CHAPTER 2
Risk Management Across the Project Lifecycle

2.1 Background

A key premise behind this project is that current risk transfer practices to highway developers, designers, and contractors have caused major issues in the highway market, particularly for large-scale and complex projects for which fixed-price APD methods are frequently used. Such market issues include higher bid/proposal prices, failed solicitations, reduced competition, and market exits. If these issues are not resolved, the potential of APD methods to generate value may go unrealized or may result in major disputes during project execution.

Based on the NCHRP 23-22 research findings, different strategies and tools can be applied during the various stages of the project lifecycle to reduce uncertainty, enhance understanding of project risks, and better communicate and align perceptions of risk. The remainder of this chapter identifies and discusses the tools that could be applied over the life of an APD project, with fixed-price DB addressed in Section 2.2, followed by more collaborative or progressive approaches, such as CM/GC or progressive DB in Section 2.3. The strategies and tools discussed in this chapter have broad applicability and can be scaled to suit the needs of projects of varying sizes and complexity.

2.2 Fixed-Price DB Projects

Figure 2.1 illustrates how potential strategies and tools can be deployed during various stages of a projectʼs lifecycle to manage and allocate risk for a fixed-price DB project. The conceptual narrowing of the “risk cone” as shown does not necessarily imply that potential risks have been eliminated, resulting in, for example, a lower-cost project. It is instead intended to reflect the reduced uncertainty provided through enhanced understanding and control of the potential risks facing the project by implementing a robust and iterative process of risk identification, evaluation, and allocation.

The application of risk management tools will evolve as the project advances through the typical lifecycle stages and decision gates of a project. To demonstrate how owners can integrate the recommended tools into their project delivery process, Figure 2.2 first illustrates the sequence of key activities that generally take place during the development and execution of a fixed-price APD project. The following sections provide more detail and context for each of these steps, focusing on when and how owners can integrate the proposed tools into their project delivery process to reduce uncertainty, attract competition, and effectively allocate and control risk. Various potential tools for fixed-price APD projects are described in more detail in Appendix A.

Note: An outline of specific steps from Stage 4: Operations is outside the scope of this publication. RFQ: request for qualifications. RFP: request for proposals. PDM: project delivery method. ATCs: alternative technical concepts. KPI: key performance indicators.

Long Description.

The stages are as follows:

Stage 0, 1 (Initiation, planning, and development). Includes design studies, preliminary risk register and term sheet, conceptual or preliminary design, and updated term sheet and risk register. The factors draft RFQ slash RFP and baseline term sheet and risk register are at the borderline between stage 1 and stage 2. Procurement start occurs at transition between stage 1 and 2.

Stage 2 (Procurement). Includes final RFQ slash RFP and updated term sheet and risk register. The contract and final risk register are at the borderline between stage 2 and stage 3. During Stage 2, preferred bidder selected occurs, and contract execution occurs at transition from stage 2 to 3.

Stage 3 (Execution). Includes risk register and changes. Substantial completion occurs at transition between stage 3 and 4.

Stage 4 (operations). Includes risk register and changes.

The potential strategies for stage 1 include the following elements: Project Pipeline, Industry slash Forums, Preliminary Risk Identification, PDM Decision Tools, Pre-procurement one-on-one meetings, Third-party coordination or outreach or agreements (for example, utilities, railroads, local governments, etcetera). The potential strategies for stage 2 include the following: Industry review of draft term sheet, RFP, contract docs, Targeted one-on-one meetings, ATCs, Reliance (versus reference documents), Incentives (aligned to risks), Stipends, Alternate forms of security, Negotiation of the following: risk-sharing strategies, Incentives and pricing structures, and Roles and Responsibilities. Tools for stage 3 include Post-award scope validation period, Risk management meetings, Partnering and issue escalation processes, Alternative dispute resolution processes. Tools for stage 4 include KPI monitoring, Warranty criteria and annual condition surveys, Issue resolution, Alternative dispute resolution processes, and Hand-back criteria.

A cone that narrows from stage 0 to stage 3 for potential risk is marked risk cone.

2.2.1 Integrating Risk Management Tools into the Lifecycle of a Fixed-Price APD Project

Note: The stage and step numbers in this section correspond to those shown in Figure 2.2.

Stage 0 – Project Initiation

Step 0: Project Programming. Capital programming (the process of evaluating proposed projects and prioritizing their initiation and implementation) generally proceeds as an iterative process that entails strategic input from many stakeholders.

Providing industry with periodic insight into potential upcoming projects (e.g., by communicating capital improvement plans, project pipelines, and feasibility studies via website postings or regular industry forums/roundtables) helps attract interest and signals to the engineering and contracting communities that the owner is readying itself for upcoming procurement actions. In turn, industry can begin its own planning efforts regarding resource commitments and potential teaming arrangements.

To provide industry with adequate time to make a pursuit decision and form a team, communication of upcoming projects should take place as early as possible, ideally more than one year in advance of formal advertisement, rather than just a few months.

Process/Tools:

• Project Pipeline

Stage 1 – Project Planning and Development

Step 1: Initial Needs Assessment and Stakeholder Identification. Once the projectʼs purpose and need are generally understood through the information obtained during the Project Initiation Phase, the ownerʼs project team should identify all internal and external stakeholders, subject matter experts (SMEs), and discipline leads who could further assist with refining the project scope and goals, identifying and allocating project risks, and developing project-specific requirements to incorporate into procurement and contract documents.

Initial stakeholder engagement activities should generally take place once enough information is known about the project so that its general scope and needs can be discussed, but before the project has been so far advanced that incorporating stakeholder feedback would be challenging or require extensive rework.

