Andy Kirby: Thank you. Appreciate it, Dr. Wu. So thank you for having me today. I appreciate it. I’m excited about teaching this. I just took some of the DBIA courses, so with some of my experience, I’ve kind of gone through this by kind of doing the formal training and it kind of makes sense, it gels. So as you guys get out in the industry and you’ve got some of this experience, you go out there, it’ll all make sense at one point and another. So without further, ado I’ll get into it, but I’m pretty excited. The first thing is I got to have lunch today at your Dog House Grill, which was actually really good. I went with one of your guys’ classmates, Andrew Wells.
So he took me over there and treated me to lunch. So I’m really kind of full so hopefully you guys aren’t and won’t fall asleep on me. So anyway, this is the agenda. We’re going to do project delivery types, the procurement method, and then I’ll go down into contract format. So the project delivery types is the first section, and I’ll have a little bit of a question-answer after each period, just to specifically talk about those topics. Specifically for project delivery types, there are four main: design-bid-build, design-build, CM at risk, and then CM multi-prime. And there’s little variations of each one of these and we can go into those different variations if you’d like after each section. Doing design-bid-build, this was probably the majority of contracts throughout the country, construction contracts, mostly vertical, are done design-bid-build.
Design-build is making a, I would say, a transition, probably about 46 percent of contracts these days. But most of those contracts are design-bid-build. Some of the characteristics, you know, as you can see, this is the relationship that you have with the owner. The designer and sub-consultants go up to the owner and then contractor to the owner and subcontractors. Where owners seem to have the biggest problem is they kind of have to play intermediary between the designer and the builder.
All of the design intent comes from the owner and the designer, and then that is accepted by the owner and then passed on to the general contractor. At that point, the general contractor really is taking at face value that what they have been provided actually works. And so that’s really up to the owner to make sure that what they’re providing their general contractor actually works. And that’s where some of the big fights come into play with design-bid-build. As you can see, it’s two contracts.
So you have two separate contracts. The owner’s responsibilities of program, finance, and management of that architect and then also the intent of the project to the general contractor. The designer obviously preparing the plan from the specs in the owner’s design intent and what they are expecting for the project to be. And then lastly the builders, obviously the prime and sub-construction, they’re just interpreting the plans as best they can from what the information is being provided by the architect themselves. For design-build, as you can see, it’s a little bit different layout here. There’s one single contract through the owner to the design-build entity.
Now, obviously there are other contracts that flow down from the design-build entity, but as far as that previous relationship where there’s two entities and they kind of battle it out between the two contracts, there is a single contract here. What that allows you to do is a little bit fast-track so that you’re not having to go through complete design before you start construction. A lot of times you can start construction as you’re getting through the foundations and the design intent through the drawings. A lot of cities will actually permit the drawings at 85 percent or 75 percent drawings.
So you don’t even have figure out where some of the details are in the room, where windows are going, and you’re already starting foundations and they’ve given you a building permit. They know you’re going to figure it out along the way. They really don’t care; just as long as it meets code, they don’t really care what you’re building, so they’ll give you permits a lot earlier on in the process. It’s very integrated. You’re working with the designer and the subcontractor is getting involved throughout the design-build process and making sure that you’re getting feedback. A lot of times the best value and what have you as far as trying to provide the owner what they’re looking at.
Now, I guess the con on design-build is, for the owner’s perspective, they have to really spend a little upfront time trying to put a stable around what they’re exactly trying to build. So they have to be able to communicate that to the design-builder so that you can select appropriately. It’s really a mind shift from going to prescriptive specs to performance-based specs, and that’s really the big mind shift. So you have to be able to get into your owner, and this design-build doesn’t work for everybody because you have to be able to say, as an owner, “I just want to be able to have a computer room that has 26 screens in it. I don’t care anything past that.” Or a lot of owners want to say, “Well, I want this specific screen. I want it wired specifically here. I want CAT 5e, I want CAT 6e, I want a box in the back and I want it to operate like this.” So those are kind of two different methodologies of how you would describe plans. And design-build, really, you need to do performance-based in order to get the most bang for your buck out of design-build.
So it’s a little bit of a mind shift, so it has to have a lot up front. And along with that is the selection of the design-build entity. It takes a lot of upfront review of their solutions, their costs, things like that; whereas design-bid-build, it’s just the cheapest cost. You know what you’re getting; it’s just who’s the cheapest and maybe most qualified if you want to go through that. And we’ll go through some of the selection criteria in a little bit. But those are the main big differences besides design-build and design-bid-build.
