Construction Project Delivery Systems and Procurement Practices

This article discusses the various project delivery systems and procurement practices in construction projects. It covers the traditional design-bid-build system and more innovative systems like Agency-CM, CM at-Risk, and the Portland Method. The advantages and disadvantages of each system are also discussed. The article is prepared by Trauner Consulting Services, Inc. and is relevant for students studying construction management or related courses.

CONSTRUCTION PROJECT DELIVERY SYSTEMS
AND PROCUREMENT PRACTICES:
CONSIDERATIONS
ALTERNATIVES
ADVANTAGES
DISADVANTAGES
Prepared By:
Trauner Consulting Services, Inc.
APRIL 2007
Copyright© 2007 by Trauner Consulting Services, Inc. No part of
this publication may be reproduced, stored in a retrieval system,
or transmitted in any form or by any means without the prior
written permission of Trauner Consulting Services, Inc.

PROJECT DELIVERY SYSTEMS
Project delivery systems refer to the overall processes by which a project is designed, constructed, and/or
maintained. In the public sector, this has traditionally entailed the almost exclusive use of the design-bid-
build system, involving the separation of design and construction services and sequential performance of
design and construction. In recent years, however, the public sector has begun experimenting with
alternative methods to improve the speed and efficiency of the project delivery process.
These alternative systems move closer to the integrated services approach to project delivery favored in
the private sector. To illustrate this concept, the innovative delivery systems have been arranged below
on a continuum, with the traditional design-bid-build approach appearing on the left and the more
innovative systems arranged from left to right according to increasing similarity to the private sector
model in terms of greater responsibility and risk shifted to the constructor, and less separation between
design and construction services.
Design-
Bid-Build
Public-Private
Partnership
CM at-Risk
ID/IQ
Design-
Build
Public Sector Model: Private Sector Model:
• Separation of services for
design and construction
• Fixed-price, low bid (for
construction)
• Owner retains majority of risk for
performance
• Single entity provides integrated
services
• Design
• Construct
• Operate
• Maintain
• Finance
• Negotiated or target pricing
• Long-term partnerships
• Contractor assumes greater
performance risk
Delivery Systems
AlliancingDesign-
Sequencing
Agency-CM
Portland Method ECI
1

Project Delivery Systems
Design-Bid-Build
Description
Design-Bid-Build (DBB), or design then bid then build, is the traditional delivery system for the public
sector, in which an agency will use in-house staff (or, alternatively, use consultants) to prepare fully
completed plans and specifications that are then incorporated into a bid package. Contractors
competitively bid the project based on these completed plans and specifications. The agency evaluates
the bids received, awards the contract to the lowest responsible and responsive bidder, uses prescriptive or
method specifications for construction, and retains significant responsibility for quality, cost, and time
performance.
Advantages Disadvantages
• Applicable to a wide range of projects
• Well established and easily understood
• Clearly defined roles for all parties
• Provides the lowest initial price that
responsible, competitive bidders can
offer
• Extensive litigation has resulted in
well established legal precedents
• No legal barriers in procurement and
licensing
• Insurance and bonding are well
defined
• Discourages favoritism in spending
public funds while stimulating
competition in the private sector
• As construction features are typically
fully specified, DBB provides agencies
with significant control over the end
product (however, this may come at
the expense of increased agency-
inspection efforts)
• Tends to yield base level quality
• Least-cost approach requires higher
level of inspection by the agency
• Initial low bid might not result in
ultimate lowest cost or final best value
• Designers may have limited
knowledge of the true cost and
scheduling ramifications of design
decisions
• Lack of input from the construction
industry during the design stage
exposes the agency to claims related to
design and constructability issues
• Tends to create an adversarial
relationship among the contracting
parties, rather than foster a cooperative
atmosphere in which issues can be
resolved efficiently and effectively
• Agency bears design adequacy risk
• No built-in incentives for contractors
to provide enhanced performance
(cost, time, quality, or combination
thereof)
• Greatest potential for cost/time growth
(in comparison to other delivery
methods)
• Often prone to adversarial positions
that lead to disputes and claims
2 Design-Bid-Build

Project Delivery Systems
Indefinite Delivery/Indefinite Quantity (ID/IQ)
Description
With ID/IQ contracting (also referred to as job order, task order, area-wide, county-wide, city-wide, and
open-ended contracting), the agency will identify and develop specifications for task items. Contractors
then competitively bid these task items based on unit prices for task items for a specific contract term.
The total quantity and exact location of the work are not provided at the time of bid. After awarding the
contract, the agency will issue individual work orders as services are needed at specific locations.
The uncertainty associated with the scheduling of the work and the quantity of work that will ultimately
be let has led some agencies to guarantee a minimum value of work to ID/IQ contractors.
Objective
• Time savings in engineering and procurement
Project Types/Selection Criteria
• Clearly defined, standardized, or repetitive work items
• Minor construction, maintenance, pavement marking, signing, and repair contracts that can be
classified into small task orders
Advantages Disadvantages
• Reduces overall procurement time by
allowing agencies to eliminate
separate bid processes for repetitive
work items
• Structuring work in small tasks may
offer increased opportunities for
smaller or disadvantaged businesses
• Provides flexibility in when to let
portions of an overall construction
program
• Awarding multiple ID/IQ contracts
will ensure competitive pricing of
work orders
• Long-term contracts can foster a spirit
of cooperation/partnership between
contractors and the agency
• Large packages could exclude smaller
contractors from bidding
• Without minimum work guarantees,
the possibility that selection for award
may not necessarily lead to work
orders may discourage potential
bidders
• Without advance knowledge of the
timing and duration of task orders, it is
more difficult for ID/IQ contractors to
manage resources
3 ID/IQ