Process/Tools:

• Third-Party Coordination

Step 2: Project Goals. Consensus on project goals should be reached relatively early in the project development process. Goals could stem from basic project requirements and performance expectations, critical project success factors, design and construction objectives, and/or the need to address any unique constraints or potential obstacles to delivering the project within the targeted budget and timeline.

A prioritized set of goals can then be used to help support and inform subsequent decision-making, risk assessments, and project execution processes. For example:

• Goals will serve as a key input to assessing project risks in Step 3 and selecting an appropriate project delivery method (PDM) in Steps 4 and 11.
• If using a best-value procurement process, the inclusion of goals in the solicitation documents can act to communicate what the owner values. Prospective design-builders can then put together their basic proposal strategy and DB teams in response to the identified project goals.

Step 3: Identify Risks and Create Preliminary Risk Register. Based on the preliminary information known about the project, the ownerʼs project team should begin to identify and document potential project risks by creating a Preliminary Risk Register.

The preliminary identification and assessment of project risks during the project development phase will serve as a key consideration in determining the appropriate PDM for a project.

Process/Tools:

• Preliminary Risk Register

Step 4: Initial PDM Screening. Based on the initial understanding of the projectʼs goals, risks, and constraints, a preliminary delivery method recommendation can be made. For example, if potential risks are minimal and/or can be well-defined in the procurement documents at the time of bid, DB may provide an effective means for transferring execution risk to a design-builder and obtaining early cost and schedule certainty. (Conversely, if risks cannot be well-defined and/or would benefit from a more collaborative relationship between the owner and contractor, progressive DB or CM/GC may be better options.)

To facilitate the decision-making process, several owners have developed PDM guidance and selection tools/matrices intended to help users determine the general suitability of different PDMs given project-specific conditions and risks.

Once more information has been obtained and conceptual design work has advanced to better understand the project risk profile (particularly with regard to the NEPA process and other third-party approvals), the PDM decision can be finalized in Step 11.

Process/Tools:

• PDM Decision Tool
• APD Method Guidance Documents

Step 5: Design Studies, Site Investigations, and Conceptual Design. The typical front-end studies and investigations that an owner performs for its traditional design-bid-build projects will generally still be necessary for a fixed-price DB project. This includes design surveys, geotechnical investigations, subsurface utility engineering, environmental investigations, hydrologic and hydraulic studies, and third-party outreach and coordination activities.

The base data collected during this phase will be used to:

• Ensure the project scope and requirements are well-defined and consistent with project goals.
• Begin environmental and other potentially lengthy processes that require third parties to help understand and distinguish those permitting and coordination activities that the owner must manage from those that could be potentially assigned to a design-builder.
• Define reasonable limits of ROW acquisition.
• Prepare and execute appropriate agreements with local government/agencies, utilities, railroads, and other third parties.
• Ensure the project is constructable within the identified budget.
• Identify, assess, and allocate key risks.

Step 6: Industry Outreach. Early socialization of project information and potential execution strategies with the design and construction community through industry roundtables and one-on-one meetings with designers and contractors can help owners gauge market interest in their upcoming projects and identify any procurement actions that could limit or expand competition.

If such outreach is performed in a timely manner, it may still be possible to rethink or restructure the proposed project packaging (e.g., dividing a mega project into smaller projects or components), delivery approach, and risk allocation to maximize participation by the contracting community and better align with current market capacity and appetite for risk assumption.

Process/Tools:

• Industry/Outreach Forums
• Pre-Procurement One-On-One Meetings

Step 7: Scope Refinement. The owner should continue to advance preliminary design activities, supporting efforts to refine the project scope and obtain an enhanced understanding of the risks facing the project.

Step 8: Readiness Assessment. To assist with subsequent PDM decision-making and risk identification and allocation activities, the ownerʼs project team should assess how the NEPA process, geotechnical and utility investigations, and other third-party coordination activities have progressed.

Ideally, data collection and third-party coordination efforts should be sufficient for both the owner and prospective design-builders to be able to adequately assess and price project risks.

In some cases, however, project constraints (e.g., schedule, funding, access, and logistical issues, etc.) may result in certain project elements or potential risk areas lacking the optimal level of scope definition or technical “readiness.” As discussed in Section 3.2 of this Guide, understanding project status in terms of “readiness” can help an owner determine an appropriate risk allocation strategy to minimize bid premiums and help ensure adequate competition.

Process/Tools: See Section 3.2 for details.

Step 9: Conduct Preliminary Risk Workshop. Before making the final PDM selection decision, it is beneficial to conduct a formal risk workshop to evaluate project risks. The objective of the risk workshop is to obtain an improved understanding of the projectʼs risk profile and how this aligns with the different delivery methods under consideration, and to begin to develop a plan for responding to project risks, particularly those risks that must be considered as the design advances and procurement and contract documents are developed.

Process/Tools:

• Updated Risk Register

Step 10: Budget and Schedule Refinement. The results of the readiness and risk assessments conducted in Steps 8 and 9 can be used to inform the development of risk-based project cost and schedule contingencies. As the design subsequently evolves and the project definition matures, the budget and schedule should be refined accordingly.

As numerous guidance documents are available to assist project teams with the development of project contingencies, e.g., NCHRP Research Report 1025: Contingency Factors to Account for Risk in Early Construction Cost Estimates for Transportation Infrastructure Projects, the mechanics of how to conduct a risk analysis are not addressed herein.

