Thought Leadership

Six Steps to Choosing the Right Project Delivery Method

Category: Thought Leadership
Carrie Okizaki • November 30, 2021

Large capital projects are carried out through a set of contracts. Together, these contracts form an interlocking system of rights and obligations that govern how the parties involved in the project work together and keep the project on track. The project delivery method determines how the parties in the construction project will be organized, when and how they will be involved in the decision-making, and which party is responsible for certain obligations and risks.

There are several different types of project delivery methods that are typically used for capital projects, including: Design-Bid-Build, EPC, Multi-Prime, Construction Manager at Risk, and Integrated Project Delivery. There are also variations of each of these methods so that a specific project delivery type can be modified to better fit the project and the risk tolerances of the parties involved.

Project owners have a variety of ways available to them to choose the right project delivery method, but often, this decision is not made based upon a formal, documented decision-making process. It could be that a particular method has worked for the organization in the past, or that current market trends favor one method over another.

However, it’s important to choose a contractual and compensation framework that best fits the project at hand. Projects vary greatly in scope, complexity and level of risk, so what’s good for one will not be well suited for another, even when they are undertaken by the same organization.

To determine the project delivery method that brings the best chance of completing a successful project, owners and contractors should bring stakeholders together to identify key project considerations: what does project success look like, and what are the factors and risks that could get in the way of that success?

Involving stakeholders in this process at the outset will help owners determine the best way to support the project through a framework that helps minimize disputes, clearly define responsibilities, and allocate risk properly. Project success is often evaluated years later, so it’s also important to understand and document the information that was known and understood at the time key decisions about the project were made.

The following series of steps can help owners arrive at a strategy that best aligns with the project at hand:

1. Identify the project’s key objectives

At the outset of any project the owners must determine how to define success. The project’s key objectives must be identified, agreed upon and documented by the stakeholders.

While agreeing on project objectives sounds simple, careful consideration of this step is often overlooked. Meeting the project’s budget and schedule are obvious objectives, but there are often other business objectives that may be just as important. A plan to build a single facility will have different objectives from a plan to build the first of many. Projects that are the first of their kind may deviate from initial cost estimates but may ultimately be successful for other reasons.

It is also important to define the long-term value that the project brings to the owner and all of the stakeholders. In this view, the impact of a cost or schedule overrun may not be as important when the entire value of the asset is understood.

2. Identify the project’s constraints

Owners must then identify the project’s constraints – the factors that could hamper the team’s ability to achieve the chosen objectives. Some constraints are general, such as workforce availability and market conditions. But others will be unique to each project. Some examples of project constraints include:

  • Timing and availability of funding
  • Experience/availability of contractor pool
  • Market conditions
  • Project location
  • Regulations/regulatory or governmental oversight

3. Identify and assess the primary risks faced by the project

A comprehensive risk analysis is a critical part of developing a complete understanding of the project and its constraints up front. It’s important for all of the team members to have a realistic view of not only the risks within their own areas, but also how risk within each area has the potential to impact others.

Additionally, the risks should be scored and prioritized based on the risk tolerance for that organization. For example, some companies view reputational risk as a higher threat than others. As a result, such risks will be evaluated differently within the context of determining the contracting methodology and project delivery type.

As part of this process, project owners will need to determine how complex the project is expected to be, based on factors such as size, duration, scope, number of stakeholders, how much technology will be incorporated, any new or innovative processes that will required, and how teams will collaborate across functions. A more complex project will, of course, have more risk associated with it.

A Quantitative Risk Analysis (QRA) may also be performed by the project team prior to determining the project delivery method. Utilizing Monte Carlo simulations helps participants analyze different scenarios to see a whole range of outcomes. Even at a very early stage of the project, the information gathered by the QRA can provide some financial and risk parameters that can be used in the decision-making process. Each project delivery type can mitigate certain risks better than others, so understanding the project risk profile will help ensure that the best project delivery method for the project is chosen.

4. Determine how the project’s scope is to be allocated

Completing these initial analyses will also help project owners decide how the work should be allocated. Based on the technology used, contractor availability and the expertise available to the project owner in-house, owners will now need to determine which contractors will perform which functions, and how those functions will work together.

Projects do not necessarily need to utilize only one project delivery model. Depending on the size and complexity of the project, it may be more advantageous to perform certain scopes of the project under different project delivery models or contracting types.

As an example, very large megaprojects may be too big for a single contractor to perform under an EPC methodology—or it may significantly reduce competition to put the owner at a negotiating disadvantage. Additionally, parts of the scope may lend themselves more easily to a fixed-price contract vs. a cost-reimbursable contract.

Additionally, the project team should perform a self-assessment on the organization’s capabilities (strengths and weaknesses) with respect to the different parts of the project planning and execution. This is needed to determine how the scopes can realistically be split (the more the scope is split, the more the owner will need the ability to manage the day-to-day execution and interfaces between contractors).

5. Decide which contractual framework suits the project being proposed (and why)

Armed with the information from the previous steps, owners are now ready to determine the appropriate contracting framework from the many types of contracts available, such as construction only, design build, or contractor manager models.

This can be done either in an informal manner, or through a formal decision analysis. A typical decision analysis will provide weighted scoring to each of the project constraints, objectives and risks, and analyze how they may be impacted by each of the project delivery methods. This results in a decision that is based on an objective score that reflects how well each method is likely to perform on a specific project.

As an example, if a significant project constraint is the inexperience and limited capability of the owner organization to manage large projects, the decision analysis will produce a lower score for a multi-prime methodology, which places much of the organizational burden on the owner.

6. Decide which compensation framework suits the project being proposed (and why)

Alongside the contractual framework, the choice of how to compensate the parties also has implications for delivering on a successful project. The two elements are overlapping and interrelated.

Compensation models set out the pricing for the various services. But they also provide a way to allocate risk to the parties involved, defining the scope of the services to be provided and including provisions for managing change and providing indemnity.

It’s important to tailor the terms to the individual project. For example, using a lump sum compensation model – where a contractor delivers the services for an agreed-upon price – works best when a project is well defined and unlikely to incur significant changes.

It’s tempting for any project owner to skip these steps and jump straight into a project. But methodically involving stakeholders up front in defining the key objectives and constraints – and tailoring the project delivery to those considerations – can meaningfully contribute to the success of the project.