CMGC White Paper
Independent Cost Estimating for CMGC
CMGC White Paper Topic No. 3:
Independent Cost Estimating (ICE)
1. Introduction
In May 2012, MnDOT obtained legislative authority to use CMGC as a delivery method for highway
projects. As part of this legislation, State Statute Sec. 2. [161.3207] requires that MnDOT “conduct an
independent cost estimate for the project or each work package,” as part of the contract price
negotiations with the Construction Manager (CM). The purpose of this white paper is to present optional
approaches and uses for ICE in CMGC contracting and for recommending a the process for using the
Independent Cost Estimator (ICE) to help negotiate the Guaranteed Maximum Price (GMP) in the CMGC
contracting process. In the white paper, the acronym ICE is used to denote both the Independent Cost
Estimator and Independent Cost Estimating.
2. Qualifications & Requirements for the ICE
2.1. Qualifications of the ICE: The ICE plays a critical role in the CMGC process, helping the owner
negotiate the final contract price often referred to or negotiated as the guaranteed maximum
price (GMP) by providing an objective and independent cost estimate against which the CM’s
estimate is evaluated. The ICE is typically an experienced contractor estimator with experience
using commercially available contractor-based estimating software (such as HCCS). Hiring an
ICE with contractor estimating and bidding experience has proven to be beneficial in helping the
owner fully understand the means and methods that are used by the CM to price the work.
Because the CMGC Contractor can be selected through a qualifications based selection rather
than by low bid in design-bid-build, hiring a qualified ICE is a key component of the CMGC
process. The ICE helps the owner make an unbiased, defensible argument that the price
proposal by the CM is fair and competitive and avoid public scrutiny of the process.
2.2. ICE vs. Engineer’s Estimate: Under traditional design-bid-build contracting, the owner
estimates project cost by using an engineer’s estimate. This estimate is typically performed by
the estimating office with occasional assistance from the owner’s representative. The
contractor’s price is then compared to the engineer’s estimate prior to awarding the construction
contract. By contrast, in CMGC contracting, the owner can fully rely on the estimate provided by
the ICE to justify that they are getting a competitive, fair price for the work. Minnesota statute
states that MnDOT must “conduct an independent cost estimate” to validate the proposed
contract price, but the statute does not implicitly state that ICE must be used as the ultimate
means used to justify the price and award the contract. The statute is clear, however, that an
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ICE must be performed on every CMGC project regardless of contract value before the contract
can be awardedi. Other DOT’s using CMGC contracting often elect to use a third estimate
(typically an “engineer’s estimate”) to supplement the ICE’s cost estimate. Engineer’s estimates
are valuable in the CMGC process in that they provide pricing redundancy, but have several key
limitations when used to help the owner during negotiation of the GMP on CMGC projects,
including:

Engineer’s estimates typically rely on historical averages to price the work and are
usually done by staff that is inexperienced in using contract based estimating software to
price the work. This provides limited value to the owner in negotiation of the GMP,
because it does not allow the owner to trace pricing back to or relate it to labor,
equipment, material costs, production rates, crew sizes, equipment usage, and other
factors that a contractor uses to derive pricing.

An owners engineer’s estimate does not form a truly unbiased third party estimate like
the ICE’s estimate does. In Utah, to further emphasize unbiased estimating, the ICE is
hired by the DOT central construction office and reports directly to them rather than to the
project manager or project staff. Recommendations for comparing the ICE's, engineer’s,
and contractor’s estimates are covered later in this white paper under Section 5.
3. Timing for Hiring the ICE
3.1. Hiring of the CM and ICE at the same time. Because the ICE plays a significant role in the
GMP negotiation process, the ICE should be hired at approximately the same time as the CM.
By hiring the CM and the ICE at the same time, the ICE and contractor develop common
understandings about project background, scope, assumptions, and risks as the project
progresses through the design process. This decreases the likelihood of pricing discrepancies
later in the project when the ICE and the CMGC contractor develop their pricing.
3.2. Hiring the ICE after versus before the CM. There is no significant advantage to hiring the ICE
prior to the CM. On the contrary, hiring the ICE immediately after selection of the CM has a slight
advantage because the owner only has to screen the ICE for conflicts of interest against the
actual CM vs. all potential contractors. Conflict of interest is discussed more in the next section.
4. Conflicts of Interest, Confidentiality and Contractual Clauses
4.1. Conflicts of Interest. Similar to other professional services contracts, the ICE should disclose
any potential conflicts of interest that could potentially disqualify them for any reason on the
project. The owner should review any potential conflicts of interest between the ICE and the CM
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prior to entering into a contract with the ICE. Potential conflicts of interests that could disqualify
an ICE on a CMGC project include:
4.1.1.