However, it should be noted that the extent to which the owner is attempting to shift risk to industry should be a factor in developing project budgets and contingencies. For example, using a risk transfer strategy when the level of scope definition is low would make it difficult for industry to effectively price risk. Prospective bidders would therefore likely include an additional premium—above the typical escalation, estimating uncertainty and risk event contingency that would be determined through a quantitative risk analysis—to account for the inherent financial risk they would be assuming for entering a fixed-price DB contract for the work. From a contractorʼs perspective, this additional “lump sum risk premium” is necessary because the fixed-price contractual basis inherently poses greater risk than other contract pricing mechanisms, such as the cost-reimbursable strategies commonly applied to progressive DB projects.

If the owner instead opts to retain the risk, it should still factor appropriate contingencies into its project budget to address potential contractual relief events.

Step 11: Final PDM Decision. To derive the maximum benefit of fixed-price DB, the final PDM selection decision should be made relatively early in the project development process to ensure the level of design advanced by the owner aligns with the project goals and the desired risk allocation strategy.

An additional consideration will entail whether to use a one- or two-step procurement process. Using a two-step process to reduce the number of proposers to a qualified shortlist can be beneficial to both the owner, as reviewers can focus on proposals submitted by the most qualified teams, and to industry, as non-shortlisted proposers do not have to expend the effort and expense to respond to a request for proposal (RFP) when their qualifications did not make the cut at the request for qualifications (RFQ) step.

Process/Tools:

• PDM Decision Tools

Step 12: Preliminary Design/Engineering. To allow the design-builder some design flexibility and room to innovate, the owner should progress its preliminary engineering effort to the level of design development needed to:

• Concisely define project scope.
• Determine ROW limits.
• Meet environmental and permitting needs.
• Obtain all necessary approvals, consents, and/or agreements with utility owners, railroads, and local governments.
• Determine if the project is constructable and biddable as currently conceived.
• Assess and properly allocate identified project risks.

This may result in some elements of a project requiring only a low level of preliminary design effort, whereas other elements of the design may require much higher levels of development by the owner to define the work required, minimize risk, and/or support environmental and other permitting processes. If a two-step best-value procurement process is under consideration, the procurement planning and RFQ efforts can typically proceed in parallel with the remaining project development steps.

Step 13: Reevaluate Project Readiness. After the preliminary design effort has advanced, a second readiness assessment should be conducted to identify the extent to which any site investigations and/or coordination activities remain outstanding at the time of procurement (e.g., due to timing or funding constraints). The associated risks and preliminary allocation strategy should be fully communicated in the RFP documents and factored into an updated project budget and schedule.

Process/Tools: See Section 3.2 for details.

Step 14: Update Risk Workshop to Address Risk Allocation. Project risk management entails a continuous process of identifying, assessing, and mitigating risk throughout the project lifecycle. As the design evolves and more information becomes known about possible project conditions that could impact successful delivery, a risk workshop should be conducted to:

• Finalize and document chosen risk mitigation and allocation strategies (considering the status of site investigations, NEPA, ROW, third-party agreements, and other factors).
• Determine if standard contract terms and conditions require modification.
• Establish the appropriate contractual insurance and/or performance security requirements.
• Finalize RFP evaluation criteria.
• Establish appropriate risk-based budget and schedule contingencies.

With regard to risk allocation, contractually assigning a risk to a particular party means that party will assume responsibility for the cost and schedule impact of the risk if it were to materialize on the project. Common methods of contractual risk allocation on DB projects include:

• Assigning certain risks and responsibilities to the owner.
• Assigning certain risks and responsibilities to the design-builder, with the expectation that the design-builder will price these risks and responsibilities into its price proposal.
• Incorporating relief mechanisms into the contract (e.g., granting the design-builder additional costs or time extensions) for certain events should risks materialize.

As discussed in Section 3.2 of this Guide, technical readiness can play a large role in determining the appropriate allocation strategy for a given risk to minimize bid premiums and help ensure adequate competition.

Process/Tools:

• Updated Risk Register

Step 15: Package Final DB Concept Plans and Reference Information for Inclusion in the Procurement Documents. To provide proposers with the information they need to understand the full project scope potential and make reasonable pricing and commercial decisions, the design package and reference information used to solicit fixed-price DB proposals will generally be advanced to a higher level of definition than a comparable progressive DB project (in which the price and risk allocation will be negotiated over time as the parties collaboratively advance the design during the preconstruction stage).

The design package used to solicit DB proposals will generally include preliminary plans, data, and design reports designated as “Reference Information Documents” that are provided to bidders for “information only” and thus do not dictate requirements or shift design liability back to the owner.

In contrast, as part of its risk allocation strategy, the owner may also designate some information provided to bidders as being “Reliance Documents” (i.e., information that bidders may rely upon when preparing their fixed-price proposals and final designs). For the purposes of change management, the owner will assume responsibility for the accuracy and completeness of information designated as “Reliance Documents.” For example, to avoid high contingency pricing, it may be appropriate to allow proposers to rely on the geotechnical data provided by the owner in a geotechnical baseline report and provide relief (via time extensions and/or additional compensation) in the contract documents for differing site conditions.

Process/Tools:

• Reliance (vs. Reference) Documents
• Geotechnical Baseline Report

Stage 2: Procurement

Step 16: Develop Procurement Plan. To help ensure a fair, open, and transparent process, a clear and comprehensive procurement plan should be developed that documents the approach and evaluation criteria that will be used to select the design-builder.

Step 17: Issue RFQ. At the RFQ step, interested proposers will typically be asked to provide, as a minimum, the qualifications of key personnel and past performance information (including a history of team members successfully collaborating on past DB projects).

While more information can be sought at this stage, it is important to balance the desire for more information with the level of effort proposers will have to expend to put together a responsive statement of qualifications. To attract healthy competition, the RFQ should not include overly extensive submittal requirements that are more appropriate for the shortlisted teams to provide under the RFP stage of the procurement.

