Construction Delivery Models

Construction Delivery Models: Construction projects can be executed using various delivery models, including design-build, early contractor involvement, and alliance models. To ensure a construction project’s success, choosing the most appropriate delivery model is vital. Each delivery model has distinct features, and the client should consider how the differences align with the project’s goals and characteristics.

In this article, EPCM will discuss the various construction delivery models that a client could consider. Once an overall contract model has been decided on, a client can further refine the contract to suit the project-specific requirements.

When a construction project is undertaken, project personnel often focus on the technical aspects of the implementation of the project. It is, however, vital to first understand under what construction delivery model the project will be delivered, as this influences how the project should be approached. The different delivery models expose each party to the contract to very different risk profiles, which should be taken into consideration when deciding on the strategy, staffing and pricing of construction projects. Not fully understanding the delivery model can lead a contractor to hugely overestimate or underestimate their tender price, leading to an unsuccessful bid or the unsuccessful implementation of the project. Common types of models include:

• Design-build-bid construct-only contracts
• Design-build contracts, including variants such as Engineering, Procurement and Construction (EPC)
• Engineering, Procurement and Construction Management (EPCM)
• Early Contractor Involvement
• Alliance
• Public-Private Partnerships (PPPs)

1 Construction Delivery Models: Design-build-bid construct-only contracts

The design and construction stages are undertaken separately for construction-only projects. The client first procures the services of consultants to undertake the design and engineering. Based on this, the client tenders out the construction of the works. The successful bidder then contracts directly with the client to construct the works, with the consultant acting in a supervisory role. The client, therefore, retains control and oversight over the entire project. This type of contract is suited to straightforward projects, with little to be gained from contractors’ input into the design.

In this construction delivery model, the client retains the risk of the design since the contractor has little if any, input. Because the contractors are merely pricing a completed design, they have a clear indication of what they are pricing for. This is a relatively low risk and, therefore, attracts many contractors, resulting in competitive pricing. This method also provides cost certainty to the client since there should be little variation after the contract award. The client, however, has to ensure that the design and requirements were complete and accurate from the outset, otherwise, there could be costly variations on the project.

Whilst cost-effective and straightforward, there is little incentive for consultants or contractors to optimise the design, potentially missing out on large cost savings. Due to the competitive tendering process, there is also the risk that the lowest bidding contractor mispriced project elements. This can lead to an adversarial project environment, with the contractor likely to take any opportunity to apply for variation claims.

2 Design-build and Engineering, Procurement and Construction (EPC) contracts

Under the design-build and EPC delivery models, the contractor is tasked with undertaking and taking on the risk of the design. While design-build and EPC contracts are similar, they have some key differences. With a design-build contract, the client will provide a high-level design outline, which the contractor has to refine and detail engineering. With an EPC contract, the client will likely provide output specifications and have little input into the design. Under an EPC contract, the contractor provides performance guarantees for the completed facility.

These projects are suited to industrial and heavy engineering projects, where function precedes aesthetics. They provide a client with a single point of responsibility for the project, who procures and coordinates the design and construction activities of all other subcontractors and specialists. The owner does not get involved in coordinating design and construction interfaces and expects a completed project at the end, delivered at the agreed price. The client, therefore, has little scope for input during implementation and should be comfortable with effectively leaving the project in the hands of others. Therefore, the client’s requirements must be very clear and well-defined at the onset of the project to ensure that the end product meets their need. Any ambiguity will likely lead to disagreements about the final product, and any changes requested later by the client will likely lead to claims by the contractor to recover unplanned costs.

Payment for design-build and EPC contracts is generally a lump sum, and the contractor ensures they meet their quoted price. The contractor is likely to price in the additional risk they take under this delivery model. Whilst the overall price could cost the client more than other delivery models, there is price surety. A substantial profit can be made if the contractor’s price in risks that do not occur. The contractor could, however, also make a substantial loss if risks do occur that cannot be covered by variation claims.

With a lump sum price, the contractor is heavily incentivised to perform the work more efficiently since it will result in greater profits. Arguably, it could also incentivize them to cut costs to such a degree that it impedes quality or performance. The client should, therefore, ensure that the output specifications are well-defined. For this reason, the owner’s engineers are usually employed to verify the requirements are met.

3 Construction Delivery Models: Engineering, Procurement and Construction Management (EPCM)

In an EPCM project, the contractor provides a professional service to undertake the design, plan the overall project, and then procure and manage other contractors to implement the construction works. The EPCM contractor does not enter into contracts directly with other contractors, which is in contrast with the EPC model. Instead, the client contracts directly with the various other contractors who deliver the implementation. Therefore, The EPCM contractor isn’t liable for the other contractors’ schedule, cost or performance.

This contract form generally costs less than EPC contracts, as more risk remains with the client. Also, the client can procure each construction and supply contract individually, ensuring the best price is achieved rather than leaving it up to an EPC contractor. Since they are engaging each contractor individually, the client has more scope to change the scope as the project progresses. Even though the EPCM contractor is there to manage the project, an informed client is vital to its success.

