Those who work in the multi-billion-dollar construction industry routinely face uncertainty and risks related to cost, schedule and safety. One of the most common problems is failing to complete a project on time and within budget. This seems to be magnified for school and university projects — education institutions often have limited budgets, and completion deadlines must be met or schools might not have adequate space to accommodate students.
As a result, the success of a school or university construction project often hinges on how risks are managed. In many education construction projects, it is a struggle to maintain a limited budget and stay on schedule. But many strategies and practices are available that can help a school maintain control over a project budget and schedule when selecting the project-delivery system, determining compensation with the general contractor, and completing the construction phase.
Pick and choose
Schools and universities can choose from a number of project-delivery systems:
- Conventional design-bid-build
The conventional design-bid-build system has a separate designer and general contractor with numerous subcontractors.
- Construction management
Construction-management systems usually consist of a three-party team of the owner, designer and construction manager from pre-construction to project completion.
- Multiple primes
The multiple primes system consists of multiple parties, including the owner, designer and independent contractors who perform the construction, and possibly a general contractor.
The design-build system consists of a two-party team of an owner and a design-build firm that works with the owner from pre-construction to project completion.
Each of these systems has its own inherent advantages and disadvantages that must be managed or avoided altogether. As a result, there is no perfect delivery system.
Each education institution should choose a delivery system based upon its own needs and capabilities. A school should choose a system before any other project activity begins. In doing so, the institution will have a better handle on the scope of work for various project participants. For example, selecting the delivery system often can help facilitate what is needed in the final plans of a conventional design-bid-build, in the design and performance criteria of a design-build, or in the coordinated bid packages of a fast-tracked multiple prime contract.
Paying the bills
Owners use a compensation arrangement or contract type to compensate project participants. One of the key compensation arrangements is the manner in which a contractor will be compensated for construction services. In general, these contract types fall into the categories of fixed fee or cost-plus fee, with certain variations. Typically, an education institution could select:
- Fixed fee/lump sum
The fixed fee/lump sum compensation arrangement requires the contractor to perform all work for a predetermined price that includes profit.
- Fixed fee/unit price
The fixed fee/unit price compensation arrangement is similar to the fixed fee/lump-sum arrangement, except the specified units of work in the unit price contract are fixed, and the total cost varies with the actual quantities placed.
- Cost-plus fee/fixed or percentage fee
The cost-plus fee compensation arrangement allows a contractor to be paid the total costs of the material and labor, plus an agreed-upon fee to cover overhead and profit. In some cases, the fee is a fixed amount or is an agreed-upon percentage of the total material and labor costs.
- Negotiated cost-plus fee/guaranteed maximum price (GMP)
The GMP compensation arrangement is used when the school and contractor agree to a maximum dollar amount for specified work unless the scope or conditions of the project change. With this arrangement, the education institution often hires a construction manager to act as the general contractor to provide pre-construction and construction services for a cost-plus fee price with a GMP to complete construction of the building and many, if not all, of its amenities.
There are many ways to organize a construction project team. An institution could enter into a design-build fixed fee, a negotiated cost-plus fee or a design-bid-build with a GMP. Similar to the project-delivery system, in many cases, outside counsel and consultants may assist with the decision-making process.
A course of action
Overall, the benefits and risks vary for each construction project and for each of the project participants, regardless of the project-delivery system or compensation arrangement. However, using various strategies can help identify and avoid common issues that plague the typical education construction project during the construction phase.
During the construction phase, a number of activities can help schools and universities meet the desired goal of timely completion within budget:
- Development and use of a policies and procedures manual
A detailed policies and procedures manual is critical for any large capital construction project. Such a manual provides internal financial controls, cost and schedule project controls, contract administration, and risk assessment and management. In addition, well-developed policies and procedures can help promote consistent treatment of the many complex technical and financial issues that arise over the life cycle of a construction project.
- Contract incentives
Depending upon the delivery system and compensation arrangement, an education institution may wish to consider putting incentives in the construction contract. For example, a shared-savings clause or early-completion bonus may help the general contractor or construction manager focus on the institution's ultimate goal of achieving timely completion at a cost that is within budget.
- Proactive risk-management program
For significant school or university construction programs, a risk-management program can help mitigate the risks that occur during a typical project.
- Construction contingency usage issues
Depending upon the delivery system and compensation arrangement selected for the project, a school or university may wish to consider developing contract terms and conditions for using and managing a construction contingency fund.
