How to Choose Construction Services
You've just signed your hotel franchise agreement and have the land under contract. Or, you're about to embark on extensive renovation or expansion. The next big steps involve choosing an architect and builder and figuring out how much the design and construction will cost. The first and most important part of this process is determining which construction delivery method to use.
There are three principal methods: design-bid-build, design-build, and construction management.
Design-bid-build is also known as the traditional method or “plan-and-spec bidding.” First, an architect and team of engineers design the building. Then construction companies submit bids based on the completed plans and specifications. Next, the owner selects a construction company, or general contractor, usually based on price.
With design-build, just one company is responsible for both design and construction. This allows for a single-source responsibility structure and enables the hotel owner to obtain firm costs for design and construction earlier in the development process. In this scenario the owner is hiring a design-builder.
With construction management, a construction manager — separate from the designer — is selected early in the process to assist in the development of the project. The construction manager acts as a general contractor, except that it joins the team early enough to contribute to the planning and design processes and delivers all project costs on an “open-book” basis to the hotel owner.
In the past, design-bid-build predominated in the U.S. However, its use has declined over the last 25 years. Today, all three approaches to hotel construction are commonly used, and each has unique advantages and disadvantages.
The design-bid-build method employs an objective means to evaluate general contractors on an apples-to-apples basis, based strictly on price. Thus, the general contractor that submits the lowest bid is generally awarded the project.
Design-bid-build is often used by companies that repeatedly build similar or prototypical buildings.
While this may seem like a perfect match in the hotel world, very seldom are hotels built exactly according to franchisor-provided prototype drawings. Moreover, these prototype drawings are not adequate to use for bidding. Prototype drawings are to be used as a guide or standard for what is important to the franchisor and as a starting point for the architect. Consequently, the hotel owner will incur full design fees for a set of comprehensive construction documents, prepared by the architect, to be used for bidding.
From the outset, design-bid-build excludes the builder from the process until the design documents are completed. This often leads to a dilemma when all competitive bids received are over the hotelier's budget. What's left is a poor set of options — spend more on construction, more on design, or both.
Aggressive price competition can also create unintended results. When a construction company knows that it needs to submit the absolute lowest price in order to be selected, it cannot include things in its estimate that are not shown in the documents, even if they are needed. As a result, even minor design discrepancies can lead to change order claims and an adversarial working relationship involving the owner, designer and builder. Unfortunately, some construction companies may intentionally bid a project at a loss, anticipating opportunities to make the project profitable based on change orders.
Of all delivery methods, design-bid-build typically generates the highest dollar value of change orders and the longest total time from project conception to completion, according to research at Penn State University.
If you choose to go the design-bid-build route, be sure to pre-qualify all bidders. Speak with their past customers. Exclude those without sufficient qualifications and those with a history of aggressive claims for extra work. When small design discrepancies arise during construction, try to resolve them by working with the builder. Ask the builder to recommend options that will minimize the cost of the change order.
Design-build overcomes many of the disadvantages of design-bid-build. A single entity is responsible for both the design and construction of the project, so there is no finger pointing over design discrepancies. This reduces change-order potential and eliminates much of the adversarial climate common to the competitive-bid approach.
A skilled design-build team knows where to focus their design efforts in the early stages to define the project sufficiently and develop accurate cost estimates. The key is to put design dollars where the majority of risks are found. Savvy developers look horizontally, not vertically. They evaluate site development costs such as utilities, off-site improvements, traffic lights and requirements imposed by the local municipality that may not yet be known, rather than focusing on easy-to-quantify building components such as roofing and windows.
Most design-build hotel budgets can be established with about 40 percent of the design completed. This translates into a relatively small investment, amounting to less than two percent of the total project cost, to adapt the prototype design and ascertain a firm price and schedule for the project. The ability to accurately define costs without making this full expenditure is extremely advantageous, especially compared to the design-bid-build method in which 100 percent of the design investment must be made prior to obtaining firm pricing.
