CHAPTER 5

Conclusions and Recommendations

This chapter consolidates the findings of the survey and the case example interviews. It also makes recommendations for future research based on the gaps in the body of knowledge identified in the synthesis. The standard set for determining that a conclusion was found was that it was result of the intersection of at least two lines of independent information.

5.1 Conclusions

The following conclusions are the findings from the research (these are listed in no particular order of importance):

• Transparency is an essential component of open-book negotiations. It is defined as access to the information that the owner needs to determine whether the GMP is fair and reasonable. Responding DOTs view the open-book process as a means to enhance project cost and schedule certainty through collaboration during the GMP development process.
• A climate of mutual trust is necessary to overcome the difficulties associated with the contractor’s market pricing exceeding the owner’s expectations, an event that occurred in all six case examples. The trust revolves around the contractor showing the owner the evidence that led to the proposed prices and explaining why the prices are what they are in the context of work sequence, schedule, and supply chain constraints.
• Collaborative decision-making provides tangible evidence that both parties are seeking mutually agreeable solutions to the issues that inevitably occur during the design and construction of complex transportation projects. Responding DOTs ranked enhanced collaboration and cost certainty fourth and fifth, respectively, in the survey. Schedule certainty ranked ninth. Taken together, the rankings indicate that responding DOTs view the open-book process as a means to increase project cost and schedule certainty through collaboration.
• Cost estimation is the crux of the open-book process. The process consists of two major categories of cost: direct costs and markups for indirect costs and profit. The markups are typically assigned to fees to be paid the contractor above the direct cost. A variety of methods exists for establishing the design, preconstruction services, and construction services fees. Each responding DOT has its own preferences, which range from specifying a fixed percentage or lump sum in the solicitation to asking the competitors to propose these fees during procurement to negotiating the fees after the contract is awarded. The preconstruction services fee was treated similarly to a design fee, with 13 of the 23 responding DOTs preferring to negotiate hourly rates and level of effort. No trend was present in how responding DOTs established the construction services fee other than 15 of 23 indicating the use of a negotiated approach.
• Using a mutually agreed-upon cost model is important to the parties in the GMP negotiations. It provides a means to establishing the basis of estimates for OPCCs and other uses. Joint development of the cost model was ranked the highest in the survey, followed by requiring

• the ICE or contractor to provide the model. In six of eight case examples, the cost model was developed by the contractor and then reviewed by the ICE and the owner. This approach was chosen because the owner did not have in-house cost-estimating resources and believed that the contractor was the best qualified to establish the model.
• Most responding DOTs (23 of 25) choose to retain an ICE, but a wide range of approaches can be taken for the role the ICE plays in open-book negotiations. Utah uses a double-blind OPCC process in which the ICE has limited input during design development, except variation in excess of a stipulated percentage exists. On these occasions, the ICE and the contractor are asked to revisit their cost-estimating assumptions, and the owner attempts to align the assumptions that caused the variation. Arkansas represents the other end of the spectrum and assigns the ICE the responsibility of managing the open-book process, actively participating in design development. The survey found that 21 of 23 responding DOTs asked the ICE to “share, review, and discuss assumptions, quantities, contingencies, constructability, and other items that affect the price of the project,” indicating a preference for a higher degree of collaboration and ICE involvement than merely producing independent estimates.
• Employing an ICE provides the owner with not only a third OPCC but also a demonstration that the agency invested in determining a fair and reasonable price for the final GMP. This aspect was cited in the TPI, CMCR, and BDBR cases.
• The need to share and jointly assign responsibility for specific risks is a primary motivation (22 of 23 responding DOTs) for using a project delivery method that permits the construction contract amount to be negotiated. However, responding DOTs tend to use professional judgment (17 of 20) as the basis for establishing risk-based contingencies rather than data-driven, quantitative methods for computing the value of risk, such as Monte Carlo simulations. Once the contingencies are established, they are typically not included in the GMP, and access to the contingency pool is controlled by the agency (17 of 20 responding DOTs). For the majority of respondents (17 of 21), contingencies are established using the expected value of the risk method, with input values for likelihood and impact established using professional judgment. Thus, it is clear that the dialogue associated with project risk, not the method for computing the contingencies, is the aspect that adds value to the open-book process. In seven of eight case examples, risk was discussed and jointly allocated. The LBB project was terminated before the negotiations reached this point.
• The literature and case examples show the importance of communication in the open-book process to furnish the conduit for encouraging collaboration when the project does not go according to plan. The Utah double-blind system demonstrates that communication does not necessarily have to include sharing the OPCC details among the project team. In 3 of the 9 case examples, the owner chose not to execute an off-ramp when it became obvious that the current OPCC greatly exceeded the project’s budget. The involvement of the contractor and the ICE perhaps provided the confidence necessary to trust the current numbers over the value of the previously established budget.
• Open-book negotiations introduce a level of flexibility into the project delivery process. The TPI case showed this type of flexibility when the project delivery method was restructured. As a result, OPCCs exceeded the available funding. MnDOT could have executed the off-ramp, but the collaborative relationships provided them with the confidence to ask the CM/GC and the ICE to assist in the rescoping process to optimize the available funding in the Phase 1 package.
• Off-ramps are generally included in CM/GC and PDB contracts but rarely used. The open-book process provided MDOT with real-time transparent pricing that allowed it to make an informed decision to execute the off-ramp. Additionally, prior to the off-ramp, MDOT received the value of having selected a bascule bridge specialty contractor as the CM/GC, whose constructability input was used in the re-procurement of the DBB project. The LBB project was rescoped, redesigned, and bid out as a DBB procurement. The open-book

