Construction Manager (CM)/General Manager (CG)
Procuring a Project under a CM/GC method may not maximize revenue potential and economic benefit nor minimize the impact of the financing on the Public Entity’s debt capacity. Further it may not bring innovation to the project nor does it ensure cost and schedule certainty or adequate lifecycle maintenance.
- Public entity would normally pay for the project through non-voter approved municipal debt which could be subject to an impact on debt capacity limitation.
- This method necessarily implies that the City issues debt to fund capital expenditures during the construction period.
- The City would have to finance all life-cycle investments for the facility with additional debt issuances over time.
- In this case, it is assumed that the City would continue to nominally allocate up to 25% of the TOT to pay the debt
- This would put significant pressure on other financing needs or priorities since non-voter approved debt is limited to 6% of the General Fund’s
- A CM/GC delivery method in practical terms does not guarantee mitigation of cost overrun and schedule delay.
- A CM/GC delivery method entails a commitment by the GC for construction performance to deliver the Project within a defined schedule and price for a given scope of work, either under a fixed lump sum or a guaranteed maximum price (GMP). In practice the outcomes are frequently not as
- This delta between expected and actual outcomes is largely driven by a lack of sufficient financial incentives during the design phase, when there is no competitive tension as the budget for the GMP and the scope are being defined, as well as a lack of competitive tension later on when the subcontracts are
- This often leads to schedule delays, cost increases, and/or trade-offs in program and other desired features through scope reductions or value engineering.
- These can become inevitable for the Owner, who must manage the often competing priorities of the CM/GC and the designer as the ability to competitively bid the project progressively diminishes.
- The Public Entity may specify a cap for the Project budget; however, in general the private sector has greater at risk financial and reputational pressure to control cost and schedule than the public
- Once the construction sub-contracts are awarded, the GC would be paid directly by the Public Entity at construction completion. In practice this means that as payments are made (and the Public Entity’s QA/QC is conducted), the Public Entity would become responsible for any issues that may be accruing as work progresses (e.g., quality issues, latent defects, coordination issues, ). This method requires a continuous and comprehensive supervision and monitoring of the construction by the Public Entity.
- Since the Public Entity would contract the design team, it usually retains all design-related risks (including errors and omissions).
- Finally, the construction contract typically allocates site, ground, and existing conditions as owner
- The CM/GC contractor would not have long-term commitment to the Project, and future latent defects and lifecycle costs would be the Public Entity’s responsibility.
- After project completion, the CM/GC contractor has liability strictly limited to its specific contract terms and legal framework. In other words, the GM/GC contractor would not be committed to the Project in the long As a result, lifecycle costs would be a Public Entity responsibility. The Public Entity would have to enter into separate operation and lifecycle maintenance contracts and issue new debt in the future to pay for these services.
- The CM/GC contractor is not incentivized to introduce innovative designs that maximize site value or minimize life cycle costs.
- The GM/GC contact structure does not financially reward designs that achieve high performance outcomes, or consider optimizing long-term lifecycle Likewise, it does not allocate downside risk of not achieving such outcomes to the contractor. Thus, this Option would not maximize innovation.
Design Build (DB) and Design Build Finance (DBF)
Procuring a Project using a Design-Build (DB) or a Design-Build-Finance (DBF) delivery may not maximize revenue and economic benefit nor minimize the impact of the financing on the Public Entity’s debt capacity. Further it may bring only limited innovation to the project nor does it ensure cost and schedule certainty and adequate lifecycle maintenance.
DB or DBF Analysis:
- Public entity would normally pay for project through non-voter approved municipal debt which could be subject to an interest rate ceiling limitation.
- This method necessarily implies that the Public Entity issues debt to fund capital expenditures during the construction period for a DB or at the end of construction for a DBF.
- In this case, it is assumed that the Public Entity would continue to nominally allocate up to 25% of the TOT to pay the debt
- This would exert significant pressure on the Public Entity’s finances, as non-voter approved debt could be limited to a capped % of the General Fund’s
- In the case of a DBF the contractor becomes responsible for financing during construction of the Project up to completion when a milestone payment from the Public Entity would be In that case the Public Entity would likely have to issue long term debt securities to fund the milestone payment.
- Two benefits of DBF are that since no payments are made until completion of construction:
- Schedule performance is highly incentivized compared to pay-as-you-go methods such as DBB, CM/CG, or
- The City has greater budget flexibility until construction is complete by allowing the City to defer issuing new
- As in the previous case, the Public Entity would have to finance the life-cycle needs with additional debt issuance in the
- A DB or DBF delivery would also expose the Public Entity to cost overruns and schedule delays.
