Utilities that are considering new large infrastructure projects should carefully evaluate whether to put the bid out for a lump sum contract, or whether they want to use an open book arrangement. Both methods have their advantages, depending on the owner’s circumstances, and matching the best style for the given project can make a major impact on a project’s success.

Ted Pintcke, Black & Veatch Vice President, Energy, said that these key choices are often made depending on the owner’s financial needs or requirements and the desire for direct involvement in the project.

“Typically, a private developer, such as an independent power producer (IPP), needs a firm lump sum price early in the project. They need a figure to take to the equity providers and banks as they seek financing for that project,” Pintcke said. “On the other hand, regulated utilities may have more time and can have more say in the financial decisions. They’re financing the project on their own balance sheet, so they may opt for an open book arrangement.”

Black & Veatch encourages strong ownership involvement in any EPC (engineering, procurement, construction) and design/build project, but acknowledges that every client has a different level of desired involvement.

“Some owners want to be more engaged, and they want to be more certain of what they are going to get with this project,” Pintcke said. “In those cases, we’ll go open book with them. It is a common practice, especially in the energy industry.”

He said the open book process means working very closely with the owner on key decisions early in the project, including selecting equipment manufacturers, designing the plant layout, and deciding on suppliers. With open book, the EPC contractor seeks bids from manufacturers and subcontractors, and those bids are reviewed and winners selected jointly with the owner. The owner sees all the bids and prices for the major components.

“Generally speaking, we’ll get roughly 30 percent into the project, and by that point, all the critical pieces are essentially purchased and the owner is happy with what’s been selected. They understand the price, they understand the basis of our total EPC estimate,” Pintcke said. “Then at that point, we typically would close the books and Black & Veatch would carry on from there.”

Seek Out an Attitude of Transparency

Ernie Wright, Black & Veatch Senior Vice President, Energy, said plant owners should seek out companies that implement transparency and constant communication.

“It is advisable that owners be engaged at a very deep level,” Wright said. “The best results come when they are involved with weekly planning sessions on projects. This approach means that they can see everything.”

He said the level of ownership involvement varies greatly from project to project.

“Different owners have a contrasting level of interest in how deeply they’re involved in the project,” Wright said. “If it’s an open book process, the owners are very much more involved and we welcome that. That’s an option we offer, and it has worked very successfully. On the other hand, some owners don’t have the staffing required to be deeply involved and want the EPC provider to ‘take care of the details,’ and that’s their choice.”

Design-Build Gaining Acceptance in Water

Blake Childress, Senior Vice President, Design-Build for Black & Veatch’s water business, said the concept of the same company doing both the design of a water facility and the construction – known as design-build – is relatively new to the water industry, but it is finding an increased level of acceptance.

“Design-build is being accepted in the water industry, but in some areas it’s slower than in others. There are still a few states that do not permit it, such as New York, but in general, owners like it,” Childress said. “They like the involvement, yet there are some misconceptions.”

He said misconceptions include worries over losing control of the project with design-build, but he said nothing could be further from the truth. “Owners can have as much involvement as they choose to or as they have staff to.” But he acknowledged that ownership involvement can be difficult due to cutbacks in utilities’ staff.

“So many water utilities today are short on staff. Therefore, they don’t always have enough resources to get involved,” Childress said. “But for those who can, they should get as involved as possible from the beginning of the design all the way through the commissioning of a project.”

Many Options for Building

Childress said that water facility owners have many options to choose from when approaching a new project. The traditional method, in which the design and construction are treated separately, is called design-bid-build. Typically, the low bidder wins, which may not get the owner the best project or the highest quality, he said. For that reason, new alternatives are now available to owners. Childress listed these as:

• Progressive Design-Build: A single contract is issued for both the design and construction of a project, and the winner is based on qualifications (past experience), rather than a specific bid for the given project. The intent is to cut down on the very expensive process of putting together competitive bids on large projects.
• CM at-Risk: Stands for Construction Management At-Risk. Similar to design-bid-build, the owner selects an engineer to design a project. Under a separate contract, a contractor is brought on later to help with constructability reviews, then the contractor makes a lump sum bid when the design is at the 60 percent completed stage.
• Lump Sum Design-Build: A single contract is issued for both the design and construction of a project, with a lump sum price offered by each bidder. The winner is selected by the owner from multiple competing bids.

Childress said he encourages owners to use open book contracting for the highest levels of transparency when developing plans for their EPC/design-build project.

“In an open book scenario, the owner gets to see all of the costs, not just those that the contractor is willing to share with them,” Childress said. “The owner sees all the invoices so the staff can validate the pricing of what a project is truly costing them – unlike a design-bid-build project, where the owner just sees one number, and the low guy wins.”

Childress cautioned project owners against approaching design-build in the same manner as the traditional design-bid-build.

“The worst thing that owners who have no experience with design-build can do is to say, ‘Okay, I’m going to try it,’ and they end up trying to do it the same way that they did design-bid-build for so many years. It’s a different approach, requiring the total integration of the engineering staff, construction staff and the operations staff of the owner, compared with the typical silos that people function in during a design-bid-build project. Design-build is a much more satisfying approach.”

Editor’s Note: This is the fourth of a six-part series on EPC/design-build that can be found in the Solutions Online library on bv.com.

— Story by Gordon Heft, Black & Veatch 

Published originally on Black & Veatch Solutions