PROJECT DELIVERY SYSTEMS

The entire construction process, from the planning of a project through its design and construction, is sometimes
referred to as the project delivery system. For purposes of this paper, these systems have been grouped into two
basic types: 1) those in which the design and construction are contracted for separately and sequentially (design-
select-build) and 2) those in which the design and construction are contracted for on a "turn-key" basis (design/
build).
A. Design - Select - Build
In this method the design work is completed by a design professional (architect). The contractor is then selected
and a construction contract is entered into which calls for the contractor to build the improvements according to
the completed design (plans and specifications). In this first type of delivery system, the project is usually designed
before the owner selects the contractor and the construction commences, and the design work is performed by
one or more architects or other design professionals who are independent of the contractor. On larger projects, an
owner may contract with separate architects for the design of the shell of the building and the finish-out (the
interior). In this age of increasing specialization, an owner may also contract with one or more engineers or other
design professionals for the site work and the civil, structural, electrical, and mechanical engineering design. When
the services of these specialized professionals are required, some owners insist on direct contracts with these
professionals. This often gives the owner greater control over these design professionals. On the other hand, many
owners prefer to enter into one "turn-key" contract for design services so that the owner can look to one party to
coordinate and be responsible for the complete design. In this latter situation, the architect (or other design
professional) may have to enter into one or more subcontracts with these specialized design professionals (often
referred to as "subconsultants").
Once the plans have been completed (or have reached a certain stage of completion), the owner then selects the
contractor(s) to construct the improvements. The owner must determine whether it will use one general
contractor who will be responsible for delivering the entire project or whether it will contract with multiple prime
contractors to perform discreet segments of the work. There are distinct advantages and disadvantages to each
arrangement.
If an owner is very experienced with regard to construction and has the capability of providing supervision and
coordination of the work, there can sometimes be a savings in eliminating the "middle-man" by not contracting
with a single general contractor. Instead, the owner contracts directly with specialized subcontractors who
perform the various segments of the work. When an owner lacks its own supervisory forces, it can enter into a
contract with a construction manager (see discussion below) who can provide those services. Of course, the
compensation paid to the construction manager must be considered in determining the actual savings by the
owner when eliminating the general contractor.
There are distinct disadvantages to the multiple prime arrangement. Supervising and coordinating the work of
various prime contractors can be a very difficult task. Inadequate supervision and coordination can turn the project
into something similar to the construction of the Tower of Babel with everyone speaking in different tongues.
Additionally, if a problem with construction arises, every prime contractor that might even remotely be
responsible in whole or in part will be pointing a finger at one of the other prime contractors. Instead of being able
to go to one source (the general contractor) to correct a problem, the owner may have to go to two or more prime
contractors, neither of whom may accept any responsibility for the problem. Accordingly, owners should weigh the
risks very carefully before deciding to forego a general contractor who can coordinate all of the work and be
responsible for delivering a complete, finished product.
Once the decision is made as to how many prime contractors will be performing the necessary construction
services, the owner must decide whether the contractor(s) will be selected on the basis of some type of
competitive bidding process or whether the owner will enter into negotiations with a selected contractor. When
the contractor is selected, the parties enter into a contract for the construction services which calls for the
contractor to construct the improvements in accordance with the plans and specifications. One of the most
significant advantages to the design-select-build delivery system is that it gives the owner more control over the
design of the project as well as the costs. Because the construction contract is based upon a completed set of
plans, both the owner and the contractor can obtain a reasonable estimate or prediction of cost and time for
construction. This measure of certainty gives the parties the ability to bargain for fixed contract prices and times
which, in turn, allows the owner to control these risks in the contract documents.
The owner also has some measure of control over the design of the improvements that will be constructed. During
the design phase, the architect should be able to provide the owner with reasonably accurate cost estimates for
particular items or aspects of the design. By working with the architect during the design phase, an owner can
obtain preliminary costs estimates which allow it to direct modifications in the design requirements. The final
result of the design phase should be a project design that best meets the owner's needs and desires within its
budgetary constraints.