So I just want to make sure that’s very clear. There’s two separate contracts, a single contract. Design-build is traditionally fast-track, take on many different forms. The design-builder is actually taking on a lot of that liability because they’re designing it themselves. So they really don’t have anyone to lean on and say, “They designed; is not my fault.” It really comes back to the design-build entity. That’s up to them to make it work, not the subcontractors.” Some of my guys that work for me, it’s a big shift for them when they go from design-bid-build to design-build because they’re saying — you’ll sit in an owner’s meeting or be talking with the owner, they’re saying, “You know the designer really screwed this up.” And I’m like, “They work for you, buddy.” I mean, you can’t just say that stuff to the owner because that’s your contractor. You can’t control them. So you have to really know your mind set when you’re talking to your owner of what contract type you have, whether it’s design-bid-build or design-build. So just want to make sure you guys are very clear on that. Next is CM at risk. CM at risk, I think, is a little bit like a quasi between a design-build and design-build. And the reason why I say that is, typically CM at risk is you can see it’s the same relationship as you have on design-bid-build where you have two separate contracts. The difference with CM at risk is you’re getting the general contractor on early, so you’re signing up the architect very early on, the very early stages of drawings. You’re also selecting your general contractor at that stage, as well. The intent is the general contractor is helping out with preconstruction efforts, scheduling, constructability, any waterproofing stuff, pricing, making sure it fits in with the pro forma for the owner. So I think this is almost the best of both worlds where the owner can still feel like he’s got control of the architect and helping him out, but at the same time, the general contractor is providing feedback as a consultant, just like the architect, to the owner as a separate contract providing him cost data, saying, “You know, I don’t know if I would do that. That’s going to cost you a lot more whenever I’m pricing this out down the road and building it.
Maybe a different alternate method would be X, Y and Z.” So it’s kind of, like I said, a quasi between design-bid-build and design-build. You can get — much like design-build, you can start construction a little bit earlier, because you’re not waiting for the drawings to be completely done before you bid it out. You already have the contractor on board, so you can take those early phases of construction and then start doing that construction early on, such as foundations and things like that. So there is an option to this. A lot of times the GC is signed up, owners do have the right to, if they’re not happy with the services, the pre-con services throughout that design period, they have what they call an off-ramp where they can say, “You know what? Thank you for your time. You haven’t done the greatest job. We’re actually going to pass you on and then bid this job out.” So then it would turn into a design-bid-build at that point. That is an opportunity. It doesn’t happen very often just because the sheer fact of, you know, the performance is typically a stick of saying, “Hey, you don’t perform, I’m going to kick you out.” So a lot of times people really enjoy this engagement because there’s not much risk on us. We’re not signing up to a dollar value yet as a general contractor.
We’re kind of just helping them down the phases, telling them what the cost is going to be, cost is going to be; and then typically, 75 to 80 percent drawings, then you’ll start signing up to actual costs. And that’s where you kind of get a little more antsy about or nervous about the risk that you’re taking on. So anyway, so I think that’s it. So it’s a hybrid, I would say, even though it is a separate, distinct project delivery system. CM multi-prime, this is probably my least favorite; this is me speaking. This arrangement is, I would say, “messy,” the best way to describe it. The owner has not only their contract with the designer, but they also have a contract with each one of these prime subs. So what that means is this is a mechanical sub, this is an electrical sub, this is a plumbing sub. All different of these contracts are all rolled up to the owner. So the owner can be holding 26, 27 contracts. The problem with this is who’s doing all the coordination between these? You think the owner’s doing that? Typically not. So if they have a — the CM multi-prime sometimes there will be an owner’s rep sit here and that will be sitting in place of the owner.
But when you do CM multi-prime, which is different than just the multi-prime, the contracts are still not through you. They’re with the owner. So your ability to, I guess, encourage — nice way — the subcontractors, the prime contractors, to do coordination and things like that is not there. Your only duty as the CM multi-prime is to just help people try to get along. That is your sole responsibility. So this is probably one of the tougher ones, and you have to be a very sophisticated owner in order to do this, so have a pretty extensive engineering and construction department in order to take on this type of role. It does happen though. A lot of school agencies do this, K through 12, some higher education will end up doing a CM multi-prime or multi-prime. Maybe some corporations end up doing, like a Home Depot or something like that, where they are used to doing that same product type over and over and over, they’ll do a multi-prime type of arrangement.
But the biggest thing is you can see, it’s, you’ve got — still again — the three linear phases of design, the bid and the build. And the toughest thing is there’s not one person in charge really of these prime contractors other than the owner. So for these guys individually, you know, as far as coordination goes, it’s the owner doing the coordination. They don’t have a general contractor or sometimes a CM helping out with that. I think that’s it on this one. It’s just, like I said, it’s one of the tougher ones to do. It can be done. It can be done right. It’s just not my preferred method. So I’ll just give you a quick scenario here. This is kind of a recap from these all four different product types. An owner needs a project done as fast as possible. He has the program defined and is looking for the best value builder. Which one do you think that would end up using? Any suggestions? Hands, anyone?
Andy Kirby: Design-build. What are the kind of keys in there that tell you design-build? Fast as possible?
Andy Kirby: Fast. Yep. And what else? Value.