In crafting the RFQ, the project team should tailor key personnel and experience requirements to the identified project goals and risks. For example, if the ownerʼs preliminary risk assessment suggests that utilities may present a particularly high risk to the project, a “Utility Coordinator” or similar may be included among the key personnel positions, and experience questions might request examples of past projects on which the proposer successfully managed complex utility conflicts and coordination issues.

At the RFQ stage, the owner should consider including a draft contract or contract term sheet to communicate project risks and the ownerʼs initial thoughts as to the allocation of these risks and risk-sharing strategies.

Process/Tools:

• Term Sheet
• Risk Sharing Strategies

Step 18–19: Receive and Evaluate Statements of Qualification. To ensure fairness and objectivity, statements of qualification (SOQ) should be evaluated by a trained selection committee in accordance with a pre-established evaluation plan that aligns with the philosophy and criteria outlined in the RFQ.

Step 20: Issue Draft RFP and Contract for Review. Shortlisted proposers should be given the opportunity to review and comment on drafts of the RFP and contract, and insurance and bonding requirements (if not previously provided with the RFQ).

Process/Tools:

• Draft RFP
• Draft Contract
• Alternate Forms of Security

Step 21: Refine and Issue RFP Package. In contrast to PDB or CM/GC, the RFP stage for a fixed-price DB project typically entails the shortlisted proposers providing detailed technical proposals in response to the ownerʼs RFP requirements. In developing these RFP requirements, owners should recognize that proposers will be spending significant time and money developing a responsive, technical proposal, which includes advancing the design sufficiently to develop a fixed price (and schedule) for the final project.

To encourage high-quality proposal submissions, it is thus important to:

• Provide the shortlisted proposers with adequate time to respond.
• Provide clear and concise Instructions to Proposers regarding the procurement process steps, schedule, weighted evaluation criteria, and algorithm used to score the proposals.
• Tailor proposal requirements to project-specific goals and risks in a way that draws meaningful information from proposers. For example, if the ownerʼs preliminary risk assessment suggests that utilities may present a particularly high risk to the project, the project team should craft proposal requirements and associated evaluation criteria to help differentiate the proposersʼ offerings. In this regard, asking proposers for their approach to minimize the risks of critical utility conflicts on the project is more likely to produce meaningful distinctions among proposers than simply asking for their general management plans. How individual evaluation criteria are weighted should likewise be tailored to project-specific needs and risks to help communicate what factors the owner considers to be of primary importance.

Process/Tools:

• Final RFP

Step 22: One-on-One Meetings. In addition to providing a forum for a proposer to share and seek approval of possible alternative technical concepts (see Step 23), confidential one-on-one meetings can also be used by proposers to provide owners with feedback on:

• Contract terms they feel are problematic,
• Additional risks that the owner has not identified or fully considered,
• Restrictive specifications that might limit innovation, and
• Other concerns regarding the procurement process, the project scope, or the intended risk allocation.

For particularly large or complex projects, it can be helpful (though time-intensive) to conduct a series of targeted one-on-one meetings focused on key topic or risk areas.

Step 23: Alternative Technical Concepts. An alternative technical concept (ATC) is a request by a DB proposer to modify a contract requirement, specifically for that proposerʼs use in gaining

a competitive benefit during the proposal process. An ATC must provide a solution that is equal to or better than the ownerʼs base design requirements in the RFP documents.

The ATC process has been implemented by owners with DB programs to promote industry innovation and cost or time-saving technical solutions. It offers proposers an opportunity to get additional points for their technical proposals, as well as to find ways to reduce their price proposal while still providing a solution that meets the ownerʼs design intent.

To encourage proposers to invest the time and resources necessary to develop truly innovative concepts, ATCs should be considered confidential and proprietary to the proposer. Typically, a proposer will discuss its ATCs as part of confidential one-on-one meetings (see Step 22).

Process/Tools:

• Alternative Technical Concepts

Step 24: Issue Addenda (As Needed). To help ensure transparency and fairness in the procurement process, addenda should be issued as needed to provide all bidders with additional details, updates, or clarifications regarding the project or proposal requirements and/or to modify draft contract terms and risk allocation strategies.

Step 25–26: Receive and Evaluate Proposals and Determine Apparent Successful Proposer. The design approaches and plans included in fixed-price DB proposals will generally be more advanced than those for a comparable progressive DB project. Owners should therefore ensure the evaluation team includes appropriate SMEs that have the skills and experience to effectively review and evaluate different proposal solutions (and ATCs) and are committed to performing their evaluations in a confidential and unbiased manner consistent with the philosophy and methodology described in the solicitation documents.

Step 27: Final Contract Negotiations. The final contract stage represents the last chance (outside of a change order or claims/disputes process) to negotiate project scope, roles and responsibilities, and risk allocation (including sharing strategies). Such negotiations should largely be consistent with prior discussions between the owner and the apparent successful proposer conducted as part of one-on-one meetings and ATC reviews.

Step 28: Update Risk Register. The Risk Register should be updated as appropriate to reflect the final roles and responsibilities, allocation strategies, and contract price and timelines agreed to during contract negotiations.

Process/Tools:

• Updated Risk Register

Step 29: Execute Final Contract. The final conformed contract should reflect all commitments made as part of final contract negotiations, including agreements regarding proposal items that may have exceeded the requirements in the RFP (“betterments”) and additional ATCs from unsuccessful proposers that the owner would like incorporated into the final design solution.

Step 30: Issue Notice to Proceed. Once the contract documents are fully executed and the design-builder has provided the agreed-upon bonds/alternate forms of security, proof of insurance, and other documents that may have been required by the RFP (e.g., joint venture agreements, subcontractor agreements, etc.), the owner will issue the design-builder a notice to proceed (NTP).

Step 31: Pay Stipends to Unsuccessful Proposers. Developing a responsive technical proposal for a fixed-price DB project can entail a substantial design and planning effort. Offering a stipend to help defray some of the proposal expenses can help attract competition.

Paying a stipend also provides a way for owners to have the ability to use the ideas and intellectual property (including ATCs) of unsuccessful proposers on the project.

Process/Tools:

• Stipends

Stage 3: Execution

Step 32: DB Kickoff Workshop. A kickoff workshop can help promote early alignment among owner and design-builder representatives around topics such as:

• Early submission requirements (e.g., quality management plan, baseline schedule)
• Design review process
• Reporting and communication protocols
• Meeting requirements and cadence
• Status of any outstanding permits or other third-party agreements
• Expectations regarding the design-builderʼs coordination with third parties (e.g., utilities, railroads, authorities having jurisdiction, etc.)

For particularly complex projects, establishing a formal partnering process can help further instill a culture of collaboration and teamwork among project participants. Facilitated partnering workshops are intended to allow relationships and trust to steadily build up in advance of any potential project issues and, if problems ultimately do arise, to provide a forum in which such issues can be discussed and resolved in a timely manner.

Process/Tools:

• Partnering
• Risk Register

Step 33: Quality Management Plan. The Design-Builderʼs quality management plan (QMP) is one of the first major submittals following NTP and is a critical document for ensuring that the design-builder delivers a completed project that complies with the contract documents. In the QMP, the design-builder shall set forth its quality management organization, processes, and protocols for the design and construction of the work.

The ownerʼs acceptance of the design-builderʼs design-phase QMP procedures is typically a precondition to allowing the design-builder to submit formal design packages for review. Likewise, the ownerʼs acceptance of the design-builderʼs construction-phase QMP is typically a precondition to allowing the start of any construction works.

Step 34: Scope Validation Period (Optional). Post-award scope validation is a risk-sharing strategy that specifies a discrete time period after NTP for a contractor/design-builder to claim relief for scope issues (errors or omissions) in the contract resulting in cost and time impacts arising from geotechnical or site conditions. In return for agreeing to the scope validation period, the contractor/design-builder waives its right to request relief related to scope issues discovered after the expiration of the scope validation period. This strategy, in theory, provides some relief for changed conditions but limits the ownerʼs exposure to claims for scope issues.

Process/Tools:

• Post-Award Scope Validation

Step 35: Design Finalization and Design Review Process. It is the design-builderʼs responsibility to provide design and engineering documents that will lead to a finished product that conforms to the contract requirements.

For complex projects, the owner and design-builder may consider grouping project elements into discrete work packages that can be designed, reviewed, and constructed as self-contained

units. This allows for the fast-tracking of certain project elements before the design of the entire project is complete. To accommodate the fast-paced nature of a DB project, the ownerʼs team must have adequate resources to provide ongoing interpretation and answers regarding contract requirements via “over-the-shoulder” design reviews so as not to cause delays.

In conducting such over-the-shoulder reviews or formal design submittal reviews (e.g., at major design milestones or for “release for construction” packages), the owner staff should limit their comments to verifying that the design conforms to contract requirements. In the absence of an identifiable nonconformance, the owner should refrain from directing or requiring changes to the design-builderʼs work, as providing such direction could undermine the design-builderʼs ability to innovate, and result in claims for additional time or compensation. (In contrast, the more collaborative PDB or CM/GC methods offer the owner more flexibility to work with its industry partners to refine the project scope and performance criteria as the design and project evolve.)

Process/Tools:

• Partnering
• Updated Risk Register

Step 36: Construction Execution. As work packages are released for construction, the owner is responsible for ensuring that the design-builder is constructing the work in accordance with the contract requirements and the approved QMP.

To the extent that the final contract includes any risk-sharing “pools” or allowance items, the ownerʼs project management team should be vigilant in monitoring the appropriate use and drawdown of such accounts. The ownerʼs team should also carefully review progress payment applications to ensure the appropriate use of material/labor cost escalation provisions.

If claims or disputes arise, the parties should follow the processes outlined in the contract.

Process/Tools:

• Partnering
• Updated Risk Register
• Risk Sharing Strategies
• Alternative Dispute Resolution Processes
• Risk Management Meeting/Update Meetings

2.3 Progressive APD Methods

Under a collaborative or progressive PDM, such as progressive DB or CM/GC, several of the early-stage activities seen under a fixed-price regime will not take place until after the contractor has been engaged and is performing preconstruction phase services.

As depicted in Figure 2.3, it is possible that there may be an expansion of the “risk cone” following execution of the preconstruction services agreement as more risks are identified and/or realized after the contractor is on board and is helping advance site investigations, third-party coordination, and other design efforts.

The application of risk management tools will evolve as the project advances through the typical lifecycle stages and decision gates of a project. To demonstrate how owners can integrate the recommended tools into their project delivery process, Figure 2.4 first illustrates the sequence of key activities that generally take place during the development and execution of a progressive APD project. Section 2.3.1 then provides more detail and context for each of these steps, focusing on when and how owners can integrate the tools provided in the Guideʼs appendices into their project delivery process to reduce uncertainty, attract competition, and effectively allocate and control risk.

Various potential tools unique to progressive APD projects are described in Appendix B.

Note: An outline of specific steps from Stage 4: Operations is outside the scope of this publication. GMP: guaranteed maximum price. ICE: independent cost estimator. OPCC: opinion of probable construction cost.

Long Description.

The stages are as follows:

Stage 0, 1 (Initiation, planning, and development). Includes design studies, preliminary risk register and term sheet. The factors draft RFQ slash RFP and baseline term sheet and risk register are at the borderline between stage 1 and stage 2.