The design-select-build delivery system takes advantage of those natural market forces which operate to give the
owner some degree of leverage in the initial stages of negotiation. Except in the rare situation where the demand
for construction services far outweighs the supply of those willing to furnish those services, an owner is usually in
its best negotiating position prior to the actual selection of the contractor. In other words, contractors are more
likely to agree to terms and make concessions favorable to the owner in order to "get the work". Therefore, an
owner is usually in its best position to obtain favorable contract terms with regard to pricing and other matters
when those terms are part of the initial negotiations. On the other hand, when the owner defers decisions
concerning pricing to some point after the contractor is selected and work has commenced, the owner has usually
lost considerable negotiating strength. The result is often less favorable to the owner.
B. Design/Build
In the design/build delivery system, the owner enters into a contract with an entity that will be responsible for
both the design and construction of the improvements. The design/build contractor may be a joint venture
between an architect or design professional and the contractor. Or, the design/build contractor may be a general
contractor who subcontracts with an architect or other appropriate design professional or who uses an "in-house"
architect or design professional to provide the design services. Occasionally, the design/build contractor may be
the architect or design professional who subcontracts with one or more contractors to furnish the construction
services.
There are several advantages to a design/build delivery system for an owner. First the owner may look to a single
source for the responsibility for the finished product. In other words, whenever a problem arises in construction,
the owner will not be faced with having to determine whether the responsibility should fall on the designer or the
contractor. In the design/build system, the designer and the contractor are one and the same, so that the owner
does not have to deal with the architect and contractor attempting to place the primary responsibility for
correction on the shoulders of the other party. The owner need only go to the design/builder for the correction
regardless of whether the primary fault lies in the design or the execution of the work.
Proponents of the design/build delivery system usually claim that the primary advantage of this system is that it
saves time. Because the contract negotiation occurs at the same time and with the same party for the entire
design and construction package, there is no dead time between the completion of the plans or design and the
commencement of construction. In fact, it is quite common for construction to commence on a design/build
project before the plans are finalized (see discussion of "fast track" below).
Because one entity is responsible for the design and construction services, this delivery system can be ideal for the
type of project in which the design requirements have to remain flexible after the initial contract negotiations.
Accordingly, it is very common to see design/build systems being used on "build to suit" projects where an owner
contracts to construct improvements to meet the requirements of a tenant.
Some proponents of design/build also maintain that an owner can save money on a design/build project because it
is dealing with a single entity for the entire package and there are certain efficiencies with a single source of both
design and construction which should result in savings that can be passed on to the owner. While this may occur in
some situations, such an opportunity for savings probably does not exist for many projects. On the contrary, the
inherent uncertainty about the design in the initial stages of the contract negotiations deprives the owner of an
opportunity to nail down cost terms at the time when the owner's leverage is usually at its greatest.
In order for the design/build contractor to price its services, it has to know what the owner requires or desires
from the project (the owner's design criteria). Unless the design criteria are specific and complete, there can be
little certainty in the pricing structure of the contract. Accordingly, it is very difficult for an owner to control its
risks relating to job costs on a design/build project unless the owner has either provided the design/builder with
tight design criteria or the owner has relinquished considerable control to the design/builder over the design of
the project. Unless the owner gives the design/builder a blank check, the owner may well end up with a project
that does not look or function like the owner originally intended.
When comparing the total project costs between the design-select-build and design/build systems, the owner
should consider the cost of preparing the design criteria. While such costs should be considerably less expensive
that the cost of designing the project, they can be substantial and should be factored in.
C. Other Variations
While most contracting arrangements can fit within one of the two project delivery systems described above,
there are two variations that are sometimes encountered in either such system.
1. Fast Track
A fast track project is one in which the construction commences before the design is completed. A design/build is
usually a fast track type of project. However, not all fast track projects are design/build.
