Alternative Project Delivery Methods for Water and Wastewater Projects: Do They Save Time and Money?

DBB is well understood and is a widely used method for public agency projects. Agencies typically have developed standard contracts and procedures based on experiences from many projects and are comfortable with the DBB approach. The owner maintains a high level of control during the design phase. There is typically a large pool of contractors who are familiar with completing public sector projects using this method. The advantages of this approach include owner and contractor familiarity with the process, ability to attract competition, and ability to spread work among several contractors.

DBB requires the longest time for design and construction because design and construction are sequential steps with no overlap. There is a lack of emphasis on life cycle costs. Firm construction costs are not known until the design and bidding process is complete. Bids greater than the estimated costs can cause project delays while the construction documents are redone to reduce costs. Design documents often are more detailed and costly than necessary because of concerns that the low-bid contractor may be marginally qualified. The owner retains the risk for design errors.

A critical function of the DB contract is the transfer of design liability to the design–builder. The design–builder proposes the preliminary design for the project as part of the procurement process and, once the DB contract is signed, develops the detailed plans and specifications for the project in a manner consistent with the contractual design requirements. The design–builder is fully responsible for the design of the project and bears all risk associated with design errors or defects.

The design–builder is responsible under the contract until the project passes the acceptance test, subject to relief only in the event of the occurrence of circumstances beyond the design–builder’s control. Problems can arise if the owner is overly prescriptive in developing the project requirements. The transfer of design liability is based on the premise that the design–builder is responsible for developing the design from the preliminary design level to the detailed plans and specifications. The owner runs the risk of negating this transfer of design liability if detailed plans and specifications are included in the procurement documents.

The transfer of risk is most clearly accomplished in the water and wastewater field when DB is applied to a new plant or a discrete addition to an existing plant. Complications can arise when attempting to apply DB to an internal modification of an existing plant because of the many factors in an existing plant that can affect performance that are beyond the design–builder’s control.

A well-drafted DB contract establishes the design–builder as the single point of responsibility for all aspects of design and construction with the sole responsibility for resolving disputes between design subcontractors and construction subcontractors. If the project fails to perform, the owner agency has a contract claim against the design–builder without the need to establish the negligence of the design subcontractor or to become involved in disputes between the design subcontractor and the construction subcontractor.

The DB contracting method enables the owner to transfer risks associated with design liability and disputes between design subcontractors and construction subcontractors to the design–builder. This is in contrast to the traditional DBB method of contracting, where the owner enters into separate contracts for design and construction.

In general, when an owner furnishes plans and specifications to a construction contractor in the traditional DBB method, there is an implied warranty that the furnished design is capable of construction. The extent of the obligation of a construction contractor in the DBB approach is the construction of the project in accordance with the furnished plans and specifications. The construction contractor bears no liability for the furnished design. In addition, the design engineering contract in a DBB project is generally not a performance-based contract, which means that the owner must establish the negligence of the design engineer in order to prevail in a claim if design issues are encountered. This negligence standard creates a bar to relief for an owner that is significantly higher than the claim available under a DB contract in the event design issues cause a project to not operate properly or otherwise fail.

It is often unclear if issues that cause a project to fail originate from the design of the project or from its construction. This uncertainty can leave the owner in the DBB approach forced to pursue claims against both the design engineer and the construction contractor, with each pointing the finger at the other. Under a DB project, one party (the design–builder) is responsible for making the project work. If the project does not work due to a design or construction defect, the design–builder is responsible, regardless whether the reason for the failure is due to design or construction issues.

The procurement process for a DB project generally enables the owner to prequalify potential DB firms through a request for qualifications preceding the request for proposals. The owner is then able to narrow the field of respondents to the request for proposals to those firms possessing the best financial and technical qualifications for the project.

Prequalification is particularly important in water and wastewater treatment projects that involve sophisticated technology and can take a number of years to implement. The prequalification process can provide assurance to the owner that its contracting partner has the technical expertise to address challenges as they arise and the financial strength to sustain a long-term project effort.

