At Risk, Yeah Right
(An excerpted version of this article was published by the National Association of State Facilities Administrators (NASFA))
"At Risk"? Yeah, Right.
Construction Management "At-Risk", a misnomer if there ever was one.
CM At-Risk (or CM/GC) is the project delivery method where the contractor gets brought on board, typically during the design process, based on any number of different criteria, with the promise of going "at risk" later. "At risk"? Yeah, right.
How many projects ever come in below the original budget, without a "value engineering" effort that rips the guts out of the program? How many projects are done within the original schedule without some huge premium being spent to make up the time lost during this great delivery method that was supposed to save time in the first place?
What risk was the CM "At-Risk" taking? Each time the design team produces an updated set of drawings, the so called at risk construction manager inevitably comes in with a budget that is higher than the previous one. Then, after helping the team through a time consuming analysis, the "at-risk" CM informs the team that much of the money that's been saved from the value analysis will be offset by the premium that must be spent on overtime and acceleration to make up for the time that was lost going through the value analysis!
What does the "at risk" CM do at this point? Does he pay any of the additional costs? Does he cover the premiums to make up for the lost time? No. The "at risk" CM looks to the Owner and politely informs him what the costs will be. He also informs the Owner what the additional time he will need unless the Owner is willing to pay the premium to accelerate the schedule.
Where's the risk?! I don't get it.
A dark view of CM At-Risk, I realize, but unfortunately, not an entirely uncommon one. No wonder so many Owners are skeptical about the CM At-Risk delivery method. Something just did not make sense. That is until I found someone who could explain it to me. Here is what he told me, "It depends on your definition of 'at risk'." He went on...
It Depends on Your Definition of "At-Risk"
He started by pointing out that definitions of CM "Agency" do not vary too much, and the industry generally has a consistent definition for CM "Agency". Sadly, he told me, this is not the case with CM "At-Risk". Everyone has formed their own definition of CM "At-Risk". He mentioned efforts by associations like the Associated General Contractors of America that are helping to lead the way with their efforts to clarify CM "At-Risk", but he admits CM At-Risk is probably still the least understood project delivery method.
He said to begin to accept how some people are using the term CM "At-Risk", start by taking a close look at the words "at" and "risk". Something as simple as straightening out how people look at these two words could clear up so much of the confusion. As with so many other things, what the words "at risk" mean to you depends on your perspective.
To begin to accept how some people are using the term CM "At-Risk", start by taking a close look at the words "at" and "risk". Something as simple as straightening out how people look at these two words could clear up so much of the confusion.
He told me that most people would look at the term "at risk" in one of two ways:
- The contractor taking the risk for the cost of construction and/or the schedule (usually at the time they are hired), or
- The contractor taking the performance risk or delivery risk (the risk of delivering the scope of the project)
He felt that many who have spent most of their career in the industry using a traditional "low bid" perspective, likely fall into the first category. They most likely associate the words "at-risk" with the contractor taking the "cost and/or schedule risk" at the time the contractor was hired. Thus, he said, they might find themselves asking the question, "What risk? What risk is the contractor taking when we bring him on board early in the process when he is not really guaranteeing anything? The contractor does not really guarantee the cost or schedule for a design that is not complete." (Wow, he really seemed to understand.)
There is, however, another perspective, he said. In the second definition, the term "at-risk" is referring to the fact that the contractor, or CM will hold the trade contracts and will eventually assume the risk for successfully delivering the project. Consider the difference of CM At-Risk to CM Agency (CM "Not At-Risk"). The CM "At-Risk" will hold the contracts with the trade contractors, the agency CM will not.
He continued to explain, the existence or timing of a guaranteed maximum price or a schedule guarantee may affect the amount of risk the CM At-Risk has, but he is still contractually responsible for the successful completion of the project.
The existence or timing of a guaranteed maximum price or a schedule guarantee may affect the amount of risk the CM At-Risk has, but the CM At-risk is still contractually responsible for the successful completion of the project.
There are situations where there is no guaranteed maximum price or schedule guarantee, but the CM is holding the trade contracts. Is this still CM "At-Risk"? Yes, if you are using the second definition of "at risk", the performance risk. He commented that to deal with this situation, many have begun to use the term CM "At-Low Risk" to describe this delivery method. (Or, perhaps to avoid the confusion entirely, this may be why many, including Associated General Contractors of America, prefer the term "CM/GC" over CM At-Risk altogether.)
In addition to the performance risk, he added, is the reputation risk that the CM At-Risk has. His ability to provide accurate estimates and timeframes, and then deliver a quality product safely within them, will be judged. This track record will become part of his reputation to be considered the next time his past performance is evaluated as part of his qualifications. Though these risks are not as tangible as the cost and schedule risks that the contractor assumes in the design-bid-build delivery method, they are real.
It is the second definition of "at risk", the contractor taking the performance or delivery risk, that allows the term CM "At-Risk" to work in most contexts, he concluded.
Based on this, CM At-Risk (or CM/GC), in its simplest form, is defined by two separate contracts (vs. Design/Build which has one) and the CM holding the trade contracts (vs. CM Agency). The existence of a cost and schedule guarantee is typical with CM At-Risk, but are not a requirement of CM At-Risk.
I must admit he made sense. If you too are struggling with the term CM At-Risk primarily because you cannot get past the "What risk?" question, then consider the two perspectives on the term "at-risk". The CM At-Risk still will not be taking the risk you think he should, but perhaps it won't bother you as much.
Michael Kenig is Vice Chairman of Holder Construction Company. He has written several articles on successful project delivery and serves on the Associated General Contractors Association's (AGC) committee on Project Delivery. He holds a degree in Construction Engineering and Management from Purdue University. |