As previously discussed, the design/build delivery system calls for the owner to contract with a single entity which
furnishes both the design and construction of the improvements. In such a delivery system, the construction often
commences before the design work is completed. This makes it a fast track project.
However, some design-select-build arrangements are fast track as well. When an owner is willing to sacrifice some
control over costs in order to shorten the time for construction, the owner may enter into a construction contract
and call for the commencement of construction prior to the completion of the design. This usually ensures a
completed project at an earlier date; however, because the architect and contractor do not have a completed and
final set of plans when the construction contract is negotiated, it is very difficult for the owner to enter into a
contract with fair, but guaranteed pricing unless the owner is willing to give up considerable control over the
design of the project.
The selection process gives the owner considerable leverage in the negotiation of a construction contract.
However, if the plans have not been completed when the owner negotiates the terms of the contract for
construction, the owner is usually unable to negotiate a firm contract price at that time. In such a situation, pricing
is often determined by an agreement after construction has been well underway. This means that the owner is
having to negotiate with the contractor over a lump sum price or guaranteed maximum price (see discussions
below) at a time when the owner often has the least amount of leverage. Given this significant disadvantage for an
owner, most fast track projects are design/build where, at least, the owner has the benefit of dealing with a single
entity which will be responsible for the entire project.
2. Construction Management
Construction Management is sometimes viewed as a separate type of project delivery system; however, it can be
adapted for use in both the design-select-build and the design/build systems. Over the course of the years,
architects have become less willing to assume the responsibility (with its associated liability) of acting as the
representative of the owner in connection with the projects they have designed. In fact, many of the Owner-
Architect form contracts which are commonly used in the industry impose an obligation on the architect to act as a
neutral party in connection with disputes between the owner and the contractor. Those same contracts often limit
the architect's responsibility for actively monitoring the work of the contractor. As construction has become
increasingly complex, many owners have come to realize that they need skilled professional assistance in
monitoring and coordinating the work of the architect and the contractor and assisting and advising the owner in
connection with the decisions and determinations an owner must make on a typical construction project. With the
recognition of this need, a relatively new segment of the construction industry -- construction management -- has
developed.
There are two types of construction managers (commonly known as "CM's"). The "agency" type of construction
manager renders professional services to the owner. A "CM-agent" does not control the means and methods of
any of the contractors or subcontractors (or their employees), does not subcontract with subcontractors or
suppliers, and does not assume responsibility for the construction work itself. In the context of the CM-agent, an
owner will either contract with a general or prime contractor who enters into subcontracts and is responsible for
delivering the completed work or the owner will contract directly with multiple prime contractors who,
collectively, cover the entire work.
The CM "at Risk", however, actually enters into subcontracts and supply agreements and assumes the risk for
delivering the completed work. The biggest difference between a CM at Risk and a general contractor is semantics
because both enter into and coordinate the work of the subcontractors and both assume the responsibility and
risk of delivering the completed improvements. One actual difference is that a CM at Risk may be called upon to
advise the owner in the pre-construction phases of the project (e.g. assisting and advising the owner in connection
with planning the project, architect selection, and coordinating the design services performed by the architect and
the other design professionals). Once the construction commences, the CM at Risk moves into the traditional role
of the "general contractor."
With regard to the design-select-build system, the owner may contract with a CM-agent to act as the owner's
representative and assist in all facets of the project from the initial negotiations with the architect through the
actual construction and final acceptance of the improvements. Although one sometimes encounters a design-
select-build project in which the contract between the owner and the contractor is characterized as a construction
management agreement, in such a situation the CM at Risk is really nothing more than a general contractor.
One encounters construction managers (more accurately, CM-agents) with some frequency on design/build
projects. It is often the CM-agent who assists the owner in developing the design criteria which can be so
important in allowing the owner to control costs and design on these types of projects. Unless the owner is
relatively sophisticated and experienced with regard to construction, the CM-agent can serve a very valuable role
in assisting and monitoring the work of the design/build contractor on behalf of the owner.
