Runner Up: Alternative Contracting Methods for Highway Construction

ALTERNATIVE CONTRACTING METHOD PERFORMANCE IN U.S. HIGHWAY CONSTRUCTION

by Arthur L. C. Antoine, PhD, PE, Assoc. DBIA and Professor Keith Molenaar

PROBLEM STATEMENT 

There are three primary contracting methods for federally funded highways: design–bid– build (D-B-B)1 , design–build (D-B)2, and construction manager/general contractor (CM/GC)3. The vast majority of the U.S. highway system was built employing D-B-B. D-B delivery began in the 1990s; CM/GC delivery began after 2005.4 Potential benefits of using D-B and CM/GC include expedited project delivery, shortened construction schedules, project cost savings, improved constructability, enhanced innovation, and reduced risk. Notwithstanding, the two alternative contracting methods can create challenges. How do state transportation agencies know when and when not to employ alternative contracting methods? 

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SOLUTION 

The Federal Highway Administration (FHWA), in conjunction with Colorado’s Department of Transportation, developed a Project Delivery Selection Matrix (PDSM)5 into which the results of its report, “Alternative Contracting Method Performance in U.S. Highway Construction,” have been integrated. The PDSM provides a formal approach for selecting highway project delivery methods. The process uses evaluation worksheets and forms to guide agency staff and project team members through a delivery selection workshop. The result is a Project Delivery Selection Report that matches the unique goals and characteristics of each individual project. What follows is a discussion of the data informing the matrix. The findings are based on empirical data from the Federal Highway Administration (FHWA) study Quantification of Cost, Benefits and Risk Associated with Alternative Contracting Methods and Accelerated Performance Specifications. The research team collected data from 291 completed projects that met the methodological specifications 6, with an eye toward answering, among others, the following questions: For what project size, complexity, and risk characteristics are agencies currently applying alternative contracting methods? How do alternative contracting methods affect cost certainty and cost growth? How do alternative contracting methods affect project delivery speed and schedule growth? How do alternative contracting methods affect production rates or project intensity? The research team began by assessing risk. From the data, eight risk factors were perceived to have a high impact on project performance regardless of delivery method: 

1. Delays in completing railroad agreements. 
2. Project complexity. 
3. Uncertainty in geotechnical investigation. 
4. Delays in right-of-way process. 
5. Unexpected utility encounter. 
6. Work zone traffic control. 
7. Challenges to obtain environmental documentation. 
8. Delays in delivery schedule. 

Next, FHWA’s National Highway Construction Cost Index was used to convert all project costs for those included in the study to equivalent costs in June 2015. The projects ranged in cost from $69,108 $357,760,287, with an average award cost of $27,140,363 7 . Publicized success of large, high-profile D-B and CM/GC projects gives the impression that alternative contracting methods are applicable only to larger projects. The data collected for this study, however, show that alternative contracting methods are widely applied on small projects. More than half of the CM/GC and D-B/LB projects included in the research are under $20 million in value, and more than half of the D-B/ LB projects are less than $5 million in value. And though, on average, D-B/BV is used on larger projects, 45% of the D-B/BV projects are less than $20 million in value. Agencies frequently choose alternative contracting methods not just based on cost, but to shorten project durations. Data from the study show they are achieving this objective. 8 When compared to D-B-B, the mean project duration for the CM/GC projects was 48% shorter, and the mean D-B/BV project duration was 15% shorter, despite the fact that the mean project costs for CM/ GC and D-B/BV projects are approximately twice that of the D-B-B projects.  

Essentially, projects twice as large are being built in half the time by using alternative contracting methods. Mean agency design durations are notably shorter for CM/GC and D-B projects. D-B/LB project had the lowest mean construction durations, perhaps due to the smaller size of these projects and the higher level of design completion at the time of award. And though D-B/ BV had the highest mean construction durations, this was probably because D-B/BV projects had the largest mean cost, and the construction durations included the design builder’s design time and coordination with other agencies. 

Because the mean costs of the projects vary so substantially, the research team analyzed two smaller pools of projects independently. The first pool involved the smallest projects ($2 to $10 million), the second larger projects ($10 to $50 million). Since D-B-B and D-B/ LB are most frequently chosen for projects in the lower cost range, only those two methods were analyzed within it. The mean D-B/LB duration for smaller projects was 49% shorter than that of D-B-B projects. Agencies took approximately 77% less time for design for D-B/LB as compared to the mean D-B-B agency design duration on these projects, and the mean D-B/LB construction time, which included both the design-builder design and construction time, was still approximately 25% shorter on average. D-B/LB appears to be delivering substantially shorter durations on smaller projects. For larger projects the mean cost of the CM/GC projects was approximately 11% higher than D-B-B and 22% higher than D-B/BV, but the mean CM/GC project duration was 69% and 43% shorter than D-B-B and D-B/ BV, respectively. Shorter CM/ GC mean durations were observed in both design and construction. D-B/BV also showed substantially shorter mean durations as compared to D-B-B. Like CM/GC, this shorter construction duration is likely because of contractor involvement with the design. 