Project Delivery Systems
Agency-Construction Manager (Agency-CM)
Description
Agency-CM (also known as Program Management for multiple contracts or programs) is a fee-based
service in which the construction manager (CM) is exclusively responsible to the agency and acts as the
agency’s representative at every stage of the project. The CM is selected based on qualifications and
experience, similar to the selection process for design services. CM responsibilities may include
providing advice during the design phase, evaluating bids from prime contractors, overseeing
construction, and managing project cost, schedule, and quality. The CM may work with the designer or
contractor to reduce the cost, but does not guarantee price or take on the contractual responsibility for
design and construction.
Objective
• Supplement in-house staff with independent professionals having expertise in project
management, scheduling, and cost control
• Time savings by fast-tracking construction
Project Types/Selection Criteria
• Agency must supplement its internal resources and management expertise given the project’s size
or complexity
• Large, complex (multi-season) projects with multiple phases or contracts
• Fast-tracked construction (using phased packages) is possible
4 Agency-CM

Project Delivery Systems
Advantages Disadvantages
• Earlier involvement of CM
(constructor) bridges design and
construction phases
• Furnishes construction expertise to
designer
• Provides the opportunity for “fast-
tracking” or overlapping design and
construction phases – faster than
traditional design-bid-build system
• Augments the agency’s own resources
to help manage cost, time, and quality
• Procuring separate design and
construction contracts is less change
for agency
• Provides an independent point of view
regarding constructability, budget,
value engineering, and contractor
selection (No inherent bias towards
design or construction)
• Potential to fast-track early
components of construction prior to
completion of design
• Reduces the agency’s general
management and oversight
responsibilities
• Added project management cost for
CM services
• Agency cedes much of the day-to-day
control over the project to the CM,
adding a level of bureaucracy in the
field
• CM not at risk for construction cost
• Agency continues to hold construction
contracts and retains contractual
liability
• Unlike CM at-Risk, Agency-CM
services are not regulated by state
licensing laws for contractors or A/E
firms
• High agency involvement (in
comparison to other innovative
delivery systems)
5 Agency-CM

Project Delivery Systems
Construction Manager at Risk (CM at-Risk)
Description
With CM at Risk, the agency engages a construction manager (CM) to act as the agency’s consultant
during the pre-construction phase and as the general contractor (GC) during construction.
During the design phase, the CM acts in an advisory role, providing constructability reviews, value
engineering suggestions, construction estimates, and other construction-related recommendations. At a
mutually agreed upon point during the design process, the CM and the agency will negotiate a Guaranteed
Maximum Price (GMP). The GMP is typically based on a partially completed design and includes the
CM’s estimated cost for the remaining design features, general conditions, a CM fee, and construction
contingency.
The construction contingency can be split into CM and agency components. The CM contingency will
cover increased costs due to unavoidable circumstances, for example material escalation. The agency
contingency would cover cost increases from agency-directed or agency-caused changes. The
construction contingency can be handled in different ways under the contract. Unused CM contingency
can be returned to the agency, shared by the agency and CM, or given to the CM.
Agencies are increasingly experimenting with sharing the contingency pool with the CM to provide the
CM with an incentive to control cost growth associated with change orders to meet the GMP. The agency
may elect to remove pricing of some material or work items as part of the GMP if pricing of these items
results in an excessively high CM contingency or GMP. For example, if the price of steel were too
volatile to achieve an acceptable GMP, the agency could establish a separate bid item and pre-pay or pay
for the steel directly under this item at actual cost.
After the GMP is established, the CM can begin construction, allowing for the overlap of the design and
construction phases to accelerate the schedule. Once construction starts, the CM assumes the role of a
GC for the duration of the construction phase. The CM holds the construction contracts and the risk for
construction costs exceeding the GMP.
Objective
• Time savings by fast-tracking design and construction in phased packages
• Transfer performance risk to CM
Performance Outcomes
According to a CII/Penn State University comparison of delivery systems for buildings used in the U.S.,
CM at-Risk costs 1.5% less than DBB, completes 5% faster than DBB, and performs equal to or better
than DBB in most quality measures. (Sanvido and Konchar 1999)
6 CM at-Risk

Project Delivery Systems
Project Types/Selection Criteria
• Large projects with multiple phases and contracts
• Fast-tracking – Staged construction
• Limited internal agency management resources and expertise
• Limited time or funding constraints
Advantages Disadvantages
• Allows for innovation and
constructability recommendations in
the design phase, yet the agency still
retains significant control over the
design
• CM holds construction contracts,
transferring performance risk to GC
• GC puts more investment in cost
engineering and constructability
review than with CM-Agency
• Fixes project cost and completion
responsibility earlier than Design-Bid-
Build
• Potential to fast-track early
components of construction prior to
complete design
• Reduces agency’s general
management and oversight
responsibilities
• Use of a GMP with a fixed-fee and
opportunity for shared savings
provides an incentive for CM to
control costs and work within funding
limits
• Once construction begins, the CM
assumes the role of a general
contractor, leading to possible tensions
with the agency over project quality,
budget, and schedule
• Use of a GMP may lead to disputes
over the completeness of the design
and what constitutes a change to the
contract
• Agency retains design liability
• CM input may not be included by
designer
• Incentive split of savings scheme may
create perception of inflated GMP
• GMP approach may lead to a large
contingency to cover uncertainties and
incomplete design elements
7 CM at-Risk