- Value engineering and quality issues
During the design and construction process, the education institution should consider requiring the architect or contractor to develop and coordinate value-engineering tasks that identify potential cost savings. Cost savings that have more of an impact on the overall project budget or schedule typically are identified during the design phase when the appropriate value engineering or QA/QC systems are in place.
For example, exterior ornamental columns or interior glazed brick tile may be aesthetically pleasing, but may not be necessary to maintain a functional learning environment. By excluding these types of items, a school or university may be able to identify significant savings. On the other hand, the architectural focus or unique design might be exactly what an education institution wants.
- Contract language issues
The construction contract's language and requirements should be strong and specific to help lessen confusion. If contract language and requirements are weak and vague, there are likely to be problems. As a result, a school or university could have difficulty managing and monitoring the overall cost, schedule and quality.
- Performance of bid analysis
As a project moves forward and the general contractor or construction manager receives bids, some owners ask that subcontractors bid competitively for the construction contract work and request a bid analysis for each of the subcontracts awarded. With education projects, when appropriate, it often is recommended that bid analyses for various subcontract awards be completed to help analyze whether the best and most competitive price is obtained.
- Project monitoring and cost management
Owners conduct construction cost assessments at periodic intervals during large capital-construction projects. Construction cost assessments can identify critical issues during the design and construction phases of a project and often lead to cost savings. Conducting cost assessments early in the project can help establish clear parameters regarding payment applications and change orders.
- Change-order evaluation process
In order to manage and evaluate changes, schools and universities should confirm that an internal process is in place for evaluating all proposed changes. This process will help personnel evaluate, negotiate and approve any change in scope and cost.
- Evaluation and management of pricing discrepancies
As each payment application and change order is received, certain cost items or issues should receive additional focus to help decrease the occurrence of pricing discrepancies. To help reduce the potential for pricing discrepancies, a school or university should pay close attention to costs included in invoices and change orders related to labor and equipment, general conditions and labor management.
- Application of labor burden multipliers
In most compensation arrangements, a contractor or construction manager is reimbursed for actual costs incurred, and in some cases, may be reimbursed for the labor and fringe benefits of labor with a flat wage rate multiplier. Schools and universities should avoid these multipliers because in many cases, the wage rate multipliers may be too high or applied incorrectly.
- Tax threshold issues
Education institutions should have a process in place to verify that a general contractor or construction manager is making adjustments for tax thresholds (e.g., social security or state tax thresholds) that apply. If adjustments are not made, overpayments are likely.
- Management of contractor overtime
On large-scale projects, an owner sometimes can take a more active role in scheduling and staffing to help keep costs down. When overtime is required, an owner and the general contractor or construction manager should discuss what caused the need for the overtime. Then, the parties can consider the overtime pricing and cost benefit to the project.
In some cases, an education institution may not be in a position to address all of these. When this happens, it may be possible to request or work with the owner's representative or project-management team, architect or general contractor to address these issues.
Once a project is completed, a final cost assessment can help identify savings or prevent future losses. After completing the assessment, the institution's project-management team should review the findings and have the general contractor or construction manager address any issues. After receiving a response from the general contractor or construction manager, the institution should evaluate any disagreements and pursue cost recovery, if appropriate.
Wallace is principal of Deloitte Financial Advisory Services LLP, Philadelphia, and leads the Northeast Construction Advisory Services practice. Kling, PE, is senior manager of Deloitte Financial Advisory Services LLP and provides construction advisory services to public and private construction industry clients and clients with significant capital-construction programs.
To avoid common issues that plague the typical education construction project, schools should consider 10 key strategies:
Evaluate and select the appropriate project-delivery system based upon an institution's needs and capabilities.
Select a compensation arrangement that addresses the institution's needs and capabilities in conjunction with the project-delivery system.
Use appropriate contract language and conditions to allocate risks among the project participants, and to manage common design and construction phase issues.
Require the owner's representative or project-management team, architect or contractor to coordinate value-engineering tasks during the design and construction phases.
Consider contract incentives to meet budget and schedule.
Manage and monitor construction contingency funds.
Perform periodic and final cost assessments.
Complete intensive evaluation and negotiation of change orders.
Evaluate pricing discrepancy issues in pay applications and change orders.
Pursue cost-recovery issues.
Number of parties typically involved in construction management: the school, the designer and the construction manager — from pre-construction to project completion.