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Knox County School Costs Probed: Part IV- 21st Century Innovative Delivery Methods.

by Sanford Loy

If you are hanging with me through this series reviewing the costs of school construction in Knox County…I want to thank you and also commend you for your endurance and determination to learn about this topic. I have previously addressed “Are we comparing apples and oranges”, and “Waste inherent to the design-bid-build project delivery method.”

This week I am going to discuss a progressive 21st century method for construction projects; which has proven to be the most cost effective method for public building. It is called Construction Management Agency (CMa). CMa is the methodology of choice supported by the Construction Management Association of America; which is the institute which certifies construction managers (CCM) which is accredited by the American National Standards Institute.

Coincidently, or maybe not…I was asked to address the Knox County Commission last week to answer their questions about the costs of schools. Commissioner Bud Armstrong invited me to discuss new methods because as he said, “It is not just school costs we need to think about but the costs of ALL public buildings.”

After I reviewed the CMa method with the commission, Dale Smith, the Director of the PBA, addressed the commission and made a couple of misleading statements; one trying to defend the cost of Hardin valley Academy, the other attempting to discredit the CMa method.

I think it is prudent to note that 2 years ago I sent Mr. Smith a certified letter containing my thoughts on how HVA was built and requested an audience to discuss our conflicting viewpoints on construction methodology. He did not respond to me but instead sent a letter to the entire County Commission attempting to minimize the points in my letter without so much as a phone call to me, a note or even copying me on the letter he wrote commission. That said; let’s get back to the more recent discussions…

During the meeting four people with school construction experience addressed school cost issues and in the process a couple criticized the PBA in varying degrees. When asked if he wanted to comment on the criticisms, Mr. Smith said this: “It is laughable to suggest that the Mayor of Knox County would allow us to award contracts without bidding them. I also encourage the commission to consider when forming the proposed committee to ask a faculty member from the School of Architecture to be on the committee because “they” consider CM at risk and Design-Build as the preferred methods for both private and public projects… CMa doesn’t even come up on the radar. While CMa has savings inherent to it, it also creates significant additional risk for the owner.”

Let’s address each of his “points” one at a time:

1. Despite Smith’s vague answer, the county mayor DID allow the PBA to award contracts on HVA without bidding and I don’t find it laughable at all. While Smith’s patronizing verbal denials may comfort some, it neither comforts nor convinces me. I know for fact that Shoffner Mechanical and Blount Construction are just two contractors which were awarded contracts after “interviews”, before drawings were even completed! I have asked Smith for proof that I am wrong for 2 years and have yet to see it.

2. Now as for methodology, I read to the commission directly from a copy of a Bill signed into law on June 20, 2002; which amended TCA Section 49-2-203(a)(4)(C)(ii) relative to construction of schools and construction management. It clearly prohibits CM at risk and design-build because they are not transparent. While those methods work fine in the private sector, they are not allowable under state law for schools. The CMa method on the other hand, is compliant with ALL state laws, because it is 100% transparent.

3. As for the School of Architecture, I graduated from the UT School of Architecture in 1976, with Honors. I also have a Masters Degree in Engineering from UT and 33 years experience and am a Certified CM. Interestingly enough, I have recently been contacted by the School of Architecture and asked to meet with the Dean to discuss construction methods and how to better educate the students about these new progressive methods; such as the CMa method. I don’t think Mr. Smith has the authority or expertise to make a policy statement on behalf of the School and I believe his statement was another attempt to “change the subject.

4. He asserts that CMa creates “significant” additional risk for the owner, and this is simply not true.

The fact is that the CM at risk, Design-build or the design-bid-build methods all cost more for the bonds which protect owners against risk. These methods supply the owner one bond covering lack of performance by the GC. The little known fact is this: the GC bonds the subs and those costs are legally included the cost of the work! This is a duplication of cost for the owner, but the GC and his bond company are the ones protected, at the owner’s expense.

