Alternative delivery contacts place greater risk on contractors

by Melody Finnemore

There was just one problem in the Vancouver Downtown Redevelopment Authority's vision for a $68.6 million convention center and hotel that would catalyze the city's revitalization strategy.

The municipal agency had no money for the project.

The new research building at the University of Washington will be built under a DBOM contract.

It solved the problem by using an alternative delivery contract, which owners throughout the Northwest are using more often to jump start projects when money or time is scarce. Contracts that go beyond the hard bid are nothing new, but owners are becoming more daring in how far they can push the risk onto the contractor.

"We financed this project with tax-exempt bonds issued by the Downtown Redevelopment Authority," said Steve Burdick, the group's executive director and Vancouver's director of economic development. "The Downtown Redevelopment Authority doesn't have any money other than the bond proceeds, so it was necessary to write a construction contract that placed all of the risk on the contractor."

FaulknerUSA won the project with a design-bid contract that allows the Austin, Texas, contractor to save money through value engineering while guaranteeing a maximum price and carrying the entire risk. That includes any delays or damage caused by earthquakes, floods, changes in land-use law or even archeological discoveries that might result in an extensive dig.

Located a few blocks south of Esther Short Park, the convention center will offer 30,000-sq.-ft. of new meeting space. The seven-story hotel, managed by Hilton Hotels Corp., will provide another 226 rooms to the city's current inventory of 1,500 rooms. The hotel and conference center are scheduled to open in 2005.

Burdick said the design-build contract made the project possible given its financial constraints.

"Once you get through the excruciating negotiation of the contract, the project goes much faster and there are some cost savings," he said.

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The trend toward contractors carrying the lion's share of the risk on a project has taken another step with the emergence of design-build-operate-maintain contracts, or DBOMs.

The University of Washington in Seattle used a DBOM contract for the first time on a 140,000-sq.-ft. research and technology building due for completion in 2005. The project team includes MA Mortenson Co. and CollinsWoerman, both of Bellevue, Wash., and Johnson Controls of Bothell, Wash.

Ed Wundram, founder of the Design Build Consulting Group, wrote the contract for the project and said the DBOM contract represents a new era in construction.

"This is where owners are going," he said. "They want someone to take over the operations of facilities as well as the development."

The UW project includes a utility service and building management contract with a monthly fee guaranteed for 30 years. The university's objectives in implementing the DBOM contract were to provide multidiscipline, scientific research facilities at below market rate; meet a three-year schedule for procurement, design and construction; and obtain a guaranteed life-cycle cost for 30 years.

"Like any contract, it requires some intelligent allocation of risk," Wundram said. "What we've noticed is that we're marrying two partners who have vastly different business plans."

Contractors tend to get in, build a good product and get out, while those who work in operations have a longer-term outlook when it comes to payback, Wundram added. "Marrying those two took a bit of a learning curve on our part."

Another lesson involved honorariums for project teams that were not selected to build the project. The honorarium was $150,000, though Wundram said he felt the amount should have been higher.

"I had recommended $200,000, but the university wanted a lower figure, as owners usually do," he said. "As I do more of these DBOM projects, I'm seeing that figure escalate to more where it should be. You have to make it worth the pain of putting together a proposal."

In Clackamas County, Ore., a DBOM contract guided the construction of a new $18 million, public services building. The four-story building, which features 110,000-sq. -ft. of administrative space, consolidated a multitude of county services that were spread out over several locations.

Project manager Steve Rhodes said the DBOM contract ensured that the project team - Hoffman Construction Co., Group Mackenzie and Johnson Controls, all of Portland - finished the building in early July.

"The goal was to have the building done in about 15 months because we wanted to move out of the other locations," Rhodes added. "We had converted rent into debt because we were facing lease terminations. The contract did accomplish our goal, but I'm not sure I would do it again."

That style of creative thinking and a willingness to experiment are allowing more owners to craft alternative delivery contracts that work best for their projects, according to Karl Schulz and Brad Wellstead, principals at Ethos Development Inc. The Portland construction management firm has served as the owner's representative on several high-profile projects throughout the Northwest.

"When a client comes to us to manage their project, we discuss their priorities," Schulz said. "Is the priority quality, budget or schedule? That's what drives the type of contract. Then we work together as a team to determine the best type of contract for the project."

When Oregon Health & Science University began planning the Physicians Pavilion, the university wanted to combine a design-build contract with an agreement that the developer would operate and maintain the building. The contract gave the university the option to extend or buy out the contract at any time.

"Each owner has the opportunity to decide how they want to manage the delivery of their project using combinations of methods," Schulz said. "As an example, a developer package can be delivered in a variety of ways using different contracting solutions, based on what's going to be the most cost effective, if that is the priority."

For projects in which schedule is a priority, design-build contracts make more sense because cost and time take priority. When Schulz managed the construction of Washington County's Walnut Street Center, the county selected a design-build contract to complete the project within a year of signing the contract.

"If it's a technically sophisticated building and there's a quality level that takes priority over getting the project done quickly, then design-build probably isn't the way to go," Wellstead said.

"The level of complexity is the driver, and the owner has to be willing to accept multiple outcomes. It may programmatically be what they expect, but it may not look exactly as they expected. The owner needs to be willing to give up a certain amount of control."

A design-assist contract also has benefits. Subcontractors are hired during the design phase, and they become part of the team earlier in the process and often feel a greater sense of ownership in the project.

"Their skill sets are keeping the budget under control by identifying products that are the most cost-effective," Wellstead said. "It's all about being part of the team rather than allowing the process to become more contentious."

Contract options depend not only on specific project priorities, but also the owner's individual character traits, Schulz said.

"There's not one type of delivery that works best for every project," he added. "And, the owner's personality, management style and level of sophistication play a big role in the type of contract. Those with more experience are going to have a better understanding and be more creative with different types of contracting solutions for the delivery of their project."