2010 Trenchless Technology Roundtable – Design-Build for Trenchless Projects

The trenchless technology industry is a dynamic market. Each year new technologies are developed that expand its reach and changing market conditions change the way they are used. Each year at the No-Dig Show, Trenchless Technology takes the opportunity to visit with industry leaders to explore the latest trends and their impact on the trenchless market.

This year we chose the topic: “Design-Build for Trenchless Projects.” Design-build has been growing in popularity over the last decade as an alternative to hard-dollar, low-bid contracting (design-bid-build) and its shortcomings that include a lack of quality control, cost overruns, claims and an adversarial relationship among the parties involved.

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Design-build offers a simpler contracting method that can foster a team approach, ensure qualifications of project team members and reduce the time from project inception to completion. However, many stumbling blocks exist.

We gathered seven leading experts in this area at the Schaumburg Hotel and Convention Center on May 4. Panelists included a cross-section of the industry, including owners, contractors and engineers with varying levels of experience with design-build for trenchless projects.

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2010 Trenchless Technology Roundtable Panelists The panel consisted of :

Dave Bennett, Ph.D., P.E., Principal, Bennett Trenchless Engineers
Brian Dorwart, P.E., P.G., Senior Consultant, Brierley Associates
David Goldwater, Area Manager of Business Development, Insituform Technologies
Jamie Hannam, MBA, P.Eng., Director-Engineering and Information Services, Halifax Water
Mark Hutchinson, P.E., Construction Division Manager, City of Portland Environmental Services
G. Allen Wishon, Business Development Manager, Mears Group Inc.
Douglas Yerkes, Ph.D., P.E., Associate Vice President, HNTB
Jim Rush, Editor, Trenchless Technology

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What is the status of design-build for trenchless projects? Is it growing?

Goldwater: The status of design-build for trenchless projects is growing slowly. It’s been a very seldom-used method of contracting and procurement in trenchless technology to date. We’re starting to see more and more communities as well as private industry clients look toward design-build. I’m hoping to see, certainly in our organization, this procurement method continue to grow. We’re seeing more and more states adopt design-build as an allowable procurement method in projects other than transportation (which have been permitted in about 15 states for a long time). A number of states in the last three or four years changed their state laws for municipal entities, water and sewer authorities to allow procuring through design-build.
It is a slowly emerging industry. It’s a real challenge to get an owner to continue to think about getting outside the box from the traditional design-bid-build and go with alternate procurement, but there are real benefits to thinking that way. So many communities are so far behind the 8-ball or stuck in a consent decree that they have to start doing something different. Design-build is a terrific opportunity for them to take advantage of the best contractors in the industry, get their minority- and women-owned business participation, get local participation and save money.

Bennett: I would agree that design-build is growing in trenchless. I think one of the impediments to faster growth is that there is a wide range of customers out there. That is, the owners. Some of them are very sophisticated and very comfortable with a number of procurement techniques. Others aren’t and they are reluctant to try something new. So, there has to be an education process. Some small municipalities that are trying design-build don’t really understand the process.

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Yerkes: I would agree that education is needed. Design-build is still in its infancy in trenchless projects. Relatively few public agencies are doing design-build, and those that do use it are using it for fire stations or libraries or other above-ground projects. A lot of smaller communities don’t have the resources to provide internal education programs or to bring in outside experts, and the result is that they elect not to try something new and innovative and instead remain with their standard design-bid-build project delivery methods.

What are some of the pitfalls or impediments that may impact the growth of design-build?

Hutchinson: The challenge we run into in the city is that people don’t really contemplate design-build until they’re into the design process. And one of the things we find with design-build is it takes more work up front. You really need to know what you’re doing. You need have an understanding of things so you can put it out to bid at the 30 percent stage. But early on you need to fully reason the risk and the scope and the cost of the project.

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Another issue is timing. It takes a long time in a municipality to do alternative contracting because you need to get the approvals from the state and city council and get everybody aligned and to trust you that this is the best value for the city.

