Design/Bid/Build/Sue...the Complete Building Process

By Ken Dean

Design/bid/build refers to a construction delivery method where an owner hires an architect first to design their project. Then after the construction documents are complete, a general contractor is selected as the result of a “hard competitive bid” of the design and specifications among several prospective companies. This delivery method is very traditional and often thought to be the best way to get the lowest price for construction. However, although hard bid is the best way to obtain the lowest initial price, it is seldom the best way to achieve the best final price and thus the process often results in the threat of litigation.

The construction industry is the second most litigated industry in the country. Project Management Journal reported that 20 cents of every construction dollar is attributed to claims and litigation, and the primary reason is an arm’s-length adversarial relationship between contractor and owner which is oftentimes birthed out of a hard bid competitive award. Therefore, when you consider hard bid, you must consider all of the costs, including the 20 cents of every construction dollar reserved for claim and litigation cost.

It does seem logical that the best way to get the lowest cost for construction would be to hard-bid finished construction documents to several prospective contractors and award the job to the lowest bidder.

So, why do hard bid prices change during construction? This process is a game or tactic that hard bid contractors must utilize to survive in an industry that typically has very low margins. What happens is that contractors bid a project by creating two lists. On one they estimate the costs they think it will take to build a project, and on the other they compile the costs they think it will take to win the award. The prospective contractors submit the price that they believe has a chance to win the competition with plans to get back to the real price through change orders during the construction process.

Well, if that is how the game is played, then why not just refuse to approve the future change orders? As the owner in a hard-bid process (design/bid/build delivery system), you have contracted and obtained architectural drawings from an architect on a separate contract. Then, you have represented to the prospective contractors that your drawings are accurate and complete, and that you want prices submitted to execute those particular plans. Unfortunately, construction documents never cover all of the details necessary to construct a project and therefore, allow contractors a legitimate angle to push for change orders.

So, what is the answer? The answer is that you want to establish a contractor relationship built on trust. You do not want to establish the most important relationship that you will have during a construction project through an arm’s-length transaction. The design/bid/build contract delivery method inherently establishes a contractor relationship with a company that “holds their cards close to their vest,” and as a result, the construction process holds surprises.

The Construction Industry Institute (CII), an organization formed by contractors, suppliers, owners and leading colleges and universities to research better ways of planning and constructing projects, reported in their 1997 study with Penn State University that, “Trust is believed to be a factor in reducing project costs, while a lack of trust in business relationships is thought to be related to inefficiencies and increased project costs. Based on CII research data from 262 projects, the intuitive notion that mutual trust and project cost are correlated is now statistically supported.”

The CII report identified that cooperation among project parties in the construction industry is directly related to lower project cost and a timely completion, and that mutual trust is the salient factor in determining the effectiveness of the relationship between owner and contractor. The report also tied mutual trust as occurring more often in delivery systems other than design/bid/build. The research data indicated that both design/build and construction management at risk delivery systems improved quality, scheduled and performance to budget (with construction management being the best method of working to a budget).

The tendency of hard-bid contractors to low-ball the bid, get the award and then get the price increased to real cost has often been referred to as “a liar’s contest.” When you consider the findings of the CII study, it is easy to understand how difficult it is to establish a trusting contractor relationship as a result of a hard bid.

So what is the alternative? The current trends or best practice is to use a design/build or team/build delivery method. Design/build is a project delivery system where the owner has a single contract with one company to provide both design and construction services. Team/build describes a delivery method where the owner has separate contracts with different firms for design and construction, but hires the firms at the beginning of the project to develop the project as a team. An example of a team/build contract is a construction manager at risk or a construction management agreement that converts to general contractor.

Can’t you have problems with these contracts as well? Yes, you can. The best advice is to always do thorough due diligence on the companies you are considering. Check references with former customers, banks and subcontractors. Quality companies will have good reputations with almost everyone. Remember, you can have the best contract in the industry and if you have a bad contractor you will still have a miserable experience.

However, contract type does appear to have an impact. Gary Aller, director of The Alliance for Construction Excellence at Arizona State University, reported that Construction Management at Risk has been used in Arizona on more than $4.5 billion worth of public projects without any claims or litigation. This is an extremely significant fact when compared to the industry statistic that 20 cents of every construction dollar goes to claim and litigation.

So if I do not hard bid, how do I make sure that I get a competitive price? The best way to work in a trusting relationship with a contractor and still be assured of a competitive price is to require that the contractor establish reasonableness of the final construction price by way of multiple subcontractor bids for the various trades and materials after the construction documents are completed. If your contractor is willing to share competitive analysis in an open-book format, then the owner can have confidence that his final price is competitive with the marketplace without the risks and surprises of a general contractor hard bid process.

One of the most emotional moments of the typical design/bid/build delivery method is the first time a price is submitted on a completed design. The reason is because in most cases even the first hard bid is generally much higher than the expectation (and it has great potential to go higher during construction).

So, the next step in this process is generally referred to as value engineering. However, value engineering in a design/bid/build method usually only means “What are we going to cut from the project?” You see, there is very little opportunity to manage value after construction documents are completed. The most effective way to manage value of a project is through the entire design process. A good value management process includes hiring a contractor to provide cost estimates and constructability input from the very beginning of a development project. The process also often starts with owner, architect and contractor analyzing the owner’s vision, feasibility, and project objectives — all before any drawings are produced. This allows for creation of project benchmarks that are then used to measure the impacts of the decisions throughout the development process.

If I do not use design/bid/build, how do I pick a contractor? Just because you do not hard bid a project it does not mean that you cannot ask for competitive proposals as a process for picking your contractor. At the beginning of a project an owner can send out a Request for Qualifications (RFQ) to several prospective contractors. After evaluating the different company’s qualifications and checking some references, often owners then develop a smaller list to send a Request for Proposal (RFP). This RFP typically informs the potential contractors of the approximate budget or size of the project and asks for a proposal of fee and general conditions. These elements of project costs can later be applied to the competitively bid subcontractor prices at the end of design to arrive at a final price.

As the CII research found, there is a direct relationship between the mutual trust of all partners involved in a construction project and the ultimate project cost. As owners desiring to manage and mitigate the risks involved in a construction project, you want partners, not opponents. The CII study defined trust as: “the confidence and reliance one party has in the professional competence and integrity of the other party to successfully execute a project in the spirit of open communication and fairness.” The statistical evidence of their research concluded that the relationship between the companies involved in a project was the single greatest impact on potential cost savings.

The CII task force said, “Those (projects) having the highest cost impact primarily relate to open and honest communications, the professional competence and integrity of the parties, and the willingness to adapt and implement changes for the betterment of the project.”

If you like a good mystery thriller where you do not know how things are going to turn out, then maybe hard bid is okay, but if you are looking for best value, predictability and no surprises, then avoid the design/bid/build delivery method, and hire your architect and contractor to work as a team from the beginning.

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