The Regents of the University of California Transforming Capital Asset Utilization and Delivery Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar July 2005 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Table of Contents Table of Contents I. Executive Summary .............................................................................................. 1 II. Background, Mission, and Work of the Expert Committee.................................... 6 III. Findings and Recommendations........................................................................... 9 1) Ownership and Accountability for Capital Asset Utilization, Delivery, and Performance.................................................................................................. 10 2) Capital Planning and Decision-Making Based on Formal Business Case Analysis ......................................................................................................... 13 3) A Shorter, Simpler Process ........................................................................... 16 4) A More Robust, More Flexible Contracting Environment .............................. 20 5) Systemwide Building and Project Metrics, Standards, and Data................... 24 6) A Process-Change Agent to Implement This New Business Model.............. 27 7) Other Cost-Saving Opportunities Examined, but not Specifically Targeted in the Committee’s Top Six............................................................................ 28 APPENDICES Appendix A – Committee Members’ and Study Consultants’ Resumes Appendix B – UC Capital Program – Core Purpose, Values, and Goals (as drafted by the “Internal Resource Group” that was formed to facilitate information gathering and provide staff support to the Expert Committee) Appendix C – Potential Areas and Issues to Examine (as drafted by the “Internal Resource Group”) Appendix D – 15 Committee Questions to Investigate Cost-Savings Opportunities Appendix E – Report of the Committee Cost Consultant E-1 – Questionnaire for Campus Executives and Project Managers E-2 – Summary of Responses to Project Questionnaires and Key Observations E-3 – Summary of Project Data Review and Key Observations Appendix F – Office Building Benchmark Study by TMCS, Inc. TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Executive Sumary I. Executive Summary The Regents of the University of California, through its Committee on Grounds and Buildings, have mounted a major initiative to explore opportunities for saving construction building costs on a large scale. The objective is to find ways to meet the capital needs of a continually growing academic program with what the Regents foresee as increasingly less capital construction funding being made available to the University. The Regents’ Committee on Grounds and Buildings instituted an investigation of current practices and policies to determine more effective approaches for designing and constructing projects. To implement this investigation, a committee of six outside experts (herein referred to as the “Committee”) who are acknowledged leaders in their respective fields of design, construction, property development, and capital project management, was formed by the Office of the President in December 2004. The mission of the Committee was to render an informed professional opinion and make recommendations to the Regents’ Committee on Grounds and Buildings on opportunities for reducing UC building costs. Over the course of six meetings from January to June 2005, the Committee convened to receive, review, and discuss information presented by the Office of the President, campus project personnel, and outside consultants. An independent consultant to the Committee conducted interviews with UC and non-UC project teams and administrators on behalf of the Committee using the Commiittee’s15-question format and 24 selected projects which served as interview vehicles. Results of those interviews were reported back to the Committee. The Committee acknowledges that these extensive background materials, briefings, and data supplied to the Committee, although extremely helpful in informing the Committee’s opinion, cannot in any way be construed as creating a complete and definitive understanding of the many nuances of a large institution such as the University of California. The Committee’s focus, and consequently its recommendations, pertains to UC capital outlays for major construction. Minor capital-outlay projects such as room fit-ups, the replacement of building system components, and refurbishments, therefore, are outside the scope of this study. At its second meeting the Committee chose to expand the mission of this study to address the effective planning for and delivery of capital assets, of which reducing the cost of constructing buildings is a subsidiary component, with the broader mission being facilitating the best economic solution to achieve program goals. Economic solutions to be considered include more efficient utilization of existing facilities, alternative procurement strategies (purchase, lease, build-to-suit), as well as non-brick-and-mortar strategies. The Committee believes that its six recommendations for transforming policy and processes concerning ownership and accountability for UC 1 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Executive Sumary capital asset utilization, delivery and performance will have a major dollar impact on its capital program. For a UC capital program portfolio on the order of $7 billion, the Committee believes there is a minimum of a 10%, or $700 million, capital dividend in cost reduction and capital preservation to be gained from implementing these measures. Given the compounding effects generated by achieving efficiencies (e.g., inflation, staffing, space) it is not inconceivable that a capital dividend of as much as 25% or more could be realized. Based on its findings and the professional experience of its members, the Committee has developed six major recommendations for capital savings that it believes requires transformation in the way the University of California does business concerning the planning and construction of buildings. 