Q&A Roundtable: Design-Build Pros Speak
(08/11/2011)

Participants: Andy Morgan, Vice President/Justice Market Leader, Vanir Construction Management Inc.; Lou Cavagnaro, Assistant Director, Department of General Services, County of San Diego; Frank Roberts, Director, Durrant Justice; David Boehm, Architect, Senior Principal, DLR Group; Jim Mueller, Executive Director, KMD Justice, Mike Retford, Principal, Justice Architecture, AECOM  

Q: Jim, with reference to design-build, what do you think over the course of the next few years, in terms of how it’s going to affect the market?

Mueller: Well, our experience with it has been that 10 years ago, I’d say 20 percent of the work that we saw and pursued shall end to the alternative delivery method environment. Now that could be the two-stage design built, pure design built — all the variations. Now, in all of our public sector work, it’s 70, 75, maybe as much as 80 percent. Interesting that I just received this morning a document from the DBIA, and they’re indicating design-build currently accounts for over 40 percent of all nonresidential design and construction in the United States. I would say, in the public sector — and this is both in the federal arena as well as sort of the general public sector and specifically within corrections. I mean, it’s 60, 65 percent of all the projects that we’re aware of for solicitation are falling

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into some alternatives: design delivery environment. I don’t see that’s changing. Given the economic circumstances that prevail out there nowadays, I think given the reduced liability exposure to owners and design-build environments and the shedding of risk, it’s almost inevitable that it will only precede more aggressively in the future.

Roberts: I would echo what Jim is saying. The business side of me says that we have to do something to be able to compete because if it continues the way it’s going, you’ll basically, for financial reasons, be squeezed out of a situation. I don’t know what the break even number is that says we just can’t afford to do that, but I know it will become more of a discussion in our board meetings than ever before.

 

Boehm: I think, first, we want to qualify that we’re really talking about a design-build at risk or value base, opposed to a one-stage qualification base selection process. The question is how these extensive design efforts have an impact on the design side. Right now, when I look at the next few years, I see a lot of owners saying this has a way to get low-cost design ideas and competitive pricing from contractors. But I don’t think that most owners know the effort that’s required; I don’t think they’ve been educated on that. I know that the GSA has not, and the large firm roundtable is in the process of trying to educate them as to how much money firms are actually studying on these things. I think quality firms will quit looking at these kinds of projects unless we’re compensated by the owners. Contractors will eventually develop their own design departments, if this is the way the industry decides to go. I think that when you look at the bottom line, we’re doing an awful lot of design for very little money. And there’s a huge amount of waste and effort at the end of it.

 

Q: I do have a thought about qualification-based selection. I know in California it’s very difficult to do that under the public contract code. Is that consistent in other states or special in California?

Retford: We see it all over the map. We see it differently in different states. But I will agree with Frank and Jim on this: in 15 years at AECOM, I’ve seen one qualification-based design-build project. We were fortunate enough to win it; it was a very successful project.

 

Q: What I’m hearing is the cost of the pursuit of this type of work seems to be the major stumbling block, is that correct?

Mueller: Yeah. How do you finance this kind of an at-risk investment?

Retford: I think there’s a threefold answer to that. Number one is it’s very costly to pursue. The other thing, and Frank you made the point about this, that it’s also the cost impact of the people tied up in the pursuit, not working on paying work. So you take a double hit there, and then we’re still at the mercy of our contract partner to get low.

Boehm: One of the issues — and I’ve talked to several contractors — and they like the design-build at risk approach because it really doesn’t affect their business model to a great extent. They are still providing, basically, the same estimating type efforts. The architect is impacted, and you can’t imagine a contractor building 30 to 40 percent of a project to get selected. Yet, the architect is expected to do 38 to 40 percent of his work effort to get selected. So, there’s a huge disparity between the contracting side and their effort and the design side effort in these pursuits. Therefore, the people on the contracting side and the design-build of the Institute of America side — they don’t see a problem with it. We’re the ones that are getting severely impacted, especially if the projects get larger and larger and more and more complicated.

Q: What is it that you feel that they are asking for that’s creating the dilemma?

Mueller: In anticipation of that, Andy, if you look at my experience and our experience, I suspect it’s true of Mike and Frank and Dave also. Typically, what owners are asking for can typically represent approximately 50 percent of what you would totally invest in the execution of an entire project. In other words, you’re going most of the time well into DD. If not true DD, then possibly, in some areas, into construction documents. Now let’s say that you have a $100 million job. Let’s say, for reasons of discussion, a normal fee for something like that is about seven percent on the AE side. And then you are now investing approximately 15 percent of that 7 percent of a $100 million dollar job into the development of documents for…solicitation. And the architect, typically, is a major component of that. In a normal design build environment, it’s about a 50-50 split. In the design-build environment, I think the architect makes a substantially bigger investment relative to the consultants. So if it’s about 75 percent of that number, of the 50 percent of the 7 percent, if you do numbers on a $100 million job, you’re talking about a million dollars. You’re talking about a million-dollar investment on the part of an architect alone. That’s a huge investment against their potential revenue return on any project. So, what it ends up being is we are now looking at projects in an extremely selective way. And instead of pursuing … potential opportunities under a design build environment, we’re looking at one opportunity to pursue in a design-build environment. So, it’s reducing competition because I can’t pursue all those projects. It’s not a sustainable business model on the architectural or the design side of the equation. 