Project Delivery Systems
The Portland Method
Description
The Portland Method, named after the City of Portland, Oregon where it was used, is a hybrid CM at-Risk
delivery method using a cost-reimbursable, fixed fee approach to compensation. The delivery is
structured into three phases, procurement, pre-construction, and construction.
In the first phase, the agency procures the contractor using a best-value process. The proposer is selected
based on qualifications and a fixed fee “bid” covering the contractor’s off-site and onsite overhead,
including superintendents, management staff, other general conditions costs, and profit, for the life of the
project. In the event that differing site conditions increase overall contract time or extra work is ordered
in writing by the agency, this fixed fee may be renegotiated accordingly.
During the pre-construction phase, the contractor provides design reviews and construction planning, with
a focus on constructability, value engineering cost and time reductions, and joint risk assessments. These
efforts culminate in the development of an estimated reimbursable cost (ERC). The intent is to establish
reasonable construction costs for labor, equipment, and materials, which factor in the costs of unknowns
without establishing a separate contingency. After comparing the ERC with the “Engineer’s Estimate,”
the contractor and agency negotiate a final ERC and combine this with the fixed fee to establish the
contract amount. Finally, the contractor will submit a cost control program and subcontracting plan for
construction. In the final phase, the general contractor will construct the project by self-performing work
on a reimbursable basis and sub-contracting work using firm-fixed-price agreements.
The Portland Method differs from conventional CM at-Risk in that it uses an ERC instead of a GMP. The
ERC shifts less risk to the contractor to meet set funding limits. Also, the Portland Method places no
limits on the amount of work that the prime contractor may self-perform, a common restriction found in
CM at-Risk contracts.
Objective
• Early contractor involvement (design and planning) to reduce cost and schedule.
• Time savings by fast-tracking construction
Past Experience
This approach was developed by the City of Portland’s Bureau of Environmental Services (BES) for the
West Willamette River Combined Sewer Overflow (CSO) project. The project consisted of constructing
a combination of near surface pipelines, a soft ground tunnel, and a pump station to transport CSO flow to
the City’s existing wastewater treatment plant. The selected contractor worked closely with the BES to
develop a baseline project cost, which included both the fixed fee and an estimated reimbursable cost.
The contractor was also tasked with developing a project cost control program to track actual costs
against budget and to make projections based on learned history. BES had review and approval authority
over subcontracts and subcontract modifications, and of all purchases over $50,000. BES also conducted
periodic field audits of contractor activity and biweekly audits of cost reimbursement requests. (Gribbon
et al. 2003)
8 Portland Method

Project Delivery Systems
Performance Outcomes
The City of Portland reported that the contractor’s early involvement with design review, value
engineering, and risk analysis prior to design completion (tunnel and pipelines were 85% complete; pump
station was 50% complete) contributed to significant cost and schedule savings on the West Willamette
River project. (Gribbon et al. 2003)
Advantages Disadvantages
• Allows for innovation and
constructability recommendations in
the design phase, yet the agency still
retains control over the design
• Fixes project cost earlier than Design-
Bid-Build
• Potential to fast-track early
components of construction prior to
complete design
• Once construction begins, the CM
assumes the role of a general
contractor, setting up traditional
contractual relationships with agency
and designer, and potential for
disputes over project quality, budget,
and schedule
• Best suited to specialized work (e.g.
tunneling) with significant risk of cost
and time growth
• Agency retains design liability and
greater risk of differing site conditions
• In comparison to CM at-Risk with a
GMP, reimbursable cost basis shifts
less performance risk to the contractor
• Provides no added incentive to
motivate contractors to control costs
9 Portland Method

Project Delivery Systems
Design Sequencing
Description
With design-sequencing, the agency sequences design activities in a manner that will allow the start of
each construction phase when the design for that particular phase is complete, instead of requiring the
design for the entire project to be complete before allowing construction to begin. The agency delivers
the remainder of the design by predetermined dates after construction has started.
To implement design-sequencing, the agency develops plans and an estimate to a level sufficient to define
the project scope and to allow the contractor to select anticipated subcontractors. The bid documents
must contain all anticipated items necessary for the complete design, regardless if final quantities have
been determined.
Due to the potential for agency-caused delays in releasing subsequent design sequences, design-
sequenced projects typically do not incorporate other time-saving contracting techniques, such as A+B
bidding or Incentive/Disincentive provisions.
Objective
• Accelerate project delivery by allowing the agency to award a project based on plans that are, on
average, 30 percent complete
Advantages Disadvantages
• Faster project delivery • The agency retains the risk for
variations in the bid quantities
• Potential for construction inefficiency
due to conflicting or overlapping work
between the initial sequence and
subsequent sequences
• Unanticipated site conditions or third
party conflicts during construction
may impact ability of a design-
sequenced project to generate time
savings
10 Design Sequencing

Project Delivery Systems
Design Build
Description
Design-build is a project delivery system involving a single contract between the project owner and a
design-build contractor covering both the design and construction of a project. The design-builder
performs design, construction engineering, and construction according to design parameters, performance
criteria, and other requirements established by the agency.
Design-Build has been implemented in the highway construction industry in a variety of ways based in
part on how the state statutes are written and on how much responsibility is transferred to the design-
builder for the design and other aspects of project performance.
Several highway agencies have used an approach called Modified Design-Build, also called Low Bid
design-build or Draft/Detail-Build, where the agency completes a significant portion of the design before
selecting the contractor using a low bid solicitation or qualified low bid process. The design-builder then
completes the remainder of the design work and constructs the project under a single contract. Modified
Design-Build is primarily used in cases where state law prohibits the procurement of construction services
using a method other than low bid or before the design is substantially complete, and the agency
administers the project using traditional practices and retains greater responsibility for project
performance.
Highway agencies with statutory authority and more experience have increasingly implemented design-
build consistent with approaches recommended by the Design-Build Institute of America (DBIA) and
other practitioners, where the agency completes the conceptual design to a lower level and then procures
the design-builder under a two-step best-value proposal process. This two-step best-value approach
allows for much earlier involvement by the design-builder and shifts greater control and responsibility for
the design and project performance to the design-builder.
A design-build contract may also include responsibilities that extend beyond the design and construction
phases of a project, shifting more performance risk to the private sector. These have included:
• Design-Build-Warranty. A single entity designs, constructs, and warrants specified components
over a prescribed time period (e.g., 5, 10, or 20 years). Warranty requirements shift quality
responsibility to the design-builder and reduce the agency’s need to inspect during construction
and maintain the facility during its service life.
• Design-Build-Maintain. A single entity designs, builds, and maintains the project works for a
specified period of time under a single contract. Payment beyond completion of construction is
typically tied to meeting certain prescribed performance-based standards for a period of years.
• Design-Build-Operate. A single entity designs, builds, and operates the project (e.g., a toll road)
for a specified period of time under a single contract.
Design-build delivery has been expanded to a Public-Private Partnership concept, where a private entity
or developer takes part in financing and leasing a transportation project in return for monetary
compensation based on contractual authorization to collect toll revenues, or pursue development rights
with the contracting agency. The private entity will be responsible for financing, design and construction,
and often will operate and maintain the roadway or bridge for a specified duration. The public-private
contract may give full or partial contracting authority to the private entity.
11 Design Build

