When A Guarantee Isn’t One
Originally posted on CityStink
Tuesday, Feb. 21, 2012
By Al Gray
The author, Al M. Gray is President of Cost Recovery Works, Inc., a provider of Cost Avoidance and Cost Recovery for America’s leading companies, businesses and governments desiring Superior Returns.
Augusta Commissioners on February 21, 2012, today, face a thorny vote on whether to approve a very expensive Change Order 2 (See the document here) to R.W. Allen LLC’s Construction Manager at Risk Contract for construction of the Tee Center. The contract is structured as a cost-plus arrangement with a Guaranteed Maximum Price. Such deals are commonly called GMAX or GMP contracts.
Under a cost-plus GMP contract, the construction manager starts construction before the design and specifications are complete in an effort to accelerate project completion. Otherwise all of the design, specifications and plans must be complete in order to bid the job on a lump sum or fixed price basis. Under a GMP contract, the construction manager mobilizes, awards the early sitework, underground piping, and preliminary concrete work while the architects and engineers complete packages for the various construction disciplines (steel, electrical, HVAC) that occur in later stages. When the overall design reaches majority completion, in this case 65%, the construction manager has enough data to provide the owner with a Guaranteed Maximum Price.
RW Allen and Augusta agreed to a GMP of $27,900,000 in January 2011. (See Document here)
The public highly distrusts cost-plus contracts, even those capped by a maximum price “Guarantee.” In this instance, properly done, cost-plus should have saved money and been the best choice method of project delivery. RW Allen had to deal with a brownfield site (unknown underground obstacles and conditions), coordination with ongoing operations of the hotel and convention center, in a congested area, and in conjunction with new design. Trying to force fixed price contracting intended for a set design would have resulted in risk-loaded contract prices where the real risk remained with the owner, the City of Augusta. The unknowns and variables were too great.Because the Guaranteed Maximum Price assumes set design parameters at the time the price is set, every GMP contract allows for change orders in the event that the design changes in the later stages at the recommendation of the architect and engineers. A change order increases the guaranteed maximum price.
Change Order 2 totaling $836,228 is actually the aggregation of 13 component change orders, including a controversial $399,083 change to the HVAC system to increase air turns to 8 over the base design standard of 2.5. Augusta’s architect approved this change months ago.
Some Augusta commissioners are grumbling because they confused “Guaranteed Maximum Price” with “Lump Sum.” In either contracting method there still would be change orders and they would be legitimate. The commissioners reticence to accept price increases because there is a price “guarantee” is a misunderstanding of the deal.
When a change order like this one gets to the Board of Commisioners it generally is a fait accompli. This looks to be the case in this instance. Under the RW Allen contract, the city is already bound. Look at the dates and signatures on the change order. The master change order 2 is dated October 17, 2011 and is more than four months old! The component change orders have to be of even earlier vintage. RW Allen’s contract for the Tee Center spells out that change orders increase the contract price in Article 15. (See Document Here)
There is little doubt that RW Allen was given the authority to proceed. The City of Augusta’s architect/engineer, program manager, and city administrator have all signed the authorization. (See Document Here) Under the Tee Center contract, the commissioners have no real options.
Augusta commissioners really should not want a lump sum at this point, because a lump sum contract has fewer options for cost reductions and cost recoveries as the contractors have born the risks and have earned the rewards of bearing those risks. (This doesn’t mean that lump sum contracts do not bear auditing, though!).
Commissioners can look forward to reductions in the Guaranteed Maximum Price as the Tee Center is completed. Allowances will be adjusted to actual cost both in the construction manager contract and in the component subcontracted packages. Contingency in this contract was $566,000 and that will be adjusted, too. Adjustments of ‘costs’ may or may not happen, depending on diligence.
Augusta Commissioners should be happy with the contract that they have and not yearn for a counterproductive fixed price that never would have been a lump sum. Just because a contract and change orders to it set a contract price, that does not mean that an evaluation of the scope documents cannot later reduce that price.
The administration and Board of Commissioners need to take prudent steps to verify the costs at completion. In fact, this needs to be performed for all of the various cost-plus GMP contracts the city has done in the last 3 years. Based upon the volume of these contracts, this writer projects that the costs recaptured by a comprehensive effort would range from $1.25 million to $5 million.
Nothing much is “guaranteed” in a GMP contract, just that the contractor keeps the change. Rarely is the change of the loose pocket variety. Augusta has let its contractors keep $millions in change by fruitlessly grumbling about change orders, then closing out “completed” contracts with nary a care.
That does guarantee a price.
Not if Augusta commissioners get wise.***
* (View pdf files of the documents referenced in this article below)
Editor’s note: City Stink contributor Al Gray is President of Cost Recovery Works, Inc., a Lincoln County, Georgia-based firm focused on construction, public administration, policy and cost recovery reviews on a guaranteed results basis.
Below are the documents referenced in this story: