There are many options for a contractor to deliver a project to a commercial owner. As with each different project, the delivery method can change to suit the needs of the parties. Careful attention should be taken when analyzing which method works for the particular project. Each of these various project delivery methods carry differing risks for the parties involved (i.e. owner, contractor, subcontractors, etc.). This two-part blog discusses some of most common project delivery methods for commercial construction projects. Part I discussed Design Build methods and Construction Manager at Risk. This part II will address some trending project delivery methods.
In the Multiple Prime project delivery method, the owner contracts directly with each of the trades, so each trade contractor is a prime contractor by their privity with the owner. In the implementation of this project delivery method, the owner typically contracts with a design team (architect and/or engineer) to design the construction project. Once the design has been completed, the owner in most instances will bid the various scopes of work on a fixed lump sum basis.
Depending on the sophistication of the owner, the owner may or may not engage a construction manager “not at risk” to advise the owner and coordinate the work. As one can imagine, coordination can be a significant issue on a Multiple Prime construction project because it may be unclear by the terms of the trade contractor agreements who is responsible for delays and interference. Accordingly, it is critical that the trade contracts deal with coordination in a detailed manner. Under the terms of Multiple Prime contracts, the contractors must often resolve disputes among themselves without involvement or responsibility of the owner. Other times, the owner (or its construction manager) may serve as an initial or, at times, final decision maker for disputes between the contractors. This is often accomplished by way of a set of general conditions that are incorporated into or form a part of every prime contract on the construction project.
Owners that employ Multiple Prime project delivery methods typically cite their control over each individual trade and a corresponding lack of change orders (or control over change orders) as the justification for this method. This project delivery method is sometimes employed by large industrial owners that use highly confidential processes in their production methods. In this situation, it is difficult or impossible for the individual trades to “steal” the owner’s intellectual property and duplicate the complete design or construction for another client. These owners may also believe that they achieve significant cost savings by avoiding multiple layers of markups. However, without significant in-house sophistication with regard to construction management or the ability to retain a very trusted construction manager, this method can expose the owner to substantial risks.
Integrated Project Delivery
Integrated Project Delivery (“IPD”) is relatively new and somewhat cutting edge as a project delivery method in the United States. IPD involves the use of a multiparty contract among, at a minimum, the owner, designer and contractor. Trades as well as design professionals that typically act as subconsultants to a project designer may also be included in an IPD contract, depending on the complexity of the specific contract.
The IPD project delivery method, by employing a multiparty contract, aims to adopt a collaborative, team-based approach to project delivery. IPD generally aims to assemble the project team as early as possible in the process of a construction project. The owner will assemble the players sometimes as early as inception of the most basic project goal. Because of the collaboration required, the owner must carefully select trusted team members, which are typically parties that it has worked with in the past.
Through collaboration regarding feasibility and potential costs, the IPD team can develop more detailed and comprehensive project goals. By the use of incentives and rewards for meeting or beating goals in regard to factors such as contract budgets and timelines, in addition to reimbursement for allowable costs, the individual parties to the IPD contract can align their goals and interests for the construction project as opposed to a more traditional adversarial approach to construction projects. Although the risks for the owner can be tremendous if a team member does not “buy in” to the collaborative project goals, the financial payback can be great on a successful project through the use of innovative design as well as considerable value engineering in the construction process.
The IPD construction delivery method typically requires a fairly complicated, “tailor made” project to justify the expense of the early collaboration process, which can be extensive.
Public Private Partnerships (P3)
Public Private Partnerships, frequently referred to as P3s or PPPs, involve a public entity that pairs with private enterprise to develop a public project, which is often a public infrastructure project. P3s can take a myriad of forms, but the most common approach employs a private entity or a partnership of multiple private entities to finance, design, construct, operate and potentially maintain the construction project over a set period of years.
During the time that the private entity is operating and maintaining the project, the public entity will typically make lease payments for the project or provide some other basis for compensation to pay back the private entity for its investment. The compensation may be generated through some sort of tax device or by the direct users of the project. For example, the construction of toll bridges and roads is sometimes delivered through the use of P3s. In this instance, the private entity is compensated for its investment by receiving a percentage of the tolls collected from the users of the new infrastructure project.
In the economic downturn, local and state governments are frequently struggling to generate sufficient tax revenue to fund infrastructure projects, and accordingly, P3s can be an attractive solution for both the private entity as well as the public entity if there is a realistic means to fund the compensation of the private entity for its investment. The overall cost for a P3 construction project can be significantly higher for a public entity because the private entity typically requires a substantial rate of return on its usually considerable investment. However, the public entity may not feel the impact of the higher cost because, as stated, the compensation is often derived from the users of the infrastructure project.
Owners and contractors should have a clear understanding of the methods by which a construction project can be delivered. Such an understanding is an important aspect for the analysis of risk and overall success of the construction work.