Dorwart: The lack of education is a problem, plus there is the fear factor of moving away from the traditional way a municipality does business. The lawyers are familiar with the traditional way, the public works people are familiar with it, so it has been a very hard sell to be able to get anybody to want to even try design-build. The private industry, I’ve found, is actually expanding the use of design-build more. There seems to be a higher level of sophistication on the private side, but also there is more trust in the contractors. The private industry tends to work with fewer contractors, and because of that, the contractors develop more of a history with a particular private client. Therefore, they build a relationship that allows different contract methods to be better accepted. So in the private industry, I’ve found better acceptance, although it’s still fairly thin. The public industry, there’s still a lot of resistance, and it’s just a lack of education and the “I’m-not-going-to-be-first” attitude.

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Wishon: A lot of it comes down to trust and experience, and the public sector especially seems to be leery. We’ve had some success stories, and it comes down to trust and the sharing of risk. We have found that the private-sector entities are more willing to step out there and do some innovative things. But all in all, our business is growing and design-build is slowly becoming more accepted.

Hutchinson: There are a couple selling points for design-build, but cost is the one that you always have to cross first or you’re not in the race. So you’ve got to somehow show how you’re going to save money. At the same time, you have to be careful with design-build because you are dealing with a different set of control mechanisms. You need to make sure you are tracking costs and conveying your message to the design-builder. You don’t just wind the car up and it takes off. You’ve got to keep working it as you go through the job.

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Hannam: From a smaller municipality perspective, we’ve had some success with design-build on facilities projects. Most of our trenchless-type projects, for our utility, are smaller in scale, and on those projects our ability to utilize traditional design-bid-build is more efficient for us. I think if we have some larger scale projects that may warrant considering design-build. One thing that concerns me about design-build is that, as an owner, I lose a little too much control. However, design-build allows you to tap into the consultant’s abilities and the contractor’s abilities. One gap in design-bid-build is that you can’t tap into the contractor’s smarts on the design side, and they’re often the brightest folks out there, especially relative to trenchless. So we’re looking at methods that could tap into the contractor’s expertise on the design side without giving up too much control.

What are some of the contract delivery methods you are using or considering as an alternative to design-bid-build?

Yerkes: One of the biggest factors for achieving the best value in contracting is using a qualifications-based selection process. When I worked in the public sector, we struggled with how to do that because there are media implications, political implications and public scrutiny, whether you are awarding a contract on qualifications purely or a two-step process where you’re short-listing and then asking for proposals. The challenge is deciding exactly what qualifications are important for a particular job and how to weigh those qualifications. Some of the qualifications can relate to understanding the job, approach, experience, financial capability and proposed timeline. Much of that becomes very subjective and requires having an owner that understands the various levels of value associated with each of those components.

Hannam: We are using prequalification of contractors. The key is coming up with the criteria. We had a recent experience where the unsuccessful contractors said our criteria were too subjective and unfair. So our goal is to come up with more solid prequalification criteria so it’s a fair selection process. Once we have the prequalification, we tend to stick with traditional low bid. I’m not so certain that there isn’t room for a value-based bid coming out of the prequalification, but we’re stuck in a bit of a traditional procurement environment.

Hutchinson: Prequalification will get you to a certain point … sometimes. You have cases where people are no longer with the firms when construction starts that were the basis for the firm’s acceptance when it was prequalified, so it isn’t the silver bullet for getting the right contractor. But the thing that you miss with prequalification and low bid vs. design-build is that the design is never finished until the job is done, it continues to evolve for the better. So having the design element involved in the entire process can help overcome some of the challenges that come up during the job, even if you have the right contractor on a hard bid job.

Goldwater: There are a lot of communities that use prequalification as a method to help reduce the potential risk for problem contractors. Determining qualifications through experience requirements is probably the most common method. Using prequalification hasn’t been approved in many cities. In addition, a lot of cities just won’t do it because of the challenges. You run into the same legal concerns with prequalification as you do with design-build because whoever doesn’t get prequalified is more than likely going to file a lawsuit against the city and they usually end up on the selection.

Bennett: I’ve seen the pendulum swing widely. Communities and districts that embraced prequalification are now moving away from it because they’re so frustrated with that process. But I believe it does have an intangible benefit, and that is that it discourages clearly unqualified contractors from submitting. So you tend to weed out those. But if someone thinks they’re on the bubble, and they don’t get included, they’re going to file a protest and, more often than not, they’ll get included.
Goldwater: The other way to obviously do it is just through specifications with clear qualification requirements. Nearly every community and every low bid law in the country allows for the community to throw out an unqualified, non-responsible or non-responsive bid. So, if your neighboring community has had problems with a contractor who messed up a job, walked off a job, whatever it is, and you’ve got four or five references, you can toss them out for not being responsible.

