THE COLLABORATIVE DESIGN PROCESS

Heinrich R. Obermoller, Naval Engineer, DIC, MSc, PhD, DEU,

Real Estate Developer, Director and Consultant.

+56-9-8234 4841       [email protected]

(If you want a pdf version please do not hesitate to contact me)

EXECUTIVE SUMMARY.

The contractual relationship between the Real Estate Developer (RED) and the General Contractor / Construction Company (GC), is regulated by a Construction Contract that, as such, establishes the scope, rights, obligations, terms and prices. The above is accompanied by guarantee slips, fines for delays and / or non-compliance and other considerations that complicate these instruments and are a permanent source of conflict between the parties.

Thus, it is not uncommon for many of these contractual relationships to end up in arbitration proceedings or rightly in courts with the consequent erosion of commercial relations, not to mention the costs in money and time associated with these processes.

This essay briefly summarizes the main contractual modalities to then focus on the author's experience with the contractual modality favored in the USA, comment on its practical implementation and try to identify the critical success variables. Finally, minimum and alternative requirements for a successful implementation are proposed.

I.- BACKGROUND.

According to a survey by the Chilean Chamber of Construction (CCHC), 90% of the 51 registered companies reported to have gone through divergences with their client during the execution of construction works. "The survey was conducted between July and September 2015, and managers or responsible for the contracts of 51 CCHC member companies were interviewed. Of the total of divergences detected in the period, 63% corresponded to disagreements that were resolved between the parties, 16% to disputes where a third party had to intercede and 21% to conflicts that ended in courts of justice".

The reasons for the judicialization of the relationship between the Real Estate Developer and the Construction companies vary, but the main causes can be summarized as follows:

a)   Change Orders initiated by the RED,

b)   Change Orders initiated by the GC, the Technical Inspector or the need,

c)   Delays in the delivery of the site and/or permits,

d)   Increases in raw material costs

e)   Increases in labor costs.

The first three sources of conflicts are due to endogenous variables, while the other two are due to exogenous variables. Later we will comment on these variables, discuss the root cause and try to envision possible solutions.

II.- MAIN CONSTRUCTION CONTRACTS TYPES.

It is expressly stated that this brief summary is not intended to be exhaustive but rather illustrative to put into perspective the two main types of Construction Contracts used to regulate the relationship between the RED and the GC.

2.1.- THE LUMP SUM CONTRACT.

This Contract is one of the most widespread type of construction contract used. Under this modality, the Construction Company directs, executes and manages the work until its total completion in a certain time and price, contributing all the work and the materials. The price agreed upon with the RED who orders the execution of the works, shall remain unchanged or immovable unless a price revision clause is established or extraordinary works are introduced or reforms or modifications introduced to the project by the RED that imply an increase or decrease in works.

The advantage for the RED is that he knows, (theoretically at least), in advance, the final price of the work. For this reason, the GC must initially and realistically forecast its prices according to the risk it accepts to assume, and the reality of the market, particularly in periods of inflation.

2.2.- THE COST PLUS CONTRACT.

The Cost Plus Contract, is based on the fixing of unitary labor and material prices by the GC and, according to those prices the RED is invoiced periodically for the executed work. The commitment of the GC is limited to fixing the amount to invoice for each month of labor, and for each unit of material used, but without assuring the number of hours or the amounts to be used in each unit of work. The GC charges a fixed percentage to cover its fixed expenses and commercial profit. Therefore, the total amount charged for these items increases as the total volume of labor and materials increases, regardless of the total volume of work performed.

This type of contract requires a strict control and supervision of the GC by the RED and its detailed involvement in the day to day of the work being performed.

A variant of this type of contract is Cost Plus with a Guaranteed Maximum Price (or GMP), which we will comment on later on in this essay.

2.3.- COMMENTS ON THESE CONTRACTUAL MODALITIES.

In a competitive and well-developed market, the Lump Sum Contract subject to bidding by experienced Construction Companies, allows optimizing the Term and the Price of the works to be executed and is perceived as far superior to the Cost Plus Contract.

III.- THE PROCESS THAT LEADS TO CONFRONTATION.

In the previous section we concluded that the Lump Sum Construction Contract was the one favored mainly by the RED.

From sections 1 and 2, however, it seems that the practical implementation of the contract is a source of recurrent conflicts between the RED and the GC

.With nuances, the process that leads to these results develops more or less in the way that is listed below:

1)  After approving a Preliminary Draft, the RED would like that the GC starts Construction the following day,

2)  All projects (Architecture, and Consultants), are commissioned and pressed so that they are ready in the shortest possible time,

3)  This generates projects with a high degree of uncertainty and usually end up also in poor coordination,

4)  Construction drawings are sent out for bidding, awarding it -normally- to the one that offers the lowest price and term.

5)  In spite of the experience of the GC to detect these project misconceptions and by a combination of the time allocated to study the proposal and the conviction that change orders will then have to be made, typically, the GC quotes what is in the plans / projects / specifications to remain competitive with the bid price.

6)  A Lump Sum Construction Contract is signed, containing clauses with fines and penalties for increases in price and terms, which the GC has no intention of paying and the RED knows that it will not be able to collect.

7) Once the Contract has been awarded, the GC begins to reveal to the RED the projects conflicts and undefinitions, and starts generating the necessary change orders to resolve said lack of definition.

8)  This in turn generates cost overruns that the GC transfers (or try to transfer) to the RED, who in turns rejects them.

9)  As a result, relationships are stressed and all too often the discrepancies end in trials or arbitration.

Everyone in the industry knows, from the beginning of the process, that it will end more or less like that. (Recall from the CCHC Survey, 90% of respondents expressed divergences of which 16% came to mediation from a third party and 21% came to trial, which would bring the total to approximately 37%).

