For manufacturers, production efficiency, innovation, cost management, and time to market are critical factors for achieving a competitive advantage. As such, manufacturing facilities are a key part of a company’s business strategy, and a strategic approach to delivering capital projects is required. By choosing the right project delivery method for capital construction projects, manufacturing companies can ensure successful project delivery and meet overall business goals associated with the project.
While there are a variety of project delivery methods available, choosing the appropriate strategic approach to project delivery varies by project. The decision needs to be based on a number of factors, including budget, schedule, cash flow, project complexity, risk mitigation, project team composition, and project goals.
Traditionally, manufacturing firms retained sufficient in-house engineering and project management resources on staff. However, due to economic and competitive issues, many manufacturing companies have reduced their in-house capabilities. This is a key consideration in selecting a project delivery method.
Whether building a new greenfield facility, modernizing, or expanding an existing facility, there are a variety of approaches available for design and construction. Essentially, a project delivery method is a configuration of roles, relationships, responsibilities, and sequences on a project. Here’s a brief overview of some of the typical project delivery methods.
DBB is the most common project delivery method in the manufacturing industry. Owners with sufficient in-house staff contract with different entities for each phase of design and construction, and take on the responsibility of orchestrating the various team members. Each step in the execution process follows the other sequentially with minimal overlap. Under the DBB approach, the owner functions as the overall project manager and hires external engineers, consultants, and contractors.
The owner typically starts by retaining an architect to program and develop a scope of work, then develop the project plans and specifications. The selection process for the architect can be competitive on a lump sum basis or the more traditional approach where the architect’s costs are a defined percentage of the total installed cost (TIC). The owner may have already selected manufacturing process equipment at this point. The architect generally prepares a preliminary cost estimate to assist the owner in budget development. These estimates are typically historically or empirically based.
The DBB approach is typically used when the project is not well-defined and there is adequate time for the design and construction phases. DBB projects are typically competitively bid and priced as lump sum. The competitive nature of the bidding process usually results in a competitive cost for the owner, but the quality of the subcontractors is left to the GC. Under this method, all construction and performance risks are assumed by the contractor. Scope variations resulting in change orders and schedule delays can occur if the owner’s intent for the scope of work is not well-defined by the architect to the contractor.
With DBB, the contractor has little influence on the project design, and opportunities for alternative approaches at bid time are minimal. In addition, the nature of DBB projects can contribute to an adversarial relationship among team members. Owners run the risk of expending significant funds and time for detailed design only to find out the final project, as designed, is above the project budget and schedule parameters.
The DB project delivery model is suited for manufacturing clients that require fast-track project delivery and want a single point of contact. The contractor and designers are hired by the owner to deliver a complete project. This model has been used extensively in the manufacturing industry for manufacturing, warehouses, and offices.
The owner selects a DB firm from prequalified companies that have submitted designs and prices based on the project requirements. The DB firms retain their own architects, engineers, and other consultants. The selection criteria are based on a combination of factors, including design, price, schedule, and team. The DB firm selected by the owner is typically responsible for preparing the estimate and scope, as well as producing all construction drawings, details, and specifications. DB contracts are typically lump sum and based on the design that accurately meets the owner’s requirements. The owner may be given a guaranteed maximum price based on the defined requirements.
DB is utilized to reduce the project delivery schedule. DB is typically used for architecturally-driven projects. The DB concept typically results in enhanced communication and a higher degree of accountability. While this is a complex delivery method, the compressed schedule and value engineering approach often result in cost savings for the owner. The DB approach is well-suited for larger, less complicated, time-sensitive projects where the owner has a clear project definition and concept prior to soliciting bids and desires a firm price to be confirmed early in the process.
CONSTRUCTION MANAGEMENT (CM)
Under the CM method, the owner will retain a firm to act as its construction management representative. There are a number of variations on the CM model. An architect is retained to develop a design package. Either the architect, design engineer, or CM rep will develop a cost estimate. The CM is retained for a fee and is responsible for managing detail design and construction while meeting goals in terms of quality, scope, cost, and schedule are met.