Boehm: The reality is that unless you can win every one of these pursuits, there’s not enough profit in these projects to have money left over to gamble with. The reality is that an architect’s profit is a necessary thing so that we can compensate talent, build a business, take care of technology, all those issues. If we are spending our profit on gambling on pursuits, eventually, the pros will weaken and collapse. Trying to get fees that are large enough to cover that gambling requirement doesn’t work because ultimately, each one of these is a price-based pursuit, and the contractors are putting pressure on the architects to lower their fees so that they can win the project because it’s part of the cost. So it’s a very, very difficult and vise-like situation for the design team.

Roberts: What the design-build process is asking architects and engineers to do is to design for free without sufficient compensation for our professional services. For example, one successful selection process was for a jail in Texas. The client used qualifications and best value to select the team. The county told the design-build teams: “This is how much money we have to spend on this project; what can you give us for that dollar amount in terms of more square footage or beds?” That project — which we won — was based on how much value we could give them for the amount of money that they had. We provided them concepts, but nowhere near the amount of design detail that is now being asked for more often in the design-build process. Maybe part of the solution in the future is for architects, contractors, vendors and clients to think about the design-build process a little differently than we currently do. This means focusing on value concepts rather than extensive design.

Q: What it sounds like to me is a change in format would help this process a whole lot. But you’re a little bit in conflict with what I heard earlier, which was a large part of the work that you are doing is driven by the requirements of the contractors so that they’ve got enough detailed information to develop a price.

Mueller: I think you’re correct. There is sort of a built-in contradiction there. I think builders have to get better at trusting their estimating capabilities at a more conceptual level. I think that is extremely difficult for a builder to do, and I don’t know Frank and Dave and Mike — what your experiences are — but I signed very few builders, contractors, and I’m sure we’ve all worked with the same ones — they’re the best ones in the country — that have a reliable, conceptual estimating capability. They just don’t do that well.

Boehm: One of the bigger issues here is not working with a contractor. It’s really, from the owner’s side, unless the owner has a very good job at defining what they want, the design-build entities are kind of guessing. And the problem with a lot of these pursuits is that you can guess wrong because you’re not given a really good opportunity to interact with the owner. I think most of us who are architects believe that interaction is critical in getting a project that is customized to what the owner’s actual needs are. And when we have to interpret a program, design a project, it’s kind of like going back to doing thesis in college. We’re really not fully engaged with the owner, which, I think, is critical to the process. The other aspect is I think it’s very difficult for an owner to evaluate these projects apples to apples.

Cavagnaro: The problem there is how much is needed for selection? From an owner’s standpoint, it’s not only a selection of the design-build entity. But it does go into context administration and what we are getting. And believe me, I understand the trusting environments that we need to have in a design-build. But especially when you’re dealing with something really, really large — to know what we’re getting from a quality perspective, it’s part of the factor. I guess the general contractors have a part of that issue too because they want to trust that they can put a number on it from the design they get from the architect and they can actually build it from that.

Q: Building on a topic of how much information is really needed to make a decision, depending on who the ultimate end user is, it’s likely not to be the department that you’re directly contracting with. It could be the sheriff’s department, health and human services, outside of the corrections world. It could be any number of other departments or users. The natural question is what are we going to get? Show us what we’re going to get and how can we expect this to hold up over time. Does it meet certain levels of requirements or performance or program requirements that we need in order to function as the department?

Roberts: This whole issue is because of the cost of doing business. It’s just gone off the charts. There was a time when you talked to contractors, and you were really talking to builders. You were talking to a project manager that built ten jails. You were talking to a project manager that had seen every situation in their career. And today, those people don’t exist. The problem with that situation is when the experience is not there on both sides of the table in those discussions, the solution to that is to give me more information. Give me more information than your contractor can give me. Give me more so I can understand and you can educate me on this issue. So many projects that we have done, when we get into the construction phase, and you walk on the site, there’s a bunch of kids on the side and they’re managing the project. We keep looking for those that have seen every situation that’s come up and can work their way through it. I think this issue of needing more information can be really laid at the feet of inexperience or no experience.

Boehm: Lou, you brought up the point about what you need to have to evaluate it. Frank was talking about what the contractor needs to bid. The reality of these projects, on a $100 million to $200 million dollar project, the contractors are taking a tremendous amount of risk putting a price together. So, he’s demanding that the design team document the project to a very large extent so that he can literally bid that project and have assurances that those prices are real and that he can hold those subcontractors to those prices — that’s just the reality of these things. You may not need to know what the structural system is or how it’s framed, but the contractor does need to know that so he can bid it. Therefore, we have to provide it, which just ratchets up the cost that it takes the design team to do this.

Q: What do you think we can do differently — we, the industry — to further design-build or support it from the designer’s perspective? What can we do differently that makes it easier on firms to pursue this kind of work?

Boehm: The issue here is what is the owner trying to get out of this process? And part of that, I think, is they’re looking for different perspectives, design ideas, etc. But in reality, they’re looking for that for free. I don’t think owners understand the effort that the design team has to go through — I just don’t think that’s a consideration. So I think there’s an education process, and I think one of the things that has to be done is that if an owner wants to look at different perspectives, they have to realize that there’s a real cost there and there’s a benefit to them, and that benefit has to be part of their project budget.

Q: So you think that they should pay for it, basically?

Boehm: Absolutely.

Retford: I look back at one of our most successful design-build projects and that was an open book process with a lot of potential for savings. It allowed each team to bring their creativity out on a limited scale during the competition because you weren’t hard bidding the project at that point. They have a max budget that they’re looking to achieve, and it was more about what can you do to hit or beat my budget. And if you beat my budget, I’ll share those savings with you, as long as my basic parameters are achieved. I think that allows the design-build teams to bring the best value to the table. I think that’s where it needs to get to — best value, not lowest dollar.

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