Andy Kirby: The value. Okay. So that’s where we feel like design-build is the fast-tracking where you can start construction on some of the superstructure or underground before you’re even done with the design. So that’s the big takeaway for this one. Any questions on those specific delivery systems? Go ahead. How does the schedule look for like a design-build? Like if you’re trying to set [inaudible] things aren’t even, you know, like it’s not fully designed. Andy Kirby: So your question is, what does the schedule look like for design-build in comparison to design-bid-build? Yes. Andy Kirby: Can I draw on this? Is that okay? Is that our… I don’t know if we have anything to draw on. So let me do it with my hands, best case. So for a design-bid-build you’ve got the design piece and this is going in my way. So design piece.
Then you’re actually going to bid it out and you’re going to build it. So it’s kind of very linear this way. If you’re doing design-bid-build, you’re actually designing just a little bit. That’s all you have to do is get what’s underground. So I just need to know what is your building height going to be so I can figure out what the structural load is going to be on the footings and then I can start pouring those footings. I don’t really care what’s going inside the building because that’s just ancillary weight. You over-design things anyway, so you’ve got some kind of cushion. So all I need to know is kind of that overall building approach and then I can start building the foundations. So your design piece is like this, and your build is just staggered just basically past that. So you’re able to start soon thereafter, very quickly. Does that make sense?
Yes. You just have small schedules?
Andy Kirby: Yes, exactly. So what you’ll try to do is you’ll try to break it up into different packages, and so that you can say that a package for design is — of this system is this long. So if you look at it in a period of time, so design-bid-build is, you do the design piece, the entire design, and then you do the build piece. No overlap whatsoever. Okay? And then when you go to design-build, you’re actually able to do a design of a specific piece and say, let’s say it’s underground, and then you’re starting the construction of the underground. But in the meantime, you still continue on with the design. So your overall design may take that amount of time, but just the little piece of underground is starting, here and you’re able to start the construction before you’re done all the way through. So a lot of times you’ll break up your design packages into underground, your structure, and then your interiors. And you can permit it in such a way. So you’re doing your underground, then maybe your structural systems, your concrete, your structural steel, what have you. And then you’re going in and doing the interiors. So about the time that you are just finishing up with putting up your structural steel, you’ve just now gotten your permitted drawings from your designer. Something like that. Does that make sense?
Is that hard to order materials and stuff if you don’t know [inaudible]? Andy Kirby: It depends. You have to put that as part of — scheduling is very crucial in design-build. You have to have a procurement log that you’re able to put into your schedule to say, “If you want me to have structural steel by X date, that means I need to be able to order it by this date, that means I need to bid it by this date, that means I need to have it designed by this date. So you have two days.” You know? So that you can back it up. So you definitely — we use pull planning, which is a lean concept to try to make sure that that works. And you really have to do across the major systems.
Electrical gear — some of these lights are 16-week lead time for lights. So design-build for smaller systems and smaller spaces is very difficult to do. But it can be done. It just depends on lead times, and you have to be very conscious of them. Any other questions about some of the project delivery systems? That was a good question about scheduling. Yes. [ Inaudible Question ] They’re not necessarily faster in design-build, but you’re able to get them earlier. Some entities will let you not finish your drawings all the way because they know it’s a design-build. They don’t care to see that you have, what kind of glazing is here. They know there’s going to be a window.
They don’t care what kind. So you don’t have to finish detailing out that this is the enclosure of this, because it’s not a waterproof system. It’s not a — it’s really aesthetics. They don’t care about aesthetics. Other than the exterior, they definitely care about exterior, but the interior aesthetics, not necessarily a concern of theirs. So you may not have to finish your drawings. Does that make sense? To get your permit? Whereas if you’re doing design-bid-build, in order to get your true value from the contractor, you have to finish drawings all the way out, because if I was bidding a job and that window wasn’t detailed, I’m not putting a price in there for that window, or I’m not getting the job.
So you have to finish the drawings. So then when you’re going to get a permit, you’re getting 100 percent, 110 percent, 100 percent drawings that are being submitted for permit, whereas design-build, you don’t have to go to that degree because I’ve got it no matter what. Whether I finish drawing it, I’ve still got it. I’ve still got to put the window in. It’s not a matter of money anymore. Does that make sense? Okay. Anybody else? Okay. So I’m going to move on to the next section. Next section is more the procurement method. So this is kind of, once you’ve decided whether you want to do design-bid-build, design-build, how are you going to procure it? And so there’s lowest price, quality-based selection, best value, and sole source. So I would say the most common is, that you see, and it’s changing, is design-bid-build with lowest price.
So they just go out there and they have an architect design it. Then they have a general contractor provide a price to it and the lowest price gets it. So the lowest price you get is obviously more traditional. It’s not subjective. Like I said, the upfront evaluation is very easy. It’s, who has the lowest price? Sometimes they’ll put some kind of qualification base in there. “I want to see that you’ve done this type of work before and then the lowest price.” Fast, simple review process.