Hutchinson: You’ve got to be pretty well aligned. I do the prequals for some of our work, and you’ve got to have everybody aligned in your group and be willing to do the fight. Some political years you do, and some political years you don’t. Prequal takes time. We do an annual prequal, but if you’re going to do it in front of a job, that’s a whole other two-month process. Once you set the qualifications you need to get on the phone and try to find people to verify the experience.

Goldwater: And the reality is there is sometimes a huge disconnect, especially in larger communities, between purchasing and engineering or public works. You may have prequalified these five contractors, they get seven bids and on bid-opening day, they go ahead and open all seven. You know what, when the bid is opened, the  firm that is  low bidder is low, and good luck in having them rejected based on qualification, even if it is in the best interest of the client.

Hutchinson: It’s hard to argue money vs. qualifications to a council member.

Dorwart: What we’ve done a couple times now is to use a modification where we prequalified the contractors then we rated the prequalified contractors. Then, we negotiated with the most qualified contractor first. We negotiated a contract with the stipulation that if we couldn’t come to a successful contract, we would then move to the next contractor. So we never had a low bid, so to speak. It was always a negotiation. However, that process added actually another year to the project.It sounds really good, but literally we had to take the process to the attorney general of the state to get the procedure approved ahead of time because the owner was so fearful of a lawsuit coming back and challenging the decision. In the end, the project was a success as it finished on budget, ahead of schedule, and the owner obtained the performance needed.

Hutchinson: The real game for an owner to do design-build is you want to get the right contractor. With the right contractor you can avoid some of the common mistakes that lead to claims. As an owner, your goal is to get the right contractor out there that’s going to make your life easy. That’s why you want to do it. When you get the right contractor, then you get the schedule and everything else. But the challenge is defining the right contractor.

Design-build changes the traditional relationships between the owner, designer and contractor on many levels. What impact does this have on trenchless projects?

Bennett: The key difference is control. That is a real challenge for the owner and the designer. I feel, as a principal of a small firm especially, we have expertise to offer in the trenchless area. Sometimes larger firms don’t have that specialty expertise. Yet if we team with the contractor, we’re subordinate to them. Yes, they tend to listen to our advice, but the power of decision typically flows with the money. And the money is pretty small on the consultant’s end. I think from the owner’s perspective, you now have the designer working for the contractor. So if the owner doesn’t have its own consultant, which should be the case but is not always the case, especially with these smaller, less experienced municipalities, then they do lose that ability to get the designer’s knowledge and input early on. So it is a challenge. Another challenge for small design firms is insurance. We cannot serve as the primary design-builder; it’s just simply not possible. My insurance carrier, and I think this is true for almost all small firms, says if you do it, we’ll just cancel your insurance. It’s just not going to happen. We can serve in that subordinate role, either to the owner or to the contractor, but not as the prime design-builder.

Wishon: If that’s the case, you haven’t built a good team. Again, it comes back to the trust. If you’ve got a good team going, a good relationship, you iron these things out and nobody is a subordinate. You sit in your meetings and you make decisions together. That’s how we see it work successfully.

Bennett: Let me just give an example to make my point. We were subbed to a large design-builder. We got the drawings and specifications to about the 50 or 60 percent level. We had particular requirements about water-tight shafts and tremie slabs and things like that. The project was awarded, the design-build leader said well, the contractor didn’t understand they were going to be required to put in a tremie slab, they don’t want to do it. And there was enormous pressure for us to ignore or relax that criterion, and we felt it was very important for the safety and performance of the project, and we wouldn’t do it. There was an enormous pressure brought to bear on us. That’s what I’m getting at, is that you lose that element of control of the process and the rationale for why things have to be done a particular way.