1) Ownership and Accountability for Capital Asset Utilization, Delivery, and Performance This is the Committee’s foremost and fundamental area of recommendation. The management of UC capital assets appears to lack individual accountability at the campus level. It is the Committee’s opinion that by creating individual accountability for capital asset utilization, delivery, and performance at a high level at each campus more value will be created from scarce capital funds, and projects will be built less expensively as the result of there being an individual with clearly defined authority and responsibility for capital assets. The Committee recommends that the utilization, delivery, and performance of capital assets on campuses be made a significant and material component of each Chancellor’s responsibility and performance review. Further, the Committee recommends that a function of “capital asset chief” be created on each campus reporting to the Chancellor, with the ownership and authority for the effective utilization, delivery, and performance of capital assets, and be accountable to the Chancellor for results. 2) Capital Planning and Decision-Making Based on Formal Business Case Analysis It appears to the Committee that the current UC response to ascertain long- term academic priorities at the campuses often jumps quickly to architectural planning of possible construction solutions to support program growth. The Committee recommends instead that the first-step, and the primary driver, for all capital planning become the Business-Case Analysis and Plan, and that each campus develop a high-level function for executing business case analysis and planning. Business case analysis and planning examines non- building solutions and alternatives to building construction, and when construction alternatives are pursued, it determines best construction solutions from a business planning perspective. The Business-Case Analysis and Plan is the key instrument on which the Committee recommendations for simpler, streamlined processes are based. The expectation of the Committee 2 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Executive Sumary is that this change in planning process will improve the utilization of increasingly scarce capital funds relative to program mission supported and greatly simplify the capital approval process. 3) A Shorter, Simpler Process The Committee believes that the University of California’s capital project processes can be made significantly more straightforward, streamlined, and faster, with more clearly defined decision-making and authority. The Committee recommends greatly shortening the lengthy pre-planning and pre-design phase, doing away with the three-step “Preliminary Plans, Working Drawings, Construction” approval processes for state funded projects, and utilizing the streamlined capital outlay process for all state funded projects on the “streamlined” track. Instead of having many slowly evolving projects in the funding pipeline, taking up to as long as 7 to 10 years, fewer projects would enter the capital funding approval pipeline based on their Business Case Analysis and Plans, and they would receive funding once for efficient execution. The result will be fewer projects in the pipeline, and all projects will complete faster. Cost savings are expected in staff man- hours at both the Office of the President and campuses, avoidance of construction cost escalation expense, and the elimination of costs associated with start-stop project schedules. 4) A More Robust, More Flexible Contracting Environment The Committee believes that three aspects of the UC contracting environment present overall cost-saving opportunities: 1) moving to a “Best Value” contracting model (based on a criterion that combines competitive pricing with assessments of contractor capabilities and past performance), 2) modifying UC contracts to be less restrictive and onerous for contractors (for example, by changing requirements that the contractor be responsible for any hidden underground conditions that may exist on the site), and 3) changing laws and policies that currently preclude UC projects from benefiting from early design consultation that could be provided by qualified subcontractors. The Committee recommends that the University aggressively pursue these changes. The Committee’s expectation is that these changes will yield significant overall cost-savings across the UC portfolio of capital expenditure activity, as well as project outcomes that are more predictable with less litigation and fewer disputes, and a smoother project delivery process with less UC project oversight. 