Design-Build Like Project Insurance

Posted on February 8, 2012

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In 2008, Southwest Airlines was turning a profit while its competitors were sucking wind. Unlike its competitors, Southwest gained tremendous momentum instead of raising prices, instituting new fees and looking to consolidate merely to survive. How did they do it?  Southwest reaped the benefits of some shrewd disaster planning during their boom years. In the prior decade, Southwest invested millions in jet fuel futures. Fuel hedging contracts allowed Southwest to lock in fuel prices months to years in advance, like a construction GMP (guaranteed maximum price), which accounted for over 80% of its profit margin in that time period. Masterful planning became a huge market advantage based on expectations that something bad (out-of-control price increases) could happen in the near future.

Think of all the things built into our lives because our plans don’t go as expected:  slush funds, buffers, contingencies, airbags, redundancies, safety factors. If everything planned turned out well, we would have no need for them. But they don’t.

Let’s face it:  if all healthcare projects were destined for perfection, it would not matter who a hospital hired to do the work because the outcome would be guaranteed—success every time. Any team would be as effective as the next. But projects don’t always go well. Some industry experts say one-in-five projects ends up with a busted schedule, budget or lawsuit. Others suggest possibly 50% of healthcare projects have at least one unexpected, expensive and contentious issue.

When I bought our certified pre-owned Honda Pilot two years ago, I felt like a sucker because I paid for the extended warranty. On my drive home I kept mulling over the significant increase in my car payment. Was the higher first cost worth the peace-of-mind? The factory warranty was still in place, and who buys an extended warranty on a Honda? 

This week I picked up the Honda from the dealership after a new transmission. Yes, at 41,000 miles—5,000 miles past when the factory warranty ran out.  If I did not have the extended warranty, it would have been an extremely expensive out-of-pocket fix, or an uphill battle with the manufacturer to prove the transmission was defective prior to purchase. The extended warranty paid for itself four times over.

We buy insurance and extended warranties because we expect the unexpected. We make a calculated judgment that, like jet fuel futures, a small investment can both protect us and provide an advantage over those who are not putting a similar protection in place.

While design-bid-build (DBB) may be the lowest first cost, quality is suspect and performance of the subcontractors is dubious. Unlike DBB, any errors, omissions and field rework come out of the design-builder’s pocket, not the owner’s. And while CM-at-Risk offers some early price protection, price escalations can wreak havoc on a project budget.  Those are passed through to the owner and there is no protection when prices are moving up:  bids can’t come in fast enough and sub’s can’t be signed up soon enough. Unlike CM, value engineering re-design, re-estimating and re-scheduling come out of the design-builder’s pocket, not the owner’s.

Owners need a project delivery system designed for when things don’t go smoothly. Design-build offers that protection. Design-build (DB) is like project insurance.

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Posted in: Design-Build