SUMMARY

Open-Book Pricing Practices for Construction Manager/General Contractor and Progressive Design-Build Projects

This synthesis seeks to determine the elements of the open-book process that contribute to a mutual agreement on a project’s construction price. A major difference between both construction manager/general contractor (CM/GC) and progressive design-build (PDB) and other public contracting methods is the ability to negotiate open-book pricing after the contract is awarded. That ability, coupled with early contractor involvement in the planning and design process, is a key benefit that a state department of transportation (DOT) can expect if it implements CM/GC, PDB, or both. The literature confirms this assertion; however, little, if anything, has been written about the mechanics of open-book negotiations.

The objective of this synthesis is to benchmark the state of the practice regarding the policies and procedures used by DOTs to negotiate the construction pricing on CM/GC and PDB projects using open-book approaches. The synthesis documents agency practices and specifications regarding open-book estimating and negotiations and the successes and challenges of both. To accomplish this task, a comprehensive review of the alternative contracting literature was conducted and used to produce a nationwide survey of DOTs, which received responses from 42 DOTs, yielding an 82% response rate. The survey results were analyzed by conducting a content analysis of DOT alternative project delivery guidelines and manuals and DOT CM/GC and PDB solicitation documents from 27 DOTs. Finally, interviews with the participants of nine case examples (six CM/GC and three PDB projects) were conducted. In two of the case examples, an off-ramp was executed when the amount proposed by the contractor and validated by the independent cost estimator (ICE) exceeded the available funding.

To use open-book negotiation of construction pricing, the DOT usually needs the authority to implement CM/GC and/or PDB. The statutes from 36 states were reviewed to better understand the role of enabling legislation on this topic. A key finding showed that some states had interpreted their existing alternative legislation to cover CM/GC and/or PDB and that specific enabling legislation was not necessarily required. This finding was particularly true for PDB in which a number of DOTs had chosen to implement PDB under their current design-build (DB) authority without seeking specific authorization for PDB.

The synthesis provides a synopsis of the state of the practice by assessing the facts gathered from the literature review, survey, and case examples. The synthesis team found that DOTs have utilized various methods, tools, manuals, guidance, and specifications to implement open-book negotiations on CM/GC and PDB projects. The major findings of the synthesis are summarized in the following section. Findings and recommendations for future research are discussed in more detail in Chapter 5.

Summarized Major Findings

1. Motivations: The desire to manage risk through collaborative allocation to the entity best equipped to manage it is the major reason DOTs deliver projects that use methods involving open-book negotiations. The survey found that 22 of the 29 respondents with CM/GC and PDB experience cited this desire as their primary motivation. An additional 21 respondents cited a need to evaluate technical alternatives before finalizing design decisions. Additionally, 18 respondents cited a desire to enhance cost certainty, and 16 respondents indicated a similar desire to enhance schedule certainty as key motivations.
2. Mechanics of the open-book process: No trend that would lead to a generic set of effective practices for open-book negotiations was identified. Each DOT had its own variation on what was negotiable, the documentation required from the contractor, a standard for a “fair and reasonable” guaranteed maximum price (GMP), and so forth. Therefore, the conclusion is that more guidance is needed if a consistent set of practices and procedures is required. It appears from the study that consistency will probably be achieved within a specific DOT. Thus, guidance should consist of a menu of options observed to be successful.
3. Negotiable elements of the GMP: Risk, schedule, production rates, equipment rates, contingencies, and project indirect costs were the top elements cited in the survey as eligible for negotiation, with 18 or more respondents citing them. Profit, contract terms, general conditions, and home office overhead appeared on the other end of the scale, with 12 DOTs citing them as negotiable items. The Cromwell Road CM/GC project only negotiated risk, schedule, sequence of work, subcontractor work, and general conditions. The content analysis showed that the level of detail for elements that would be negotiated was sparse or missing entirely. Therefore, it could be argued that DOTs might benefit from aligning industry expectations for the open-book process with their own during procurement.
4. Role of the ICE: The responsibilities of the ICE ranged from merely validating the contractor’s estimates to collaborating during project development. Once again, the individuality of DOT processes shows that the components of the open-book process are tailored to meet the preferences of each agency. Three of the case examples showed that the presence of an ICE provided evidence to upper management that the GMP was indeed reasonable when it exceeded initial budget estimates. Twenty-three respondents retain an ICE to assist them in making a fair and reasonable GMP decision. Two respondents, Oregon and Rhode Island, do not. Twenty DOT respondents are required to prepare a “state’s estimate” in addition to estimates developed by design consultants and other external sources. Nine DOTs are not required to prepare a separate “state’s estimate” if an ICE is retained.
5. Risk management: Risk was cited by 23 responding DOTs as a negotiable element in the survey. It was also indicated as the top reason for choosing to negotiate construction costs by 22 responding DOTs. The survey confirmed that the literature showed that the ability to negotiate risk was a key benefit of using CM/GC and PDB (Reilly 2010, Alder 2012, Gransberg and Molenaar 2019). In all nine case examples, the respondents negotiated risk. Converting risks to contingencies was most often accomplished using professional judgment rather than cost data. Only one respondent indicated that it used a data-driven, Monte Carlo simulation to quantify contingencies. In another finding, the responding DOTs were engaging the contractors in the dialogue on risk, jointly developing risk registers, and addressing alternatives to mitigate or manage the identified risk. The dialogue was deemed to enhance collaboration, as evidenced in the four case examples in which off-ramps were not executed when the contractors’ estimates greatly exceeded early

5. expectations. The Minnesota DOT (MnDOT) case example underlined this conclusion when MnDOT had the CM/GC contractor and ICE assist it in converting the project to phased construction.
6. Establishment of fees: No trend was found in how responding DOTs established the preconstruction and construction services fees. The approaches ranged from specifying the fee in the procurement to requiring the contractor to propose the fees to make them a competitive part of the best-value evaluation. No information indicated that the industry objected to any of the possibilities or that one approach performed better than the others.
7. Off-ramp usage: Typically, responding DOTs include an off-ramp in their CM/GC and PDB contracts. However, the off-ramp is rarely exercised. The primary reasons cited in the survey for triggering an off-ramp were when the contractor’s price exceeded available funding and when agreement on pricing could not be reached. However, in three case examples, the owner chose not to exercise the off-ramp because the open-book process was transparent enough to give the owner the confidence that the contractor’s estimate was reasonable. In the two case examples in which an off-ramp occurred, the DOT used the open-book process to reassess the project budget when the contractor’s and ICE’s numbers exceeded the available budget. The transparent pricing permitted the DOT to determine that rescoping was in order. Perhaps this finding is important and provides an argument that the collaborative nature of open-book negotiations, the dialogue on risk, and the transparent disclosure of current market pricing can keep projects moving to completion despite errors and omissions in the original budget estimates.

Each DOT defines and controls its own open-book negotiation process and can dictate the required documentation needed from the contractor to achieve a fair and reasonable GMP. However, the synthesis team found that many DOTs are not publishing the details of how they want to conduct open-book negotiations. Nevertheless, the open-book process has demonstrated itself to lead to agreement on GMPs without a detailed description. That fact can be attributed to the dialogue on scope, risk, market costs, and schedule that is inherently invoked when the contractor collaborates with the owner during the project’s design process.