Both results suggest that agencies gain substantial time savings by using alternative contracting methods. Alternative contracting methods also provide agencies with earlier cost certainty. For smaller D-B-B and D-B/ LB projects, D-B/LB cost certainty is known more than 60% earlier. On larger projects, when compared to D-B-B, the average point of cost certainty for CM/GC is more than 60% earlier and for D-B/BV approximately 40% earlier. Project intensity is a measure of how much money is spent per day on a project. Projects with a greater intensity can have a shorter impact on traffic, providing an excellent measure of how agencies are serving the commuting public. The shorter project duration and higher contract cost of CM/GC and D-B/BV projects result in a much higher project intensity than D-B-B. Award growth is the ratio of the difference between the engineer’s initial estimate of the cost of a project and the actual contract award. 

Any differences can indicate trends in the accuracy of agency cost estimating and highlight projects that experience significant change in cost during procurement. The mean award growth is lowest for D-B-B projects and highest for CM/GC projects. The low award growth in D-B-B projects could be a result of more competition and agencies’ use of historic unit pricing for estimates, whereas CM/GC uses negotiated pricing. Conversely, CM/GC projects provide, over the course of the project, slightly more award certainty. Though no statistically significant difference in cost growth from the time of the award to the final contract cost was found between any of the contracting methods, CM/GC did see the lowest growth—only 0.9%. In summary, agencies are expediting overall project delivery and gaining early cost certainty using alternative contracting methods without seeing additional cost growth. As for change orders, no delivery method seems to be immune to the effect of unforeseen conditions. However, agencies could be transferring some risk to contractors through alternative contracting methods, as reflected in the fewer change orders with CM/GC methods.9 Increases due to plan quantity changes, plan errors, and omission changes agree with what would be expected between delivery methods. D-B-B has the largest percentage of plan quantity changes, which is likely attributable to the designs being performed by the agency and the pricing being predominantly unit price. Plan errors and omissions are also highest in D-B-B.

CONCLUSION 

The information used to inform the PDSM provides an up-to date perspective on the types of alternative contracting methods. Agencies are using alternative contracting methods on projects of all sizes to reap benefits, as illustrated by the high frequency of use of the CM/GC, D-B/ BV, and D-B/LB methods on projects valued under $20 million. Agencies are saving substantial time in project delivery, with 40% to 60% savings over D-B-B average project durations. They are also greatly accelerating the point of cost certainty in the project development process. Contrary to intuition, the alternative contracting methods do not seem to have an impact on cost growth when compared to the traditional D-B-B method. With regard to project intensity, the alternative contracting methods are facilitating project delivery at a faster pace in terms of the rate of resources invested in the project per day. In summary, alternative contracting methods are shorter in duration, have an earlier cost certainty, and have a higher project intensity. In essence, agencies are getting more work in place with less disruption to the traveling public.

REFERENCES 

1. Design-Bid-Build is the traditional delivery method where the agency contracts separately for design and construction services, the construction bid is based on complete (100%) plans and specifications, and design and construction occur sequentially. D-B-B is typically a unit-priced contract, but it can also include lump-sum items. 
2. In Design-Build the agency contracts with one entity to complete both the design and construction of a project under a single contract, typically a lump sum with allowances or unit cost items to address risk. D-B has been implemented using various procurement approaches, including qualified low bid (LB) and best value (BV). 
3. With a Construction Manager/General Contractor, the agency procures professional services on a qualifications or best-value basis from a construction manager during the design phase to offer suggestions on innovations, cost and schedule savings, and constructability issues. Upon completion of the design or individual design packages, the contractor and agency negotiate a price for the construction contract, and then the construction manager acts as a general contractor to complete construction. The contract can employ a guaranteed maximum price administered on a cost-reimbursable basis, unit price, or lump-sum contract. 
4. Federal Highway Administration. (2015). Every Day Counts, EDC-2 Final Report, pp. 22–25 and 69–72, Federal Highway Administration, Washington, DC. Available online: https://www.fhwa.dot.gov/ everydaycounts/reports/edc-2-final-report/, last accessed June 10, 2016. 
5. Transportation Construction Management Pooled Fund. (2014). “Alternate Contracting Methods.” (website) Available online: http://www.colorado. edu/tcm/projects/alternate-contracting-methods, last accessed October 11, 2016. 
6. For a discussion of data collection and methodology, see “Alternative Contracting Method Performance in U.S. Highway Construction,” FHWA Publication No: FHWAHRT-17-100. 
7. It should be noted that contractor design costs are included for the D-B projects; no design costs are included for the D-B-B and CM/GC projects. 
8. Final project durations include all contractual changes and/or builder delays. Please note that the mean project duration is longer than the sum of the design and construction durations because procurement times and other agency administrative tasks are not shown. Additionally, note that construction duration for D-B projects includes design-builder design and construction duration (i.e., the D-B contract duration from award to completion). 
9. It should be noted here that agency changes are not automatically bad. They can also have positive impacts on project goals. Negative impacts occur with incomplete scopes or lack of clarity in the RFP. Positive changes can add value to a project that was awarded below budget, as with more than half of the agency-directed change orders across the analyzed projects, projects whose initial award was lower than the engineer’s estimate. In these instances, the changes could have added value to the project.