Goldwater: Something that we’ve seen throughout the industry is that a number of consulting engineering firms are afraid of giving up control and shun design-build specifically because of that issue. Now there are a lot of good firms out there embracing design-build — both smaller, regional firms, as well as the big multinational firms. It certainly has been a challenge to try and change the mindset that they’re giving up control of their relationship with the community or their control of the project. And you’re right, most of the engineering firms can’t bond the job. So the contractor is in the lead position because they have to bring a $20 million bond to the table or whatever the dollar amount is. But it really should be a partnership. It should be with the right team and the right players, and it should be a good partnership where both players are being well-served and well-heard and have a seat at the table.

Hutchinson: As a municipality, we commonly see specialty subconsultants hired for a small piece of the overall project. A lot of times, these specialty subs aren’t brought to the table, even when it relates directly to their area of expertise and why they were hired. Just recently we had a case where we were discussing shafts and the specialty consultant was not there. I don’t think it’s done out of disrespect, but I think sometimes the prime designer just doesn’t understand the subtleties between a tremie slab or dewatering, or whatever it is that is being built.

Wishon: We see projects all the time where designers have specified directional drilling, but when we look at their plans we see that they just can’t be constructed. And most of the time you’re fighting an uphill battle because they don’t want to admit that they really don’t know. Then there are other scenarios where the consultant calls us up and asks whether the design can be built. It comes back to getting the right members on the team and everybody working together.

Goldwater: I think it’s also important that the owner doesn’t bring too much of an expectation to the table of what’s going to be done. One of the things communities and municipalities are looking at right now from a design-build perspective is to go out and look at an entire watershed or basin and put it out for design-build to rehab the entire thing. In this situation, they are looking for the design-builder to determine what the technologies are. Don’t put out a design-build package that says I want cured-in-place pipe here and pipe bursting here. That’s not design-build. The real savings, the real innovation and the real true partnership between the owner, contractor and engineer can come from a little bit more open-ended expectations at the start.

Dorwart: I’m also looking at the difference in the expectations of the contractors, owners and engineers. The contractor wants to maximize profit, so he’s going to put a tremendous amount of pressure on the engineer to design within the contractor’s  body of knowledge. The owner, on the other hand, has a certain expectation of quality and performance for the best cost and/or schedule. I’m looking at this difference in expectations as an opportunity for engineers to be the mediator to merge the expectations of the owner and the contractor. Actually, it is the engineer, more often than not, who knows best what the city has to do by code and by good engineering practices to have a successful project. Contractors bring innovation to the table, but sometimes they may not know all the requirements of the work, including even some basic OSHA codes, municipal operational needs, capital planning or urban master planning. So, the contractors have to move a little bit, the owners need to move a little bit, and the guy in the middle is the engineer. The result is that we get the least amount of money on the project but we get the most amount of pressure. Still, it is an opportunity for engineers to step up, but it will require a much higher level of construction experience by the engineer to be able to mediate the situations and still design a constructible project.  This lack of construction experience within the engineering community is an impediment to the design-build process.

How does design-build affect risk allocation between the various parties?

Bennett: The problem that designers have, especially smaller firms, is the risk-reward equation changes drastically. The rewards don’t appreciably increase for design firms, but the risks do. They ratchet up significantly. You still get about the same fees for your design, perhaps even less because you’re not taking it through to a full, 100 percent design, and yet if something goes wrong, the owner’s going to point the finger at you and say how did you let this happen?

Hutchinson: You have to have that discussion of risk. We had a shaft project where designer was looking to overbuild because there were a lot of risks there. But we sat down with the designer and had him design the project based on certain assumptions that we didn’t have information on, with the understanding that we would take the risk for that. This was based on a risk-reward comparison. We had a discussion where we just kind of put all of the cards on the table, and everybody knew where their spot was. Another important consideration in evaluating risk vs. cost is not just the thing you are adding, but also the impact on schedule.

Bennett: The City of Portland represents a very sophisticated owner that understands those issues. But when you’re dealing with a lot of the smaller sewer and water districts and municipalities, what they see design-build as is a way to shove more risk somewhere else and get a faster, cheaper project. They need to be educated about sharing risk and responsibilities.

What types of projects lend themselves to design-build?

Goldwater: The risky, difficult, time-sensitive projects are ideal. Going through the traditional design-bid-build process can be a lengthy process by the time you follow state rules and regulations for public notice and those kinds of things. Again, sometimes the design-build laws are a little cumbersome, depending on the state you’re working in. It can be a very shortened time frame and allow for an expedited project schedule if there’s something that needs to be done quickly.