As with the design-select-build system, while it is conceivable that the design/build contractor could be
characterized as a CM at Risk, in such a situation the CM at Risk is nothing more than a general contractor.
These (and next) excerpts were collected from:
http://pmbook.ce.cmu.edu/08_Construction_Pricing_and_Conctracting.html
http://www.constructioninside.com/2008/07/07/construction-contracts-an-overview/
http://www.pp.okstate.edu/Arch/Chopshop/New%20Folder/A11.pdf
http://constructioninside.com//wp-content/uploads/types_of_contracts.pdf


Contract types based on Means for compensation
1. Lump Sum Typically used with Design-Bid-Build method of project procurement.
a. A lump sum contract, sometimes called stipulated sum, is the most basic form of agreement between a
supplier of services and a customer. The supplier agrees to provide specified services for a specific price.
The receiver agrees to pay the price upon completion of the work or according to a negotiated payment
schedule. In developing a lump sum bid, the builder will estimate the costs of labor and materials and add
to it a standard amount for overhead and the desired amount of profit.
b. Most builders will estimate profit and overhead to total about 12-16 percent of the project cost. This
amount may be increased based on the builder's assessment of risk. If the actual costs of labor and
materials are higher than the builder's estimate, the profit will be reduced. If the actual costs are lower,
the builder gets more profit. Either way, the cost to the owner is the same. In practice, however, costs
that exceed the estimates may lead to disputes over the scope of work or attempts to substitute less
expensive materials for those specified.
c. The Stipulated Sum contract may contain a section that stipulates certain unit price items. Unit Price is often
used for those items that have indefinite quantities, such as pier depth. A fixed price is established for
each unit of work.
d. Contractor free to use any means and methods to complete work.
e. Contractor responsible for proper work performance.
f. Work must be very well defined at bid time.
g. Fully developed plans and specifications required.
h. Owners financial risk low and fixed at outset.
i. Contractor has greater ability for profit.
j. Requirements:
1) Good project definition.
2) Stable project conditions.
3) Effective competition essential when bidding.
4) Much longer time to bid and award this type of project,
5) Minimum scope changes due to higher mark-ups than occurred at bidding.
k. Advantages:
1) Low financial risk to Owner.
2) High financial risk to Contractor.
3) Know cost at outset.
4) Minimum Owner supervision related to quality and schedule.
5) Contractor should assign best personnel due to maximum financial motivation to achieve early
completion and superior performance.
6) Contractor selection is relatively easy.
l. Disadvantages:
1) Changes difficult and costly.
2) Early project start not possible due to need to complete design prior to bidding.
3) Contractor free to choose lowest cost means, methods, and materials consistent with the
specifications. Only minimum specifications will be provided.
4) Hard to build relationship. Each project is unique.
5) Bidding expensive and lengthy.
6) Contractor may include high contingency within each Schedule of Value item.
2. Unit Price
a. In a unit price contract, the work to be performed is broken into various parts, usually by construction trade, and
a fixed price is established for each unit of work. For example, painting is typically done on a square foot basis. Unit
price contracts are seldom used for an entire major construction project, but they are frequently used for
agreements with sub-contractors. They are used for maintenance and repair work. In a unit price contract, like a
lump sum contract, the contractor is paid the agreed upon price, regardless of the actual cost to do the work.
b. When the work is clearly defined but quantity is unknown or uncertain, a unit price contract may be employed.
c. Requires:
1) Adequate breakdown and definition of work units
2) Good quantity surveying and reporting system
3) Sufficient design definition to estimate quantities of units
4) Experience in developing bills of quantities
5) Payment terms properly tied to measured work completion
6) Owner-furnished drawings and materials must arrive on time
7) Quantity sensitive analysis of unit prices to evaluate total bid price for potential quantity variations
d. Time and Cost Risk are Shared:
1) Owner at risk for total quantities
2) Contractor at risk for fixed unit price
e. Large quantity changes (>15-25%) can lead to increase or decrease in unit prices.