Prices really drive the selection, so you may not get the best overall price, but you’re going to get the lowest upfront price. And this goes back to what I was saying, is you have to detail out every finite detail for the project in order to get your price. If you leave anything out, you’re going to pay for it later, and it’s going to be a little more expensive, more than likely. There’s really no incentives for innovation.
So, again, using this light over here, or the sidelight for the windows, in design-build you could say, “You know, I could put this parametric lights in here and it makes it look really neat like a fishbowl and you can see out but you can’t see in.” But whenever you’re doing design-bid-build, you don’t have that opportunity. You’re putting that specific window in. And so it really eliminates that and that’s — lowest price, if you’re providing that, you’re typically not allowed to provide alternates. Next one is qualification-based. This is typically used in the architectural community, especially within federal procurement.
Very rarely, and throughout the states I think there’s only like four states, two or three states that allow qualification-based selection for general contractors. I think it’s Arizona, Texas and Florida. And what this is, is basically, without a price typically, it’s all about your qualifications. Have you done this product type before? What is your bonding capacity? What is your capability? Show me the projects that are similar or dissimilar. What is your corporate history? What are your personnel? What are their qualifications?
Hundred-percent qualification-based and really people try to push more toward this because the pricing piece, you’re going to try to work for this general contractor — the contractors work best for the owner whether it’s a design-bid-build or design-build. If you’re qualification-based, you’re choosing on quality of that contractor. And they’re typically going to try to work as hard as possible for you to get the best price, but it’s a leap of faith for owners to take a qualification-based because they want to know, “What’s my dollar? Should I even move forward with this project if I don’t know at least what some costs are?” So there’s some iterations that they do with qualification-based.
Sometimes they’ll do, “Submit your qualifications and what you think the budget might be.” And now theoretically don’t select on what the budget is because it’s not really a hard number, but they really evaluate your qualifications and then they get an idea, kind of a free chance at estimating. A second way of doing it also is they’ll do what they call fee and GCs. So you submit your qualifications, and then along with that is your fee, your overall fee for the project, and how much it’s going to cost for you to run the project. So not necessarily the sub-trades, not mechanical, electrical, plumbing, but me as a general contractor, what it’s going to cost me and what I’m going to mark it up. So that’s a really competitive piece. So whether you’re a two percent fee and $1 million to run the job or two and a half percent and $1.8 million, and then they use that kind of balanced out with your qualifications to see who’s the best value. So that’s kind of an iteration of quality-based.
And the next one is best value. So best value is truly looking at an overall price and the qualifications and seeing which one is the best value. So you take, you can do it on a point system. You can do it on a letter grade system. However you want to do it is what the person gets on the technical proposal and then their qualifications and then their price. And those are kind of mashed together to come out with an end point. A lot of different universities will do your qualifications to get you to a certain stage, and then a price, and then you do an interview and the price isn’t opened. They’ll score you on your qualifications and your interview, then that’s your overall point total.
And they’ll take your price and divide it by that point total and it’s your price per point. Does that make sense? So it’s a price per point wins the competition. And that’s a way of doing best value. Best value is most times, is oftentimes the best way to select general contractors. DBIA’s best practices is doing a two-phase, where you do the RFQ and you short-list people. And then second phase is awarded based on your price, technical approach and your design. One reason why this is best practice is, if you’re doing a truly design-build, qualification-based selection, and you’re doing it on a first phase, we have — how many students are here? Let’s say 18. You guys don’t know who’s proposing on this job, so, you know, I do that. I’m going to propose on it. Well, 17 of your best friends are also proposing on it.
And the average cost to do a design-build proposal is probably four to six times more than a typical design-bid-build. So if you’re pursuing a design-build project, it’s $100,000 easy between the design costs to actually — you have to do some kind of design to figure out what you’re going to price. And it’s a short period of time, four weeks. You’ve got to put some kind of design together and you’ve got to put some price together. And so in a single phase, you’re competing against 18 people. Not very good changes. So a lot of people try to really shy away from that, whereas if you’re doing a kind of two-phase, the first phase is really qualification and they try to narrow it down to three to five firms.
So then you really feel like, “Hey, this is a fair competition. I’m able to compete against three to five of my best peers that I’m on the same level with.” So that’s really why — I mean, it’s a big upfront cost. I mean, some of these jobs — the Camp Pendleton Hospital. I think they spent like $1.4 million putting together their proposal. This is four teams putting this together. I mean, just think about $1.4 million. You don’t get the job, you just lost $1.4 million. There’s no stipend. And that’s another best practice, is they’d like to see stipends for this second phase, design-build in DBIA. And what that means is the losing firms get a set amount. Maybe it’s $25,000, maybe it’s two percent of the project value, just to kind of help offset some of those costs that you would do throughout the RFP stage. Okay? The next one is sole source which is everyone’s favorite.
