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February 3, 2005

Design-Build: An Alternative Construction System

Design-build is a construction delivery method that is relatively new to state and local government. Seventeen statutes have been enacted since 1993 authorizing its limited use by the state and local agencies. In this report, we look at the experience of these agencies and examine the advantages and disadvantages of the design-build method compared to the traditional design-bid-build method. We find that design-build can be a useful option for some public construction projects. We make recommendations for statutory changes to provide that option while preserving the public's confidence in the procurement process, quality control, and access for small contractors to public contracts.

DESIGN-BUILD: AN ALTERNATIVE CONSTRUCTION SYSTEM

For most of the last century the state—like all sectors of government across the nation—accomplished construction work using a system called "design-bid-build." The state used this approach almost exclusively to build its roads and freeways, public buildings, correctional institutions, universities, hospitals, and water and natural resources infrastructure. Similarly, local governments have used mainly design-bid-build to construct public projects.

In the 1990s, the state began to experiment with awarding and managing construction contracts using the "design-build" system.
Figure 1 summarizes the various legislation authorizing state and local entities to use design-build under specified circumstances.

 

Figure 1

Recent State Laws Authorizing Design-Build

 

State

 

Authorization

Facilities

Comments

Ch 429/93 (AB 896 Brown)

Junipero Serra (Los Angeles) and Civic Center (San Francisco) buildings.

 

Ch 430/93 (SB 772, Petris)

Elihu Harris (Oakland) building.

 

Ch 761/97 (SB 1270, Johnston)

East End Project (Sacramento).

 

Ch 252/98 (SB 776, Johannessen)

Permits Department of General Services to use design-build on at least five projects authorized by Legislature.

      Used for CalTrans District 7
building (Los Angeles).

      Expires 1/1/06.

Ch 782/98 (SB 1934, Johnston)

Department of Corrections headquarters (Sacramento).

      Not used.

Ch 733/99 (AB 290, Steinberg)a

Department of Parks and Recreation, Stanford Mansion
restoration (Sacramento).

 

Ch 672/01 (SB 809, Ortiz)

West End Project (Sacramento).

      In planning stages.

 

Local

 

Authorization

Facilities

Comments

Ch 663/95 (AB 1717, Cortese)

Four specified counties.

      Projects not exceeding $50 million.

      Expired 1/1/01.

Ch 1040/96 (AB 2660, Aguiar)

Authorized local agencies to enter into agreements for private
funding and development of revenue producing facilities.

 

Ch 258/99 (AB 755, Corbett)

Alameda County, juvenile justice facility.

 

Ch 541/00 (AB 958, Scott)a

Transit operators.

      Projects exceeding $10 million.

      Expired 1/1/05.

Ch 594/00 (AB 2296, Dutra)ab

Seven specified counties.

      Projects exceeding $10 million.

      Expires 1/1/06.

Ch 767/00 (SB 1144, Johannessen)a

Two specified cities.

      Projects not exceeding $50 million.

Ch 421/01 (AB 1402, Simitian)a

School districts.

      Projects exceeding $10 million.

      Expires 1/1/07.

Ch 637/02 (AB 1000, Simitian)ab

Three specified community college districts, and five additional as selected by the community colleges Chancellor.

      Expires1/1/08.

Ch 976/02 (SB 1759, Johannessen)ab

Four specified cities.

      Projects exceeding $5 million.

      Expires 1/1/06.

Ch 196/04 (SB 1130, Scott)

Transit districts.

      Revised Ch. 541/00.

      Expires 1/1/07.

       

a    Required to report information to Legislature.

b    The LAO is required to report on local implementation.

 

Seven of the laws require local entities that use the process to report on their projects to the Legislative Analyst's Office (LAO) at various times between December 2004 and January 2007. Three of the laws (Chapters 594 of 2000, 637 of 2002, and 976 of 2002) require the LAO to report on these implementations of design-build. This report contains the LAO's consolidated findings on design-build to date. Specifically, the report describes the differences between the primary construction delivery and procurement processes, and discusses their advantages and disadvantages. The report then reviews public sector experience using design-build in California, and makes recommendations regarding design-build authority for state and local agencies.

Construction Delivery and Procurement

Construction Delivery

There are two primary construction delivery systems used in the public and private sectors. These are (1) the traditional design-bid-build and (2) the increasingly common design-build approaches. The construction delivery system defines the contractual and reporting relationship among the principal participants in the construction project and the methods and procedures used to complete construction. Figure 2 shows these relationships in simplified form. While there are variations to these approaches, most construction delivery systems fall into one or the other.

Design-Bid-Build

Under the design-bid-build system, the public agency first awards an architect/engineer contract to design the project based on subjective criteria of qualifications and experience of the architect/engineer. This contract generally accounts for a relatively small portion of the project's total costs—about 5 percent to 10 percent. After detailed project plans and drawings are completed, a contractor is selected to perform the construction work, which accounts for 90 percent to 95 percent of the project's costs. In almost all cases, contracts for construction work are awarded objectively based on competitive bidding.

Design-Build

With design-build, the public agency contracts with a general contractor to both design and build the project. The agency does not separately contract with an architect/engineer for design. That is the responsibility of the general contractor. The general contractor in turn subcontracts, through competitive bidding or otherwise, for an architect/engineer and various construction trade work. Design-build delivery methods have a number of variations, but most can be placed in one of two categories—stipulated price and construction management.

Stipulated Price. With stipulated price design-build a public agency specifies how much it will pay for construction of a particular building. For example, the agency might provide only a programmatic description of the building it wants by specifying the size of the building, types of spaces, and perhaps some acceptable construction materials. The agency then asks competing firms to present proposals that illustrate a conceptual design and provide specifications for materials and building systems that it is willing to construct for the price stipulated by the agency.

Construction Management. With construction management design-build the public agency awards a contract to a "construction manager" (frequently a construction firm, but sometimes an architect/engineer firm) on the basis of a fee. The construction manager designs the project and solicits bids from subcontractors and suppliers. The total of these bids plus the construction manager's fee determine the total price the agency pays for the building.

Construction Procurement

There are two principal construction procurement systems. These are: (1) procurement by competitive bidding; and (2) procurement based on experience, qualifications, and best value. The construction procurement system defines the process used to select and award contracts for construction projects.

Competitive Bidding

Procurement by competitive bidding means a public agency awards contracts for construction or construction-related work objectively, based on bids. Bids are offers to perform the work for a specific price, with the contract going to the lowest bidder. This is the way construction contracts are awarded under design-bid-build. Competitive bidding also is used to procure most of the construction work when construction management design-build is used. Competitive bidding may or may not be used when stipulated price design-build is used.

Experience, Qualifications, Best Value

Procurement based on the experience and qualifications of competitors, or a judgment that a competitor will provide best value to the project, is subjective. It is used to award most design-build contracts, as well as architect/engineer contracts in design-bid-build. Although these are subjective criteria and bidding is not used, this procurement system has competitive elements because contractors compete to show they have the most experience and are best qualified.

Construction Delivery Processes: Pros and Cons

Each of the construction delivery processes has advantages and disadvantages. Figure 3 summarizes the pros and cons of the design-bid-build process versus the design-build (with stipulated price) process.

 

Figure 3

Design-Bid-Build Versus Design-Build
Advantages and Disadvantages

Advantages

Disadvantages

Design-Bid Build

        Building is fully defined.

   Agency gets involved in conflicts and disputes.

        Competitive bidding results in lowest cost.

   Builder not involved in design process.

        Relative ease of assuring quality control.

   May be slower.

        Objective contract award.

   Price not certain until  construction bid is received.

        Good access for small contractors.

   Agency may need more technical staff.

     Design-Build (Stipulated Price)

        Price certainty.