The request for DB proposals process enables competition on factors other than price, which can result in innovative proposals. This enables an owner to tap into private-sector ingenuity to solve the particular design challenges of a given project. This is particularly useful in the context of a project involving a water or wastewater treatment facility that involves complex operations, as contrasted to an office building or road project that does not. Through the request for proposals process, an owner can stipulate a basic set of performance requirements for the completed facility and require the DB firms to compete on proposed design solutions in their proposals. As price is also a factor in the selection process, the DB method generates competition on how to achieve the performance requirements in the most cost-effective manner.

The DB contracting method enables collaboration between the design engineer and the construction contractor in the development of the proposal. The exchange of ideas between these parties can help them avoid problems when the construction contractor begins to implement the design. Under the DBB method, the construction contractors have no involvement in the development of the design or in identifying constructability issues that can lead to a greater risk of encountering problems in the implementation of the owner’s design.

Both DBB and DB contracting offer fixed pricing—DBB for the construction work and DB for both design and construction services. A key difference is that under the DB method, the lump sum price for the project is known by the owner much earlier in the procurement process, and for a much lower transactional cost.

Design–builders propose a fixed price in response to a request for proposals based on a 20% to 30% complete design. DBB contractors, by virtue of the nature of the procurement method, must await a 100% complete design from the owner in the request for bids. DB transaction costs (primarily the owner’s procurement and engineering advisors) typically are between 1% and 3% of the project’s construction cost. DBB transaction costs can be from 8% to 12% of construction cost (mostly engineering fees for the 100% complete design). Using these benchmarks for a hypothetical $100 million treatment plant, an owner can determine the actual cost of the project under DB within approximately 9 to 12 months (the time for project planning, design to 20% to 30%, and receipt of proposals), with procurement transaction costs of $1 million to $3 million.

Under the DBB method, actual project costs are not known for 18 to 24 months (the time for project planning, design to 100%, and bidding), with transaction costs of $8 million to $12 million (project design, engineering and procurement costs). Estimated project costs are prepared at the preliminary stage under either method, but under DB the owner is in a much better position to make adjustments to the project in the event the actual cost is unexpectedly higher than the planning estimate.

DB contracting is particularly useful for a project when schedule is a key concern. As contrasted with the DBB method, in which the design must be fully developed under a separate contract prior to the procurement of the construction contract, the DB method involves an overlap in the design and construction phases of the project. This enables the design–builder to achieve efficiencies in the design and construction schedule. More rapid project delivery is often cited as the key reason for selecting the DB project delivery method. Time is saved by

Unless changes are dictated by the owner, design changes under a DB contract are generally the responsibility of the design–builder. In the event that the design–builder determines that a change to the design is required to meet the performance requirements of the DB contract, the design–builder must make such changes at its own expense and without schedule or performance relief. Change orders under a DB contract generally are issued only in the event of uncontrollable circumstance or if the owner’s project requirements change. Change orders are more common under the DBB method of contracting, where the owner retains liability for changes needed to correct the furnished design.

Concern is often expressed that the owner under DB has limited control over the development of the final design for a project. In a typical DB transaction, the owner develops only a basic description of the project and its requirements, focusing primarily on the performance standards that the completed project will be required to meet and on construction quality standards. While an owner may include prescribed design elements in a request for DB proposals, an overly prescriptive request for proposals runs the risk of negating the transfer of design liability. Thus, the nature of DB requires an owner to relinquish some control over the final details of design development. This makes the development of the performance requirements and construction quality standards for the completed facility in the request for proposals all the more important, because these requirements can serve to dictate the nature of the facility design.

Methods that have been incorporated in the DB approach to see that the project meets the owner’s expectations include the following:

A study of 351 DBB and DB projects asked owners to rate how well the quality met their expectations after project completion (Sanvido and Konchar 1999). Owners were asked to rank the actual performance of the facility versus expected performance. The authors concluded that DB “significantly outperformed” DBB and that DBB, on average, “barely met facility owner/developer expectations” in regard to specific system performance metrics.