So what this means is I just walk up to you, and you like me, and I like you, and you give me a job. I mean, how much better can you get? This I obviously very relationship-driven. Like I said, it’s most commonly in the private sector. We’re doing a Bloomingdale’s job in Palo Alto. It’s a ground-up, and that one was a sole source. We just kind of negotiated our fee and our GCs and the price of the subcontractors. We bid them out, and it is what it is. That’s the cost of doing business, and we really just negotiate our fee and GCs; it was not bid with anyone else. And so obviously that’s — the down side of that is that sometimes the owners feel like, “Well, did I get the best value because maybe if I’d have maybe brought in a little competition, maybe the price would have gone down a little bit.” But if you’re a pretty savvy buyer, owner, you’re going to know what the cost of that work is, and you’re going to know whether they’re in line or not.
A lot of times with this is, like I say, it’s repeat clients. We have a lot of repeat clients, whether it’s Bloomingdale’s. We do some work for DreamWorks. We do work for Disney. So we kind of get repeat-type work. A lot of it is sole source or negotiated. Alright, so before I get to my question, any questions about specifically those types of contract types? Anything as far as — yes, Mr. Hyatt?
Andy Kirby: Yes.
What’s kind of the positive or plus or minus for having a stipend or not having a stipend? Why does DBIA pay [inaudible]? Andy Kirby: Well, I think they look at their members and they say, “Hey, these guys are putting forth a lot of effort.” The down side is obviously the owner is paying out an additional $100,000, let’s say, between four teams that they wouldn’t otherwise have to. So obviously it increases their budget a little bit. But I think by doing that you get a better competition because people are saying, “You know, I’m willing to go after that because I know at least I’m going to get some of the money offset, and so I’m not completely in the hole. So it’s not I have to do four of these to make up back my fee.” You know, because a lot of times they’ll go in with maybe $100,000 in fee. So that means you hit four of these, you’ve just wasted $25,000 apiece. You’re just doing it for free, really, after the fourth one. So I think the down side is maybe the owner is spending more money, but I think they’re buying, by doing that, a better pool of design-build entities to select from. And I think DBIA is really looking at it saying, “You know, you can get a lot better firms if you’re able to provide even just something, a stipend, so that you’re not just wasting people’s time.” Any other questions on that? [Inaudible] Alright, so now I get to ask you a question. So, a public owner needs to procure a project at the cheapest possible upfront cost with a quick review process. Which type of method do you think they would end up doing? Say again? Lowest price? Andy Kirby: Lowest price, absolutely. And even trying to go back — I guess I gave you the answer — going back, what do you think as far as the best delivery method? If they’re trying to select as quick as possible, lowest price? Design-bid-build?
Andy Kirby: Design-bid-build, yep. Because, I mean, they’re trying to, the selection, not necessarily the overall procurement, the overall construction process to include design, but the quickest selection process, because all it is is lowest price. Very easy. Okay. Any questions on any of those? Okay. I’ll move on to contract format. So it gets kind of confusing. You’re like, alright, so you have the type, how you’re going to design it. You’ve got to figure out how you’re going to procure it. Now how are you going to contract for it? So this is all before you even put one shovel in the ground you have all these decisions you’ve got to make. Alright? So the first one, lump sum, cost plus, target value and unit price. Okay? I would say lump sum is probably, the preponderance of most contracts are lump sum. And so what that means is basically, “I’m signing up to a value. I’m telling you it’s going to be $20 million and if I make, if I save some money, I keep it. If I go over, that’s my problem.”
The owner says, “Alright. I can program — it’s going to be $20 million. Got it. I don’t have to worry about anything else, theoretically. In design-build there’s no change orders unless I change the programming. It’s $20 million.” So I can go back to my bank and say, “This is costing me $20 million. I need a $24 million loan to include all the soft costs. I know what that cost’s going to be.” So that’s the up side of lump sum. It’s guaranteed price, schedule, and performance because you’re buying all that as part of your contract. All the risk is then on the design-builder because you’re saying, “I know I can do this for an X amount of dollars.” Alright? It’s easy as far as contract administration because you don’t have to go back to the owner and say, “Okay, it was only $18 million, and let me show you why,” or “It was $21 million.
You owe me extra money. Let me show you why.” So as far as substantiation, it’s a lot easier. And, again, I’ve talked to you about the cost secure for the owner and all the savings accrue to design-builder. So, as an example for this, I mean, we try to maybe kind of get our cake and eat it, too, in the general contracting community or design-build entity, is sign up on a GMP, get so far, and transition to a lump sum. Owner gets comfortable and says, “Yeah, I don’t think you’ve got too much money in there. I don’t want to have any more risk. I want to be done for the day. Alright, I’ll change it over to a lump sum.” So then you stop the substantiation.
