We summarize below the built-in deficiencies of the "award to low-bid" system of selecting contractors discussed in our previous newsletter:

• The low bidder will be the bidder who made the most mistakes in bidding.
• The low bidder will be the bidder who needs the project the most.
• The low bidder will undoubtedly be the bidder intent on making the most of errors, omissions or ambiguous language in the bid documents.
• The low bidder will likely place his least expensive personnel and equipment on the job.

Because state and federal law governing contractor selection is not likely to be changed any time soon, the possibility of changing to a "winner-is-closest-bid-to-average-of-bids-received" system or other more equitable solution is just not going to happen. At least not in my lifetime.

So then what's a body to do?

"Construction management" is a term of which most administrators have heard. More than one city council or school board has made poor decisions in implementing "construction management".  Some have even been drug into litigation. Our objective in this newsletter is to make administrators a little more knowledgeable of what "construction management" is and what it is not. 

Essentially a construction manager (CM) can be hired, at least under Texas law, under the category of professional services, using an interview process and qualification based selection instead of pricing. The CM is hired early in the planning process so that his expertise in building materials and trades can be passed along to the design team.  In fact, he becomes an essential resource for the design team, gathering quotations for various elements of the project in advance. As a result the project should be brought in under budget instead of waiting for "surprises" at a conventional bid opening and then having to re-design. 

The CM then, on behalf of the entity who hired him, solicits bids for various trade groups (brick masons, roofers, tile setters, etc.).  The theory is that the entity can save the general contractor's mark up if there is no general contractor.

A good CM still continues to solicit bids and negotiate price savings on behalf of the owner. This may involve a process known as "value engineering" whereby the design team and the construction team evaluate alternative construction methods and materials in an effort to produce savings in the final project while preserving the value of the project.   In many CM agreements, the owner and the CM agree to split any savings between the actual final construction cost and the original guaranteed maximum price.  In fact, CM's will sometimes afford owners 100% of the savings.

Here in East Texas, federal court indictments were recently handed down against officials of two school districts for hiring what they thought were construction managers.  Unfortunately, all these imposters did was negotiate and award subcontracts to their buddies without legal bids.  Construction Management receives a black eye when it is improperly used or misrepresented.

Generally there are two distinct forms of the CM process: 

• Construction Manager Without Risk
• Construction Manager At Risk.

CONSTRUCTION MANAGER WITHOUT RISK

In this process, the CM solicits the bids from the various trade groups for the project and the owner signs a contract with each independently.  Under his professional agreement, the CM may be required to bid out the work under state-mandated public bidding procedures usually requiring advertisement to solicit bids over a certain threshold.    (Ironic, isn't it. You still are getting a low bidder!)  For smaller bits of work, the CM can be required to get at least three bids (or any other reasonable number). It is equally important to contractually limit the percentage of the total project the CM can perform with his own personnel.  Otherwise, he has been awarded a construction contract without bidding. Further, the CM provides superintendence on the job and job administration. The owner can elect to pay "general conditions" costs such as trash hauling, job shack, utilities, builder's risk insurance, and even the cost of a job secretary, telephone and fax machine.

CONSTRUCTION MANAGER AT RISK

Under this scenario, the CM solicits the bids as previously described, obeying where required state laws for solicitation.  He then assembles the successful bids, adds his own superintendence and job administration costs and signs a single contract with the owner with a "guaranteed maximum price" based on the scope of work in the plans.  As with the "not-at-risk" option, the CM must contractually agree to limit work done by his own personnel to avoid conflicts with state bidding laws. The "guaranteed maximum price" is conditional.  So long as the scope of the work does not change, the guaranteed price will not change.

ADVANTAGES

A typical general contractor's mark-up on every subcontractor and for materials for the project is around ten percent of the construction cost with another ten to fifteen percent for profit. A CM professional services fee is between five percent and eight percent.  Even given an additional fee for superintendence and contract administration, the CM's fee is way below a general contractor's fee.

A second advantage mentioned earlier is the CM's participation in the design process.  Far better the owner and design team know the cost of improvements early in the process where budgets can be adjusted or the scope of work altered.  Nothing can be more embarrassing to administrators, elected officials and designers than opening sealed bids for a general contract and finding you are twenty five percent over budget.  By this time the only alternative available is to reject bids and re-design the project, a process which costs not only money but valuable time.

A third advantage is, because of his professional services agreement, the CM is on the "same side of the table" as the owner and design team and not therefore an adversary.  He participates in developing solutions during construction and, because he receives no mark up on the various other trades, he does not participate in any "extras" as would a general contractor.

DISADVANTAGES

As with any professional services agreement be it with your attorney or engineer, the weakness of the system is in the actual evaluation and selection of a professional construction manager.  Opportunities for "creative bookkeeping" and other misdeeds abound, so the selection process must be based on qualifications and not blood relations, Yellow Pages® advertising or other similar criteria.

Many design professionals, architects and engineers, are not completely familiar with CM and shy away from the process mostly on the basis of their own apprehension.  Your design team may have to educate themselves.

The chief disadvantage of the "CM Not at Risk" is the possibility of divided responsibility or liability. With a general contractor or CM At Risk it is always clear who must sort out responsibility if something were to go wrong.  The general contractor or CM At Risk has to break up the fist fights and sometimes pay for corrective action out of his own pocket.  The same cannot be said of a CM Not At Risk.  When the roof leaks is it the fault of the roofer, the plumber, the heating and air conditioning contractor, or the framer?  This is not a battle you want to get into.

SUMMARY

While certainly not perfect, the CM process offers distinct advantages over the conventional low-bid/general contractor method.  There are pitfalls to be sure so consult with your legal professionals and your design team.

The Associated General Contractors of America (AGC) has produced standard forms of agreement between Owners and Construction Managers (both At Risk and Not At Risk).  Get a copy from any contractor member.

For further information, e-mail me, Terry Brannon, or call 800-256-2492.  We'll be glad to help.