The authors of the study examined the factors with the greatest difference between the top and bottom performing projects (Sanvido and Konchar 1999). They found the following to be the critical success factors:

The ability in DB to consider contractor qualifications and the quality of the proposed design in the selection of the design–builder is a key to achieving the prequalification and restraint of the contractor pool noted above. In DBB, the selection of the DBB contractor is driven by the low bid, and there is less control over the quality of the contractor pool. A study of 147 water and wastewater treatment projects found that the owners of DB projects were as satisfied with project quality as the owners of DBB projects (Water Design–Build Council 2009).

A potential disadvantage of implementing a project such as a water or wastewater treatment facility with DB is the lack of a long-term stake on the part of the design–builder in the operation of the facility. Respondents to a request for proposals are motivated by the competitive process to propose the lowest cost facility that will achieve the performance standards. However, the design–builder’s responsibility with respect to project performance effectively ends at the completion of the acceptance test and the turnover of operational responsibility to the owner. Accordingly, while the owner can be confident that the DB process will result in a facility that will pass the acceptance test, the owner retains the risks associated with long-term functionality and operations, maintenance, and repair and replacement costs.

These long-term risks can be mitigated by carefully developed selection criteria, prescribed design elements, and performance standards. However, there are risks associated with these mitigation measures. For example, while the owner can include items such as project operability and life cycle costs as evaluation factors in the selection criteria, there is no way to contractually guarantee such items. The design–builder has no control over project operations following acceptance and will not assume risks associated with long-term operations. The absence of a long-term vested interest in the project on the part of the contractor is also a fundamental characteristic of the traditional DBB method.

The risks associated with project operations are mitigated through the DBB method of project delivery by developing a project design tailored to the owner’s particular operating concerns. However, in DBB the owner ultimately bears the operating risk, as well as the design and construction risks. In determining which method will best serve the owner’s needs, the risks associated with project operations in the DB context need to be weighed, along with the mitigation measures discussed above, against the advantages and benefits of DB. One way to solve the operations risks associated with DB while retaining its advantages and benefits is through the DBO method, discussed in the next section.

A typical service contract incorporates the DB contract provisions discussed earlier and also requires the DBO contractor to operate and maintain the facility for the term in accordance with carefully defined performance guarantees. The service contract provides for the payment of an annual fixed service fee for the performance of the operations and maintenance services, subject to an indexed inflation adjustment factor. In addition to assuming the risks associated with design and construction, the DBO contractor assumes risks associated with project operations, including the risks of project performance and the costs of operations and maintenance. As under the DB method, the typical service contract provides for price, schedule, and performance relief only in the event of carefully defined uncontrollable circumstances.

An owner typically uses the same competitive proposal procedures in selecting a DBO contractor as are used in selecting a design–builder in the DB method.

An owner considers similar factors in developing the project description as considered under the DB method. However, because the DBO contractor will assume long-term operations and maintenance responsibility for the project, prescribed design elements are generally less of a concern. This enables the owner to rely on the performance requirements to generate competition for the most cost-effective design. The DBO method also enables the owner to anticipate changes in future regulatory requirements in developing the operating performance guarantees. Enhanced standards can be included in a DBO contract to capture standards expected to be required in the future.

In addition to the transfer of design liability and the risk of disputes between various subcontractors, the DBO method enables the owner to transfer significant operating risks to the DBO contractor. The DBO contractor is obligated to operate and maintain the facility in accordance with all permit requirements and stipulations. The DBO contractor is ordinarily responsible for all fines and penalties assessed by government bodies and must indemnify the owner from third-party claims. The DBO contractor bears the risks associated with the operation and maintenance of the facility, including the risk that the facility costs more to operate and maintain than anticipated by the contractor in offering its fixed service fee.

