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Changing economy good for design-build projects: IO

Richard Gilbert
Changing economy good for design-build projects: IO

The executive vice-president and group head of major projects at Infrastructure Ontario (IO) said the rapid change in current economic conditions is creating an environment which is good for the use of design-build projects.

"This is actually an ideal time to be doing design-build (DB), because you guys in the DB industry can respond very quickly to changes in economic activity and economic indicators in a way we couldn’t do under the old traditional ways of doing business," said John McKendrick, during an IO update hosted recently by the Ontario General Contractors Association (OGCA).

"I think it is a very good time to be in the business and a very good time for us as well."

McKendrick made this statement on April 10 at the 2015 OGCA Construction Symposium held at the Blue Mountain Resort in Collingwood, Ont.

He provided an update on the latest status of IO projects and discussed the long-term plans for future infrastructure programs in Ontario.

"The thing about design-build is it’s a very flexible model that adjusts quickly to change in the environment," said McKendrick.

"What I mean is when you have a design that is fixed one year in advance, the price of concrete or steel can be specified, but in the meantime these prices can go up and the design is fixed and you can’t change it."

According to McKendrick, design-build allows bidders to change design very rapidly, depending on the different prices of commodities that go into the final product.

In addition, these bidders have the flexibility to make these changes in real time.

"If you think about some of the major things that have happened, such as the price of the dollar going down, this provides an incentive for people to switch from offshore materials to made in Canada materials," said McKendrick.

"The price of oil has gone down, so if there is an oil intensive product that goes into manufacturing, the industry would be very rapidly switching to those types of materials."

The price of West Texas Intermediate (WTI) crude was about $56 a barrel on April 16, which is a high for the year. However, this still represents a significant decline from more than $100 in early August 2014.

Lower oil prices mean that the cost of petroleum-based building materials and transportation will experience price drops as well.

Products like asphalt, roofing materials, insulation, plastic materials, steel and PVC piping will be affected, producing moderate cost savings to overall building proposals.

The fall in oil is having a ripple effect on the national economy. For example, the Canadian dollar has fallen by 5.4 per cent against the U.S. dollar so far this year, after declining by 8.6 per cent in 2014.

The Canadian dollar has recently gained strength due to the rebound in oil prices and was trading at about 82 cents US on April 16.

McKendrick compares the advantages of design-build with the traditional stipulated-sum project, which has the design fixed before the request for proposal (RFP) goes out.

With the traditional approach, the work on the project may start a year before this stage in the procurement process.

"In a design-build, they haven’t even started the design, when the RFP goes out," said McKendrick. "So, they have a year’s knowledge, before they even start to get the design out. While the price of materials have all gone up, they can switch out in the RFP to cheaper materials and it could be quality materials as well."

With design build, even if there is a change in the RFP, the bidders can still switch and things change things. This is why McKendrick considers design-build to be a much more flexible model, especially in changing economic times.

Another economic factor identified by McKendrick is the reduction in the rate of interest, which makes it cheaper to finance construction from the government perspective.

The Bank of Canada cut its target for the overnight lending rate in January from an already low one per cent to 0.75 per cent, in light of the risk posed to the Canadian economy by slumping oil prices.

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