March 16, 2010

CUES' Credit Union Management's online-only "Facility Solutions" column runs the third Tuesday of every month. In each installment, author Paul Seibert, CMC, answers a question posed by a CU leader during research for CUES Complete Guide to Credit Union Facilities.

Q: Should we hire a design/build firm or a local architect and contractor for our new branch or headquarters project?

Building branches and headquarters facilities is expensive and can be risky. Every CEO wantsto build the best possible facility at the most reasonable cost while mitigating risk to the credit union and their insurance carrier. Is it best to hire a local architect and then use an open bid or negotiated bid approach? Should we use a local design/build contractor and hope they can learn our business, or will we get better results by contracting with one of the national design/build firms that focus on the credit union industry?

The true stories of failure are many, but are not reserved for one methodology:

• The local architect who designed a pleasant looking building but did not understand credit union branding, culture or operations and could add nothing to the credit union's knowledge resulted in an underperforming building 30 years behind the times.The local contractor who bid to his friends resulted in a much higher pricing than could be gained from a regional contractor.

• A regional design/build contractor who underbid and could not complete the headquarters project put it on hold for one year as it made its way through court.

• Or, the national design/build firm that had grown so large that internal communications failed and the project was completed six months late and 15 percent over budget.

While these unfortunate stories continue to emerge, there are many more stories of success. Over the past 15 years credit unions have become significantly more design, construction and contracting savvy through books, articles, educational sessions and hiring experienced advisors. At the same time design and construction firms focusing on the credit union industry have elevated their level of service to better integrate the range of expertise needed to deliver the required comprehensive array of services. But this does not mean that all is equal in the industry or one design and construction option is right for every credit union.

In the CUES 2009 Facility Survey, we learned that over 30 percent of credit unions under $500 million in assets would be expanding headquarters occupancy over the next three years and 55 percent of those over $500 million would be doing the same. We also found that over 50 percent and 75 percent respectively preferred design/build contracting over separating these services and open bidding. The majority of the responders felt they would get a better end product and the risk was less with design/build. The other credit unions felt using more traditional design and construction solutions would be better for their credit union, citing such advantages as working with local contractors to visibly support the community, employing a local architect who would provide a local style, and separating design from construction and bidding the project to meet board requirements.

How then should a credit union decide which design, construction and contracting methodology is right for their credit union? There are many options and factors to consider in the selection process. Let's look at the two primary options.

Separating architectural and construction services allows the design of a facility to be completed without overbearing influence of a contractor. When the design and construction documents are complete the project can be bid to multiple contractors. If the architect is good at estimating costs, this can be an effective methodology. But if not, over-budget bids will result in reworking the design and rebidding at your cost. A viable option is "negotiated bid" wherein the contractor is part of the design team providing cost input during the design process and then contracting based on a fixed overhead and profit margin.

Design/build services have gained wide acceptance over the past 20 years as both public and private sectors have realized the advantages. The benefits include one point of responsibility, ability to fast track, no redesign to budget, the potential of lower cost due to ongoing value engineering and matching team member objectives. One of the big benefits to a credit union management team can be taking much of the project management responsibilities out of the hands of senior executives so they can focus on credit union business, thus reducing their involvement to proper project set-up and oversight.

All design/build firms are not the same. Some firms have developed design, branding and constructing services within their firm so they have maximum control over the process and profitability while a few other design/build firms purposely keep these critical creative responsibilities separate to ensure a high level of expertise and advocacy.

Another big separator is how design/build firms price credit union projects. The amount of profit gained by national firms can range between 10 and 30 percent. How is this possible and is this fair? The latter part of the question is for you to decide, while the former is easy to answer. Many firms work in a "closed book" environment where a credit union is given an estimated price and then the design/build contractor bids or rebids individual project components resulting in lower prices that benefit the firm. Many of the firms also sell furniture and equipment much above their cost. This is how a firm that states 10 percent for architecture and 10 percent for construction can make so much money. The primary reasons for the high profit margins are large sales staffs, big marketing budgets, high investment firm expectations, investment in facilities and research and charging what the client will bear.

For some credit unions the traditional closed book method of contracting design/build services works, as there is a promise of being taken care of. All a credit union has to do is approve a simple invoice each month or at stages of completion. All management, construction, permits, furniture and equipment are rolled up into one bill.

Until recently I was not in favor of design/build due to the hidden cost and occasional compromises in design. Over the past few years a hybrid "open book" methodology has emerged.

In this relationship structure you agree to an overhead and profit fee at the outset. A guaranteed maximum price is agreed to when design and construction documents are completed and then all future cost savings are recognized by both the contractor and credit union. All costs are visible as they are itemized and backed by invoices. Additionally, furniture, equipment, accessories, signage and other project items are priced at contractor cost, which is typically below what a credit union can get, plus an agreed-to fee.

It is not unusual to realize a 10 to 15 percent difference in total project cost using this method. This means that by utilizing a true "open book" relationship, you could save $1.5 million on a $10 million headquarters project and $225,000 on a $1.5 million free-standing branch project while receiving the same value in terms of design, brand image, construction and systems quality, management and risk mitigation. See CUES Complete Guide to Credit Union Facilities (2009), Chapter 13 - Construction Delivery Methodologies and Strategies for a detailed explanation of different contracting methods.

Selecting the most beneficial design and construction methodology for you and your credit union requires the willingness to research beyond the sales person who calls monthly pursuing a relationship and contract. There are many ways to develop a short list of industry-focused designers, contractors and design/build firms by looking at CUES', the American Bankers Association's and other organizations' vendor pages, keying in "branch design," "credit union design," "credit union headquarters" and other phrases on the Web, talking with other credit union managers and saving articles from industry publications.

Branch and headquarters projects can do a lot for a credit union by providing advanced methods of delivery that provide a powerful brand experience for members and staff and promote the credit union, and headquarters that support the growth and prosperity of an organization for the next 10, 20 and 30 years. While the risks can be high, the right design and construction methodology will help ensure both the success of your credit union and its management team for many years to come.

Paul Seibert, CMC, is VP/financial services at CUES Supplier member EHS Design, Seattle, and the author of CUES Complete Guide to Credit Union Facilities.