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The construction process in the past couple years has been fraught with risk for owners and contractors. Materials and labor price escalation has sent shock waves through the industry. This has led owners to look for new means of project delivery to manage, if not transfer, risk. And many are turning to construction management on an at-risk basis.
However, CM-at-risk doesn’t mean that CM firms are willing to shoulder unreasonable risks. “Our model is fairly consistent,” says Mark LaVoy, executive vice president and South region manager for Hunt Construction Group. He says that requiring a guaranteed maximum price (GMP) early is not a good idea. “We like to wait until the bid packages are issued and construction documents are 100% complete,” he says. That’s when prices can be locked in. He notes that some owners prefer a GMP as early as when the design documents are complete, “but in those cases, you end up with a lot of narrative describing the contract assumptions because there are so many uncertainties at that point.”
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The complete 2006 Top 100 Design-Build / Construction Management special report will be available on Friday, June 9, 2006. This is indicative of a general trend in recent years for CM-at-risk firms to insulate themselves from the higher level of risk associated with materials and labor price escalation. “We are seeing contractors’ general conditions and fee portions of contracts escalate well above the general 10% rule of thumb,” says Donald R. Boyken, CEO of Boyken International. And many CM firms note that contingencies are on the rise where a GMP is required early on the process.
But for clients, bringing in an at-risk CM early in the process can pay dividends. “As a CM, we are pricing materials as the project is being designed and we have price escalation tables we use to keep owners up to date throughout the process,” says Robert Episcopo, director of business development for Alvin H. Butz Inc. “With a CM on board from the start, you can start the construction process sooner.” He says that, in building the corporate headquarters for Olympus America, Butz got the footings and steel work going before the final design was finished. “We beat nearly a year of materials inflation that way,” he says.
While CM-at-risk has been popular in the education market, many other public agencies and government entities now are looking beyond design-bid-build and CM-at-risk for the first time. “In many cases, government entities resisted CM- at-risk because of legal restrictions or procurement policies, but are now starting to use it,” says Alfred K. Potter II, senior vice president for Gilbane Building Co.
For example, Potter notes that the Commonwealth of Virginia historically had not used CM-at-risk. But Gilbane now is at-risk CM on a $68-million renovation and expansion of the state capitol building. Similarly, a change in Massachusetts’ law requiring outside management assistance of public construction projects a couple years ago opened the gates for significant use of CM-at-risk.
“You usually associate CM-at-risk in Massachusetts with school work, but we are doing two courthouse projects for the Massachusetts Dept. of Capital Asset Management on a CM-at-risk basis,” Potter says. One project is a 427,000-sq-ft, six-story courthouse with 27 courtrooms in Worcester, for $145 million. The other is a $54-million family court facility in the City of Plymouth. Each has a guaranteed maximum price.
However, legal barriers to the use of CM-at-risk and design-build in the public sector still exist in some states. “We are the agency construction manager at the University of Alabama, Tuscaloosa, and Auburn University, but Alabama still doesn’t permit CM-at-risk, says Mike Lanier, vice president in charge of general contractor Hoar Construction’s program management group. “We figure that those laws will be changed soon, but in the meantime, we will work as an agency CM on the campuses.”
CM-at-risk continues to grow as an alternative to design-bid-build and, for some owners, is seen as a means to transfer at least some of the project risk that agency CM does not provide. However, it requires experienced and talented people. “In any successful project, it’s as much about the people managing it as it is the delivery system used,” concludes Hunt’s LaVoy.