Project Delivery Systems
Objective
Streamline and enhance project delivery by contracting with one entity to provide design, construction,
and other pre or post-construction services.
Past Experience
Forty-four states allow the use of design-build on public works projects. The states that have most
actively use design-build include Florida, Michigan, Ohio, and Pennsylvania.
Performance Outcomes
There have been multiple studies on the effectiveness of using design-build as a delivery method.
However, due to variations in project scope and difficulty in identifying comparable design-bid-build
projects for use as baselines, these studies have produced highly variable results.
A recent and fairly comprehensive study on design-build effectiveness focusing on design-build projects
completed under SEP-14 reported the following (SAIC, AECOM, and University of Colorado 2006):
• An average 14 percent time savings for design-build projects when compared to design-bid-build
schedule estimates and a 3 percent reduction in total cost (based on survey respondent estimates).
Actual data for the surveyed design-build projects indicated an average reduction of 1 percent
between planned and actual total project duration and no appreciable change in total cost.
• A comparable level of quality to design-bid-build delivery. For agency satisfaction as a quality
measure, the use of best-value procurement, lower level of design, and larger projects with
design-build yielded higher satisfaction ratings.
The Construction Industry Institute (CII) and Penn State University found a 33 percent project delivery
time savings and a 12 percent construction time savings for design-build versus design-bid-build projects
based on data obtained from 351 projects delivered in the building sector using design-build, design-bid-
build, and CM at-Risk techniques. (Sanvido and Konchar 1999)
12 Design Build

Project Delivery Systems
Advantages Disadvantages
• Single point responsibility for design
and construction
• Accelerated project delivery by:
- Fast-tracking design and
construction
- Close coordination between
designer and contractor
- Early contractor involvement to
enhance constructability of plans
• Cost containment by minimizing
owner’s exposure to design errors and
omissions
• Earlier schedule and cost certainty
• Innovation and quality improvements
through:
- Alternative designs and
construction methods suited to the
contractor’s capabilities
- Flexibility in the selection of
design, materials, and construction
methods
• Reduced opportunities for smaller,
local construction firms
• Fewer competitors and increased
risk may result in higher initial
costs
• Elimination of traditional checks
and balances. Designer is no
longer agency’s advocate. Quality
may be subordinated by cost or
schedule considerations.
• Less agency control over final
design
• Higher procurement costs
• Traditional funding may not
support fast-tracking construction
or may require accelerated cash
flow.
• Accelerated construction can
potentially overextend the
workforce.
13 Design Build

Project Delivery Systems
Early Contractor Involvement (ECI) and Target Pricing
Description
Early Contractor Involvement (ECI) is a hybrid design-build project delivery method from England
involving qualifications-based design-builder selection and an open-book target pricing system.
With the ECI delivery method, the agency uses a qualifications-based approach to select a contractor
early in the project development process, when the agency has only conceptual plans and an approved
budget price. Once the contractor has been selected, additional design and planning is performed with the
input of the entire delivery team to establish a target price for the project from that point forward.
Various mechanisms are incorporated throughout the design and construction process for the contractor to
share in savings, and participate in any losses, realized when actual costs are compared to the target price.
The agency compensates the contractor for actual costs, based on open-book accounts and records, plus a
fee. In addition, an incentive structure, similar to that described below, is established to motivate the
contractor to design and construct the project within budget.
Design Bonus – If the contractor designs the project within the project budget, as indicated by
comparing the forecast total project cost to the project budget, the contractor is paid a design bonus.
If the forecast costs are greater than the project budget, the contractor does not receive a bonus, but
likewise does not suffer any reduction in payment. If the agency elects to proceed with the project,
the contractor still has the opportunity to earn incentives during the construction phase of the project.
Construction Bonus – During the construction phase, the contractor is paid actual construction costs
plus a percent fee. If, at the end of construction, the total of actual costs plus the contractor’s fee is
less than the estimated cost (i.e., initial target price adjusted for any additional compensation paid out
during design and construction), the contractor is paid a share of the savings, as calculated using a
formula set out in the contract. Similarly, the contractor would pay a share of any cost overruns.
Final Bonus – At the completion of the project, the agency will calculate a final bonus based on a
comparison of the contract budget to the total project expenditures incurred by the agency, including
any design and construction bonuses already paid to the contractor, as well as an estimate of future
costs not yet incurred. If the total expenditure is less than the contract budget, the contractor is paid a
bonus percentage of the savings achieved on the contract budget. If the contract budget is exceeded,
no final bonus is payable to the contractor; however, the contractor does not share in any additional
cost overruns (other than what they may have already incurred in the construction cost share).
Objective
• Align team goals through the early establishment of the contractor’s role in the project
development process and through the rational and equitable sharing of project risks
Past Experience
ECI was first developed and used by the Highways Agency in England. The Highways Agency now
recommends use of ECI on all publicly funded major projects (i.e., contracts valued at over £5 million) as
a standard procurement strategy.
14 ECI/Target Pricing

Project Delivery Systems
Washington DOT (WSDOT) used a form of target pricing to resume work on the $204 million
construction project to reconstruct and widen the SR 104 Hood Canal Floating Bridge, after the discovery
of unexpected tribal burials interrupted construction. WSDOT proceeded with an altered project scope
using the original contractor, with which it negotiated a target price for the remaining project work. The
target price included the estimated construction cost plus the contractor’s fixed fee, with the potential for
shared savings to reward good performance. Note that this project did not embody pure target pricing
techniques because the target price had to be negotiated in response to an emergency condition, when all
subcontractors and suppliers were already engaged on the project. The project also lacked a formal
partnering process (although the agency and contractor are working collaboratively) and a specific
assessment of major risks and associated contingency budgeting. (Molenaar et al. 2007)
Advantages Disadvantages
• Allows contractor’s expertise to be
introduced earlier in the project
development process
• Bonus structure provides an incentive
for contractor to control costs and
work within the target price
established for the project
• Open book target pricing system
requires contractor to operate in an
open and collaborative way
• Potential for overlapping design and
construction phases may allow for
faster project delivery
• Encourages better communication
between contractor and agency
• Absence of direct price competition
can lead to overly conservative and
easily achievable performance targets
• Open-book accounting structure and
the risk of sharing in cost overruns
may deter potential bidders
• Increased procurement costs
15 ECI/Target Pricing