The client retains a lot of the project risk due to having separate contracts directly with the various other contractors and suppliers and has no single point of responsibility. Therefore, the interface between the separate contractors is a risk to the client. The client is, however, also more involved in the project and has input into how it is delivered. The EPCM contractor can help the client manage the project successfully, and its oversight can ensure that a high-quality product is delivered.

4 Alliance

The Alliance construction delivery model is a collaborative arrangement where the client and contracted parties share the risks and rewards of the project. They are usually used on large, highly complex infrastructure projects which are difficult to scope and implement under other contract models. They require a transparent open-book approach by all participants, who also jointly develop the deliverables, measures of success, and percentage split of costs and profits. They were developed to counter the disputes seen in large, complex projects, which can result in long, costly court battles.

One of the key benefits of the Alliance model is flexibility, with changes that would benefit the project readily accommodated. However, with the focus on the quality of the outcome rather than the process it takes to achieve it, there is a risk of uncertainty and escalation of cost and programme. It is, therefore, vital that agreements, processes, measures of success, etc., are agreed on upfront.

The Alliance model relies on a collaborative, trusting approach where the parties’ interests are aligned. Furthermore, parties must address any issues that arise jointly rather than attributing blame. Whilst these can be addressed in various procedures and with clear performance measures, the success of the Alliance model remains dependent on the attitude and culture that each participant brings to the table.

5 Early Contractor Involvement (ECI)

In the ECI delivery model, the client engages a contractor early to contribute to the development of the design. The ECI model allows for a collaborative approach to the project between the client and the contractor. This can lead to innovation in the technical approach and the project’s implementation. It is particularly useful if the project’s scope is not well defined at the onset. The ECI approach can help ensure that the client and contractor’s interests are aligned and on the same page, which helps prevent future disputes. ECI is usually suited to large, complex projects where there is benefit from a team collaborating to find innovative solutions, but it can be applied to projects of any size.

The delivery model is generally broken into two stages, with the first similar to the Alliance model and the second stage taking only the form of a design-build or construct. In the first stage, a contractor works with the client to develop and optimise the design. The contractor can be responsible for the design or work with the client’s design team. This can lead to innovation and improved constructability, leading to large cost savings due to better integration between design and construction. It also promotes transparency between all parties and creates a less adversarial culture. The contractor’s role should be clearly defined in this early stage, as it could be ambiguous, especially if the client employs an independent design team.

In the first stage of the ECI delivery model, a client could also engage two contractors to refine the design. At the end of Stage 1, the Client could request a competitive tender from each contractor, with the lowest bid being awarded the construction contract of Stage 2. This ensures some price competitiveness for Stage 2, even though engaging with two contractors will result in a more costly Stage 1.

Alternatively, one contractor can be engaged from the start. Still, their price for Stage 2 is transparently built up with the client, and/or subcontracts can be tendered out individually with full price transparency to the client. As an additional option, the client can put a ceiling on construction costs, and if this isn’t met, they can retain the right to go to the open market after Stage 1. However, contractors not involved in the previous design stage might be unable to submit competitive bids.

Before proceeding with an ECI delivery model, the client should plan the process and clearly define roles, responsibilities, and expected deliverables. The client should also be aware that, at the onset of the project, there will be little cost certainty. It should also be remembered that the best contractor for stage 1 might not be the best for the construction stage due to the different skill sets involved.

6 Public-Private Partnerships (PPP)

PPPs are long-term partnerships between the public and the private sector to deliver on infrastructure, buildings or services. Depending on the need, they can take various forms and can be used to make projects viable. The partnership apportions the responsibilities and risks between the public and private sectors. The public sector ensures the project is correctly defined and monitors compliance with the requirements. The private party is usually responsible for partly or fully financing, designing, building and operating the infrastructure or service. In return, the public sector makes payments to the private entity for an agreed period (e.g. 30 years).

Construction of the infrastructure or implementation of service comes with technical and operational risks, which the private partner carries. Where the public partner agrees to make set payments, they carry the demand and price risk they can generate from the facility’s use. There are further risks, such as public perception and acceptance of the project and the impact of future political changes that could lead to the withdrawal of support for the project from the public sector. It is, therefore, vital that the partnership agreements are well-considered and thorough.

7 Conclusion

Construction delivery models differ greatly in how they apportion risk and responsibility. Clients should understand the project they are embarking on to choose the most appropriate delivery model. In deciding on the delivery model to follow, clients should consider:

• the clarity of the project scope and requirements
• the project’s complexity
• the potential for innovation
• whether they need price surety at the onset
• what their risk appetite is
• the urgency of the project
• whether they want to maintain control of the project
• their capabilities in implementing the project
• how involved they want to be in the project
• market conditions

To ensure project success for all parties involved, the most appropriate delivery model should be selected to suit each project’s unique requirements.