Our team has traveled around the Midwest working with and listening to owners and design professionals as they navigate the Construction Management at Risk (CMR) delivery method. Iowa recently passed legislation that enables use of CMR as a delivery method in the state. The legislation outlines the process for engaging a Construction Manager (CM) and bidding work to subcontractors and suppliers. Let’s take a closer look at the CMR method and key elements that are advantageous to owners and design professionals.

Overview

Typically, a CMR firm (contractor/CM) will be hired early in the project planning phase – often shortly after an architect is brought on board. The architect and construction manager will have separate contracts with the owner and work together through preconstruction and construction. The greatest benefit of the CMR delivery method is the development of a working partnership between the owner, architect, and construction manager. Early involvement from the construction manager helps remove barriers typically associated with the Design-Bid-Build method. The construction manager is able to provide constructability reviews, cost estimating, scheduling, and procurement support throughout the process leading to more accurate budgets and timetables as well as increased knowledge of the project before construction begins. When managed effectively, this approach ensures a smoother process characterized by fewer RFIs (requests for information) and change orders. Ultimately, the team is better positioned to deliver the project on schedule and on budget.

So what are the problem areas and what steps can be taken avoid them? We’ve found that the common areas of frustration involve delaying or avoiding establishing a guaranteed maximum price (GMP), management of contingency funds, and lack of preconstruction services.

Guaranteed Maximum Price (GMP)

Most CMR projects will include a GMP. What is a GMP? A GMP is a not-to-exceed price that includes all projected construction costs, contractor-managed contingency funds, and fees. Ideally, the owner, architect, and construction manager will have a conversation during contract negotiations to define when the GMP will be established. If, for instance, a GMP will be established when contract documents are 65% complete, then it’s critical that the team members clearly define what level of detail is expected at that stage of drawing development. This helps keep everyone on the same page and provides a measurable standard to which team members can be held accountable. While the term “at-risk” could refer to the contractor’s risk associated with holding trade contracts and general construction performance, we’ve found that most people equate “at-risk” with a GMP. Controlling the owner’s financial risk is one of the benefits of using the CMR method. Make sure to choose a construction manager that has a history working through these types of scenarios and will walk you through the pros and cons of different timelines for establishing a GMP. Setting clear expectations, defining deliverables at the drawing development stages, and holding team members accountable will lead to a better overall CMR experience.

Contingency Management

There are generally two types of contingency funds; owner managed and contractor managed. Owner-managed contingency funds are set aside to cover unanticipated owner directed scope changes after the establishment of a GMP. Typical scenarios might include wanting additional casework for storage in a classroom or reconfiguring an outdoor seating area. This fund’s purpose is to cover the “I wish we would have done this” items. The contractor-managed contingency is a quantification of the risk associated with the unknown and undefined items in the drawings. This contingency fund should be adjusted accordingly on a sliding scale as the undefined becomes defined. The same strategy applied to establishing clear expectations in regard to a GMP is relevant when setting the stage for how, when and why these funds will be used.

Preconstruction Services

The goal of preconstruction services should be to maximize value for the owner with the budgeted funds available for the project. Firms that excel at conceptual cost estimating and constructability reviews are very skilled at looking around corners and peeling back layers of the project even when working with early schematic designs and drawings with limited detail. They’ve been there before and understand what it’s going to take to make a building function. They are able to maximize the use of budgeted funds because they work collaboratively with the architect to create substance by defining the undefined in a detailed scope narrative outlining assumptions that were made along the way. As a valued team member and industry expert, they will make recommendations and analyze the pros and cons of different materials, building systems, and scheduling strategies. Unfortunately, this type of service is rare and what owners and architects are often left with are baseline estimate checks that provide little detail or value to the project team. These scenarios are characterized by projects coming in dramatically over or under budget. When your building project comes in dramatically under budget, you’ve missed opportunity and left value on the table. You could have had more square footage, higher quality, a more efficient mechanical system, etc. On the flip side, projects that come in over budget lead you down the path of late stage value engineering. This process is characterized by cutting scope, decreasing the quality of finishes or changes in systems.

Being aware of common pitfalls of CMR and strategies that can be used to guard against them can help establish a firm foundation to maximize the value of your capital construction project. The CMR delivery method can be extremely effective if a true guaranteed maximum price (GMP) is established, contingency funds are managed responsibly, and you choose a contractor that provides exceptional preconstruction services.