Project Delivery Systems
Project Alliancing
Description
Under project alliancing, an agency and one or more service providers (constructors, consultants,
designers, suppliers, or a combination thereof) collaborate on the delivery of a project. In contrast to
partnering, another relationship-based approach to project delivery, alliancing uses contractually
established financial incentives to encourage superior project performance and cooperation among the
alliance participants.
Typical characteristics of a project alliance include the following:
• The alliance team members jointly develop and agree to a target cost, which is then verified by an
independent estimator.
• At project completion, the target cost is then compared to the final cost, and the under-runs or
overruns are shared equitably (through pre-agreed ratios) among the participants based on their
relative contributions to the leadership, performance, outcomes, and overall success of the
alliance. In this manner, all participants have a financial stake in the overall project performance.
• Project risk and responsibilities are shared and managed collectively, rather than allocated to
specific parties.
• All participants have an equal say in decisions for the project, with decisions made unanimously
on a “best-for-project” basis, rather than to further individual interests.
• All participants provide “best-in-class” resources. Full access is provided to the resources, skills,
and expertise of all participants.
• The alliance agreement creates a no-fault, no-blame, and no-dispute culture. No legal recourse
exists except for the limited cases of willful default and insolvency.
• All transactions are open-book.
The use of project alliancing to establish and deliver a project generally entails four phases, with the
alliance remaining intact until the end of the final phase. A practitioners’ guide published by the State of
Victoria, Australia (2006) describes these phases as follows:
• Alliance Establishment Phase – The agency will select project participants on the basis of non-
cost criteria, such as technical expertise and experience, financial and management resources,
quality and time record, and willingness to commit to a cooperative relationship with the agency.
The agency may either select each of the key participants (e.g., designer, contractor, supplier,
etc.) in separate selection processes, or allow industry to establish its own teams and submit
proposals as an integrated team or consortium. Although conducting separate selection processes
allows the agency to select the best individual companies, this approach can be time consuming
and may not necessarily yield the best overall team. For such reasons, agencies more commonly
choose the integrated team approach to alliance participant selection.
Following participant selection, the agency will conduct a series of meetings and workshops with
the selected participants to establish the commercial framework and primary alliance parameters,
including the compensation structure, fees for overhead and profit, and the gainshare/painshare
arrangement, which are then formalized in an alliance agreement.
• Project Development Phase – The agency and the selected alliance participants will work
together as an integrated team to develop and agree to a target cost and other performance targets
(e.g., timely completion, maintenance costs, quality, etc.).
16 Project Alliancing

Project Delivery Systems
In response to concerns that the absence of direct price competition leads to overly conservative
and easily achievable performance targets, an alternative participant selection model has been
developed, although used only sparingly at this time. In this model, the agency enters into
interim project alliance agreements with two groups selected on the basis of non-cost criteria.
The agency will then work with each group to develop separate costs and other performance
targets. The agency selects the winning team based on the lowest or best target cost and other
performance criteria. This approach can be particularly useful in cases where the choice of
technology can have significant effect on the capital or operating cost of the project.
• Implementation Phase – Once the targets are established and agreed to, the alliance team works
together to deliver the project with the objective of achieving or exceeding the agreed-to targets.
• Defects Correction Period – The participants remain collectively responsible for addressing any
defects in the work (typically for a period of about 24 months).
Compensation to the non-agency members of the alliance team is typically based on a “3-limb model”
that compensates each participant as follows:
• Limb 1 Fees consist of all direct project costs and project-specific overhead incurred by the
alliance team members. These fees are viewable by all contracting parties using 100-percent
open book accounting.
• Limb 2 Fees consist of corporate overhead and profit. These fees were determined during the
Alliance Establishment Phase through a series of financial audits of the participants.
• Limb 3 Fees are based on a predetermined gainshare/painshare arrangement that is dependent on
how the actual cost (Limb 1 fees) compares to the target cost. Losses are capped at Limb 2 fees;
therefore, participants are at least guaranteed to recover all direct costs (Limb 1 fees).
Objective
• Encourage cooperative behavior among project participants by tying compensation to the final
project outcome
• Better value for the money and improved project outcomes through collaboration and “best-for-
project” decision making
Past Experience
Project alliancing was first used in the early 1990’s by British Petroleum (BP) to develop its North Sea oil
and gas reserves. Project alliancing has since been used on multiple public infrastructure projects in
Australia and New Zealand.
Performance Outcomes
In its initial project delivered using project alliancing, BP realized a £30 million cost reduction in
comparison to the target cost and completed the project 6 months ahead of schedule. (Sakal 2005)
Transit New Zealand used project alliancing to deliver its $68 million Graft Gully motorway
improvement project well ahead of schedule and under budget. (Transit New Zealand 2006)
17 Project Alliancing

Project Delivery Systems
Project Types/Selection Criteria
• Project alliancing should be used to deliver complex, high-risk projects, where risks are
unpredictable, inherent to the nature of the project (rather than due to inadequate planning,
scoping, or time), and best managed collectively. The project should also derive significant
benefit from the involvement of both the owner and non-owner participants in all aspects of
project development and implementation.
• Alliancing is not as beneficial for projects having clearly defined and allocable risks.
Advantages Disadvantages
• Improved ability to manage risks due
to the sharing of responsibility and
incentive for all participants to
proactively mitigate risks
• Earlier involvement of construction
and cost planning expertise in the
project development phase
• Reduced need for contract
administration (i.e., inspection, dispute
resolution) allows resources to be
focused on achieving project
objectives
• Less adversarial system
• Transparent pricing of the project,
including contingencies
• Increased efficiency provided by a
well-functioning team
• Absence of direct price competition
can lead to overly conservative and
easily achievable performance targets
• Absence of legal recourse (with the
exception of willful default and
insolvency)
• Participants are exposed to a broader
range of risks than on a traditional
project
• Participants are liable for the
performance of other team members
• Requires high level of involvement
from senior management to establish
and maintain alliances
• Agency’s ability to make unilateral
decisions is severely restricted
• Increased procurement costs
• Contractors may be hesitant to enter
into a arrangement where risks are
shared and selection occurs prior to
target pricing
18 Project Alliancing