   Limited assurance of quality control.

        Agency may avoid conflicts and disputes.

   Subjective contract award.

        Builder involved in design process.

   Limited access for small contractors.

        Faster project delivery.

 

        Agency needs less technical staff.

 

 

Design-Bid-Build

Advantages

Building Is Fully Defined. With design-bid-build, the facility the agency wants is fully defined by detailed working drawings and specifications before bids are solicited. This means there is little uncertainly about what the agency wants and what the contractor is required to deliver.

Competitive Bidding Results in Lowest Costs. With design-bid-build, the contract is awarded to the bidder who offers to construct the building for the lowest price. This competition motivates bidders to offer the lowest price they can because they know price is the only basis for award of the contract. Also, since the building the agency wants is fully defined by detailed working drawings and specifications, bidders do not need to increase their bids to cover contingencies that might arise if a building is not fully defined.

Relative Ease of Assuring Quality Control. Quality in a construction project is controlled using detailed working drawings and specifications, which are the basis of the contract between the agency and a construction contractor. This allows an agency inspector to compare the materials and workmanship of the project under construction with what are required. If the requirements are not met, provisions of the contract can compel the contractor to correct the work. Without detailed working drawings and specifications, there is little an agency can do to control the quality of the contractor's work.

Objective Contract Award. Awarding construction work, which represents about 90 percent to 95 percent of the building cost, by competitive bidding, uses an objective criterion of lowest cost. This reduces the opportunity for bias and inappropriate influence to play a part in awarding the construction contract. The smaller architect/engineer contract (representing about 5 percent to 10 percent of the building cost) is awarded based on subjective criteria of experience and qualifications because it is for professional services that cannot be defined in detail before the building is designed.

Good Access for Small Contractors. By awarding contractors based on price, the design-bid-build process provides the best opportunity for qualified small and new contractors to obtain government contracts. Small and newly established contractors may be able to perform work at a lower cost than large competitors because of lower overhead and more efficient operations.

Disadvantages

Agency Gets Involved in Conflicts and Disputes. Design and construction of a building is a complex and difficult undertaking. There will always be conflicts and disputes that can lead to time-consuming and expensive legal action, no matter what construction delivery process is used. One major source of conflicts is errors and omissions in the working drawings and specifications prepared by the architect/engineer. In the design-bid-build process the public agency hires the architect/engineer directly, and the law holds the agency to be the guarantor of the completeness and accuracy of the architect/engineer's work. This draws the agency into disputes between the designer and builder and frequently subjects it to significant liability because of its perceived "deep pockets."

Builder Not Involved in Design Process. With design-bid-build, the builder is not known until after the design work has been completed, bids have been submitted, and a construction contract awarded. This means the design cannot incorporate any input by the construction contractor on construction materials and methods that could improve the building's design, functionality, and cost.

May Be Slower. The design-bid-build process is usually slower than the design-build process, mainly because of the sequential nature of the process. In contrast, under design-build, design and construction work may be undertaken concurrently. (This difference, however, may not be significant in the case of larger projects because procurement using subjective criteria of experience, qualifications, and best value often requires substantial time to allow competitors to prepare proposals and agency officials to evaluate them.)

Price Not Certain Until Construction Bid Is Received. With design-bid-build, the architect/engineer firm prepares cost estimates as the design work progresses, typically when the working drawings and specifications are about 10 percent, 35 percent, and 100 percent complete. While this gives the agency an early indication of the project's cost, there is no cost certainty until design is completed and construction bids have been received.

Agency May Need More Technical Staff. Design-bid-build requires the completion of detailed working drawings and specifications before bids are solicited, and then a substantial inspection and quality control effort during construction. This may require an agency to employ a substantial number of technical staff to manage larger design-bid-build projects.