Stage 2 (Procurement start). Includes final RFQ slash RFP. The precon phase agreement is at the borderline between stage 2 and stage 3.

Stage 3 (Execution, contract award). The construction phase agreement, GMP, and final risk register are at the borderline between stage 3 a and stage 3 b.

Stage 3 b and 4 (operations, substantial completion) include risk register and changes. The potential strategies include the following elements. Project Pipeline, Industry Forums, Preliminary Risk Identification, PDM Decision Tools, Third-party outreach, identification of ICE candidates, industry forum, one-on-one meetings, lean tools for collaborative decision-making, target value delivery, construction price proposal process (ICE, OPCC, cost model, risk register negotiation), Risk management meetings, Partnering and issue escalation processes, Alternative dispute resolution processes, KPI monitoring, Warranty criteria and annual condition surveys, Issue resolution, Alternative dispute resolution processes, and Hand-back criteria.

A cone from stage 0 to stage 3 for potential risk is marked risk cone.

2.3.1 Integrating Risk Management Tools into the Lifecycle of a Progressive APD Project

Stages 0–1: Initiation and Planning and Development

Step 0–11: Initiation through Final PDM Decision. For a progressive delivery method such as PDB and CM/GC, the Project Initiation and Planning and Development steps leading to a final delivery method decision will largely be the same as for fixed-price DB.

One possible exception is that owners, recognizing the project presents a high potential for unknown or poorly defined risks and would thus benefit from the early and ongoing involvement of a contractor in the development and design of the project, may settle upon the PDM decision with far less conceptual design and engineering than a comparable fixed-price DB project.

Process/Tools: See Steps 0–11 from Section 2.2.1.

Step 12: Identify Independent Cost Estimator Candidates. On PDB and CM/GC projects, an independent cost estimator (ICE) serves as an important member of the ownerʼs project team, tasked with reconciling estimates and assisting with negotiating construction costs with the PDB or CM/GC team.

To be most effective, the ICE should:

• Have construction estimating experience specific to the nature of the given project
• Use standard industry estimating software when preparing its estimates
• Not be the same personnel as those who prepared the ownerʼs original budget estimate (to avoid “pride of ownership” issues)

Process/Tools:

• Independent Cost Estimator

Stage 2: Procurement

Step 13: Develop Procurement Plan. To determine the optimal procurement strategy when using PDB and CM/GC, owners will have to decide upon the following:

• One-step vs. two-step procurement process: Would it be beneficial to establish a shortlist of proposers based on an initial RFQ process? (Note the procurement effort for progressive delivery methods is generally not as resource-intensive as for fixed-price DB. As the progressive methods envision that the owner and selected proposer will work together to develop and refine project solutions post-award, detailed project solutions and binding construction pricing are not sought at the procurement stage. This, in turn, reduces the burden on industry to develop detailed proposals and on owners for administering the procurement. Reducing proposers to a shortlist for expediency purposes may therefore not be necessary.) The decision to use a one- or two-step process may hinge upon the level of industry interest (potential proposers) resulting from pre-procurement industry outreach.
• Qualifications-based selection (QBS) vs. Best Value: Do procurement statutes/regulations allow for a pure QBS approach, or does price/cost have to be included as part of the evaluation criteria?

Furthermore, the owner will also have to make decisions on how to contract for PDB or CM/GC services.

• Two contracts. Some owners use two separate contracts: one for preconstruction services and another for final design/construction services.
• One contract. Other owners will use a single contract to cover the entire scope of work, with discrete phases of work to address the preconstruction services phase and the final design/construction phase.

If the project will likely entail early work or enabling packages (e.g., for long-lead item or equipment procurement, site work, demolition) that can be released for construction before the design has been sufficiently advanced to start negotiations on the full construction phase of work, a single contract may be more appropriate. This is because the typical preconstruction agreements may not be robust enough to include terms addressing insurance, bonding, and other major commercial issues that might affect the contractorʼs site activities.

Step 14: Issue Draft RFQ/RFP Package. For PDB and CM/GC, the final project price and commercial terms will be negotiated and agreed upon after award. If using a best-value process, one must therefore consider (1) what information should be sought as part of the price proposal and (2) how much weight should be allocated to the price proposal (given that the provided prices will only be for a relatively small percentage of the overall project cost).

Examples of what owners ask proposers to provide as part of their price proposals include the following:

• CM/GC proposers are often asked to provide a proposed price for their preconstruction services (either lump sum or reimbursable up to a not-to-exceed amount), as well as their construction fee (e.g., overhead and profit) to be applied if they are awarded the construction

• phase of the project. Other items that might be sought include general conditions costs for the construction phase and proposed rates for personnel, bonds, and insurance rates.
• PDB proposers are often asked for the same items that are addressed for CM/GC contractors. In addition, owners may ask for design fees, both for the preliminary services phase and the complete design of the project.

Because these prices address only relatively small components of the overall project price, it is important for owners to note that they can be subject to manipulation. If the owner has a price proposal weighting that is too high in relation to the non-price factors, one or more of the proposers might decide to submit an artificially low price to win the job, knowing that they will have an opportunity to negotiate the final construction price and have a reasonable chance to make up any shortfalls. The opposite scenario could unfold if the owner has a price proposal weighting that is relatively low, and a proposer that believes it has a strong chance of winning based on its technical submission could submit a high price proposal.

Process/Tools:

• Term Sheet

Step 15: Industry Forum/Pre-Proposal Meeting. Use of industry forums to communicate key elements of the project, including anticipated risks and risk allocation, and the ownerʼs expectations regarding collaboration and integrated team dynamics under a PDB or CM/GC delivery approach, can help promote the submission of quality proposals that are responsive to the ownerʼs goals and needs.