Currently being employed in any way (either directly or indirectly as a subcontractor) by
the proposed CMGC contractor. In addition, MnDOT may wish to extend this requirement
to disqualify an ICE that has worked for the proposed contractor within a certain period of
time, for example, within the past year.
4.1.2.
Any past relationships with the proposed CMGC contractor that could potentially
influence their pricing judgment (prejudice or favoritism) in any way.
4.1.3.
Past or present contractual relationships with any of the other contractor teams that
proposed on the project.
4.1.4.
Any current financial interest, including stock ownership, in the CMGC contracting firm.
4.2. Confidentiality.
4.2.1.Because the ICE has access to proprietary bidding information during the development of
the GMP (such as labor, equipment, and overhead rates), MnDOT may need to modify their
standard contract language to require the ICE to enter into a confidentiality agreement to
protect the confidentiality of the CMGC firm’s financial data. All proprietary pricing
documents used by the ICE during the CMGC process should be turned over to the owner
at the conclusion of the project and the ICE should agree to not discuss confidential
financial information with competitors.
4.2.2.Defining the ICE’s ability to participate in project if GMP negotiations are
unsuccessful. Under Minnesota statute, if MnDOT and the CMGC firm are unable to
negotiate a contract, MnDOT may use other contract procurement processes to bid the
project (including Design-Build or Design-Bid-Build), and the CMGC firm is allowed to bid
on the projectii. However, the statute does not define the ICE’s ability to work for a
contractor team under this scenario. Because the ICE has direct access to the CMGC’s
confidential pricing during price negotiations (including their labor, equipment, and overhead
rates) it would be highly questionable to allow the ICE to later participate on a competitor’s
team that is pursuing the project. Furthermore, the ICE has inside knowledge about the
project having working directly for the owner during the GMP negotiation process, and this
relationship could be perceived as an “inside advantage”. As such, MnDOT should carefully
consider contractual language that defines the ICE’s ability to participate on any of the
contractor teams pursuing the project.
4.2.3.Maintaining Independence of the ICE. In order to maintain independence and remain
unbiased, the ICE (or the ICE’s firm) should not be allowed to participate on any other part
of the CMGC project team, including the Design Consultant. This approach has used by the
MaineDOT.
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5. Independent Cost Estimating Process
The ICE process described below outlines an approach as well as alternatives to consider when
developing the final ICE process. Many of the general concepts are common to the ICE process that has
been used on other CMGC projects throughout the Country.
5.1. Establish consistent pricing/bidding assumptions up front. In order to reach consistent
pricing/bidding assumptions, the owner should clearly define critical pricing/bidding assumptions
that will be used to develop the GMP. Consistent assumptions that need to be clarified by the
owner include:
5.1.1.
Agreed upon profit and indirect (home office) overhead percentages that will be added to
the direct costs used by the CMGC contractor and the ICE to calculate loaded bid prices.
5.1.2.
Set the competitive bidding expectations for the ICE. Does the owner expect the ICE to
base their bid on an aggressive low bid scenario, or common understandings on the
contractor’s proposed means and methods? In other words, is the expectation to reach a
“fair” price or a “low bid” price?
5.1.3.
Subcontracted items of work. The CMGC contractor should provide the ICE with a list of
items that will be self-performed vs. subcontracted out. Bids for subcontracted items of
work should be shared with the ICE to justify competitive pricing. If the CMGC contractor
solicits bids from subcontractors but elects to use a subcontractor that is NOT the low
bid, the CMGC contractor should justify this decision with owner so the ICE can use the
same assumption.
5.1.4.
Establish an agreed to process for final pricing. Will final pricing be based on unit rates
similar to the design-bid-build bid schedule or a hybrid of the standard bidding schedule
where similar bid items or work groups are combined into a price
5.1.5.
Establish an agreed to definition of work for each price subset. For instance is sidewalk
inclusive of all sub-excavation, grading, base materials, forming and concrete or other. Is
structural concrete inclusive of forming, rebar, oiling, inspection, placement, curing, form
removal, final finish or other?
5.2. Joint participation in the preconstruction process. Both ICE and the CMGC contractor
should attend and participate in preconstruction team and interim (milestone) review meetings
together. The engineer is not generally required to attend these meetings because their estimate
is assembled based on historic prices and not through a construction style estimate. By
attending progress meetings, both the ICE and CMGC contractor are exposed to consistent
project background, risks, and assumptions that are used to develop pricing, including some of
the following items:
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5.2.1.
Type of equipment used to perform the work.
5.2.2.
Risk ownership. Discuss and agree upon who owns project risks. Which risks will be bid
by the contractor? Which risks will be assigned to the owner? Which risks will be shared?
Contractors bid risk, and any disagreement about who owns the risk can create pricing
differences between the ICE and the CMGC contractor.
5.2.3.
Schedule agreement. Pricing can fluctuate dramatically if the ICE and contractor bid
different schedules.
5.2.4.