Design-Build—Using Stipulated Price

Advantages

Price Certainty. With the "stipulated price" method of implementing design-build, an agency has the best certainty of the cost of the building at the outset of the project. This is because the agency specifies what it is willing to pay for a building before it solicits proposals from design-build contractors for the configuration, features, and materials they are willing to provide for the specified price. The risk with this approach is that the agency may not get the best quality building for the price it pays.

Agency May Avoid Conflicts and Disputes. Because the designer and builder are part of the same design-build entity, and the public agency is not the guarantor of the completeness and accuracy of the work of the architect/engineer, the agency may avoid conflicts and disputes that can arise between the architect/engineer and construction contractor.

Builder Involved in Design Process. The construction contractor is involved in the design process from the beginning and can provide helpful insights on construction materials and methods that can make the design more efficient and less costly to construct.

Faster Project Delivery. By overlapping design and construction to some extent, and by potentially reducing conflicts between designer and builder, design-build can usually deliver a project faster than the design-bid-build approach. With large projects, however, this may be less of an advantage because of the extra time needed for competitors to prepare their statements of qualifications and technical proposals.

Agency Needs Less Technical Staff. Under design-build, the public agency does not have to review the accuracy and completeness of the architect/engineer's work. Thus, the agency may have less need for in-house technical staff to manage projects.

Disadvantages

Limited Assurance of Quality Control. Because the building the agency wants is not defined in detail at the time it enters into a contract with a design-build contractor, there is limited basis for enforcing a contract and the agency may have little control over the quality of the construction work.

Subjective Contract Award. With design-build, the design and construction work generally is awarded based on subjective criteria such as experience, qualifications, and best value. Agencies have established contractor evaluation and selection processes and policies to try to mitigate the risks of subjective judgments, but drawbacks still exist, such as:

Limited Access for Small Contractors. Because design-build contracts mostly are awarded based on qualification and experience, this method may tend to work against small, newly established contractors, who do not have the range of experience of large, long-established firms. As a result, access to design-build contracts, especially the large contracts, may be limited for these contractors.

Design-Build—Using Construction Management

The advantages and disadvantages of design-build construction delivery using construction management methods are similar to those for design-build using a stipulated price, with two main exceptions:

Price. The public agency has far less price certainty under this method than if the stipulated price approach is used. Even so, construction management still provides more certainty than design-bid-build, where the total price is not known with reasonable certainty until design is finished and bids have been received. With construction management, a series of trade contracts is bid over time. This provides partial cost information earlier, and allows design changes to be made in subsequent trade packages to control costs and keep the project within budget.

Benefit of Competitive Bidding Flows to Agency. With the construction management approach to design-build delivery, the savings resulting from competitive bidding for subcontracts and supplies benefits the public agency rather than the design-build contractor. This is an important advantage construction management has over stipulated price.

Experience With Design-build

Cities and Counties

The authority for local governments to use design-build was first granted by the state in 1995 and has been extended to various California cities and counties. Figure 4 summarizes how these local governments have used this authority under those statutes that required them to report their design build activities to the Legislature. As the figure shows, of the 13 counties and cities that have been given the design-build option, six—Alameda, Sacramento, and Solano counties, and the cities of Davis, West Sacramento, and Woodland—have used the option to construct one or more capital outlay projects.

 

Figure 4

Summary of Design-Build Activities by
Authorized Cities and Counties

Agency

Used
Design-Build

Did Not Use
Design-Build

Types of Projects

Counties

Chapter 663, Statutes of 1995

 

Solano

X

 

      $2.3 million juvenile hall expansion.

      $0.4 million county recorder’s office renovation.

Chapter 594, Statutes of 2000

 

Alameda

X

 

      $15 million county recorder’s office building.

      $135 million juvenile justice center (under construction).

Contra Costa

 

X

 

Sacramento

X

 

      $2.5 million branch library.

Santa Clara

 

X

 

Solano

X

 

      $18.4 million health and social services building (under construction).

      $80 million county administration center (under construction).