Process/Tools:

• Industry/Outreach Forums

Step 16: Issue Final RFQ/RFP. The draft RFQ/RFP should be refined as appropriate based on feedback received from industry.

Step 17: One-on-One Meetings. Although ATCs are generally not used with PDB or CM/GC procurements, confidential one-on-one meetings can still be useful for encouraging the open and candid exchange between the owner and proposers of concepts, concerns, and ideas. Requesting that proposers submit an agenda and list of clarification requests prior to the meeting can help streamline and focus the subsequent discussions.

Step 18: Issue Addenda (as Needed). To help ensure transparency and fairness in the procurement process, addenda should be issued as needed to provide additional details, updates, or clarification regarding the project or proposal requirements and/or to modify draft contract terms and risk allocation strategies.

Step 19–20: Receive SOQs/Proposals & Determine the Apparent Successful Proposer. To help ensure a fair, transparent, and objective evaluation process, members of the proposal evaluation team should be unbiased, knowledgeable about the procurement process, and committed to performing their evaluations in a manner consistent with the methodology described in the solicitation documents.

Step 21: Pay Stipends (Optional). As discussed in Step 13, the level of effort to develop a responsive PDB or CM/GC proposal is generally less intensive than that required for a fixed-price DB project, as design solutions and a binding construction price proposal are not being sought. As such, while industry will always be receptive to stipends, they are less prevalent for progressive delivery methods.

Process/Tools:

• Stipends

Step 22–23: Contract Negotiations and Contract Execution. Negotiations at this stage of a PDB or CM/GC project will primarily focus on preconstruction/preliminary services; contract negotiation to initially engage a CM or a design-builder should thus be simpler than a comparable fixed-price DB project.

Care should be taken to ensure the contract fully describes the ownerʼs expectations regarding preconstruction responsibilities, particularly if such services will be provided on a lump sum basis. For example, for a CM/GC contract, the owner should be explicit regarding the extent to which the CM is expected to support the design development process and evaluate the constructability of the design. Typical preconstruction services outlined in a CM/GC contract scope may include:

• Assisting with the Designerʼs geotechnical and existing conditions investigations
• Providing real-time estimating support to the Designer to help guide design development activities and the selection of the optimal design alternatives
• Identifying the schedule impacts/benefits of different design alternatives and ways to mitigate potential delays (e.g., advance purchasing of long-lead materials and equipment)
• Identifying challenges with the design, with the intent of improving the constructability and economy of the project
• Assessing the feasibility and practicality of the selected materials and equipment, as well as the availability of material, labor, and equipment
• Assessing site/access constraints and potential impacts to construction phasing and manpower restrictions
• Confirming all work has been included in the final design and construction documents and described in sufficient detail to ensure complete pricing

Step 24: Issue NTP. Following contract execution, the owner will issue NTP for the preconstruction services phase. A key characteristic of PDB and CM/GC agreements is the inclusion of contractual “off-ramps” in the event the parties cannot arrive at a final construction price and agreement. For this reason, any early construction work must be in completely severable packages (see Steps 34–35).

Step 25: Select and Engage ICE. To be effective, the ICE should be engaged early (at about the same time as the PDB or CM/GC team) to allow the parties to reach an upfront agreement as to the format of the cost model to be used for the project.

Often, the variance between a contractorʼs estimate and that of the owner or ICE comes down to just a handful of items. It is therefore important for the ICE to prepare a detailed, bottom-up estimate that is generally structured in the same manner as that of the contractor to allow the parties to drill into what is driving the variance (e.g., assumptions regarding productivity, means, and methods, etc).

Process/Tools:

• Independent Cost Estimator

Stage 3a: Execution (Preconstruction Services)

Step 26: Preconstruction Kickoff Workshop. A kickoff workshop can help promote early alignment among the owner and its industry partners regarding project goals, processes, preconstruction deliverables, and construction-phase requirements.

Step 27: Collaboration and Team Integration. In comparison to fixed-price DB, CM/GC and PDB offer the owner more flexibility to work with the industry project team members to refine scope, budget, schedule, and other performance criteria as the design and project evolve. As part

of the kickoff workshop, the parties should therefore reach agreement on the methods that will be implemented to support such team integration and collaborative problem solving.

In addition to formal partnering, “Lean” design and construction techniques are often implemented in conjunction with PDB and CM/GC to further enhance the potential efficiency of these relationship-driven delivery methods and promote more active and collaborative risk management and problem solving. Such tools and practices may include applying:

• Target Value Design principles to ensure the design phase progresses in a manner that will allow the project to be completed within the ownerʼs allowable cost and schedule.
• Pull planning as a management method to better understand the order and dependencies of different work tasks and identify roadblocks or constraints that could cause delays.

Process/Tools:

• Partnering
• Lean Tools for Collaborative Decision-Making
• Target Value Design

Step 28: Scope Validation and Continued Refinement of Design Studies. The integrated project team (i.e., design-builder working in close coordination with the ownerʼs team; or the CM working with the owner and its designer) will determine the appropriate design studies and investigations needed to:

• Continue to refine the project scope,
• Understand the risks facing the project,
• Advance NEPA processes, ROW acquisition, and other third-party coordination efforts, and
• Validate that the scope and evolving design can be constructed within the ownerʼs budget and schedule.

Step 29: Design Packaging Plan. Based on what is known about the project, the owner and its industry partners should reach early consensus on the anticipated design production plan, including:

• How the design effort will be phased to accommodate early enabling work or long lead items, and
• How design deliverables will be packaged and included as part of discrete construction work packages for bidding to the subcontractor community (to promote some competitive tension in construction pricing).

