Early Subcontract Bidding on GC/CM Projects

It’s been a little over a year now since the July 1, 2007 effective date of a revised Washington State law for General Contractor/Construction Manager (GC/CM) contracting (chapter 39.10 RCW).

One of the more untested and potentially risky provisions of the new law provides that a public owner may, at its option, authorize the GC/CM “to proceed with bidding and award of bid packages and construction before receipt of complete project plans and specifications. Any contracts awarded under this sub section shall be incorporated into the negotiated maximum allowable construction cost.” (RCW 39.10.370 (3))

What this means is that the GC/CM would be conducting subcontract bidding for work with incomplete plans. In addition, the owner and the GC/CM would not have yet negotiated the cost of the work. An owner may want to pursue this route in order to meet a tight schedule for the project. In addition, there are advantages to having major subcontractors on board early to work with the GC/CM on pre-construction services with the GC/CM. Prior to embarking on this course, however, the owner should have careful discussions about the potential risks of such an approach and how to manage and mitigate against them.

One potential risk is how to manage the cost risk of increases in the subcontract amount until the time the plans and specifications are fully developed. Who should bear the risks for such cost increases: the owner, the GC/CM, the subcontractor, or a combination of the three? It all depends how complete the subcontract bidding documents are, what assumptions are placed on the subcontractors, whether the owner adds new work during the finalization of the documents, etc. It’s a complicated question that requires careful thought about how to fairly manage the risks.

Another risk for conducting early subcontract bidding and awarding the work and having construction begin prior to successful negation of the Maximum Allowable Construction Cost (MACC) is how to handle the possibility that the owner and GC/CM may not be able to negotiate a MACC. Under this scenario, the owner would have a partial MACC contract with the GC/CM, work may be progressing, and the owner may then need to select the second highest ranked GC/CM for the rest of the work or put the remainder of the work out for bid.

In contracting for early subcontract bid packages with the GC/CM, the owner will need to include a percentage of the costs previously bid by the GC/CM for “Fixed Amount for Specified General Conditions” work. The owner will also need to apply the Percent Fee (also bid by the GC/CM) to the portion of the “mini-MACC” resulting from the early subcontract bidding.

Early subcontract bidding, award, and construction has its place, but the owner must be very thoughtful and savvy in managing the potential downsides of such an approach. It will be interesting to see the results of some owners as they explore this new option under the law.