One of the questions frequently asked by owners is how and when to use “earned performance fees” in water and wastewater design-build projects. In this context, earned performance fees are defined as monetary benefits established to attain a specific achievement or goal.
The use of earned performance fees with any delivery method can be a powerful tool that helps both the owner and design-builder to better align accomplishing the project objectives. However, in a design-bid-build project, the intent of earned performance fees is often to drive innovation, collaboration, schedule, and cost savings, which are all hallmarks of design-build delivery. This begs the question: Why use earned performance fees for design-build delivery projects? One of the answers is: When earned performance fees are used with a design-build delivery project, it further stimulates maximizing innovation, collaboration, schedule, and cost savings – well beyond what can occur in the limited design-bid-build process, since much of the contractual arrangements are already locked in once the project goes out to bid.
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For example, on one recent project, an owner offered the design-build team an earned performance fee totaling less than 2% of the project value. This earned performance fee then tracked the progress of the project by using evaluation forms that rated everything from schedule, to safety, to owner design input. The fee was paid out in five equal installments throughout the project, with the last payment being one year after substantial completion.
On projects where owners are concerned about having additional design input, the use of an earned performance fee gives the design-builder encouragement to seek owner input over the planned process. In this scenario, while the contractor did receive the entire earned performance fee, they also needed to spend a portion of the fee to maximize the fee. These extra resources went toward additional services such as incorporating owner requested design features and staff overtime to meet schedule milestones that were required to meet the fee guidelines. In addition, the owner stated in the RFP stage that they would consider the project a success if the entire earned performance fee was paid in full.
So, when is an “earned performance fee” different from an “incentive?” An earned performance fee needs to be significant enough to get the design-builder’s attention, but just a small percentage of the project cost can go a long way toward further motivating a team. Many times, a well-defined earned performance fee can result in cost savings or additional scope well beyond an incentive cost. Ideally, the earned performance fee becomes a score card, further stimulating the team to maximize their overall performance, for pride as much as for the actual monetary reward. When the design-builder shares the earned performance fee with key staff, subcontractors, and consultants, everybody gets on board. This internal action not only drives the team to maximize the earned performance fee, but also to keep team members in check that may jeopardize the incentive.
For projects where every scheduled day of work has true costs, owners should tie the earned performance fee to accelerating the schedule. Sharing the true costs of schedule delays with the design-builder and incentivizing early completion will drive true innovation and ultimately lead to project success.
The bottom line: When considering design-build delivery for a project, owners can attain greater value by exploring the option of investing in earned performance fees to maximize innovation, collaboration, schedule, and cost savings - and get more bang for their buck.
With over 20 years of experience in the construction industry, Doug Wachsnicht has led dozens of water related projects from budgeting to closeout, totaling hundreds of millions of dollars. Doug has been a key member of Goodwin Brothers' third generation and recently guided two of the first municipal design-build water projects in the state of Missouri.