Step 30–33: Design Development and Risk/Cost/Schedule Management. The owner and design-builder (or CM) will collaboratively advance the project, with the following activities performed as part of an iterative design development process:

• Risk management: Project risks will serve as both an output and input to an iterative design process. As more is known about the project, more risks may be identified. In turn, such risks will inform the level of additional design and investigation needed to mitigate or otherwise address the identified concerns.
• Cost model development: A cost model should be developed to facilitate the continual estimating of project components and elements via benchmarks, metrics, or detailed take-offs. Regular (and ideally, near-real-time) updates to the cost model may then be used to demonstrate whether the design is proceeding within the expected cost, or whether adjustments are necessary to bring the project cost back in line with the ownerʼs budget expectations. Incorporating project risk analysis results into the cost model—to the extent discrete risks can be monetized (vs. simply relying on a general contingency line item)—and the subsequent monitoring of these risks, can further enhance the utility of the cost model.

• Schedule development: Similar to the cost model, the schedule should be used as a tool for identifying the impacts/benefits of different design alternatives and ways to mitigate potential delays, phasing issues, or manpower restrictions.
• Design package development: The design should be progressed in accordance with the agreed-upon packaging plan, with constructability reviews included as part of the design development process. To avoid potentially costly and time-consuming design churn, the owner should help steer the project team towards achieving design “freeze” as early as possible.

Process/Tools:

• Partnering
• Risk Register
• Lean Tools for Collaborative Decision-Making
• Target Value Design
• OPCC (Opinion of Probable Construction Cost)
• Cost Model

Step 34–35: Development and Buyout of Early/Enabling Work Packages. In accordance with the design packaging plan process described in Step 29, the parties may decide to expedite the completion of certain work elements that can be designed, reviewed, bought out, and constructed as self-contained units before the design of the entire project is complete and/or before a construction price for the entire construction phase is negotiated. Typical early packages may include site work, demolition, excavation, long-lead item procurement, and foundation work.

To preserve the contractual “off-ramp,” the early work must be in completely severable packages in case the parties cannot ultimately agree upon a final construction cost for the full project.

Step 36–37: Construction Price Negotiations. As the project design evolves, the associated cost model, schedule, and risk register will continue to be discussed and negotiated. Typically, the owner will engage an ICE to either develop an independent cost estimate or validate the reasonableness of the cost estimates being developed by the design-builder (or CM). To be effective, the ICE should participate in periodic preconstruction activities (i.e., design review workshops, risk workshops, etc.) so that they may have a good understanding of the project as it evolves and can factor this information into their cost and schedule estimates.

At a certain point, after the parties are comfortable with the assumptions reflected in the cost model and risk register, including any associated risk allocation and response strategies (e.g., allowances, contingencies, risk pools, etc.), negotiations of the final construction price will commence. This price is generally a buildup of fees, general conditions, direct construction costs, and contractor contingency (with fees and perhaps general conditions costs possibly already established as part of an initial best-value procurement process).

If an agreement cannot be reached on the final construction price, the off-ramp can be implemented as needed to deliver the project using a different PDM.

Process/Tools:

• Independent Cost Estimator
• Updated Risk Register
• Opinion of Probable Construction Cost
• Cost Model
• Guaranteed Maximum Price
• Risk Pools
• Contractual Off-Ramp

Step 38: Issue Construction-Phase NTP. Following agreement on the construction price, the owner will issue NTP for the construction phase of the work (and final design if applicable). This can be handled as a construction price (guaranteed maximum price) amendment to the initial contract; or, alternatively, if a two-contract approach was used to procure services, the parties will execute a separate Construction Services Agreement.

Stage 3b: Execution (Final Design/Construction)

Step: 39: Final Design. For PDB, the design-builder will proceed with developing construction documents for the balance of the design that are suitable for bidding and construction purposes.

The ownerʼs team should continue to review and comment on design milestone submittals, focusing on conformance with contract requirements, the Design-Builderʼs QMP, and the basis of design and performance criteria agreed to during the preconstruction phase.

For a CM/GC project, this step would entail the CM conducting technical design and constructability reviews of each design package prepared by the ownerʼs designer and using the design packages to develop scopes of work for bidding purposes.

Process/Tools:

• Partnering
• Risk Register
• Lean Tools for Collaborative Decision-Making
• Target Value Design

Step 40: Subcontracting/Self-Performance Plan. The design-builder (or CM) will typically develop and submit for the ownerʼs review a Subcontract Execution Plan that identifies for each construction work package the extent to which it intends to self-perform any work, and how it intends to prequalify bidders and obtain competitive pricing for subcontracted work and materials.

The ownerʼs involvement in the subcontract execution process should be described in the contract documents. Typically, the ownerʼs involvement includes reviewing and commenting on the design-builderʼs or CMʼs initial bidderʼs list, subcontract terms and conditions, and award recommendations.

Step 41: Construction Execution. As work packages are released for construction, the owner is responsible for ensuring that the design-builder (or CM) is constructing the work in accordance with the contract requirements and the approved Quality Management Plan.

To the extent that the final contract includes any risk-sharing “pools” or allowance items, the ownerʼs project management team should be vigilant in monitoring the appropriate use and drawdown of such accounts.

Progress payments will likely be on an open-book basis, which may require extensive owner resources to ensure the requests are, in fact, reimbursable and appropriate under the contract.

If claims or disputes arise, the parties should follow the processes outlined in the contract.

Process/Tools:

• Partnering
• Risk Register
• Risk Pools
• Lean Tools for Collaborative Decision-Making
• Alternative Dispute Resolution Processes