or work pack- ages and asking the CMR to generate individual GMPs for each phase or package. The final GMP becomes the sum of the individual GMPs plus any remaining project- level contingencies. • Contingency: The amount budgeted to covers costs that may result from incomplete design, unforeseen and unpredictable conditions, or uncertainties within the defined project scope. The amount of the contingency will depend on the status of design, procurement, and construction; and the complexity and uncertainties of the component parts of the project (Cost Estimating Guide 1997). STUDY INSTRUMENTS To accomplish the objective for this synthesis, varying sources of information were consulted and synthesized. Information was collected using the following seven study instruments: 1. Review of the current literature; 2. Surveys using a web-based questionnaire to state highway agencies and other transportation agencies to identify those with CMR experience; 3. Structured interviews with DOTs and other public trans- portation agencies with CMR experience; 4. Content analysis of RFQ/RFPs for CMR transportation projects; 5. Case studies of DOTs and other public transportation agencies that have implemented CMR; 6. Case studies from the transit, airport, and building sectors; and 7. Structured interviews with members of the construction industry. The next chapter will detail how these instruments will be applied to achieve the synthesis’s objective.