Project Delivery Systems
Contract Maintenance (performance-based or traditional)
Description
In Contract Maintenance, the agency will outsource maintenance or rehabilitation tasks to contractors,
either through traditional or performance-based contracting methods.
In traditional maintenance contracting, the agency will direct the contractor to perform specific tasks.
The agency specifies what work will be done and how it will be done, providing little or no flexibility to
the contractor in its selection of means and methods.
In performance-based maintenance contracting, the agency will specify performance standards, and the
contractor will select the means and methods that will best ensure that these standards are met. The
contractor manages and directs the work, and the agency monitors progress to ensure that the contractor is
achieving the desired performance and system conditions.
Objective
Proponents cite numerous objectives for using contract maintenance, including reducing costs, increasing
efficiency, improving quality, promoting innovation, enhancing risk management, and overcoming a lack
of in-house expertise.
Project Types/Selection Criteria
Examples of maintenance activities that agencies have outsourced include mowing, snow and ice
removal, sweeping, catch basin cleaning, sign installation, fence and guardrail repair, pothole repair, and
roadway patching and sealing.
19 Contract Maintenance

Project Delivery Systems
Advantages Disadvantages
• Potential to provide cost savings*
• Supplements agency resources or
provides specialty skills or equipment
not otherwise available in-house
• Promotes efficiency, optimization of
resources, and innovation (if
performance-based)
• Competing with private sector firms
can increase the efficiency and
effectiveness of agency’s own staff
• In contrast to ID/IQ maintenance
contracts, the contractor can respond
immediately to safety-critical items
(e.g., fallen trees, displaced light poles,
large potholes) without having to wait
for a task order.
• Provides a planned spending schedule
for the agency
• Agency must actively monitor the
contract, requiring allocation of
appropriate personnel and monitoring
equipment
• For performance-based contracts, the
desired results might not be achieved
if performance criteria are not fully or
adequately described
• Long-term contract awarded to just
one contractor forces the agency to put
“all of its eggs in one basket”
• Outsourcing maintenance may be met
with resistance from agency personnel
• Political motivations could turn
maintenance contracting into a
contentious issue
• Potential for negative publicity if the
public’s expectations regarding levels
of service are not met
* Difficulty in calculating the true overhead burden borne by agencies for in-house maintenance staff
makes it difficult to obtain an objective and appropriate comparison of the cost of doing the work in-
house versus using private contractors.
20 Contract Maintenance

Procurement Practices
PROCUREMENT PRACTICES
Procurement practices are the procedures agencies use to evaluate and select designers, contractors, and
various consultants. Evaluation and selection can be based solely on price, solely on technical
qualifications, or on a combination of price, technical qualifications, time, and other factors.
An alternative procurement method uses a method other than the traditional fixed-price, sealed bid
procurement process to award a construction contract. By considering factors other than cost alone, the
alternative procurement practices move closer to the qualifications-based selection and negotiated
procurement process used in the private sector. To illustrate this concept, the alternative methods
considered in this section are arranged below on a continuum, with the public sector model (i.e., fixed
price sealed bidding) and the private sector model (i.e., sole-source selection) located at the two extremes.
As one moves from the public toward the private sector model, additional factors, other than cost alone,
are considered in the evaluation and selection process to improve the long-term performance and value of
construction.
Procurement Methods
Traditional
Sealed Bidding
Sole Source
Selection
Lump Sum
Bidding
• Historically Public Sector
• Typically Fixed-Price
• Open Bidding
Historically Private Sector
Typically Negotiated
Target Pricing
•
•
•
Price and
Technical
Considerations
A + B
A + B + C
Alternate Design
Alternate Bid
Additive Alternates
Best Value
Reverse Auction
Bid Averaging
Not Approved
by FHWAApproved by FHWA
21

Procurement Practices
Lump Sum Bidding
Description
In lump sum bidding, a contractor is provided with a set of bid documents that do not contain detailed
quantity tables. The contractor develops quantity take-offs from the plans and estimates a lump sum price
based on this take-off.
Objective
• Reduce costs design and contract administration costs associated with quantity calculation,
verification, and measurement
• Reduce quantity overruns due to errors in quantity calculations or changed field conditions
Project Types/Selection Criteria
Lump sum payment methods are appropriate for relatively simple projects having a well-defined scope,
low risk of unforeseen conditions, and low possibility for changes in scope during design and
construction.
Advantages Disadvantages
• During design development, reduces
the effort spent by design staff on
obtaining detailed computations or
quantity take-offs
• During construction, reduces the time
spent by field inspectors on measuring
quantities and preparing invoices,
allowing staff to concentrate on
monitoring the quality of the work
• Streamlines unit items into bundled
items, reducing the administrative
burden
• Creates a built-in incentive for
contractors to control costs and work
more efficiently
• Eliminates requirements for detailed
quantity measurements, allowing for
faster processing of payments, which
can lead to improved coordination and
cooperation among all the project
parties
• Contractors may add more
contingency to bid prices, particularly
if there is uncertainty in the estimated
quantities for the lump sum items
• Potential that the agency will pay the
lump sum price when total quantities
under run estimated amounts
• For contracts with multiple lump sum
items, there is the potential for front-
end loading
• Less control by the agency over
quality and safety when the
contractor’s primary focus is on cost
and schedule
• Changes that affect lump sum price
require more effort than simply
adjusting the quantity of a unit-priced
item.
22 Lump Sum Bidding

Procurement Practices
Cost-Plus-Time Bidding (A+B)
Description
Cost-Plus-Time Bidding uses a cost parameter (A) and a time parameter (B) to determine a bid value.
The cost component (A) is the traditional bid for the contract items and is the dollar amount for the work
to be performed under the contract. The time component (B) is the total number of calendar days
required to complete the project, as estimated by the bidder, multiplied by an agency-determined daily
user cost (DUC) to translate time into dollars.
( ) BidTotalDUCBA =+
The total bid value is used only to evaluate bids. The contract amount is based on the bid price (A), not
the total bid value. The number of days bid (B) becomes the contract time. Note that the lowest
combined bid may not necessarily result in the shortest B time. A+B bidding relies on the contractor to
provide the optimal combination of cost and time.
Many states use A+B bidding with incentive/disincentive (I/D) provisions as an additional motivation for
contractors to save time.
Objective
• Provide the optimum tradeoff between time and cost (if schedule is critical, use an incentive
clause along with A+B)
23 Cost-Plus-Time Bidding