• deliverables provided by the contractor and the ICE were used to guide the rescoping process. A similar result was found in the DelDOT I-95 project during which the off-ramp was used after concerns regarding the adequacy of the budget were realized. When the project was bid out as a DBB, the low bid was $20 million more than the proposed GMP.
• CM/GC solicitations do not provide the detail on the open-book GMP process that the literature maintains is essential to creating the required environment to align the DOT and contractor’s expectations and facilitate a collaborative environment in which to negotiate.

5.2 Future Research Recommendations

Five gaps in the body of knowledge were identified that would benefit from future research:

• Need for open-book negotiation guidance,
• Training for DOT negotiating staff,
• Evaluation of the performance outcomes associated with setting preconstruction fees,
• Evaluation of the performance outcomes associated with the role of the ICE, and
• An assessment of the impact of subcontractor selection by low bid or best value on Disadvantaged Business Enterprise (DBE) goals.

5.3 Open-Book Negotiation Guide

First, the dearth of detail found in the solicitation content analysis and DOT manuals with regard to the DOT’s intentions to conduct the open-book negotiation to establish a GMP indicates that guidance is needed to assist DOTs in aligning expectations for open-book processes with its industry partners. The suggested research would produce a guidebook for developing both program-level and project-specific models for:

• Assembling a GMP,
• The GMP’s components,
• How direct and indirect costs are defined and accounted,
• A summary of approaches to establishing and allocating project contingencies,
• Various options for dealing with self-performed work,
• Best-value versus low-bid selection of subcontractors, and
• Other topics as required.

The envisioned guide would also furnish a menu of options proven to be effective so that each DOT can tailor its own program. A template for use in CM/GC and PDB RFQs and RFPs would also be a helpful deliverable from the research. The benefit would be to promote a consistent approach from each DOT and would result in increased competition.

5.4 Open-Book Training

The case example interviews indicated that agency personnel considered themselves ill-prepared to negotiate with the contractor. This sentiment led to a recommendation for future research regarding the preparation and training needed by the owner’s negotiating staff. DOT staff are typically educated as design engineers and that curriculum rarely, if ever, provides preparation on cost estimating and soft skills, such as negotiating. A whole body of knowledge exists on how to prepare for, conduct, and document negotiations. The American Society of Civil Engineers offers a continuing education course on negotiating change orders and claims. A similar training course would be developed to implement open-book GMP negotiations for DOT staff. Hence, research to develop a guide and training course for open-book negotiating is recommended.

5.5 Setting the Preconstruction Fee

Setting the cost of preconstruction services is done using a number of different approaches. One method is to treat it like a typical consultant contract in which the contractor provides hourly rates and an estimated level of effort, which are then negotiated with the DOT. Another option is for the DOT to set a lump sum amount that will be paid. A third option is for the proposers to provide a lump sum amount or percentage, which is then used as the price portion of a best-value award. The other prevalent approach is to merely set the preconstruction fee at an amount that seems appropriate.

One school of thought takes the position that the most value is received from the CM/GC or PDB contractor during the preconstruction phase. As such, it benefits the owner to invest in the preconstruction fee, ensuring that the contractor is properly compensated for its efforts during that phase of a CM/GC or PDB project. It also provides motivation for the contractor to pay close attention to the budget and assist the owner and designer in identifying potential value engineering savings. The other prevalent approach is to merely set the preconstruction fee at an amount that seems appropriate. This creates a gap in the body of knowledge, which would benefit from future research to compare the performance of the various options for setting preconstruction fees.

5.6 An ICE’s Role in Open-Book Negotiations

Another research recommendation relates to the role of the ICE in open-book negotiations. The literature indicates that collaboration is essential to CM/GC and PDB project success. Some DOTs expect the ICE to bid against the contractor rather than merely validate the contractor’s proposed GMP. When the contractor and the ICE are put in a competition, it seems to create a negative impact on collaboration, which could ultimately make it more difficult to reach a mutually agreed-upon GMP. Clarifying the role of the ICE, and determining whether a difference in project performance exists in CM/GC and PDB projects with and without an ICE, is recommended for future research. The research would also cover other related topics, such as the timing of the ICE contract award and the qualifications used to determine whether the ICE has appropriate experience in preparing “contractor-style” estimates.

5.7 Subcontractor Selection Methods

The final research recommendation relates to the role of DBE goals in the project’s subcontracting plan. Two concerns should be investigated. First, how does requiring the CM/GC and PDB to award subcontractor work packages to the lowest bidder affect the CM/GC and PDB projects’ ability to achieve the stated DBE goals? Secondly, do projects for which a best-value or direct selection of subcontractors is permitted perform better in DBE achievement than low-bid projects? The research should also visit whether DBE status is appropriate to be brought into the open-book negotiation process.