You stop the — that’s, like I say, that’s the best of both worlds. You’re saying, “I have no risk to get up to that cost and then I’m going to feel comfortable about it for a little while and then I’m going to set that’s the price.” That’s the best case, but it doesn’t always happen. But lump sum is, like I said, the preponderance of most contracts. Cost plus or GMP, that’s a guaranteed maximum price. So what this typically is is you, through the CM multi-prime process you’ll see this, and sometimes on the design-build. I’ve heard it called now progressive design-build, PDB, where you do a GMP on a design-build. For me it’s hard to swallow because you’re saying, “I’m taking all the risk as the design-builder and I’m going to give you some money back.” Alright, well, why is that? I’m taking the risk. I should get all the money. But it’s called progressive design-build because some of that risk is you’re not actually establishing that GMP or that cost plus until later on in the design process. So you’re’ still signed on and you’re the design-builder as a quality-based selection or a best value selection, and they select you on your fee and your GCs.
And you’re going through the design process, you’re getting some updated numbers, updated numbers; and then about 80 to 90 percent through the design process, you’re able to say, “Here’s what the cost is going to be,” and you establish a cost, and that’s what your contract value is. So, like I say, cost plus is the cost of work plus your fee. It is based on a reimbursable, so if I pay the subcontractor $100, I’ve got to prove to the owner that I paid you $100 and they want to see everything behind it, every change order, every discussion you had, every — if I’m paying my employee $10 an hour, they want to see that I’m paying them exactly $10 an hour. Nothing more, nothing less. So in that respect it’s very cumbersome. I mean, billings can be that thick for an owner, which is a lot. So you’re spending a lot of your time substantiating the cost to the owner. Another down side is kind of no guaranteed price up to a certain point, until you’ve met that guaranteed maximum price. And at this point where there’s, sometimes they do cost savings.
So like I was mentioning, some of the savings would go back to the owner, some is split with you. So contract’s not get too much into or set up where there’s maybe designer contingency or owner contingency or contractor contingency. Sometimes the contractor contingency is split and the owner’s contingency all goes back to them. And that sometimes doesn’t make us the most efficient because we’re like, “Hey, if we use that amount it’s, again, cost plus your fee.” So if I spend all your money, I get fee on that. If I don’t spend it, you just get it back.
So sometimes people aren’t as efficient as they could be. And audit disputes could occur from markups and staffing. I mean, we have a cost plus contract and, I mean, it is — we even have set rates in there and we still have discussions about it. I mean, it’s very onerous. So cost plus can be good because the risk is theoretically lower because you’re just paying me for the cost of work plus my fee. Target value. Target value, we try to use this in a lot of design-build where you’re setting a value and you’re trying to design to that. It’s very close to a lump sum where you, it’s a little bit different though. Lump sum is you’re kind of setting that value upfront and you just, or you’re giving a program and setting a value to it. This one you’re setting a value and designing that program to that value.
So it’s kind of the opposite of the lump sum. This is where the owner is really a mechanism that relies on their savings through lower risk because they’re saying, “I want to design to a specific value. My budget is $10 million. I want the best that you can provide me for $10 million.” And so you really work with the owner on a constant basis to try to design the project to meet that. A lot of times it’s very similar to the cost plus where there’s a lot of administrative burden on this to try to make sure your substantiation is appropriate. I would say not used as much. And then probably the least used is this unit price. Unit price is really difficult to use in construction unless you’re doing maybe highway work, civil work. You know, it’s linear feet of roadway is X dollars within the contract. If you maybe had a housing complex and you’re doing single family homes and it’s this model type is X dollars, this model type is Y dollars, and it’s just kind of plugging them going throughout your contract. A typical commercial contract, not so much on the unit price, not used very often. I don’t know, has anyone ever used a unit price contract in construction? I know manufacturing uses it quite a bit. Any questions on these four different types? There’s my answer — sorry. So an owner shares risk with the contractor for cost control, and the design-builder has an incentive to save money through split savings. Which contract format would this be?
So without reading that lower part, anyone want to guess? So this one, obviously it’s cost plus GMP. So as I was describing talking about the shared risk and the shared cost, that’s where GMP is valuable. A CM multi-prime, or I’m sorry, CM at risk with a GMP is a lot of times a good match. You’re helping them set, establish values and working through the design process, but you’re not taking on the risk. And at the same time you’re not taking on the risk for the dollar value either. You’re just kind of helping them establishing it. So I think this is kind of the best marry. For design-build, the design-builder prefers, probably, the lump sum because you’re saying, “I’m taking on this risk. I’m signing up these contractors. I want to get rewarded for it.” But GMP does happen. I have a project right now that’s in Mountain View. It’s a mixed-use contract and it’s, I think they call it progressive design-build where it is a, we were selected on our fee and GCs, and it’s a GMP. So we provide substantiation out the yin-yang for each billing. So it does happen. Alright. I think that is about it for me for questions. What do you guys think? Kind of confusing? You have to really kind of try to break it out into three separate sections. It’s what delivery type you’re going to do, your procurement type and your contract type.
So you have to really kind of put it in those three separate categories on how you’re going to procure it. So, what questions do you guys have? I’ve done all the talking. Go ahead, sir. For the design-build, when you submit for approval how do you get your approvals if you’re not sure of what the building’s actually going to be?