Procurement Practices
Advantages Disadvantages
• Reduces contract time
• Promotes innovative scheduling on
projects that do not require all work to
be completed sequentially
• Encourages contractors to maximize
efficiency of crews and equipment
• Typically encourages greater
coordination between the prime
bidders and their subcontractors prior
to bid to develop an achievable time
component estimate
• Potential for increased costs and delay
claims due to utility and third party
coordination problems or lack of
timely agency reviews
• Contractors may sacrifice quality and
safety to meet an unreasonably low
time component bid to win the
contract. Some practitioners
recommend specifying a minimum B
duration to avoid excessively low bids.
• Without factoring in the potential
savings to users, bid prices and other
direct project costs may be higher for
A+B projects when compared to
conventional projects.
• Administrative and inspection costs
may be higher as a result of
accelerated schedules that increase
demands on construction personnel
(however, such costs may be offset by
the shorter construction duration)
24 Cost-Plus-Time Bidding

Procurement Practices
Multi-Parameter Bidding (A+B+C)
Description
Multi-Parameter bidding extends the A+B bidding concept to include an additional cost parameter (C)
that may include a quality or warranty parameter. The total bid value is used only to evaluate the low
bidder. The contract amount is based on the bid price (A), not the total bid value (A+B+C). The “C”
component can increase or decrease the bid value. For example, if “C” is a bid warranty period, a higher
“C” value should result in a lower bid value to reflect the added benefit to the agency.
To date, multi-parameter bidding has only been used in conjunction with a warranty parameter (C), which
is converted to an equivalent annual cost for bidding purposes. The multi-parameter concept has been
more widely implemented in a best-value procurement process using a point-scored, weighted criteria
formula. The formula calculates a total technical score (TS) as the summation of technical scores and an
equivalent price score as follows:
TS = W1S1 + W2S2 + … + WiSi + W(i+1)PS
Where: TS = Total Score
Wi = Weight of Factor i
Si = Score of Factor i
PS = Price Score
To incorporate a quality parameter into the bidding process, NCHRP Report 451 (Anderson and Russell
2001) suggests using the multi-parameter equation in the form of (A+B)C, where C is a quality factor
used to adjust the contractor’s bid based on anticipated or bid quality levels. For example, if the agency
collects contractors’ historical quality data, this past performance on agency projects could be used with
the pay factor equation to determine the quality factor for bid evaluation. Calculating the quality factor as
the inverse of the pay factor equation (1/PF) would reduce bids from contractors with high quality levels
on past projects (i.e., pay factors exceeding 100 percent), while increasing bids from contractors with
poor quality on past projects (i.e., pay factors less than 100 percent). This approach would thus reward
contractors for higher levels of quality delivered on previous projects for the agency. Note that under this
approach, the “C” quality parameter would only be used to determine the low bidder. Once the project is
underway, the agency would assess the quality level actually achieved on the project for payment
purposes.
Alternatively, the agency could allow contractors to estimate and bid their own “C” quality value. The
contractor would then be held to achieving the quality level bid, or risk receiving reduced payment. This
approach could be implemented by applying a factor of Cactual/Cbid to the results of the pay factor equation.
For example, if the contractor were to exceed the quality level bid (Cactual/Cbid >1), payment would be
increased. If the contractor could not meet the quality level bid (Cactual/Cbid <1), payment would be
decreased.
Objective
• Incorporate the value of quality in the bidding and contractor selection process
• Achieve equal or better quality than specified, at optimal cost and time
25 Multi-Parameter Bidding

Procurement Practices
Project Types/Selection Criteria
• Time critical projects that can incorporate QA specifications and/or warranty items with
measurable performance criteria
• Projects for which there is a low risk that external factors not within the control of the contractor
will affect quality items
Advantages Disadvantages
• Encourages improved end-product
quality
• Achieves multiple goals by lowering
life-cycle costs while saving time
• Encourages innovative construction
that can improve quality and timely
delivery
• Balances the risk between the agency
and the contractor from an acceptance
standpoint
• Could allow the turn over of more
testing and inspection responsibility to
the contractor, thus reducing demands
on agency personnel
• Possible reduction in open competition
• Accelerated schedules could result in
increased demands on agency
personnel
• Difficult to determine appropriate
quality parameters and associated
measurement methods
• Difficult to translate a level of quality
into a dollar value and determine an
appropriate weighting to combine with
other factors
26 Multi-Parameter Bidding

Procurement Practices
Alternate Design
Description
Alternate design is a bidding technique where contractors may propose and submit a bid on an alternate
design that is equivalent to the design specified by the agency. Typically, alternates involve pre-
engineered features or products.
Alternates are more commonly used in a design-build framework, but have also been applied within a
low-bid design-bid-build framework.
Objective
• Stimulate contractor innovation
• Provide equal or improved performance at lower cost
• Reduce initial costs or life-cycle costs
Advantages Disadvantages
• Potential for lower initial costs or life-
cycle costs
• Promotes innovation
• Encourages contractors to price time
saving methods, techniques, and
designs
• Risk of not receiving the desired end-
product if minimum requirements are
not clearly and completely stated
• Review of alternate design
submissions may be time consuming
• Difficulty evaluating costs of
alternates
27 Alternate Design

Procurement Practices
Alternate Bid
Description
With Alternate Bids, the agency asks for alternate bids on specified designs. At some point before
awarding the contract, the agency will decide which alternate provides the best value.
Objective
• Provide equal or improved performance at lower cost
• Reduce initial costs or life-cycle costs
Advantages Disadvantages
• Potential for lower initial costs or life-
cycle costs
• Allows agencies to select the alternate
that offers the best cost-to-quality ratio
• Allows competition between products
with different maintenance and service
life expectations
• May increase the risk of bid protests if
bid documents do not clearly state
instructions regarding the alternates
(e.g., are bids for all alternates
required)
• May reduce the number of capable
bidders if the alternates are outside the
average contractor’s capabilities
• May be difficult to evaluate costs of
alternates on an apples-to-apples basis
• Requires development of full plans
and specifications for each alternate,
increasing the agency’s engineering
costs
• Multiple designs increases the
potential for conflicting details,
specifications, and quantities
28 Alternate Bid