In a typical DBO contract, the DBO contractor’s fixed service fee is subject to adjustment only in accordance with an indexed inflation adjustment factor or in the event of the occurrence of carefully defined uncontrollable circumstances. If, for example, the DBO contractor requires more labor for the operation and maintenance of the facility than originally proposed, the associated costs are the responsibility of the DBO contractor.

The DBO method enables the development of an operator-driven design that involves significant attention to project operability. The fact that the DBO contractor will be responsible for the operation of the facility over a 15- to 20-year period helps ensure that the project will be designed and constructed in a manner that will produce a high-quality, operable facility.

There are fewer companies who have the operations capability for a DBO project, which results in less competition than if DBB or DB were used. However, the companies that compete in the DBO industry are strong companies that specialize in providing the services required for a DBO project. These companies often have investment-grade credit ratings, which enable them to provide the financial security required in connection with major capital improvement projects.

In DBO, owners relinquish direct operating control of a critical public asset to the DBO contractor. While the government agency remains the owner of the asset, control of the day-to-day operations is transferred to the DBO contractor. If service issues arise, the owner works within its rights in the DBO contract to address these issues. Thus, it is critical that the DBO contract clearly defines the service responsibilities of the DBO contractor and provides effective enforcement mechanisms for the owner. The owner must understand that it will have a continuing contract administration and monitoring role for the life of the contract.

An important contract element of owner control in a long-term DBO contract is the ability to terminate for convenience on payment of a convenience termination fee without having to prove DBO contractor default. The size of the fee is defined in the service contract and depends on the project size and remaining term of the operations portion of the contract. The convenience termination fee is typically a fraction of the annual service contract fee.

In DBFO, typically no payments are made to the DBFO contractor until the facility has been completed, has passed the acceptance test, and is in full operation. In some circumstances, the owner may find this deferral of cash flow to be a benefit.

As in DBO, an important element of owner control in a DBFO contract is the ability to terminate for convenience on payment of a convenience termination fee without having to prove contractor default. However, in DBFO the convenience termination fee must cover equity, equity return, and outstanding loan balances. Its payment in effect represents a payment for the purchase of the asset. In the event an unworkable relationship develops, the owner needs to raise or borrow the large amount of money needed to essentially refinance the project and end the relationship. This barrier to convenience termination is not present in the DBO method.

The equity sponsor investment and loan repayment are jeopardized if service is not properly provided. As a result, equity sponsor involvement represents an extra layer of diligence beyond that provided by the operating services firm. It also provides a financial cushion to absorb the risk of collecting damages from the design–builder and operating services subcontractor should they fail to perform. However, this collection risk has rarely occurred on dozens of projects implemented by the major operating service firms. In DBO, because the operating services firm is the single point of accountability and has the resources to absorb any reasonably conceivable damage amount, the presence of the project financing parties to take the collection risk may result in a relatively small incremental increase in risk transfer.

Cost savings associated with alternative delivery methods have been reported in several sources. In a comparison of costs for 351 buildings, Sanvido and Konchar (1999) found the DB approach provided an average of 6.1% reduction in unit construction costs with a 99% level of certainty when compared to DBB. Larger cost savings have often been reported for water and wastewater projects.

An analysis of several case studies developed estimates of capital cost savings from five water and wastewater projects that used the DB approach (City of Phoenix 1999). These savings in capital costs from those estimated for the DBB approach ranged from 14% to 43%, with an average of 29.4%.

William Reinhardt, editor of Public Works Financing, surveyed municipal water and wastewater DB projects and reported that the average capital cost savings on 19 projects was 39% (Adams 2003). Public Works Financing also surveyed municipal water and wastewater projects using the DBO method and reported that the average life cycle cost savings of 22 projects was 26% (Adams 2003).