The CM rep is also responsible for estimate development, construction, engineering, subcontracts, scheduling, reporting, quality control, and cost controls. Then architects, engineers, and consultants are retained to develop a program. Specifications and drawings are developed for various parts of the project. Multiple construction packages are developed, and bids are solicited from various trades that then become contractors reporting to the CM. Under the CM method, design and construction activities overlap. The CM rep is essentially an extension of the owner and is typically referred to as “Agency CM” or “CM for Fee.”
The CM model is well-suited for owners that lack in-house design and construction expertise or capacity. The method ensures consistent oversight and careful monitoring of costs and schedule. However, this method can result in additional upfront costs and create communication challenges among the team.
EPC has emerged as a preferred choice of project delivery for many industries and is starting to gain favor in manufacturing. With an EPC contract, the owner has a single point of contact for the project. Under this model, the EPC firm handles the design, procurement of all equipment and construction materials, and construction services for turnkey delivery of the facility, usually at a lump-sum price. The EPC process starts with a preconstruction effort that involves some preliminary planning and engineering to define the scope, schedule, and costs of the project. This can be completed for approximately 1% to 3% of the TIC. The EPC firm has complete responsibility for the project from start to finish.
Project scope and estimates are developed by the EPC firm. The project schedule and project budget are known at the start. All scope and budget risks are passed to the contractor. EPC project delivery offers the tightest integration of activities during the construction process through a structured and disciplined approach. In addition, communication among the design, procurement, and construction teams begins immediately.
The EPC model helps align team members for optimal project performance. This often results in a collaborative, value-based construction process. EPC delivery is typically used for process or equipment driven projects. The EPC model reduces project risks for the owner, delivers predictable results, and maximizes the effectiveness of capital planning.
PRICING CONSIDERATIONS: GUARANTEED MAXIMUM PRICE (GMP)
The GMP approach is similar to the lump-sum bid, except the GC, CM rep, EPC team, or design firm submits a guaranteed maximum cost rather than a firm lump-sum bid. The GC or EPC firm is compensated for actual construction costs plus a fixed fee. Design fees can be on a cost-plus or lump-sum basis. For GMP pricing, there needs to be a well-defined scope and time frame. On a schedule-driven project, the owner to selects team members based on fees and/or labor pricing, prior to developing project details and scopes necessary to procure credible lump-sum bids.
Regarding the actual construction phase, a general contractor or EPC firm can participate in a “shared savings” approach that incentivizes them to manage costs and bring the project in under the GMP. If work is completed for less than the GMP, the contractor and owner can opt to share the savings. Additional incentives can be addressed for sharing risk of schedule, safety, and quality. If the actual costs exceed the GMP, the contractor carries that burden. These variations effectively identify project risk areas and initiate important discussions concerning project responsibilities and ultimate accountability among the project team members.
Under the GMP approach, the owner is given a “not-to-exceed” cost during the project development phase for the overall project by the GC or EPC firm. The GMP approach allows the owner to establish a firm project cost early. Once the GMP is established, the risk of cost performance is transferred to the GC. GMP arrangements typically involve an open-book approach to costs. The GMP feature can be successfully implemented in most project delivery approaches.
ACHIEVING COMPETITIVE ADVANTAGE THROUGH PROJECT DELIVERY
Whether manufacturing, R&D, or warehousing, capital projects are becoming more challenging and complex. The right configuration of roles, relationships, responsibilities, and sequences is essential. The owner’s ability to define and develop project requirements and scope, as well as provide project management, significantly impacts the decision process. Owners need to consider cash flow (initial and overall), opportunities for concurrent processes with other project activities (e.g. process design, long lead-time items), and the owner’s capital approval process.
Selecting the right delivery method can be challenging, but the success of any capital project depends on it. Project objectives vary by each project, and there is not a single project delivery method that addresses every situation. While there are trade-offs for each delivery method, quality, cost-effectiveness, and timely project delivery can be achieved. By clearly defining expectations and balancing project goals, costs, schedule, complexity, risks, and the team, manufacturing companies can achieve competitive advantages through project delivery.
This article orginally appeared in Made in S.C. magazine and published by the South Carolina Manaufacturer’s Association.