Andy Kirby: Alright, so for design approval — I’m just repeating for the camera — through the permitting process how do you get things approved when you don’t know what you’re doing? Right? Is that kind of — so it’s very interesting. So you know, I’m going to draw a building and it’s going to be this building, and it’s going to have this pad and this kind of footings. You just need to know generically what this building is going to be to design these footings. You don’t have to know every specific detail that’s in this building. I don’t need to know that I’m going to have a window on the third floor. It doesn’t really matter because you’re taking these generic loads to figure out what these specific footings are going to be. Along with that you have to do a generic fixture count. I know that each floor is going to have two bathrooms, that specifically I need to know this specific flow to come in the building so now I know what kind of water line I’ve got to have. And I know that I’ve got to have a sewage line. I know I’ve got to have fire.
So you can figure out all that before you figure out the building. So you can take this package, just this package right here, and take it into the city and say, “This is what we’re going to build, but this is what the substructure is going to need to be in order to build that building. Permit just that. We won’t go any farther than that. I just want to build that.” Does that make sense? It’s kind of tough. You have to take a leap of faith, because you’re going to say, “So you’re telling me, I’m going to design the footings without knowing the top of this?” But it’s a generic pounds per square foot on the footings themselves, as well as the utilities that go in the building. So planning departments, you have to definitely go up front and say, “I’m going to do this this way. I’m going to do multiple packages. I’m going to do a foundations package, then I’m going to do a building package, and then a tenant improvement package.” Does that answer your question?
Somewhat. Does the engineer or the town or city require a resubmittal to make sure you did what [inaudible]?
Andy Kirby: Yeah, so whenever you submit — so the question is does the city require you to resubmit and look at this whole as a package. When you submit this building piece, this piece, they’re reviewing this in the same time. So you are taking a risk. If they say, “I don’t agree with you,” You may have to go back and do some additional work down here. So you have to be, but most engineers are very conservative. So you’re going to be very sure when you submit this that it’s going to meet it for this building. Okay? You have a question?
Yeah, so design-build, is it good to like submit a set of plans that’s just a skeleton of the building?
Andy Kirby: A lot of times, and the reason why, it’s quicker to get through. The Bloomingdale’s job we’re doing, it’s not a design-bid-build. It’s a design-bid-build, but we’re really helping the owner our and almost a CM at risk type arrangement. So we are, as we’re getting the plans, we signed up for that fee and GCs and every trade is a change order into our contract. And the way they did it was we did foundations just to get going. Because they want to be, we started in December, they want to be open in August. This is a full Bloomingdale’s, 109,000 square feet, three stories, structural steel, glazing everywhere, and they have 52 different vendors inside. So that means Coach, all the makeup, every one of those has to do a build-out inside. So they want to do it in eight and a half months.
So we started structural steel as quickly as possible. So someone had the question about ordering materials early on. We ordered the steel like the day, I had to do a schedule and go, “I need to order steel by September in order to get it in the ground in February so that I can have a structure that I can put tenant improvements in in May.” So they’ll really break it out in design-build where you can say, “I’m doing this. Then I’m going to do this. And then I’m going to do tenant improvement.” Because you’re able to build without designing the whole thing. But with that requires a lot of coordination, and that’s where we use a lot of modeling to do that because, as an example, for this Bloomingdale’s job we have the foundations, theoretically, or the pad was set. So that means it was kind of compacted already. We came in, did the foundations with one architect, Ginslow [phonetic] Architects, and then the interiors is a completely separate architect halfway across the country.
And they never talked whatsoever. So we’re taking these tenant improvement drawings and these shell drawings and trying to jam them together and make sure they work. So we’re trying — and at the same time they want the highest ceilings possible, so we have to do some modeling to say, “Well, we’re going to have to move some equipment over here and maybe move some electrical loads this way and run different circuits different ways and go back through it.” So it’s interesting. So in answer to your question, in design-build they try to break up packages because they can and it’s faster. Do they tend to be over-constructed to be on the safe side? Andy Kirby: Sometimes the structures are, they can be. It depends, not all design-builds will do in three separate packages. So don’t let me lead you down that every design-build does three separate packages. That’s not always the case. They may do a full build-out. The design-build we’re doing in Mountain View, we’re at like 90 percent, and we’re starting on foundations. So it doesn’t always go that route. But it can, they can spend a little extra money just to get things going. I mean, like again, back to the Bloomingdale’s, they don’t care as much about the cost because they know when they open they’re making $1 million a day. So they want to be open as fast as possible. So if you spend an extra $30,000 on footings, it doesn’t really matter. So it just depends on the client.
On like design-bid-build where you have two contracts, do they have two different contract formats for one per designer and the other for [inaudible]?