- Although these models provide greater risk transfer than a CM/GC model, there are nevertheless cost implications for the Public Entity due to delivery inefficiencies in addition to the lesser extent of risk transfer as compared to a P3 model, for
- In the case of a DB or DBF, the Public Entity would go to the market with an RFP containing a defined reference design and a well-defined project in term of specifications and
- It would seek bids to complete and fine tune the design and build the
- The Public Entity may specify a cap for its In this case, projects are usually awarded based on the DB contractor’s technical qualifications and past performance, yet, ultimately, the quoted price drives the decision making process.
- This delivery method would require a continuous and detailed supervision and monitoring of the construction by the Public Entity. Any modification of the design or the construction program would translate into a change order, thus increasing costs and delaying the completion date.
- The Contractor would not have a long-term commitment to the Project, and latent defects and lifecycle costs would be the Public Entity’’s responsibility.
- After Project completion, the Contractor has liability strictly limited to its specific contract terms and legal framework. In other words, the DBF contractor would not be committed to the Project in the long run.
- As a result, lifecycle cost risk would lie with the Public Entity. The Public Entity would have to enter into separate operation and lifecycle maintenance contracts and issue new debt in the
- The DBF contractor is not incentivized to introduce innovative designs that provide maximum value for minimum costs on a lifecycle basis.
- The DB / DBF contact structure does not financially reward designs that achieve high performance outcomes, or consider optimizing long-term lifecycle Likewise, it does not allocate downside risk of not achieving such outcomes to the contractor. Thus, this Option would not maximize innovation.
Design, Build, Finance, Operate and Maintain (DBFOM)
A DBFOM (or P3) scheme would entail a significant risk re-allocation between the Public Entity and the private partner. This would shift the private partner’s interest and incentives from a short-term to a long-term focus on optimizing design, construction, and life-cycle / facility maintenance. This would help the Public Entity meet its objectives which could include:
- Revenue and economic impact maximization
- Impact minimization on the Public Entity’s debt capacity
- Bringing some innovation to the project
- Achieving cost and schedule certainty
- Achieving adequate funding and performance of lifecycle maintenance.
- Under a P3 scheme, the Public Entity would benefit from additional tax revenue drawn from project without issuing debt for the Project.
- The financial burden would be transferred to the private partner – specifically to the Special Purpose Vehicle (SPV) that would be in charge of designing, building, financing and maintaining the
- In addition, the scope of the SPV could include venue operations. Analysis should be done to conform that the Public Entity’s availability payments, which the private partner will use to cover project expenses and pay for its debt service, would not be considered a debt obligation and therefore would not impact the Public Entity’s debt capacity.
- When the majority of a Project’s material risks are transferred to the private sector, experience shows that the Project has a higher likelihood of being delivered on time and within budget.
- This is particularly the case for risks related to long-term performance and operational functionality.
- Under this model, the Public Entity would first conduct an RFI/RFQ to shortlist bidders based on their technical and financial qualifications and past performance.
- The Public Entity will issue an RFP to the shortlisted bidders, containing a minimum list of non-negotiable programmatic, service, and performance requirements for the project and the uses that the project will be a solution for.
- The Public Entity would specify bidding parameters and selection criteria, while granting a substantial flexibility to the private partner to develop its technical and financial proposals in response to the Public Entity’s program and specifications
- This allows the bidders to develop optimized design and engineering, and an efficient construction cost and
- The P3 contract would be awarded based on a best value evaluation of the technical and financial
- The Public Entity can choose the main bid variable to be:
- The lowest annual availability payment for a given minimum program, or
- The maximum program furnished for a pre-set annual availability
- In the latter case, the availability payment would be set by the Public Entity based on its affordability limit. The bidder would then be responsible for sourcing and implementing the financing, including both equity and debt, with no recourse to the City (only to the SPV).
- Once the P3 project is awarded, the Public Entity negotiates and executes a long-term P3 contract which specifies the service and building performance indicators.
- The Public Entity establishes penalties for non- performance and the formulas for the Public Entity’s availability payment obligations (the Payment Mechanism).
- These performance indicators and their associated penalties and incentives are critical to ensure a good upkeep of the asset throughout the P3 contract
- A DBFOM gives assurance that life-cycle costs are adequately funded to maintain the facility in a state that satisfies the P3 contract requirements, which can include market-based performance metrics.
- Another advantage is that at the end of the P3 contract period the building would be handed back to the Public Entity in a condition that meets contractually pre-established performance criteria and facility condition indicators verified by 3rd
- The private partners are motivated to find integrate solutions for design, construction, and lifecycle / facility maintenance.
- The private partner is incentivized to earn an equity return, therefore maximization of revenue throughout the concession term is a strong incentive to design an innovative, market-appealing
- The SPV (as opposed to the Public Entity in the other delivery Options considered) is responsible for arranging contracts with DB contractors and operation and maintenance (O&M) service
- These contractors and service providers must deliver a work product that is in line with relevant performance specifications included in their respective
- Financial incentives are built into these contracts to drive