5) Systemwide Building and Project Metrics, Standards, and Data There appears to be a lack of system-wide standards concerning mission- relevant metrics (for example, project cost per student, bed, principal investigator), and no system-wide methodology or infrastructure across the campuses (and between the campuses and the Office of the President) for collecting and using project administration data. These represent two 3 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Executive Sumary opportunity areas for achieving, over time, the kind of construction economies of scale envisioned under the Committee’s recommendations on “simpler, shorter process.” The Committee sees very substantial cost savings being realized from a common project administration system that facilitates automated roll-up reporting for monitoring and tracking projects, and better and faster planning resulting from the system-wide use of mission-relevant metrics and standards. As a start, campus project systems should be compliant with systemwide standards and criteria, and have the predictive capacity to project and help mitigate project over-runs, delays, disputes, scope delivery issues, and claims. 6) Process-Change Agent to Implement This New Business Model Consistent with the Committee’s recommendations on ownership and accountability, it is the Committee’s recommendation that the implementation of the recommendations set forth in this document be assigned to a single change-agent (not a committee, and not left up to the individual campuses) who has the responsibility, tools, resources, and authority to implement these changes. It is the Committee’s opinion that to be effective this process- change agent must be supported at the highest levels (the Board of Regents, the President and his Cabinet, and the Council of Chancellors). This person’s job performance should be evaluated on, and their job tenure dependent upon, success in accomplishing this task. Twelve additional cost-reduction opportunities were identified and examined by the Committee and are referenced in this report with the Committee’s comments. These represent areas of investigation that were either targeted in the Committee’s original list of 15 questions, or they became discussion points during the Committee’s deliberations. As noted, the twelve additional opportunity areas are considered by the Committee to have already been addressed in its primary list of six recommendations, or were felt by the Committee to be of secondary importance. The Committee notes that various campuses have pursued implementation of portions of the above six recommendations, and met with varying degrees of success, perhaps constrained by external and systemic factors. It is the Committee’s strong recommendation that in spite of barriers to change that may appear to exist in the form of existing state laws, long-established practices, firmly entrenched organizational structures and cultures, and large numbers of people affected, a fundamental change in the way the University does business with respect to its capital assets is necessary if significant cost savings and capital expenditure avoidance are to be achieved. It also believes that the necessary changes will not be implemented unless a single individual is given the responsibility, resources, and authority for orchestrating this recommended change of business model, and has the necessary support from the highest levels in the University (the Board of Regents, the President and his Cabinet, and the Council of Chancellors). 4 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Executive Sumary In summary, the Committee’s view is that the University of California has a major opportunity for significant cost reduction and capital preservation by dramatically changing its up-front capital project planning, development, and funding processes. The Committee believes strongly that without such a change, significant capital savings and increased value from capital expenditures for the University of California will not be realized. Respectfully submitted Steven L. Westfall, Ph.D. Committee Facilitator and Scribe 5 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Background, Mission, and Work of the Expert Committee II. Background, Mission, and Work of the Expert Committee A committee of six outside experts (the “Committee”; refer to Appendix A for Committee membership and resumes), who are acknowledged leaders in their respective fields of design, construction, property development, and capital project management, was formed by the Office of the President in December, 2004 to render an informed professional opinion and make recommendations to the Regents of the University of California on opportunities for reducing its building costs. The reasons for this undertaking are two-fold: 1) the University expects continuing growth in its campus populations over the next 10 years, and 2) at the same time, it expects an increasing scarcity of capital funds with which to build campus buildings to accommodate the population growth. The Committee’s recommendations, therefore, are intended to identify courses of action that will accommodate the needs of a growing academic program with fewer capital dollars. At its second meeting the Committee chose to expand the mission of this study to address the effective utilization and delivery of capital assets, of which reducing the cost of constructing buildings is a subsidiary component, with the broader mission being facilitating the best economic solution to achieve program goals. Economic