f. Advantages:
1) Complete design definition not required
2) Typical drawings can be used for bidding
3) Suitable for competitive bidding
4) Easy for contractor selection
5) Early project start possible
6) Flexibility: Scope and quantities easily adjustable
g. Disadvantages:
1) Final cost not known at outset since bills of quantities at bit time are only estimates
2) Additional site staff needed to measure, control, and report on units completed
3) Unit price contracts tend to draw unbalanced bidding

3. Cost Plus Typically used with Construction Management style of delivery
a. In this delivery method a Construction Manager (CM) is selected to construct the project based on fully
completed drawings and specifications prepared by an architect hired by OSU. The CM provides advice during
design. The CM is selected based on competitive proposals from three to five firms.
b. The CM approach differs from the other methods in the following ways (see the section later as well):
1) The project manager approves the CMs construction management staff and their required time on the
project.
2) The CM provides pre-construction services, including construction cost estimating and constructability
review, throughout programming and design.
3) The project manager approves the subcontractor bidders list and the selected subcontractors.
4) All of the costs of the CM and subcontractors are open book to the project manager and subject to
the project managers approval. There is no profit mark-up by the CM on the subcontracts.
c. The CM approach best fits a project where design requirements are complex, the owner wants to supplement
the expertise of its project management staff, and the owner wants full control of the design and construction
process. This approach is considered the most cost effective since the CM is involved early to help assure the
design is constructible and affordable, and the owner can control the level of services that are purchased.
d. The CM method is significantly faster than the GC method when a fast-track approach is used. In this
approach, the CM starts construction on each of the project components as soon as that particular portion of the
design is completed and bids are received for that work. In new construction, the earthwork and foundations can
begin months before the rest of the building design is fully completed.
e. Types of CM construction tracts commonly used:
Cost Plus Fixed Percentage Contract
For certain types of construction involving new technology or extremely pressing needs, the owner is sometimes
forced to assume all risks of cost overruns. The contractor will receive the actual direct job cost plus a fixed
percentage, and have little incentive to reduce job cost. Furthermore, if there are pressing needs to complete the
project, overtime payments to workers are common and will further increase the job cost. Unless there are
compelling reasons, such as the urgency in the construction of military installations, the owner should not use this
type of contract.
Cost Plus Fixed Fee Contract
Under this type of contract, the contractor will receive the actual direct job cost plus a fixed fee, and will have
some incentive to complete the job quickly since its fee is fixed regardless of the duration of the project. However,
the owner still assumes the risks of direct job cost overrun while the contractor may risk the erosion of its profits if
the project is dragged on beyond the expected time.
Cost Plus Variable Percentage Contract
For this type of contract, the contractor agrees to a penalty if the actual cost exceeds the estimated job cost, or a
reward if the actual cost is below the estimated job cost. In return for taking the risk on its own estimate, the
contractor is allowed a variable percentage of the direct job-cost for its fee. Furthermore, the project duration is
usually specified and the contractor must abide by the deadline for completion. This type of contract allocates
considerable risk for cost overruns to the owner, but also provides incentives to contractors to reduce costs as
much as possible.
Target Estimate Contract
This is another form of contract which specifies a penalty or reward to a contractor, depending on whether the
actual cost is greater than or less than the contractor's estimated direct job cost. Usually, the percentages of
savings or overrun to be shared by the owner and the contractor are predetermined and the project duration is
specified in the contract. Bonuses or penalties may be stipulated for different project completion dates.
Guaranteed Maximum Cost Contract
When the project scope is well defined, an owner may choose to ask the contractor to take all the risks, both in
terms of actual project cost and project time. Any work change orders from the owner must be extremely minor if
at all, since performance specifications are provided to the owner at the outset of construction. The owner and the
contractor agree to a project cost guaranteed by the contractor as maximum. There may be or may not be
additional provisions to share any savings if any in the contract. This type of contract is particularly suitable for
turnkey operation.