Material sources. It is important for the contractor and the ICE to agree on materials
sources when applicable. For example, the contractor may assume materials need to be
imported in order to meet specification, but the ICE may assume that onsite materials can
be used to manufacture the required materials.
As an added benefit, when the ICE and the contractor work together during the preconstruction
phase, it increases the potential for design innovations and construction cost savings.
5.3. Progressive, Interim Pricing (Pricing Milestones). One of the most critical steps in
successfully negotiating price on a CMGC contract can be to develop progressive pricing
milestones as the project develops. The number of pricing milestones varies based on the
complexity of the project. Logical pricing milestones are built into the typical design process at
30%, 60%, and 95% review meetings. Pricing milestones allow the owner to expose and resolve
pricing disagreements early in the CMGC process prior to the final GMP negotiations.
5.4. Blind Estimate Comparison Process.
5.4.1.
During each pricing milestone, the CMGC contractor submits a “bid” to the owner for the
work. This is a non-binding bid, referred to by some agencies as a contractor’s “opinion of
probable construction cost” or OPCC. Although non-binding, an OPCC bid is considered
a good-faith estimate of construction costs and assumes that prices for items of work will
not vary dramatically between pricing milestones, unless the change is substantiated by
documentable changes in bidding assumptions or Work. This is why open book
estimating and critical path schedule control are other beneficial elements in a successful
in the CMGC process. A change in price between pricing milestones or GMP requires the
CMGC contractor to demonstrate a significant change in bidding assumptions and to
back up this justification by “opening up their books” to show a significant change in
labor, equipment, material costs, production rates, crew sizes, equipment usage,
phasing, and other factors that were used to develop pricing.
5.4.2.
The ICE price is then compared to the CMGC contractor’s OPCC and the engineer’s
estimate (if applicable). For a Blind Estimate comparison process the ICE provides this
comparison. The owner is allowed to see the CMGC contractor’s proposed prices, and
the engineer’s estimate, if applicable, but in order to maintain integrity of the ICE’s bid,
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the ICE’s estimate is kept hidden or “blind” from the owner and the CMGC contractor.
The ICE provides the owner with a comparison that shows variance between the ICE and
the contractor’s OPCC for the overall bid and for each bid item. A good approach to this
process is to ensure the variance analysis does not reveal whether or not the contractor’s
price is high or low. Instead, the variance is reported as “within tolerance” or “outside
tolerance”, where the tolerance is set by the owner. For example, an owner may set the
tolerance as ± 10% which is a common percentage used in design-bid-build to determine
the ability of an agency to award bids. The owner may use the engineer’s estimate as a
third estimate to help resolve disputes between the ICE and the CMGC contractor. The
latter approach can add additional complications due to the nature of the estimate
process for the engineer versus the ICE and CMGC contractor. A non Blind process
would be where all bids are tabulated and reviewed by all parties.
5.4.3.
Quantity & Pricing Reconciliation Meetings. Following each pricing milestone, the ICE,
owner, and contractor meet to reconcile pricing differences. Differences in bidding
assumptions are discussed for bid items that differ by more than 10%, with the goal of
resolving or narrowing these differences. The ICE participates in these discussions, but
the owner is not allowed to direct the ICE to modify their price because this would violate
the independent, unbiased estimating role of the ICE. The owner is allowed to discuss
the ICE’s bidding assumptions and attempt to understand the differences in order to
reconcile these differences and help the two parties reach common bidding assumptions.
5.5. Final Price Negotiation Using an ICE to Reach GMP
5.5.1.
The process to reach GMP is similar to the blind estimate pricing milestone process
discussed in the previous section, with two key differences:

First, during final price negotiations, the CMGC contractor submits a formal,
contractual bid to the owner. The final bid should be submitted to the owner using
the formal bidding process required by the owner for design-bid-build projects
(electronic or hard bid).

5.5.2.
Second, the owner is allowed to see the ICE’s price when the bids are “opened”.
If the final bid proposed by the CMGC contractor does not fall within tolerances set by
statute or pre-determined percentage that could be based on project complexity, degree
of specialty work, etc., for awarding a bid, then the owner can:
5.5.2.1.
Terminate the contract with the CM and advertise the project competitively
through a low bid process,
5.5.2.2.
Elect to continue negotiations with the CMGC contractor in an attempt to reach
an agreeable price. For example, some owners allow contractors to negotiate
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an unsuccessful GMGC bid one final time before terminating the contract with
the CM and letting the contract out for low bid.
i
Minnesota Statute Sec.2. [161.3207] Construction Manager/General Contractor Contracts; Definitions, Subd. 3
“Phase 2 construction manager/general contractor contract”.
ii
Minnesota Statute Sec.4. [161.3209] Construction Manager/General Contractor Contracts; Definitions, Subd. 3,
paragraph 2b.
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