solutions to be considered include more efficient utilization of existing facilities, alternative procurement strategies (purchase, lease, build-to-suit), as well as non-brick-and-mortar strategies. An important feature of the Committee’s work was to focus on recommending opportunities for savings, rather than looking for problem areas. This had two implications for the work of the Committee. The first concerns instances where the University might have processes or results comparable with other institutions. Where such findings were apparent, the Committee’s view was that its mission was to identify opportunities for cost savings on all fronts, even those where problems were not evident. The second implication concerns areas of process and results where in the Committee’s view a definite problem might exist. In these instances, the Committee agreed that it would look for the cost-saving opportunities associated with solving such problems, and if solving the problem constituted only a minimal cost-saving opportunity, it would be dropped from the list of the Committee’s recommendations. Over the course of six months the Committee convened six times. At the first four meetings, the Committee received, reviewed, and discussed information presented by the Office of the President and testimony from both UC and non-UC persons on the conduct of UC projects. This included: a) A briefing from UC Office of the President on University Core Purpose, Core Values, and Visionary Goals (refer to Appendix B), prepared by a group of campus and OP staff (“Internal Resource Group”), formed to 6 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Background, Mission, and Work of the Expert Committee facilitate information gathering and provide staff support for the Committee; b) An extensive list of potential areas for the Committee to examine (refer to Appendix C), as prepared by the Internal Resource Group; c) Testimony on capital project processes at UC Irvine; d) Testimony from a construction consultant on a detailed cost study done on a recent Davis construction project (refer to Appendix F); e) Background information from the Office of the President on the different organizational structures, widely varying site conditions, maturity, and local town political environments that exist on the different campuses; f) A formal report (refer to Appendix E) from the Committee’s consultant, Peter Morris (a Principal of the firm, Davis Langdon), on (i) the results of interviews conducted with UC and non-UC project teams on specific questions posed by the Committee, and (ii) the data review of 24 UC and non-UC projects. Early in its deliberations, the Committee formulated 15 questions that it felt would identify the most significant cost-saving opportunities (refer to Appendix D), and it selected 24 specific UC and non-UC projects to serve as vehicles for obtaining answers to those questions. Live computerized note-taking projected onto a screen seen by all Committee members was used to track and build the Committee’s meeting proceedings. Formal proceedings notes were distributed to all members after each meeting for comment, corrections, and additions. Based on the findings of the Committee’s consultant relative to the list of 15 questions, the Committee conducted a working session to draft individual “opportunity sheets” indicating target areas, proposed actions, pertinent UC conditions, and expected results. Opportunity sheets were converted into flip chart exhibits and posted on the walls of the meeting room, and members used colored post-it tabs to register their priority votes of “Do this,” and “This might be hard to do, but well worth the effort.” This session set the priorities and tone for the Committee’s final report. A draft report was written by Committee scribe, Steve Westfall (President, Tradeline Inc.) based on meeting proceedings, the Consultant’s findings, and the outcome of the Committee’s working meeting. At the Committee’s subsequent meetings the draft and final reports were reviewed and discussed to develop the final Committee statement. The Committee’s findings and recommendations set out below are based on a necessarily broad understanding by Committee members of University of California policies, processes, and history concerning capital projects. While Committee members bring to this study their own extensive professional 7 TRANSFORMING CAPITAL ASSET UTILIZATION AND DELIVERY Opportunities for Reducing Project Costs and Achieving More Program for the University’s Capital Dollar Background, Mission, and Work of the Expert Committee experience in the planning, design, and construction of institutional buildings, and while some members have had personal experience with specific UC capital projects, they are not experts in all the intricate details of current UC systems, organizations, or governing laws. The extensive background materials, briefings, and data supplied to the Committee by the Internal Resource Group and the Office of the President, although extremely helpful in informing the Committee’s opinion, cannot in any way be construed as creating a complete and definitive understanding of the many nuances of a large institution such as the University of California. Thus, the collective opinion rendered here should be viewed as that of a panel of outside experts whose opinions are informed to the extent possible by the time limitations and the format of their involvement in this study. 8