How a Design-Build Firm Can Help Avoid Cost Overruns and Create a Partnership of Complete Transparency and Accountability
A Misalignment of Interests
First, let’s talk about how everyone’s interests are not aligned in a traditional non-Design-Build contractual relationship.
When using separate service providers for both design and construction, clients do their best to create the most value for both their project and their investment in the property for the least amount of money, because of course anyone would!
Likewise, both design and construction providers do their best to deliver a good product for the least amount of resources, yielding the highest possible profit, because of course they do.
The obvious problem here is that these two goals can create a mis-alignment of interests, often keeping clients and providers in an endless negotiation, resulting in adversarial relationships for both design and construction.
An Ethical Dilemma in Design
Here’s a good idea: Don’t spend money designing something unless you are certain it will be built.
Here are five simple facts:
1. All architectural colleges teach their students to make project costing part of their design process.
2. The American Institute of Architects’ (AIA) standard service contract for residential remodeling design services requires costing as part of the process but unfortunately does not specify at what point in the process this should occur.
3. Most residential and light commercial design contracts do not use the AIA standard and instead may have a clause stating some version of “I am not responsible for the cost of what I design, nor am I responsible for making costing part of my design process.”
4. The technical requirements for the project drawings to obtain a permit do not even come close to meeting the requirements to keep change orders to a minimum during construction.
This is because the permit process does not demand any information for Finishes, Fixtures, and Equipment (FF&E) for residential construction as a condition for granting that permit. As such, most design-only professionals will either exclude this work in their competitive bid for design or include it as an “add-on” to the primary contract.
5. Most clients will naturally obtain competitive bids for design services. And why not? However, by providing FF&E design information than the permit does not require in their bid for the design contract, the design-only firm knows their own bid will likely not yield a sale, as the obvious assumption is that all the other designers will not be including FF&E either, since again, it’s not required for the permit.
These five facts set up a difficult ethical dilemma for the design-only professional, as they have no stake in the financial viability of their design, and may also be uncertain in how to resolve this dilemma caused by market forces and their own contractual dis-incentivizations.
So how to resolve these dilemmas? When should costing occur?
Every project is different, but here are some quick tips:
- Get high-level, conceptual-only numbers at the beginning of the conceptual design phase. “About what can we do? About how much will it cost?” Close enough is close enough. Establish Project Viability first. This is a “textbook” procedure for us.
- Revise costing after Planning Dept. approval and structural engineering (if any), and after preliminary work has begun on the FF&E
- Revise once more before the construction contract is signed to reflect final FF&E decisions.
- Require competitive bids at the Sub-Contractor level from the General Contractor as part of their contractual obligations before the contract is signed and during construction. (this is actually the standard procedure for large commercial projects).
These four steps create complete transparency in a Value-Engineering (costing) process that increases certainty at the beginning of the project and keeps change orders to a minimum throughout the project.
Because why would you do anything else?
An Ethical Dilemma in Construction Costing
Build-only providers also have an ethical dilemma on their hands, stemming from the same market forces and 20th century (no computers) practices.
When costing a project for free, hoping to be the lowest bidder, contractors must decide how much to reveal of what is not on the plans, especially when it’s known there are other bidders asking themselves the exact same question.
My own experience early on in my career is that “no good deed goes unpunished”, and revealing the “hidden costs” of construction was interpreted as “up-selling”, and also did not yield a sale, as all the other contractors were insisting that their bids covered everything, even though the FF&E components were usually not part of the drawings. In addition, a standard builder’s contract states quite specifically “If it’s not on the plans, it’s not in the contract”.
It’s not on the plans because the permit did not require it, most owners opt out on additional design costs for FF&E after the permit is obtained, and since the builder’s contract is usually awarded based on the lowest cost, this sets the stage for a significant amount of change orders during construction, devastating the clients funding goals, and leaving them to regret their necessary adjustments to their long-term ROI calculations.
A Nervous Lack of Expertise
Making matters worse in design, clients are seldom able to recognize and understand what defines a quality 24” x 36” design product. We would define this product as one that keeps change orders during construction to an absolute minimum. Can most clients look at a set of drawings and discern whether or not those drawings meet this standard? Probably not.
For construction, can most clients observe a water-proofing installation process during construction and judge how many years will pass until those water-proofing efforts fail? Of course not.
Most clients quickly discover this after either contracts are signed, and are understandably nervous about their lack of expertise in these areas, especially when these contracts are non-transparent.
It’s bad enough when you don’t have the expertise to judge the quality of the design and build products you’re paying for, but it’s even worse when you have no idea how your investment funds are being disbursed due to a lack of transparency in either contract.
A Potential for Transparency, Partnership, and Accountability
But there’s hope! Any Design-Build contract should require complete contractual transparency for both design and construction services by a single provider.
But let’s be clear: transparency need only work in one direction. The client need never reveal the details of their financial situation, only the willingness and ability to pay for what they are asking for.
What’s more, when the same firm provides in-house expertise for the design, costing, and construction methods as a unified process, the added bonus of a contractual requirement for complete transparency redefines and elevates the traditional adversarial relationship to one of partnership.
The client and the Design-Build provider now have an equal stake in the successful outcome of the project and work together to produce that result.
However, the best part of working with a Design-Build firm is that there is an implicit, if not outright, contractual requirement that the firm is actively designing a project that must fit the client’s funding goals from the start of design, not as an afterthought once the design is complete, and the engineering and permits are paid for. That strategy does not usually end well for anyone.
We have found that this built-in accountability for the cost of what we design creates a perfect alignment of interests, resulting in a functioning transparent partnership for the project.
Moreover, all the ethical dilemmas are entirely resolved, change orders are kept to a minimum, and the long-term ROI goals are met.
Again, why would you do anything else?