BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 2498 (Gordon) - Caltrans project delivery: Construction
Manager/General Contractor.
Amended: June 15, 2012 Policy Vote: T&H 9-0
Urgency: No Mandate: Yes
Hearing Date: August 6, 2012
Consultant: Mark McKenzie
This bill may meet the criteria for referral to the Suspense
File.
Bill Summary: AB 2498 would authorize the Department of
Transportation (Caltrans) to use the Construction
Manager/General Contractor (CMGC) procurement method on up to
four projects, three of which must have construction costs of
over $10 million.
Fiscal Impact: Unknown project costs or savings to Caltrans
(State Highway Account and federal funds) by providing authority
to use a new project delivery method. Caltrans costs to
administer and report on the new contracting method would be
minor.
Caltrans anticipates significant long term savings, based on
other states' experience. Staff notes, however, that early
experience with any new project delivery method usually proves
to be more costly than traditional design-bid-build in the
initial implementation period. (see staff comments)
In addition, since a contract for preconstruction and
construction services for CMGC is a negotiated process with the
most qualified construction manager, rather than a traditional
"lowest responsible bidder" process, it is difficult to
determine whether the negotiated price would be lower or higher
than project delivery costs through a traditional
design-bid-build process. It is expected that use of the CMGC
method would minimize change orders, which is currently a
significant factor in unexpected cost escalation on Caltrans
projects.
Background: The traditional project delivery process is the
design-bid-build method, whereby complete plans and
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specifications are prepared prior to the advertising, bidding,
and awarding of any construction contracts. The agency awards
the contract to the lowest, responsible bidder. Although this
method is structured to ensure a project is built for the lowest
cost, oftentimes project costs escalate dramatically as change
orders are necessary to address unforeseen problems encountered
during the construction phase. In addition, the bulk of project
risk remains with the sponsoring agency.
In the last several years, public agencies have been adopting
alternative project delivery methods. The principle reason for
this is the desire to shift construction risk from the
agency/owner to the project contractor and to expedite project
completion. The most widely used alternative project delivery
technique is design-build. This method requires the public
agency to prepare plans to 30 percent completion before
advertising for bids. The bids are submitted with a fixed cost
for both design and construction services, and they are
evaluated using the best value methodology, which includes
factors such as the design-build firm's qualifications, proposed
approach to design, experience, and other factors. The winning
bidder completes the design work and commences construction.
Because the team finishes the design work, it carries most of
the risk associated with the adequacy of plans. Often
construction can commence on a phase of the project before the
entire project is designed, reducing the construction time.
Design-sequencing is a method of contracting that enables the
sequencing of design activities to permit each project
construction phase to commence when design for that phase is
complete, rather than requiring a complete design before
commencing construction. When the contractor bids, the first
phase of the project is completed and the remaining phases must
be at 30 percent completion according to Department of
Transportation (Caltrans) guidelines. The award is made to the
lowest, responsible bidder. The benefit of design-sequencing is
assumed to be time savings. Caltrans' authority to use
design-sequencing expired in 2010, and final reports on its use
on state projects are pending.
The construction manager/general contractor (CMGC) project
delivery method allows an agency to engage a construction
manager during the design process to provide assistance to the
design team, including advice regarding scheduling, pricing,
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phasing, and other input that helps the owner design a more
constructible project. The agency selects the construction
manager on the basis of qualifications, past experience, or a
best-value basis. According to the Federal Highway
Administration, when design reaches approximately 60 to 90
percent completion, the agency and the construction manager
negotiate a guaranteed maximum price for the construction of the
project based on the defined scope and schedule. If this price
is acceptable to both parties, a contract is executed for
construction services, and the construction manager becomes the
general contractor. The benefits of this procurement method is
that the public agency does not sacrifice control over the
design of the project, and during the construction phase the
contractor is familiar with the project design, resulting in
fewer change orders and disputes over design issues.
Proposed Law: AB 2498 would authorize Caltrans to use the CMGC
project delivery method for up to four projects statewide, three
of which must have construction costs of $10 million or more.
The CMGC method is a procurement method in which Caltrans
selects a construction manager to provide preconstruction
services during the design phase and construction services
during the construction phase of a project, and the execution of
the design and construction phases may be sequential or
concurrent.
The bill requires Caltrans to establish a procedure to evaluate
and select a construction manager through a ranked request for
qualifications process, as specified. Caltrans would enter into
a negotiated contract with a construction manager for
preconstruction services that includes a fee for those services
but may not include provisions for payment for construction
services. The contract would provide for subsequent negotiation
for construction. The construction services contract would be
awarded after plans are sufficiently developed and either a
fixed price or guaranteed maximum price has been negotiated, as
specified, and the construction manager must perform at least 30
percent of the work covered by the contract. The bill would
also require annual progress reports to the Legislature by July
1 of each year during which a CMGC project is underway, and no
later than July 1 of the year after any CMGC project is
completed.
Related Legislation: AB 1549 (Vargas), which is currently
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pending in the Assembly Appropriations Committee, would
authorize the San Diego Association of Governments to use both
design-sequencing and CMGC contracting methods for an unlimited
number of public transit projects, as specified.
Staff Comments: The Legislature has generally taken a measured
approach to authorizing the use of new project delivery methods.
This usually involves some limited authorization initially,
either through a fixed number of projects or period of time,
which provides the opportunity for evaluation through data
collection and analysis. For example, the Legislature
authorized Caltrans to use design-sequencing for a total of 24
projects over two phases, and evaluations are ongoing. Initial
reports for design-sequencing have been mixed, with some
projects achieving moderate time and cost savings while others
experienced significant cost overruns. On balance, Caltrans'
ability to target which projects might benefit from
design-sequencing has improved as they gained experience, so
they expect to show improved results for more recent Phase II
projects. Initially, however, whenever the state authorizes a
new project delivery method, actual costs tend to exceed
estimated costs in the early stages. The Legislature has never
authorized the use of the CMGC project delivery methodology, but
based on experience with previous authorizations of innovative
procurement methods, it is likely that actual costs for CMGC
projects would exceed estimated costs during the pilot period
authorized by this bill. It is unknown whether total project
costs, including any unexpected escalation due to inexperience,
would exceed project costs under the design-bid-build method.
A detailed 2009 report from the Utah Department of
Transportation (UDOT) on experience with 19 projects utilizing
the CMGC project delivery method describes the benefits of
having the contractor involved with in the design process. The
report indicates that CMGC delivers projects more economically
than traditional design-bid-build and design-build methods, and
that cost savings are primarily achieved by minimizing risk and
implementing innovations, resulting in reductions in bid prices,
optimization of construction methodology, and minimization of
price adjustments during construction. In UDOT's experience,
overall project costs are reduced by as much as 15 percent from
state average pricing models. Staff notes that despite overall
long-term savings, the report suggests that most of the early
projects experienced costs that exceeded estimates. After
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gaining experience with the program and making adjustments to
various procedures, however, more recent UDOT projects
experienced more savings than anticipated. One significant
limitation of CMGC noted in the report is the lack of
competitive pricing in the construction bid. To address this
risk factor, UDOT began collecting price information in the
construction manager selection process, rather than selecting
contractors strictly though a qualifications-based evaluation.
The Committee may wish to consider whether the pilot program
authorized in this bill should include similar considerations of
price during the RFP process.
Recommended Amendments: Staff recommends that additional
information be reported to the Legislature on estimated and
actual project costs, a description of challenges or unexpected
problems, and the number of change orders on CMGC projects.