Until more recently, the construction industry was not known as an innovative industry. For most of the past 150 years, we’ve followed a single construction delivery method where an architect and engineer develop the design and the general contractor builds it. To develop more collaboration, innovation, and potential cost savings, the industry adopted new methodologies that require teamwork, technology, and more of a business mindset – all good things for the owner of the construction project.
Determining the best construction delivery method depends on numerous factors including the owner’s expertise in the building process, budget, timeline, and expectations for design. In some cases, a shorter timeline produces a better ROI (Return on Investment) than a smaller budget because the building can be profitable sooner, such as with a multi-family, retail, or mixed-use property. With most public projects, cost control outweighs innovative design and timing.
In the private sector, we commonly see these four construction delivery methods:
- Design-Bid-Build (DBB)
- Design–Build (DB)
- Construction Management-at-Risk (CMAR)
- Integrated Project Delivery (IPD)
Design-Bid-Build (DBB) Construction Delivery
In the United States, Design-Bid-Build is the most common construction delivery method and is referred to as the “traditional” approach to construction, although it is relatively new in the grand scheme of things. This method came in vogue as the construction process was institutionalized post-Civil War. Previously, master builders served as both the designer and contractor through history.
As its name suggests, Design-Bid-Build projects consist of three distinct phases: design phase, bid phase, and build phase. The building owner contracts the designer (architect) and the builder (general contractor or construction company) separately, and, more importantly, at different times. The architect develops the look of the building and works together with an engineer, who is generally hired by the architect, to complete the design documents.
Once the design phase is complete, the owner initiates the bid phase and starts to look for a contractor to build the project. Since the Design-Bid-Build delivery method has three distinct, linear phases, the project timeline requires the most time of all the construction delivery methods. Additionally, since the architect and construction company are engaged separately, there is no certainty that the two companies or employees of those companies can harmoniously work together, thus adding stress and risk to the owner.
Furthermore, this method is the least collaborative and provides the least amount of innovation since the designer and builder are generally kept an arm’s length apart and they can become adversarial with each party looking out for their respective interests, not that of the owners. Many property owners view the Design-Bid-Build process as the most cost-efficient method since the design is known at the time the construction company bids the project, requiring construction companies to competitively price their services to earn the business [known as the Competitive Sealed Proposal process]. In some cases, the architect will utilize their expertise to facilitate the bidding process, or maybe part of the owner’s selection committee. In the public project realm, the architect may be completely hands–off of the bidding process.
This method usually has the lowest upfront price and provides the owner with the most control. However, segregating the design and construction teams generally leads to overruns with work change orders and puts the owner in a position of playing referee due to the inherent finger–pointing produced by this delivery method.
The Design-Bid-Build delivery method is ideal for owners who have a good comfort level with construction because they are ultimately in charge of the entire process, who do not require an aggressive schedule, and who want the lowest price.
Design-Build Construction Delivery
Design–Build [also written as Design/Build or even D/B] has risen in popularity over the past decade because it shortens the lengthy timeline of the Design-Bid-Build method. The Design-Build Institute of America reports that 40% of non-residential construction projects in the United States utilize the Design–Build methodology. The fundamental difference between Design–Build and Design-Bid-Build is the owner eliminates the complexity of multiple contracts and signs a single contract that includes both design and construction with the Design–Build delivery method.
In some cases, a single entity handles the entire Design–Build project because the design firm has construction managers on staff or the construction company has design capabilities in-house. If the primary organization does not have all the capabilities needed on staff, the prime may subcontract a firm it trusts to fill the gaps. Joint ventures between a design firm and a construction company are also common with Design–Build projects. These companies join forces to offer the client a single source and work together, which is not guaranteed when pairing them separately in the Design-Bid-Build process, especially if the bidding process is predicated by low bid scoring methods. Even if the Design–Build agreement is with a joint venture, most often, the firms have worked together before and have good synergy working together.
The power of Design–Build is not a single contract, it is the teamwork and efficiency harnessed by the process. The build team gets involved in the design phase and uses their expertise to prevent potential design conflicts (known as clash detection) and save money on materials and labor (known as value engineering). Additionally, the design team stays actively involved during the design process to lessen the time it takes to resolve issues.
Having the construction team involved in the design phase and vice versa produces more innovation translating into even more cost savings. The accelerated timeline also means the building owner can utilize the property sooner, thus providing a faster ROI.