The City of Longmont, Colorado, reported construction cost savings of $2.8 million for a DB water treatment plant project with a $43 million budget, a savings of 6.5% (Black and Veatch 2006). The City of Seattle (2008) estimated that it reduced the construction costs of the new 454 ML/day (120 mgd) Tolt water treatment plant by at least 30% by using DBO and reported a net present worth savings of 47%, including operating cost savings. The savings at Seattle were based on a comparison of the actual DBO costs with a benchmark cost estimate based on a 30% design of the Tolt plant. The 30% design had been prepared in anticipation of using the DBB delivery method before the City decided to change to the DBO method. The project delivered with the DBO method has the same capacity and meets the same finished water quality and reliability standards as the DBB project that had been planned. The benchmark DBB design had been subjected to two value engineering reviews. A lot of thought and creativity had gone into the DBB design, including cost estimates by the value engineering team and a third independent cost estimate. Although the DBO savings are based on comparing an estimated cost with an actual bid, the benchmark cost estimate had been carefully scrutinized.

Seattle also chose DBO for a second water treatment plant, the Cedar River Project, where life cycle savings compared to the benchmark project were reported to be 31% ($50 million savings relative to a $159 million benchmark; Adams 2003). The City of Lynn, Massachusetts, reported a life cycle savings of 45% from the DBO approach for its wastewater treatment plant (“Best Practice: Lynn” 2001).

The City of Phoenix (1999) used the DBO approach for the 303 ML/day (80 mgd) Lake Pleasant Water Treatment Plant. The plant has been constructed and is in operation. Table 1 summarizes the three DBO bids and the benchmark project costs of net present value of design, construction, and 20-year operating costs. The benchmark costs were based on a 20% design. Earth Tech was selected but withdrew because of financial problems of its parent company, Tyco. At the completion of construction by the All American team, final costs were 8.1% below the City’s benchmark costs.

A limitation of extrapolating the savings reported in the above examples is that they compare the actual cost of alternative delivery methods with estimated costs of the project delivered by DBB. The only way to precisely determine the relative capital cost of a project delivered by DBO and traditional DBB is to bid the project using both DBO and DBB. There are very few cases where this has happened. In one case (Washington Borough, New Jersey), the savings for the DB approach were 25% on a $9.9 million wastewater treatment project (Price 2006). In a case in Lee, Massachusetts, involving a 5.6 ML/day (1.5 mgd) sequencing batch reactor wastewater treatment plant, the DBO bid was 35% less than the $21 million DBB bid (A. Cohen, personal communication, May 2008).

In the conventional DBB approach, the construction contractor is usually entitled to a change order if the project is disrupted by the owner’s actions, if project conditions change, or if design problems occur. In the DB approach, the first two occurrences may result in change orders, while the third ordinarily does not. Because the design–builder is responsible for the plans and specifications, it cannot use errors in them to expect a change order. Of course, if the owner changes the project criteria, the need to change the design may result in a change order. A study of 104 public sector DB projects found that cost growth during construction was 3% to 4% (Molenaar et al. 1999). A study of 351 projects found that the cost growth for DB projects was 5.2% less than for DBB projects (Sanvido and Konchar 1999). A study of 147 water and wastewater projects found 38% of DB projects finished on or under budget versus only 20% for DBB projects (Water Design–Build Council 2009).

In their study of 351 projects, Sanvido and Konchar (1999) found that DB had an overall delivery speed that was 33.5% faster and construction speed that was 12% faster than DBB. They also found that DB had 11.4% less schedule growth than DBB. A study of 147 water and wastewater projects found that DB projects had less overall schedule growth than DBB projects and that more DB projects were completed on time or early (Water Design–Build Council 2009). Examples from the water and wastewater treatment field confirm that substantial time savings can be achieved. Seattle completed the 120 mgd Tolt water treatment plant in 30 months after executing the DBO contract. Similarly, San Diego completed the 100 mgd Twin Oaks water treatment plant within 30 months after executing their DBO contract. Under DBB, one would expect 100 to 120 mgd plants to require at least 39 months (at least 12 months for design, 3 months for bidding, and 24 months for construction). Spokane County had construction underway on a $130 million water reclamation plant 5 months after signing a DBO contract.