A NEW STUDY released by a conservative think tank says schools built in Massachusetts under a relatively new construction approach cost taxpayers far more than similar projects built using the traditional lowest-bidder method.
The report from the Beacon Hill Institute at Suffolk University, using data from several state agencies on nearly 100 school projects, said those built using the so-called Construction Manager at-risk method cost $26.49 per square foot more than those projects built with the design-bid-build approach, which had been the approach for decades until the Legislature changed the law to add more options in 2004.
“In sum, there is evidence that the CM‐R method has increased the cost of school construction in the Boston area since 2005,” says the report. “Officials at both the state and local level should be aware of the higher costs associated with the CM‐R method when planning and building future public schools.”
Paul Bachman, an economist and the director of research at Beacon Hill Institute, said the study looked at 96 school projects, both new construction and renovations, undertaken between 2007 and 2014, with 44 built by Construction Manager at-risk and the remainder built by lowest-bidder. Bachman said many of the Construction Manager at-risk projects did not have final costs available so he compared only the fixed construction costs – what would be termed bid prices under the traditional approach – between the two methods.
Bachman said he is “99 percent confident” that the report’s conclusion of the $26.49 difference per square foot is valid for new construction and renovations, mainly smaller projects, such as those under 140,000 square feet. Bachman says the difference is not as stark in comparing renovations under the two methods.
“The statistical analysis shows it’s pretty consistent with the fact that they would be more expensive, more costly” using Construction Manager at-risk, said Bachman. “It holds for new projects, not as much renovations. New projects tend to be more expensive than renovations.”
The study comes as more attention is being paid to the way public construction is being performed in Massachusetts. In 2004, with the cost of constructing school buildings skyrocketing and delays and changes running up the price, lawmakers, state construction officials, local governments, and private contractors agreed on a plan that allowed state and local agencies to use the Construction Manager at-risk method.
The goal was to introduce cost certainty into construction and minimize changes that stemmed from contractors low-balling their price, then adding changes to recoup lost profits. The new method required a “guaranteed maximum price,” after which the construction manager would be responsible for overruns that were not approved by the public agency.
CommonWealth compared construction approaches in its summer issue and came to similar conclusions. The new approach did not appear to save money and, in fact, construction managers often continued to receive approval for changes to the original design that ran up the cost. In addition, with the new method, a contractor and architect are hired based on qualifications and then the contract price is hammered out, giving the contractor leverage in price negotiations.
The MBTA’s Green Line extension used a method similar to the Construction Manager at-risk approach. Officials said the approach used on the Green Line, called Construction Manager- General Contract, was not designed properly and implemented poorly, contributing to the project’s run-up in cost by more than $1 billion. The T abandoned that approach and may try to build the project using the design-bid-build method of soliciting bids for each section.
Bachman said the study’s “CM-R effect” – the difference in cost between the two different approaches – can be attributed to the fees for the construction manager and the “contingency” budget that is allocated for potential changes to the projects. Bachman said in nearly all the cases, the full contingency amount was expended and those two line items are the difference in costs.
“When we pull those out, the effect disappears,” he says.
Construction industry experts say the Beacon Hill Institute study is incomplete and fails to take in many of the intricacies involved in public construction. They say the report acknowledges that final costs were not used in determining the comparisons, a flaw that undermines the results.
“Cities and towns know what they are getting with (Construction Manager at-risk) and go into it with eyes wide open,” says Robert Petrucelli, president and CEO of the industry group Associated General Contractors of Massachusetts. “We never sold this process. It was never billed as cost saving. Construction Manager at-risk is more suited for complex larger projects. They’re just comparing initial costs.”
Joel Lewin, a partner at the law firm Hinckley Allen and head of the firm’s construction law division, said the study’s conclusions, absent final costs, are like “trying to determine who the best marathoners are by looking at their times after the 13.1-mile mark.” Lewin said the alternative approach is favored by government agencies because of the capped prices. He said the traditional method often resulted in costly litigation that, on balance, made the final costs of both comparable.
“Over 90 percent of the projects that we do are design-bid-build,” said Lewin. “There are substantial disputes, substantial change orders under that scheme that have kept us busy for 40 years. You have to look at the cost of disputes, then I think the costs of CM at-risk are not materially different than design-bid-build. If you look at 40 years of history of design-bid-build, there is a fair amount of shoddy workmanship that schools experienced over time because contractors were aiming for the lowest possible price.”
Bachman said he’s confident that when the final tallies are available, the results will still hold true. He said state and local governments should not abandon the alternative method for large or complex projects, but not use it on the growing number of smaller ones.
“I think it sheds light on a new construction process and it starts the conversation that, is this new process, in fact, favorable to the taxpayers and favorable to the public owners?” he said. “We conclude it’s more expensive.”
