Most large airports face or will soon face the need to complete a major construction project while maintaining airport operations. Owners don’t have the option of closing the airport for an extended period of time, so they face the dilemma of balancing ongoing construction with the demands of the traveling public.

What is the best way to achieve this delicate balance in light of the multitude of alternative construction project delivery systems? You’ll have to consult your favorite swami for the answer to that question, but in this article you will read about what PB did to enhance a client’s existing project delivery system.

Construction Manager/General Contractor

The Port of Portland has been using successfully a form of cost-plus-fixed-fee contracting called construction manager/general contractor (CM/GC) as the preferred construction contract format for major capital improvements to the Portland International Airport. This project delivery system involves using a quality-based selection process to choose a contractor, bring the contractor on during design and negotiate a cost-plus-fixed-fee contract for the work prior to design completion. CM/CG offers several advantages. It has:

• Provided the port the flexibility and adaptability it needs to respond to emerging and changing customer requirements in a dynamic, time-critical operating airport environment.
• Allowed the port to start a design, then bring in the construction contractor at an early stage before design is completed to participate in and help to shape the final design.
• Given the port the opportunity to start construction on a project before the entire design is completed.

The drawback to the CM/GC form of contract is the “cost plus” nature of the contract. How can the owner control and minimize cost?

Portland International Airport

Controlling Costs

Guaranteed Maximum Price (GMP). In an effort to control cost, the port has coupled the cost-plus-fixed-fee CM/GC contract with a GMP, which provides a “cap” for the cost of the project. The port pays all costs up to the GMP, and the contractor pays all costs over the GMP.

This cap provides some measure of cost control for the owner but there is no direct, overall incentive for the contractor to minimize costs or stay on schedule. This is because the contractor will be paid for all costs incurred up to the GMP and any savings under the GMP accrue to the owner.

The port has generally had good results with CM/GC but wanted to add an element to the contract that would provide an incentive for the contractor to exceed the performance typically expected of a quality contractor.

Traditional Incentives. The port had used traditional monetary incentives on previous CM/GC contracts with mixed results. These incentives generally rewarded specific, measurable performances and the rewards were tallied at the end of the job. The port’s incentives had been tailored generally to rewarding contractors for:

• Early completion. The early completion incentives seemed to foster questions during construction as to whether the port or its contractors were responsible for causing delays, and they resulted in negotiations for additional time if changes were made in the planned sequence of construction.
• Exceeding pre-established safety standards. The safety incentive sometimes frustrated a safety-conscious contractor who had a minor accident despite a superbly implemented safety program, or frustrated the owner’s safety manager when a contractor with a less-than-stellar safety program had no accidents.

The goal of using a CM/GC contract was to select a quality contractor and create a team that worked together cooperatively, was flexible and adaptable, and responded to changes required to accommodate the needs of the traveling public without engaging in laborious negotiations for minor changes. The traditional incentives just didn’t seem to fit well in the CM/GC contract format, however.

Children playing on a bronze inlay of the Columbia River in the new concourse of Portland International Airport

South Security Lobby of Portland International Airport

A New Incentive System

For solutions, the port turned to PB, which had been hired to provide construction program management support. We developed a new incentive system to overcome the shortcomings of the traditional incentive system. It included the following elements:

• Periodic evaluations and rewards
• Rewards for behavior, not outcomes
• Subjective evaluations
• Owner as the final deciding authority.

This incentive system was inserted into the current CM/GC contract for expansion of the existing terminal and demolition and construction of a 13-gate concourse. The contract:

• Established an incentive fee (expressed as a percentage of the original GMP), the number of evaluation periods and five evaluation criteria (listed below)
• Required the port to establish the amount of the total incentive fee “pool” that would be available for each evaluation period
• Provided flexibility for the port to weigh the five criteria for each evaluation period, with the only requirement being that the port let the contractor know what the criteria weight would be at the start of the evaluation period.

Having the flexibility to determine the amount of incentive fee and the weight of the evaluation criteria gave the port the ability to have each evaluation tailored to the particular phase of construction. For example, the initial evaluation could be more heavily weighted to the criteria associated with getting started—such as team building and planning—while subsequent periods could focus more on safety, cost control and schedule control.

The Five Evaluation Criteria. The criteria were established to reward behavior, not outcomes—the rationale being that if the behavior is correct, the outcome should be positive. The five criteria are the effectiveness of the contractor’s:

• Efforts to minimize disruption to airport operations, passengers and tenants
• Implementation of a safety program
• Management of the construction schedule
• Management of costs
• Team-building efforts.

For example, instead of the traditional criteria of providing a reward for completing so many days early, the schedule control criteria focuses on whether the contractor is proactively looking ahead, anticipating problems and taking timely action to avoid schedule slip. Likewise, the safety criteria evaluation focuses on the implementation of the safety program, not whether or not the contractor got lucky and had no accidents.

Evaluation Process. The five criteria are subjective, so how are they evaluated? A three-member committee comprised of port representatives does the evaluations. The port’s project manager and the contractor’s project manager each prepare an evaluation (limited to one page per criteria) of the contractor’s performance against the five criteria for the evaluation period under consideration. The port seeks input from various interested parties, such as the airport operations staff, in preparing its evaluation report. The two project managers’ reports are submitted to the evaluation committee and exchanged between the two project managers. The two project managers may be asked to make a short presentation to the committee and respond to questions.

The committee evaluates the contractor’s performance and makes a written determination as to the amount of available incentive fee the contractor is to receive for the evaluation period under consideration. The committee’s determination is final and is not subject to appeal or review. The contractor is paid the earned incentive fee with the next monthly progress payment. Any unearned fee is lost (retained by the port) and not available to the contractor in subsequent evaluation periods.

Contractor’s Response. The contractor was enthusiastic about the incentive fee provision and during the negotiations of the CM/GC contract agreed to add a portion of his fixed fee into the incentive fee pool of funds. The port contributes 75 percent of the incentive fee pool and the contractor contributes 25 percent. This means that if the contractor receives an award (grade) of less than 25 percent in any evaluation period, the contractor will be paying the port.

Light Rail Station at Terminal Expansion

Update

The contract has been under construction for twenty-nine months as this article goes to press. We have concluded five of the seven incentive fee evaluations periods and the contractor’s average award has been approximately 84 percent.

The process has proven to be a valuable communications tool for the project team. It has been especially beneficial in that there has been no animosity between the port and the contractor. We have noted that in many instances the contractor was more critical of his performance than the port was.

The system has also provided a valuable means to focus the contractor on issues that the port feels are significant. One such example was that during the first evaluation period the contractor’s safety program did not appear to be as effective as the port thought was necessary to ensure success on a very critical phase of the work. The contractor was going to construct a large canopy structure over the airport’s upper roadway (for departing flights) during that phase while keeping passenger access to the terminal open. Because of the concern for safety, the contractor’s performance was noted in the evaluation, and the percentage (weight) of this criterion was raised for the subsequent evaluation period. The contractor altered his behavior, focused on this issue and the critical construction sequence was handled superbly.

The incentive fee structure provided the flexibility to change the weighting of the criterion to fit the construction phasing and provided an opportunity to alter one of the criterions. Quality was implied in all of the criteria originally, but we found that we were identifying quality issues as we evaluated all of the various criteria. In response, the contractor, suggested that we create a criterion that dealt with quality only to avoid “watering down” valid criteria. We changed the team-building criterion to “Effectiveness of the Contractor’s Quality Control Program” before the fifth evaluation period.