Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 2498 (Gordon) – Caltrans project delivery: Construction Manager/General
Contractor.
Amended: June 15, 2012
Urgency: No
Hearing Date: August 6, 2012
Policy Vote: T&H 9-0
Mandate: Yes
Consultant: Mark McKenzie
This bill may meet the criteria for referral to the Suspense File.
Bill Summary: AB 2498 would authorize the Department of Transportation (Caltrans) to
use the Construction Manager/General Contractor (CMGC) procurement method on up
to four projects, three of which must have construction costs of over $10 million.
Fiscal Impact: Unknown project costs or savings to Caltrans (State Highway Account
and federal funds) by providing authority to use a new project delivery method. Caltrans
costs to administer and report on the new contracting method would be minor.
Caltrans anticipates significant long term savings, based on other states’ experience.
Staff notes, however, that early experience with any new project delivery method
usually proves to be more costly than traditional design-bid-build in the initial
implementation period. (see staff comments)
In addition, since a contract for preconstruction and construction services for CMGC is a
negotiated process with the most qualified construction manager, rather than a
traditional “lowest responsible bidder” process, it is difficult to determine whether the
negotiated price would be lower or higher than project delivery costs through a
traditional design-bid-build process. It is expected that use of the CMGC method would
minimize change orders, which is currently a significant factor in unexpected cost
escalation on Caltrans projects.
Background: The traditional project delivery process is the design-bid-build method,
whereby complete plans and specifications are prepared prior to the advertising,
bidding, and awarding of any construction contracts. The agency awards the contract to
the lowest, responsible bidder. Although this method is structured to ensure a project is
built for the lowest cost, oftentimes project costs escalate dramatically as change orders
are necessary to address unforeseen problems encountered during the construction
phase. In addition, the bulk of project risk remains with the sponsoring agency.
In the last several years, public agencies have been adopting alternative project delivery
methods. The principle reason for this is the desire to shift construction risk from the
agency/owner to the project contractor and to expedite project completion. The most
widely used alternative project delivery technique is design-build. This method requires
the public agency to prepare plans to 30 percent completion before advertising for bids.
The bids are submitted with a fixed cost for both design and construction services, and
they are evaluated using the best value methodology, which includes factors such as
the design-build firm’s qualifications, proposed approach to design, experience, and
AB 2498 (Gordon)
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other factors. The winning bidder completes the design work and commences
construction. Because the team finishes the design work, it carries most of the risk
associated with the adequacy of plans. Often construction can commence on a phase
of the project before the entire project is designed, reducing the construction time.
Design-sequencing is a method of contracting that enables the sequencing of design
activities to permit each project construction phase to commence when design for that
phase is complete, rather than requiring a complete design before commencing
construction. When the contractor bids, the first phase of the project is completed and
the remaining phases must be at 30 percent completion according to Department of
Transportation (Caltrans) guidelines. The award is made to the lowest, responsible
bidder. The benefit of design-sequencing is assumed to be time savings. Caltrans’
authority to use design-sequencing expired in 2010, and final reports on its use on state
projects are pending.
The construction manager/general contractor (CMGC) project delivery method allows
an agency to engage a construction manager during the design process to provide
assistance to the design team, including advice regarding scheduling, pricing, phasing,
and other input that helps the owner design a more constructible project. The agency
selects the construction manager on the basis of qualifications, past experience, or a
best-value basis. According to the Federal Highway Administration, when design
reaches approximately 60 to 90 percent completion, the agency and the construction
manager negotiate a guaranteed maximum price for the construction of the project
based on the defined scope and schedule. If this price is acceptable to both parties, a
contract is executed for construction services, and the construction manager becomes
the general contractor. The benefits of this procurement method is that the public
agency does not sacrifice control over the design of the project, and during the
construction phase the contractor is familiar with the project design, resulting in fewer
change orders and disputes over design issues.
Proposed Law: AB 2498 would authorize Caltrans to use the CMGC project delivery
method for up to four projects statewide, three of which must have construction costs of
$10 million or more. The CMGC method is a procurement method in which Caltrans
selects a construction manager to provide preconstruction services during the design
phase and construction services during the construction phase of a project, and the
execution of the design and construction phases may be sequential or concurrent.
The bill requires Caltrans to establish a procedure to evaluate and select a construction
manager through a ranked request for qualifications process, as specified. Caltrans
would enter into a negotiated contract with a construction manager for preconstruction
services that includes a fee for those services but may not include provisions for
payment for construction services. The contract would provide for subsequent
negotiation for construction. The construction services contract would be awarded after
plans are sufficiently developed and either a fixed price or guaranteed maximum price
has been negotiated, as specified, and the construction manager must perform at least
30 percent of the work covered by the contract. The bill would also require annual
progress reports to the Legislature by July 1 of each year during which a CMGC project
is underway, and no later than July 1 of the year after any CMGC project is completed.
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Related Legislation: AB 1549 (Vargas), which is currently pending in the Assembly
Appropriations Committee, would authorize the San Diego Association of Governments
to use both design-sequencing and CMGC contracting methods for an unlimited number
of public transit projects, as specified.
Staff Comments: The Legislature has generally taken a measured approach to
authorizing the use of new project delivery methods. This usually involves some limited
authorization initially, either through a fixed number of projects or period of time, which
provides the opportunity for evaluation through data collection and analysis. For
example, the Legislature authorized Caltrans to use design-sequencing for a total of 24
projects over two phases, and evaluations are ongoing. Initial reports for designsequencing have been mixed, with some projects achieving moderate time and cost
savings while others experienced significant cost overruns. On balance, Caltrans’
ability to target which projects might benefit from design-sequencing has improved as
they gained experience, so they expect to show improved results for more recent Phase
II projects. Initially, however, whenever the state authorizes a new project delivery
method, actual costs tend to exceed estimated costs in the early stages. The
Legislature has never authorized the use of the CMGC project delivery methodology,
but based on experience with previous authorizations of innovative procurement
methods, it is likely that actual costs for CMGC projects would exceed estimated costs
during the pilot period authorized by this bill. It is unknown whether total project costs,
including any unexpected escalation due to inexperience, would exceed project costs
under the design-bid-build method.
A detailed 2009 report from the Utah Department of Transportation (UDOT) on
experience with 19 projects utilizing the CMGC project delivery method describes the
benefits of having the contractor involved with in the design process. The report
indicates that CMGC delivers projects more economically than traditional design-bidbuild and design-build methods, and that cost savings are primarily achieved by
minimizing risk and implementing innovations, resulting in reductions in bid prices,
optimization of construction methodology, and minimization of price adjustments during
construction. In UDOT’s experience, overall project costs are reduced by as much as
15 percent from state average pricing models. Staff notes that despite overall long-term
savings, the report suggests that most of the early projects experienced costs that
exceeded estimates. After gaining experience with the program and making
adjustments to various procedures, however, more recent UDOT projects experienced
more savings than anticipated. One significant limitation of CMGC noted in the report is
the lack of competitive pricing in the construction bid. To address this risk factor, UDOT
began collecting price information in the construction manager selection process, rather
than selecting contractors strictly though a qualifications-based evaluation. The
Committee may wish to consider whether the pilot program authorized in this bill should
include similar considerations of price during the RFP process.
Recommended Amendments: Staff recommends that additional information be
reported to the Legislature on estimated and actual project costs, a description of
challenges or unexpected problems, and the number of change orders on CMGC
projects.