Andy Kirby: Yeah, so the question is for design-bid-build, do they have two separate contract formats? Yes. So you’ve got two separate, in design-build you’ve got the owner, and then you go down to the designer, and then the GC. A lot of times these guys are almost, they’re on the lump sum format because they’ll just say, “I know it’s going to cost me,” they can do a sheet count. They can say it’s going to take 48 sheets and it’s 12 cents a sheet. It’s going to cost me X amount of dollars. I mean, it’s amazing how they do that. With 3D modeling it’s not as easy because you can’t count sheets. But they can tell you the number of man hours that it takes to do a specific job. For GC, then they can do a lump sum or they could do a GMP. And a lot of times they’ll do that for like a CM multi-prime, which is the same arrangement as a design-bid-build. They’ll do the designer as a lump sum and the GC will come in and do a GMP because they’re helping out and going through the process and figuring out what the costs are. And then, about the 80 percent, 90 percent, then they’ll set a GMP at that point. So yes, you can have different contract formats. Any other questions? Yes, Doug.
Can I ask a question regarding the criteria documents and bridging documents and how to [inaudible]?
Andy Kirby: That’s a good question. So the question was about criteria documents and about bridging documents and how those relate to the risk and sometimes reward of both the design-builder as well as the owner. So let me just draw that out, make sure you guys understand about bridging documents. And some of this is the preference of DBIA and what they say, and some of this is just industry practice. But theoretically this is the timeline of design, and then this is construction. The design process, they prefer to have bridging documents prior to 20 percent. That’s — DBIA’s preference is 20 percent. So what that means is, bridging documents are, you hire an architect to do bridging documents to go ahead and send out to select your design-builder. So what they’re doing is kind of adjacencies. What that means is like rooms are, this is the floor plan and you have this room, and this is your bathroom and then next to it is going to be an office. They lay out stuff like that and do generic building schematics. And that’s where they get to the 20 percent mark of these are called bridging documents.
And a lot of times — I was taking a class and this guy did a lot of DOT work and they say they go almost right here, 90 percent, for bridging documents, because the Department of Transportation, in this case, they like to know pretty much what they’re going to get before they turn it over to the design-builder which, as we talked about design-build, that is one of the things that design-builders have that opened to interpretation and their ideas. That’s the beauty of design-build is, “I don’t have to do that specific glass. I can do whatever glass I want as long as it meets your criteria of open space. But if you’re telling me it has to have three separate windows in there, you’re really taking away that flexibility.” And so their intent is that’s why they want to stop it at 20 percent and not go up to 90 percent because they want to leave this room for those collaborative open ideas. But at the same time, some owners don’t feel comfortable at this 20 percent because they aren’t sophisticated enough to design their program or specify their program or their end needs. They’re really stuck in the, “I need to have 26 laptops and they all have to be Acer and they all have to have six hook-ups and I want four HDMI,” going down to prescriptive versus the performance. So obviously the further you get down in the design process, you’re becoming more prescriptive… and you’re reducing your chance for innovation. And on top of this, this is risk.
The more that this bridging architect designs, the more risk the owner takes on. The owner takes on the risk of what they’re providing to that design-builder. So in a design-bid-build, owner, architect, contractor, the owner has 100 percent of that risk because they paid for this, they own it, and they pass it onto the contractor. If I have an issue, it’s yours, owner. As you get further down this 90 percent, that owner takes on more and more of that risk, regardless if it’s design-build, because you’ve given me the criteria on which to base it on. So the less that an owner can provide you and performance-based, the more risk the contractor takes on. Does that make sense, anyone, sort of?
If you’re looking to find a design [inaudible] bridge documents in CM at risk [inaudible]?
Andy Kirby: Yes, because you have to finish them. A lot of times, like the Army Corps of Engineers, they call theirs site-adapt. So they’ll design what a school looks like and it’s just a matter of putting it wherever you want it. But you still have to finish it and so that’s where the design-build comes into it. Or CM at risk, you can do it in that respect because you’re selecting the contractor without finishing it. But you can’t do it in design-bid-build because you can’t select your contractor until you have your price, lowest price. Did that answer your question, Doug? Okay. Alright. Anybody else? Any other questions? Yeah.
How is design-build adapted to [inaudible]?
Andy Kirby: Very good. I mean, that’s probably — the industry that probably uses it the most is industrial buildings, like manufacturing. A lot of times they’ll say, “I want to create a thousand widgets. I don’t care how you do it. Here’s my specifications on how to create a widget. This is the design criteria. I don’t care what he layout is. I want to be able, at the end of the day, flip a switch and I get a thousand widgets out of that.” It’s very simple. So manufacturing, it’s very easy. In industrial-type plants, if “I need to produce so much oil in a day, I want to make sure I am producing crude oil in X amount of days and it needs to be produced in this way.” So it’s very easy for design-build. You just set those end criteria that you want, very simple. More so, some people say, than hospitals. Even though hospitals are a big user of design-build. Any other questions? Anybody else? It’s been good. It’s been fun, a lot of fun. I think everyone’s awake, so that’s good. Alright, that’s all.
Thank you very much.
Andy Kirby: You’re welcome. Thank you.