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Progressive design-build – target price and emerging norms
PROGRESSIVE DESIGN-BUILD -
target price and emerging norms
About the author
Daniel Josiah, PGDip, PQS, MRICS, MCIArb, is Director, Contracts & Commercial with Lakeland Consulting Inc., where he provides services to a wide range of clients in the private and public sectors on pre-contract, delivery, and contract closeouts. Daniel has a particular expertise in issues around scope, schedule, and cost, and has prepared expert reports for the purposes of negotiation, alternative dispute resolution, and litigation. In 2020, Daniel was selected by On-Site Magazine and SitePartners in the inaugural edition of the 40 Under 40 in Canadian Construction.
In the last 18 months, we have seen knock on effects of the pandemic that have impacted supply chains globally including those in the construction industry. Uncertainty factors including commodity price fl uctuations, labour shortages, and prolonged lead times continue to contradict project stakeholder commitments by adversely impacting the agreed scope, price, and schedule.
With this ongoing uncertainty, the risk profi le of projects has become unpredictable, and owners on large and complex infrastructure/institutional projects are increasingly engaging in collaborative delivery models that provide owners with more control over the design, costs schedule, and risk through innovation on an iterative basis. In parallel, specifi c provisions addressing the rights and responsibilities related to relative unknowns such as the pandemic are being introduced into contracts.
Progressive Design-Build (PDB) is an emerging delivery model which is being introduced in large scale infrastructure projects. This article provides an overview of the PDB delivery model which is seeing an increased uptake by owners seeking collaborative approaches to reduce procurement and construction timelines,
apportion and proactively mitigate and risks, and attain cost certainty on an iterative basis.
SEQUENCE
The PDB delivery model can be categorised into four phases (as summarised in Figure 1).
A. Phase 1: Request for Qualifi cations (RFQ)
The RFQ stage is the initial stage of a two stage procurement initiated by the owner. The RFQ identifi es the summary key terms and commercial/fi nancial considerations for the project.
Entities responding to the RFQ are assessed, shortlisted, and qualifi ed based on relevant project experience.
B. Phase 2: Request for Proposals (RFP)
The RFP stage is the second stage of the two stage procurement. Entities responding to the RFP are typically assessed on technical and fi nancial aspects. It is important to note the distinction with PDB, unlike other design-build RFP models, there is no design development required at this stage and as a result, the bidders do not offer a price to execute the project. Instead, bidders are required to provide rates for overhead and profi t upon which emphasis is placed by the owner’s evaluation team. It is noted that this may be considered by some to be a risky approach, as there is no competition on pricing of overall project cost. Recognizing the collaborative nature of the PDB model, consideration is given for collaborative behaviours, with one responding entity being selected to proceed to the
Development Phase as the development partner with a trust relationship being fostered between the parties.
C. Phase 3: Development
The Development Phase commences after the execution of a development agreement between the owner and a development partner. The development agreement which includes terms that allow the owner and the development partner to enter into a collaborative period in which the parties jointly work on an iterative basis to progress the design and establish key commercial and legal terms including: a. Design: The design commences and is progressed to at least 60% to meet Class 2 estimate classifi cation, suffi cient to establish a Target Price for review and potential adjustment through design development. Emphasis is placed on early work packages (e.g., enabling works) for early owner review. b. Price: The owner and development partner establish a Target Price for the next phase (Implementation Phase) on an iterative basis through open-book cost estimates prepared by the development partner, which may be reviewed by an independent cost consultant.
At the end of the Development Phase, the estimates are converted into a final Target Price for the purposes of the
Implementation Phase. c. Schedule: Based on the design progress and associated risks known or foreseen, the owner and development partner set the project schedule. To realise schedule benefits and de-risk the project, early work packages can be advanced. d. Risk: The owner and development partner mutually agree on a strategy for the identification, tracking, and mitigation of risk. During this process, contingencies are established for inclusion in the Target Price.
D. Phase 4: Implementation
Following the Development Phase, the owner and development partner enter into a Design-Build Agreement to finalize the design and facilitate the construction work. The Design-Build Agreement confirms the agreed scope,
Target Price, schedule parameters, and other items including the arrangement for any increases (“pain”) and decreases (“gain”) to the Target Price, sometimes referred to as painshare/gainshare. The Implementation Phase continues the collaborative theme with the owner supporting the design-builder (previously the development partner) in risk management such that the project achieves its cost (Target Price) and schedule objectives.
THEMES
There are a number of themes that apply to the PDB delivery model, including: 1. Collaboration: The parties are required to work together to achieve project goals and outcomes, with the parties mitigating and closing out risks in a collaborative manner. 2. Input: Recognizing the collaboration between the parties, the owner has the opportunity to utilize the expertise of the development partner/design-builder and input into the design such that the design meets the owners project goals. 3. Incremental: A stepped process is utilised which allows the owner to mitigate issues associated with the project (scope, schedule, and budget) as they arise, and re-align objectives to achieve project goals and outcomes. 4. Streamline: The RFQ and RFP periods are shortened significantly as there is no design development during these phases. This allows the project to advance to the
Development Phase in short order. 5. Trade-Off: There are significant advantages around the trade off between risk and price with the owner mitigating project risks as they arise. 6. Incentivisation: The target price includes a painshare/ gainshare mechanism where the owner and design-builder share any cost savings/overruns to the Target Price. 7. Validation: The use of an independent cost consultant can assist the parties with validation of the iterative estimates prepared by the design-builder and the final Target Price. 8. Open-Book: The design-builder is compensated on an open-book basis for the work performed in respect of actual costs incurred plus overhead and profit during the
Development Phase and the Implementation Phase. 9. Resource: Recognizing the iterative process and openbook reporting, the owner requires adequate and suitably qualified resources to track and manage project information in respect of budget and costs, which would not otherwise be required in a design-build arrangement. 10. “Off-Ramp”: In the event that the owner and development partner are unable to agree on terms, the owner may terminate the Development Phase Agreement for convenience with the development partner being reimbursed for costs incurred. In the event of such a scenario, the owner obtains the rights to the design progressed prior to termination, which the owner may use in a future procurement in respect of the project.
CONCLUSION
The PDB delivery model is an approach that is growing in popularity as public sector owners seek the benefits of the design-build model with the added flexibility of being able to have some control on the design, cost, and schedule aspects on an iterative basis. PDB will not be a suitable approach for some owners, especially those that require full price competition prior to entering into commercial negotiations and contract award, and for owners unable to commit the resources required to be committed for the collaborative approach.
QSM
MECHANICAL AND ELECTRICAL COST CONSULTING
Dennis M. Smith PQS
dennis@qsmconstructors.ca www.qsmconstructors.ca
CELL 416-949-8540 OFFICE 905-649-8540