In addition, consider this, should a sub fail to perform, is the GC going to wave the flag when it may expose his own bond? On the other hand, with CMa, each sub becomes a “prime contractor”, the CMa manages them for the owner/county and secures a bond for EACH OF THE PRIME CONTRACTS; so the owner pays for one level of bonding, not two. Furthermore, if a (sub)contractor doesn’t perform the CMa is not hesitant to point it out because he doesn’t have his own interest to protect. The CMa’s sole interest is to advocate for the owner/county.

Conversely, a GC is conflicted by protecting his price, his liability exposure, his bottom line profit, and his bond rating. The “risk” Mr. Smith refers to with CMa is simply non-existent. These type of misleading statements are a commonly used by people who don’t want to use the CMa method for their own benefit or they don’t understand the way the process really works in detail.

The CM Agency method is the most progressive method used in major markets across America…because it works. The reason is simple mathematics and common sense. The process eliminates the General Contractor, and the associated cost of the GC’s overhead related to handling the money. When cash flows through a construction business, even when passed on to vendors and subcontractors, there are many fixed costs associated with that cash flow; which is contractually categorized as cost of the work to be paid for by the owner. Just the gross receipts tax, liability insurance, worker’s compensation and bonds alone can cost up to 5% depending on the contractor’s insurance and bond ratings. Add to that the lost opportunities of getting ALL the low prices from every subcontractor; which is realized in CM Agency (see Part III)…and the GC bid method can cost you another 5-10%. That’s an additional 15%... just due to the process.

This is more than a theory, it has been proven. Claiborne HS was originally estimated by the architect to cost $19mm, this was based upon the historical data available at the time for schools being built using the traditional GC bid method (as discussed in Part III). Using the CMa method, CHS cost $17.4mm, soup to nuts, all the fees, all the change orders. That is more than a 9% savings from the based upon GC bid data. These sorts of results were repeated or exceeded at Cumberland Gap High School, Chuckey-Doak High, Mosheim Middle, Sweetwater Primary… you get the idea.

As I demonstrated in Part II, comparing “apples and apples” in construction is complicated… but let’s try it. We have several known facts; one is that Claiborne HS has now been certified by the Knox County facilities manager Doug Dillingham as being up to Knox County construction standards. This allows us to make a fair comparison if we compare the respective sizes with the prices paid. Claiborne is about 160,000SF, HVA about 250,000, Claiborne cost $17.4mm, HVA $50mm, which means Claiborne cost $110/SF, HVA $200/SF. Now, even if we add in the additional cost of the DBB process as shown above, HVA could reasonably have cost up to $132/SF. Still a long way from 200…let’s throw in Mr. Smith’s excuse that HVA was built post Katrina when materials were exorbitantly high…how much higher? While in 2005-06 a few specific materials, such a gypboard, were inflated… the impact on a project of this scale would have been modest. That said, a “Katrina factor” of 15% is high, but for this discussion let’s use that figure. That would inflate an already inflated number for HVA to $150/SF. Still not there…let’s add in PBA’s fee and 10% for bureaucratic inefficiencies… that gets the number to $167/SF! Geez, I’m still 20% short…I can’t get it to $200/SF with gold plated faucets! Commissioner Pinkston asked for my opinion about HVA costs, I stated. “I can explain $27mm, even $32-33mm, and in a stretch $40mm as a worst case “everything went wrong” scenario….but $50mm? I can’t explain it.”

I understand why GC’s don’t like the CMa method. There is no place to find additional profits. The total transparency means your fee is your fee, period. As a result of this series I had one competitor call and accuse me of being “like the magician who gave away the secrets to all the tricks!” He wasn’t happy.

What I am mystified by is the lack of interest by any government body to explore the CM Agency method as a project delivery system. Why would they not be interested in finding out the details of this method and try it once to see if it works as described. What do they have to lose? It has to be an improvement and history suggests it will deliver any public project for the best possible price, with the biggest bag for our buck.

Last but not least, the CMa process is something the public can believe in because it is totally transparent! Considering the lack of confidence the public has in government today that alone should make it worth trying.