Sonoma

 

X

 

Tulare

 

X

 

Cities

Chapter 1040, Statutes of 1996

 

Woodland

X

 

      $14.4 million police station.

Chapter 767, Statutes of 2000

 

Davis

X

 

      $7.3 million police station.

West Sacramento

X

 

      $2.6 million pump station.

Chapter 976, Statutes of 2002

 

Brentwood

 

X

 

Hesperia

 

X

 

Vacaville

 

X

 

Woodland

 

X

 

 

Views on Design-Build Generally Favorable. The counties and cities that have used design-build generally expressed favorable opinions of the process. Almost all reported that compared to the traditional design-bid-build process, it took less staff time to construct a project and resulted in fewer claims and less litigation. To a substantial degree, this is because the local agency is removed from disputes between the architect/engineer and the construction contractor. They also indicated that by awarding a fixed price contract, design-build provided more price certainty.

Lessons Learned. These local agencies also made various observations about the general usage of design-build:

Reasons for Not Using Design-Build. Local agencies that did not use design-build provided different reasons for not doing so. For example:

All of the cities and counties that did not use the design-build authority, however, indicated that they would like to have design-build authority available to them as an alternative construction delivery method.

The State

The Department of General Services (DGS) has completed several major projects using design-build. Generally, the DGS-managed design-build contracts have been completed on schedule and within budget, although there have been exceptions. For example, the East End project required an $18 million augmentation and was completed about a year and a half after its original scheduled completion date. The Caltrans District 7 building is currently under construction and has required no augmentations to date. It is currently estimated to be completed about 15 months after its originally scheduled completion date. Nonetheless, DGS has indicated general satisfaction with the design-build approach used on all of these projects, pointing primarily to the advantages of using the process discussed above.

Federal

Federal agencies have been authorized to use a design-build construction delivery process since 1996, and federal officials have expressed general satisfaction with it as an option. The federal procurement process has two phases. In the first phase, federal officials reduce the number of competitors to no more than five based on subjective criteria of experience and qualifications. In phase two, competitors submit technical and price proposals which are evaluated and a design-build contract is awarded based on a combination of subjective ("best value") and objective (price) criteria.

Issues to Address

To date, experience in design-build by state and local agencies in California as well as the federal government has generally been positive. Nevertheless, the experience has been relatively recent and limited. As such, questions and issues remain in how design-build can best be implemented in the public sector. The key issues include:

Where Does the State Go From Here?

Figure 5 shows that many of the statutes authorizing design-build in California included expiration dates, after which authority to use the design-build process ends. As these statutes expire, the Legislature likely will be asked to extend the authority, either for limited terms or permanently. The Legislature will also likely be requested to provide the authority to a larger number of public entities. Based on our review, we recommend the Legislature provide the design-build authority on an ongoing basis to local agencies and the state—within a framework that protects the integrity of the procurement process, controls the quality of the construction work, and provides access to public contracts for small and newly established contractors. Specifically, we recommend:

 

Figure 5

Design-Build Legislation Expiration Dates

Chapter/Year

Agencies

Expiration Date

541/2000

Transit operators

1/1/05

252/1998

Department of General Services

1/1/06

594/2000

Seven specified counties

1/1/06

976/2002

Four specified cities

1/1/06

421/2001

School districts

1/1/07

196/2004

Transit operators

1/1/07

637/2002

Eight community college districts

1/1/08

 

Conclusion

Design-build can provide state and local agencies with a useful alternative to the more commonly used design-bid-build process to deliver construction projects. However, to the extent design-build contracts are awarded based solely on subjective criteria, there is an opportunity for compromising the public procurement process. Thus, it is important that statutory changes that make the design-build process more widely available to state and local agencies also preserve the public's confidence in the procurement process. Using construction management with competitive bidding of subcontracts or a two-envelope system can achieve that.

 

Acknowledgments

This report was prepared by Paul Guyer, under the supervision of Dana Curry. The Legislative Analyst's Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature.

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