Procurement Practices
Additive Alternates/Tied Bids
Description
Additive Alternates is a bidding technique that may be used when it is necessary to keep the awarded
contract amount within budget. With this procedure, the agency will include most of the project scope in
base-bid items, while also specifying additive alternates that may be selected if the base-plus-alternates
price is within budget. The bid documents should specify the priority in which the additive alternates will
be considered. The contract is awarded to the lowest responsive bidder that is within budget, considering
the sum of the base bid and additive alternates.
Objective
• Include as many scope items as possible while remaining within budget
Advantages Disadvantages
• Allows agencies to tailor project
scopes to include as many items as
possible within a fixed or limited
budget
• Allows agencies to bid all work in the
initial procurement process, and thus
ensure competitive bidding on the
entire project, rather than increase
work using the change order process
• May increase the risk of bid protests or
contract disputes if bid documents do
not clearly state instructions regarding
the alternates (e.g., are bids for all
alternates required, priority with which
the alternates will be evaluated, etc.)
29 Additive Alternates

Procurement Practices
Best-Value Procurement
Description
Best-Value procurement allows agencies to consider price and other key factors (e.g., cost, time,
qualifications, quality, and design alternates) in the evaluation and selection process to minimize impacts
and enhance the long-term performance and value of construction.
The traditional low-bid procurement is typically a one step process. Under best-value, Agencies may use
either a one-step or two-step procurement process. In a one-step best-value procurement, price,
qualifications, and other criteria are evaluated to determine the best value in a single step. One-step
involves the issuance of an RFP requesting the submission of a two-part bid, composed of a technical
proposal and a price for construction. The agency selects a bid based on a technically qualified low bid or
a formula combining price and technical score.
In two-step best-value, step 1 involves the issuance of an RFQ in a short-listing process. Step 2 involves
the issuance of an RFP to the short-listed contractors. The agency then evaluates the contractors’
proposals and awards the contract based on a technically qualified low bid or through a combination of
price and technical score, using a formula to calculate an adjusted price or score, or using a trade-off
analysis to determine the most advantageous combination of price and technical score or ability.
Objective
• Incorporate into the bid evaluation process parameters considered important to the success of the
project
Project Types/Selection Criteria
• Highly complex or unique projects that would receive measurable benefit from using an
alternative form of procurement
• Projects that required specialized equipment, knowledge of construction, or exclusive technology
Note that an automated web-based project selection tool can be found on the University of Colorado’s
website at http://construction.colorado.edu/best-value.
30 Best-Value Procurement

Procurement Practices
Advantages Disadvantages
• Encourages contractor innovation with
respect to quality, cost savings, and
time savings
• Ensures that the agency can select a
capable, qualified contractor
• Allows for project schedule, quality,
and/or other parameters to be
competitively bid
• May achieve higher quality by open
competition
• May result in lower life-cycle costs
• Can be administratively burdensome
for both the agency and contractors
- Requires additional staff time and
a different level of training to
evaluate best-value proposals
- Preparing a best-value proposal
will likely require a high level of
effort, which may discourage
smaller or DBE contractors with
limited resources from bidding
• Potential for a higher initial cost
• Subjectivity of the evaluation process
may result in protests
31 Best-Value Procurement

Procurement Practices
Reverse Auction Bidding
Description
Under this bidding technique, also called “ebay for construction,” contractors use an online bidding
process, incrementally decreasing their bids until all reach their lowest offer.
A typical format for this process is as follows:
• Potential bidders obtain documents electronically.
• A third party conducts the auction online with all bidders participating simultaneously.
• Bid amounts are disclosed to all bidders, but the identity of bidders remains anonymous.
• Bidders can resubmit lower bids until the specified auction closing time.
• Contract is awarded to the lowest bid at the specified auction closing time.
Objective
• Achieve the lowest competitive bid price
Past Experience
Reverse auctions were originally designed to procure commodities and other manufactured goods. It has
not gained widespread acceptance in the construction industry.
In 2003, Minnesota considered expanding public bidding laws to allow the use of reverse auction bidding
in all applications; however, Minnesota revised the law to exclude public construction contracts due to
strong opposition from the construction community. Arizona, Kansas, and Pennsylvania also allow
reverse auction bidding in certain public applications, but exclude construction.
32 Reverse Auction Bidding

Procurement Practices
Advantages Disadvantages
• Allows owners to use internet
technology to reach a broad pool of
potential bidders
• Repetitive auction process drives bids
down
• Provides an even playing field for
bidders
• Reduces administrative effort
associated with the bidding process
• No opportunity for bidders to seek
clarification or confirmation
• May encourage imprudent bidding if
bidders are forced to quickly react to
decreasing bids without fully
analyzing the consequences
• Without some type of pre-qualification
procedure to ensure that the
participating bidders are qualified to
perform the work, the bidders’ work
history, experience, and related
qualifications cannot be taken into
account.
• Even though bidders are anonymous,
the practice may violate Federal
Acquisition Regulations, which
include a policy of not disclosing
contractor price information.
• Many contractors refuse to participate
in this type of bidding because it is
viewed as a form of bid shopping.
33 Reverse Auction Bidding

Procurement Practices
Bid Averaging
Description
Bid averaging is a procurement method that awards the contract to the bidder closest to the numerical
average of the bids submitted, typically after the highest and lowest bids have been eliminated. After
contract award, normal contract administration processes are used.
Objective
• Encourage contractors to submit reasonable bids
Project Types/Selection Criteria
Ideally, bid averaging should be used for projects that attract at least 5 bidders.
Advantages Disadvantages
• Provides a balance between cost and
quality
• Eliminates low bidders with
unrealistically low bids buying the
project
• Does not award to contractors below
the competitive range
• Could eliminate viable low bids if the
competitive range is narrow
34 Bid Averaging