The design-build approach is especially beneficial for individuals or small developers with only modest construction experience or those who want the counsel of the builder from the beginning in order to manage the design, cost and approval process.
But design-build is not for everyone. Commodity shoppers are a bad fit. Choosing a design-builder is highly subjective. The hotel developer must identify which design-builder can provide the most value before knowing the cost of the project. The collaborative process of design-build requires a certain level of trust between members of the team and some flexibility as the design is refined in the context of the established budget.
When selecting a design-builder, make sure the firm has the necessary qualifications. Look at the builder's and designer's project experience, including projects that are at least five years old to see how they have withstood the test of time. Also, evaluate the designer and builder as a team. If two companies are collaborating for the first time, you may not be getting the benefits of a well-tuned machine.
A construction manager is like a ringmaster who gets the hotel preconstruction process up and running and sees it to completion on behalf of the hotel owner. As in design-build, the builder and designer are both involved in the project from the start. However, each retains its independence, and both are under separate contracts to the hotel owner. The selection of a construction manager is based on qualifications, and a fee structure is established at the beginning of the project.
When the construction drawings are about 80 percent complete, owners request a guaranteed maximum price (GMP) from the construction manager in order to control the total cost of the project. Since the construction manager's fee is already known, the GMP is the total estimated cost of construction, including the construction manager's fee. This is commonly referred to as construction management “at-risk,” or CM at-risk. CM at-risk is beneficial to the hotel developer because it requires the construction manager to be responsible for all of the subcontractors and material providers. A “non-risk” or “agency” construction management approach places all of the subcontractors under direct contract to the hotel developer. This time-consuming responsibility should not be taken on by the hotel developer.
The construction management approach is particularly well-suited to the experienced hotel developer who has built several hotels. The developer perceives the ultimate cost to be more reflective of the final design than of the ability of builders to negotiate and assemble costs for subcontracted work. The purchaser of construction management services negotiates the overhead and profit up front, and then works with the entire team — including architect and builder — to control cost as derived from the marketplace.
Hotel projects that involve extensive renovations are also good candidates for the construction management approach. The terms of these contract agreements are well-suited for projects that may encounter issues due to unforeseen conditions.
Like all delivery methods, construction management has its share of challenges, too. For one, it is difficult to control the ultimate cost early in the process. Even the total cost that will ultimately be paid to the construction manager is difficult to pin down. In addition to the fee, construction management agreements provide for the payment of reimbursements, from personnel cost and phone usage to insurance premiums and more. Each construction manager will likely have a unique set of billing rates for such items. Separating and clearly understanding the general conditions cost, overhead and profit from the “bricks and sticks” cost is critical to making this approach a satisfying one for the hotel developer.
When selecting a construction manager, be wary of shared-savings arrangements. They can be an incentive to look for cost reductions but can also encourage inflated estimates intended to assure large savings. Also, remember that cost shifting does not equal cost eliminating. If a construction manager intends to require certain tasks or functions to be done by prime contractors, it may make their cost structure look lower, when in fact, it isn't. For example, one construction manager may include the building layout in the general conditions but another may include it in the concrete or finishes, thereby making the general conditions appear to be lower. How a task is categorized is less important than making sure that each task is included.
The construction delivery method that works best for one hotelier may not be the best for another. Many factors, such as your experience in purchasing construction services, your timeframe for construction and your budget will affect your choice. Understanding your options will help you determine which method is the right one for you.
Michel Gibeault, AIA, is vice president of business development for High Construction Company (www.HighConstruction.com), a construction firm serving Pennsylvania, Maryland, Delaware and New Jersey. Gibeault joined the firm nearly 20 years ago to lead the architectural team and later the firm's construction operation. He now directs the company's business development and marketing efforts. Gibeault has a degree in construction management from State University of New York at Delhi, and a bachelor of architecture degree from the Boston Architectural Center. He is a registered architect in Pennsylvania. Gibeault can be reached at (717) 390-4601 or email@example.com.
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