Hutchinson: One of the big advantages of design-build is you can start buying the parts and pieces before the design is done. So on a microtunneling job, for example, you can start to get your microtunneling machine and your pipe, which are long-lead items. You can get a jumpstart on these types of things while other details like rights of way and connections are still being worked out. We do it to manage risk, and schedule is part of that risk. If you doing a large project that is impacting people, then schedule is a big factor and design-build can allow you to work on things in parallel.

Wishon: That is the perfect situation for design-build. That’s when you get the full advantage of having your consultant and your contractor involved early on. We’ve seen very often where an owner will have a consultant come up with their budget numbers without any review or involvement of contractors. They’ll go through some sort of prequalification process, and then they’ll put the project out on the street for bid only to find that the bids come back much higher than their budget. By going through the design-build process and having all parties involved early on, you’re able to determine and lock down the budget and schedule much earlier in the process.

Bennett: Time is of the essence. You see that in every contract. And I think that is one of the main selling points for design-build, especially when you think of some of these projects that have to be done so quickly now because of recovery funds or the threat of fines for not meeting a certain deadline. Design-build can be very effective in reducing that design construction window to fit a tight schedule.

Dorwart: There is a saying that owners have a choice: schedule or cost? They have to decide which one is going to control the project because you cannot ever on any project have both. No matter how carefully you manage it, your decisions will be based on one or the other. If you determine that you have a schedule-driven project, then cost has to be flexible. I believe that this understanding of main decision drivers opens opportunities for design-build.

Hutchinson: Design-build can be very useful for emergency projects. We had a job a couple of years ago where we were spending $400,000 a month on sewage diversion costs. We were able to get a contractor on board quickly based on qualifications and experience and got to work resolving the issue right away. With the low bid process, it would have taken three months to before we got notice to proceed, so we were able to save quite a bit of time and money.

Goldwater: With design-build in the private sector, there is much more opportunity for partnering and coming up with solutions that are beneficial to both parties. If you come up with a solution that saves $500,000, the parties can share the rewards.

What legal barriers exist that restrict the use of design-build?

Goldwater: It can be variable from state to state, and a lot of them, even though some states allow design-build, are very restrictive on vertical construction only, transportation projects only. It just really varies significantly from state to state.

Bennett: Even within states where design-build is legal, there are certain municipalities and districts that aren’t going to allow it. We’ve got a project right now that’s a perfect candidate for design-build. They need to have this project built before Jan. 15, 2011, and it would realistically take till Jan. 15 to design it. Yet, we’re using the traditional design-bid-build process. The result is enormous pressure is on everybody.

Hutchinson: In Portland’s case, we had two issues. In our state, there are laws that require us to hard bid projects, so we had to get an exception. Then the next step is crafting a specification that works for all the parties, and that’s the tougher thing for us. How do you handle changes? What’s in scope? What’s out of scope? That’s the key to the relationship with folks as far as sharing risk. That took us a while to deal with and then to educate everybody about how the ball game is to be played. Now that we have done it several times it’s easier. One of the things we really liked is that it’s gotten us out of that claim game. Of course, ours is a little bit different than traditional design-build. We have a fixed fee, and then we reimburse costs, labor and materials, and we buy the equipment for the job. When you get into an issue, people get right into problem solving vs. arguing about whose problem it is.

Bennett: The procurement model that Mark [Hutchinson] just described, by the way, has been so successful that within the tunneling community it’s called the Portland Method. When you get something named after you, you’ve done something right. There a lot of people out there in the tunneling community saying let’s explore the Portland Method.

Considering some of the problems associated with design-bid-build, why is it still the predominant way of contracting for trenchless jobs in the municipal sector?

Goldwater: There is a reluctance to change. Design-bid-build has been the methodology for 100-plus years and people are averse to learning something new and understanding the risks. They know how to procure with design-bid-build, and many times municipal attorneys don’t want to get involved with something new, so they are a barrier to getting innovation in procurement.

Bennett: The old saying “If it ain’t broke, don’t fix it” also applies in many cases.