Construction Manager–at–Risk (CMAR)
Before we dig into the at-risk aspect of this delivery method, let’s get on the same page about the Construction Manager portion. A construction management company is hired by the owner to act on the owner’s behalf as a consultant and make decisions in the best interest of the client. The Construction Manager (CM) can sign contracts and make project-specific decisions. This method requires trust on the owner’s part but takes a lot of pressure off of the owner, especially those with less construction experience or who are overwhelmed with numerous projects. The Construction Manager (also called Construction Management Agency or CMA) generally manages the entire lifecycle of the project from the design phase until the keys are turned over to the owner.
Although a construction management agreement may sound like an additional cost, the CM’s service generally pays for itself because the construction manager reduces change orders being involved in the entire process and generally splits cost savings with the owner that are derived from value engineering. Although this construction method has a higher upfront cost, it generally has the least amount of scope creep and provides a high level of quality, while still offering an expedited schedule similar to Design–Build.
Regarding the “risk” portion of Construction Manager–at–Risk, the risk is on the contractor, not the owner. With this construction delivery method, also known as CMAR, CM At-Risk, or CM@R; the Construction Manager–at–Risk, typically a seasoned construction company, provides the owner a Guaranteed Maximum Price (GMP) or not-to-exceed price.
Under a Construction Manager–at–Risk relationship, the owner generally has two contracts, one for design and the other for construction management, because the construction manager cannot provide a guaranteed price until the design phase is completed. The owner may opt to hire the designer or the construction manager first. During this design phase, the construction manager acts as a consultant, known as preconstruction, to provide value engineering insights to reduce costs or the timeline. During the building phase, the construction manager hires, manages, and pays the subcontractors like a general contractor does in the Design-Bid-Build delivery method.
What is unique to the Construction Manager–at–Risk delivery method is the cap on pricing and the deadline to turn over the property. The construction manager provides the owner a Guaranteed Maximum Price about halfway through the design phase. The construction manager accepts all risks associated with meeting the time and cost requirements, otherwise, they face penalties built into the agreement. [These agreements have a few exceptions such as acts of God, pandemics, unforeseeable supply shortages, etc.] Most of these agreements also have bonuses for closing out projects ahead of schedule and construction managers can also be rewarded coming under budget with a cost-sharing agreement.
The biggest benefit to owner with Construction Manager–at–Risk agreements is cost control, thus limiting the owner’s risk. Work change orders rarely exist because the construction manager is involved throughout the process. This type of agreement requires a seasoned general contractor because inexperience will bankrupt a construction company with one failed project. Because of the financial pressure on the contractor, inexperienced construction managers may attempt to save cost by sacrificing good design. Although the risk is minimal for the owner, this agreement is a high risk, high reward opportunity for the construction manager.
As an owner, you may fear that the construction manager may sacrifice quality for the sake of profit. In the private sector, most Construction Manager–at–Risk agreements are made between construction companies and real estate developers or owners with multiple properties where the general contractor has a relationship that he or she does not want to jeopardize by shortchanging the client. Construction Manager-at-Risk agreements are more like a short-term partnership and should be a win/win relationship with the owner and general contractor both making a fair profit on each project.
Integrated Project Delivery
The newest of the construction delivery methods, Integrated Project Delivery (IPD) is the ultimate team relationship where the owner selects the architect, engineer, and construction manager before the design of the project. All parties sign a contract stating the collective goals and objectives of the project, then collaborate as a joint venture throughout the project to achieve those goals and objectives.
Because of the nature of this agreement, generally, the owner of the project either has extensive design or construction experience; a strong relationship with the other companies; or the architecture, engineering, or construction company is the property owner. This construction delivery method works best in the private sector when the project has a tight schedule but an unclear scope.
ROI of Preconstruction
Involving the builder in the design phase usually more than pays for any fees the contractor earns as the construction manager or for consulting in a Design–Build project because most of the cost savings derived from value engineering need to happen before construction starts. We find that 95% of the cost-saving opportunities happen in the design phase.
For example, changing a building’s structure from wood framing to steel allows the owner to build a taller building. That decision may allow for a parking structure at the base of the building, shrinking the acreage the owner needs to procure. Additionally, steel structure buildings can save building owners 30% on property insurance, especially in hurricane-prone areas like Central Florida and less acreage requires less ongoing maintenance to parking lots, lighting, landscaping, etc.
In summary, these four construction delivery methods offer owners, designers, and builders multiple options and the decision comes down to the owner’s expertise, timeline, budget tolerance, and relationship with the other parties. We find that the Construction Management-at-Risk and Design/Build methods work best for our clients’ needs because they provide the lowest overall budget and accelerate the schedule allowing our clients to earn income from the properties quicker.