In 1993 a US Owners Organisation was confronted by a potential large increase in their capital construction volume. It was projected to very quickly exceed $1,000,000 per annum and was likely to continue at that level for the foreseeable future. To respond to this the Owner’s Organisation’s New Construction department formed a strategy to cater for the increase in construction volume with a reduction in lead-time, overall schedule and cost while improving safety and quality.
The lynchpin to this strategy was the alliance of their preferred Designer and General Contractor (GC) to form a separate joint venture legal entity. This legal entity was basically an Engineering, Procurement, Construction and Management (EPCM) company.
The Owner’s Organisation then entered into an EPCM contract with this newly formed entity.
One of main advantages to the Owner’s Organisation was that there was only one contact to be administered. One contract eliminated the perpetual triangular arguments between Owner, Designer and Constructor. Individual projects were to be written as project releases under the one contract regardless of the type or location.
The main advantage to the Designer and Contractor was a steady stream of work without the need to engage in either bidding or marketing.
The criticality of the schedule to the Owner’s Organisation plus the complexity and volatile nature of the project(s) design were such that an Owner ‘hands off’ approach would not be effective. The risk was too great to the Owner’s Organisation. It was their experiences that there was no design-builder in the US market that could provide the flexibility and perform to the standard of the selected Designer and General Contractor alliance. The Projects were complex Hi-Tech facilities and required specialised forms of construction built at a very fast pace and the risk would be too great for a classic designer-builder approach.
The Designer had to be capable of covering all aspects of a dynamic design with in-house resources or by using and managing specialist sub consultants. The Designer had to adapt to constructability reviews from the General Contractor, adjust it’s design schedule and release elements of the design earlier than normal. Likewise, the General Contractor had to be able to self-perform large elements of the work on the critical path as well as act as construction manager (CM). This self-perform advantage should not be underestimated. Many design-builders are really joint ventures of a designer and a construction manager. This EPCM had the capability to, and did, start installation long before plans would have been ready for a typical design-builder to secure bids. The partnering or teaming environment allowed them to do this while mitigating the risks. This approach resulted in greatly reduced our lead times and construction schedules as well as increased safety throughout.
The owner’s construction team and the EPCM team were engaged as soon as a project was authorised. Long before funding had been secured or even sometimes before a site had been selected. There were initial difficulties in breaking down the old triangular relationship. However, as time passed, more of the contractor’s personnel were able to influence the design and more importantly the phasing of the project and associated phasing of the design itself. With this partnering arrangement certain fairly entrenched concepts became blurred. Some of these blurred concepts were:
- Warranties and Corrective work: The usual GC type contract requires general contractors to warrant their subcontractor’s work. The cost for this risk allocation is included in their fees to compensate for the additional risk. Studies conducted by the Owner’s Organisation indicated that this risk allocation was not a cost effective risk transfer when using this partnering EPCM Contract. Under this new contract the EPCM was required only to warrant their own self-perform work and to assist the Owner’s Organisation in the enforcement of their subcontractors’ warranties. This can be a saving of 0.5% of the EPCM fee, which can be substantial on large construction projects.
- Small Tools, Plant and Equipment: Who owns and maintains the small tools, plant and equipment? Who pays for upgrades to the designers and constructors (CM or GC) project information / reporting systems? Who owns any surplus equipment / materials? Who pays for staff training and development? These questions never arise with traditional methods of contracting. It is best all parties concerned address them prior to commencement of activities.
- Insurance: The Owner’s Organisation was able to own and control each project’s insurance (Builders Risk, Workers Compensation) in their name. For a large corporation that is already self-insured and has a sophisticated risk management department this was not an additional burden but was a very lucrative saving. The Owner’s Organisation’s attitude was the EPCM were using their dollars to improve safety and reduce premiums why should n’t the Corporation benefit.
A way to offset the above lessons would have been to employ third party independent advisors. This was achieved in later hybrids of this contract with the introduction of independent Chartered Quantity Surveyors. However the damage had been done and the partnering Contract with the EPCM was can celled after 5 years. This was despite major World Class advancements in Schedule, Quality and Safety.
- The Owner’s construction team was aware of a premium being paid by the Owner’s Organisation for this approach and had communicated same to their management. However when the final costs were established and an historical audit conducted there was little evidence of management buy-in to the premium costs. This lead to a perception of cost overruns without benefit.
- This partnering or teaming environment presented an opportunity to create new style incentive schemes. There was tremendous scope and a great opportunity afforded by the fact that the EPCM contract was completely open book. However during the heat of construction the incentives were not reviewed nor rigorously applied in the manner in which had been intended.
- The auditors also believed that there was an exposure due to the removal of the ‘check and balance’ afforded by traditional competitive bidding. The EPCM was basically awarding itself (to it’s self performing entities) hundreds of millions of dollars worth of work. It was perceived to be flawed and open to abuse.
It should be remembered that new innovative contracting methods in construction can have far reaching effects that not only affect the manner and length of time to complete a project but also impact how the project is administered. So serious can these impacts be perceived that they outweigh all the improvements in Scope, Schedule, Budget and Safety.