Wishon: It’s also a perception of cost and a big factor is politics. Politicians are under pressure to keep costs low and stay within budgets. And even though low bid doesn’t mean lower cost, it is often perceived that way. As mentioned earlier, the use of prequalification with design-bid-build can help. The owner will work with consultants to establish the prequalification criteria to try to involve the best contractors and end up with the best product.

Yerkes: We are seeing municipalities entering into low-bid, design-build contracts. Those are projects that my company prefers not to pursue, but we see it again and again. Part of what’s driving that is public perception or media perception. In those cases, elected leaders don’t want to be under the scrutiny of the media writing something that says, “The city again awards a no-bid contract.”  That’s how the media often portrays a quals-based contract award: no bid. Then questions arise as to what connections there are between the contractor and elected officials:  What’s the relationship there? Who gave who money? That puts elected officials in an untenable position with respect to the media. So that’s why many owners are using a two-step process, where you evaluate qualifications up front and then go for a low-bid or quantitative best-value proposal.

Hutchinson: We still low-bid the majority of the work and we will probably continue to do so. There is a lot of competitiveness in the market, and it’s nice to take advantage of that. Another challenge of design-build is the cost element. The cost of the project never goes down through the design process. As you as you get more educated about the project, the more things you find that you need to add to the design, which raises the price. So, you start to either cut off scope or you go ask for more money in the budget and that gets embarrassing after a while.

Dorwart: Many times when you’re dealing with specialty work like trenchless, you can run into budget/cost variations from beginning to end that can be upward of a factor of 10 whereas in construction of a sewage treatment plant, you won’t have that level of volatility in your pricing. Variations can be caused by very basic issues like do you have rock or not — something as simple as that can have a profound effect on the real project cost. Then you add the regulatory element that can also add a significant amount of money that was totally unanticipated to the project through certain innocent but very risky conditions such as there will be no drill fluid loss. Now the engineer has to go back and explain this problem and the high cost increase to the owner or board, and people start pointing fingers.

Goldwater: There’s always going to be a low bid, and low bid is perfectly good procurement for a large portion of projects. But more and more owners are realizing they’ve got a stack of projects piling up that they can’t get done through the low bid process because it doesn’t fit the model. They’re very complex, difficult and sensitive projects, and that’s where you can engage a process like design-build to get the most qualified contractors and the most qualified engineering firms to come up with solutions. Politically, you can still go out and low bid a huge portion of your work, your regular work that is less risky. Your traditional rehab or traditional new installation with trenchless technologies you can do low-bid, that’s OK. But for those complex, difficult projects that are in sensitive areas, you may be better served to engage a process that makes it a partnership and allows you to solve the problem.

Yerkes: Part of that challenge is that design-build has been a tool for most of these communities only for the last couple of years. If you look the Design-Build Institute of America’s map of the United States, which indicates where design-build is allowed, in the 1990s, it was mostly red, meaning that design-build was not allowed. Now it’s mostly green, meaning widely permitted, with some yellow, meaning conditionally permitted, and there’s not a single red state left. So for some communities, design-build was not an option 10 years ago. Now, it is. However, for many of them that are already have projects or programs under way, it is like switching horses in mid-stream, from design-bid-build to design-build. Once you institutional momentum starts heading one way, it’s very hard to stop.

It seems that design-build procurement for trenchless projects has primarily been used on the new installation side. What about rehab?

Hutchinson:  We have a need for cured-in-place rehabilitation in Portland and I’ve got several contracts going on that involve cured-in-place work. We are looking at annual service contracts, but finding a model is really tough.

Dorwart: Annual contracts allow communities to budget how they’re going spend money over the next several years. If you have a multiyear contract, public service directors can budget their needs and finance people can say, “I have X amount of dollars to spend on trenchless pipe rehab per year.” You now have a method for owners to predict what the cost is going be and the contractors can now plan their resource allocation to cover projected work. It allows all sides to better allocate resources.

Yerkes: Multi-year contracts for the City of Chicago have been really beneficial in all but eliminating emergency contracts. The City uses both the annual service contracts and job-order contracting to eliminate construction-related emergency contracts. Right now, most of the design-build work for the water and sewer sector is being done at the treatment plants, but collection and distribution lines will follow as owners get experience. For a lot of owners, the same folks who are responsible for the improvements at the plant are also responsible for the collection systems, so design-build will grow as they become more familiar with it.

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