The Alignment of Interest
The design-build (DB) delivery model has been increasingly utilized by the public sector over the last 20
years. Some would say that it is now the preferred delivery model. While the benefits to the designbuild model are unquestionable, they must be weighed against possible risks and project detriments.
Many books have been written about the benefits of the design-build delivery model. The numerous
reports, case study testimonials, speeches, seminars, and full semester classes at major universities all
describe a simple concept of aligning the interest of designers and builders to deliver a faster, less
expensive, and arguably a “better” product. There is no doubt that schedule enhancements are
generated and that first cost savings can be achieved by utilizing this model. Even the most adamant
opponent could not argue these potential benefits.
Questions requiring answers include: 1) is the value of first cost savings more important than total lifecycle operating costs, and 2) for whom should the term “better” be demonstrated? The simple fact is
that under the design build (DB) model, the designer is now working for the builder, who with even the
best intentions is not perfectly in line with the owner’s interest.
The design-build team is tasked to create something based on general criteria for a set amount of dollars
in a set amount of time. An owner needs to economically utilize that creation for a significant amount
of time. The expected useful life, the life-cycle costs, the asset value, operational usefulness, and
financing costs are all of significant interest to the owner but do not hold the same concerns for the
design-build team. In fact, many of owners concerns may be diametrically opposed to a design-build
team’s goals and objectives.
These potential opposing concerns are summarized through the following examples:
1. A 600,000 square foot office building’s roof design is not specified in the owner’s original
criteria. The designer proposes a built up roof with 8” of insulation that may cost $8/sf, with an
expected useful life of 20 years. The builder’s original cost estimate was $7/sf. The builder, in
an attempt to stay within budget, slightly alters the scope by reducing the amount of insulation,
the ply of the rubber, and the quality of the roof cement.
The scope adjustments reduce the cost down to $6/sf but it only has a 15-year useful life. The
owner gets a “roof” that will meet the contractual obligations of the DB contract, but probably
will cost more in utility costs, repair and maintenance, and replacement costs than the $1.2M
would have cost to originally install a “better” product.
The designer may not like it but is contracted by the decision maker, the builder meets its
obligations and financially benefits, and the owner loses, but does not know it. Asset value is
lessoned even though the owner expended the same dollars.
2. An owner requests design-build proposals for a 1,000,000 square foot industrial building and is
concerned about budget and schedule. Proposal A comes in at $90M for a pre-engineered
metal building and 14-months to construct. Proposal B is $94M for a tilt-up concrete structure
with a 16-month schedule.
The owner accepts Proposal A based solely on its budget and schedule concerns, not knowing
that the financing for a pre-engineered metal building will cost a half percent more on the term
debt. The $4M “savings” will be paid back twice in interest over the term. Also, the asset value
of a pre-engineered structure depreciates faster than that of a masonry structure. Again, what
appears to be an alignment of interest for the DB team and the owner is only aligned at the start
of the building’s useful life.
In both of the above examples, the design-build team meets the contractual obligations but they are not
providing what is in the overall best interest of the owner. Hundreds of examples could be given, and
include line items and specifications for every discipline of construction, such as floor slab thicknesses,
pipe and foundation bedding specs, aggregate quality, windowpane specifications, MEP equipment
sizing and quality, asphalt specifications, etc.
Skeptics will say that most designers would naturally demand the better product or contractors would
present the various construction options to the owner. However, the designers are contracted and being
paid by the contractor with whom they may want to work with on future projects and these contractors
must focus on the bottom line. Decisions like these occur every day in a design-build model.
I am not suggesting that the DB model does not work. Rather, I am suggesting that the Design, Build,
and Finance (DBF); the DBF and Maintain (DBFM): and the DBFM Operate (DBFMO) models all move
closer to aligning the interests of vendors and owners. I am certainly not suggesting that designers or
builders are unethical or in some way cheating their customers. The issue is one of focus: what one has
been contracted to accomplish and who has the responsibility for the future operating costs.
As we move down the various levels of delivery models, the long-term nature of cost structure and asset
value is more clearly defined in light of who funds the first costs in contrast to who funds the entire lifecycle cost. The addition of finance to the delivery model assures that the DBF team’s asset valuation is
in line with the owner’s. Regardless of how the capital stack is finalized, this model provides a check and
balance to insure asset value is maximized and extends through the asset’s useful life.
In Example 2 above, the private developer/financer will be in a position of knowledge to insure, request,
and ultimately fund the more costly first cost of the masonry building in exchange for a life-cycle cost
savings and asset valuation concerns. Therefore, the developer’s interests are directly in line with the
owner.
Adding the maintenance component will further align the interest because the risk of continuing
operations, generally for the term of the financing, passes from the owner to the DBFM team. Now the
roof replacement in Example 1 is the responsibility of the DBFM team in year 15.
If we move all the way to including operations in a DBFMO model, we then start looking at the impact of
facilities with an eye toward long-term operating costs. If the DBFMO team is responsible for these
costs, 8” of insulation may grow to 10” to reduce future gas bills, rather than reducing thickness to save
first costs.
Finally, a full concession model is also available where the developer’s team steps into the shoes of the
owner and participates with the risk/rewards that are generated by the operations of the facility. This is
the ultimate in the alignment of interest.
I am neither suggesting that the DB model is the less suitable model, nor that the concession model is
perfect and should be used everywhere. I am also not suggesting that the traditional design, bid, build
model is one relegated to the history books. I am suggesting that the delivery models available to end
users should reflect the uniqueness of their experiences, culture, and uses.
The development and finance community can work with the design and build community to deliver
projects that will save the users money on the opening day and at the end of year 20.
The Alignment of Interest must occur regardless of what model is utilized and the responsibility resides
with the entire vendor community of designers, builders, developers, financers, and operators. Working
together to deliver the information to the owner that allows for the selection of the model that best fits
the needs of specific projects will assure that the interest of all parties are aligned.
Buddy Johns
President and CEO
CGL
1619 Sumter Street, Columbia, SC, 29201 USA
Office: (713) 840-6025 ext. 16025
Cell: (724) 601-4918
bjohns@CGLcompanies.com