Albert Einstein is credited (mostly anyways), with the famous quote: "Madness is doing the same thing over and over again hoping to get different results." Maybe it's time to explore other alternatives

IV.- AN ALTERNATIVE: THE COLLABORATIVE DESIGN PROCESS.

Having lived the experience of managing, co-managing and participating in real estate developments in the USA, I have become familiar with the contractual modality of the "Cost Plus with a Guaranteed Maximum Price", or "GMP ("Guaranteed Maximum Price”). In this case, the Construction Company quotes:

 a)   A direct construction cost,

b)   An assumed percentage of inflation,

c)   A General Conditions item that take into account the GC′s back office and personnel expenses,

d)   A GC fee, which typical represents the declared profit for the contract, and

e)   A percentage cushion for incidentals.

The sum of these items, constitute the GMP.

Additional aspects of interest:

i)   The real estate company has the right to see all the quotes of the subcontractors, quotations for the acquisition of materials, etc.

ii)  Any savings generated at the end of the execution of the contract, is distributed 50% / 50% between the RED and the GC.

iii) Any cost over and above the GMP is absorbed by the Construction Company.

 For this modality to work, there are some pre-requisites to fulfill and to explain them better,I will allow myself to remind the reader of the three main endogenous variables listed in section I of this essay, namely:

a)  Modifications of projects initiated by the Principal,

b)  Change Orders initiated by the GC, the Technical Inspector or the need

c)  Delays in the delivery / obtaining of land and / or permits,

 Based on practical experience and to prevent -or at least greatly mitigate- these endogenous variables, a "Collaborative Design Process" was designed.

In any engineering design project the methodology of the "design spiral" is used.

Historically, it has been argued that construction has a high "artisanal" component, as if the fact that some construction processes (such as sticking layers of bricks together or installing PVC pipes), are labor-intensive, justify a lower design standard.

To implement this process, the pre-construction services of two construction companies were contracted and incorporated from the beginning to the design process according to the following scheme:

This allowed to have throughout the design process sitting at the same table the Architect, the Engineer, the Calculator, the Specialties and the Builders.

The objectives of the Collaborative Design Process are:

1)  Incorporate Value Engineering into the Design Process

2)  Optimize the Cost of Construction.

3)  Achieve Zero "Change Orders", initiated by the parties.

4)  Achieve Zero delays during the construction process.

5)  Reduce to 10% the "usual/typical" on-site problems.

Of course the objectives are ambitious and probably unattainable to a 100% because perfection is infinitely expensive. Notwithstanding the foregoing, the implementation of this process is, in my opinion, a great step forward in the right direction. Only as an illustrative figure, once the collaborative design process was finished, the final GMP quoted represented a 6% savings over the lowest Schematic Design quote given early by the GC′s.

In the figure presented below, the design spiral incorporated into the collaborative design process is presented schematically to try to achieve the desired objectives.

6.- CHALLENGES FOR A SUCCESSFUL IMPLEMENTATION.

While the GMP is widely used in the USA, the Collaborative Design Process is not.

The full implementation of this system / method will probably not be without problems, but my initial impression is that the barriers will be more psychological than technical and that will have to happen sooner rather than later to avoid the systematic judicialization of the real estate construction activity.

From the Real Estate point of view, it must be accepted that the design deadlines in the collaborative design process will necessarily be much longer than the times to which we are currently accustomed. In effect, from the usual 6 to 8 months, we will go to 10 - 14 months since the level of detail in the architecture, engineering and consultants projects that this methodology requires is much greater than the standard used to date.

It should also be recognized and accepted that the initial cost of the project stage will be higher, not only because of the greater amount of man hours that should be allocated to the process, but because the design spiral implies, as the name implies, to give several Optimization rounds to the design and add the cost of the participation of 1 or more construction companies in the process.

The expectation then is that the savings occur in the Construction Stage in terms of price and terms. Remember the old maxim of popular wisdom, that “it is much easier (and cheaper) to modify plans than to move walls”.

The leadership of this collaborative design process must reside in a representative of the Real Estate, which must be known, recognized and accepted by all.

From the point of view of the Construction Company, the challenge is to transfer experience and transparent the prices to the Principal, declaring in passing its real utility.

It is important that the concept of the Work Team be established early instead of wearing out in a fight of egos. In that context everyone should feel part of the design effort and not take the detection of errors as an attack or personal affront.

The integration of the projects must be done by a BIM Manager (Building Information Modeling for its acronym in English), with experience. Ideally, the BIM Manager must continue during the Project Construction Phase to use the model to provide on-site solutions. The BIM is a technical tool of the design process, but well used by an experienced coordinator allows detecting in the paper a good part of the errors that, if detected on site, cost a lot of time and money.

Specifically, I believe that as prior activities to a successful implementation of the collaborative design process to advance in the direction of a PMG, the following should be achieved:

a)  Overcome the initial resistance of the Collaborators, subordinating the “use and custom”, “egos”, and “personal preferences" to the process of Collaborative Design of the project.

b)  Incorporate from early the experience of the Builders in the process regarding Value Added Engineering in specifications, materials and methods.

c)  The integration of Projects, detection of interferences and proposal of alternative solutions must be done by a BIM Manager with experience in close collaboration with the collaborative design team in general and with each consultant in particular. That way it will not matter that, for example, the sanitary system consultants knows little or nothing about BIM or that he does not use Revit in his designs.

Finally, I am convinced that this is the way of the future to obtain products with a better price-quality ratio for the clients and to achieve harmonization of the RED / GC relationships, thus avoiding the increasing judicialization of the activity.