Staff Report - April 2, 2002 - Agenda Item

To present the Design Development Phase Program and request authority for staff to proceed with the Construction Documents Phase Program and to develop the Guaranteed Maximum Price for the Development & Community Services Building Project

BACKGROUND

Project Hold - The City placed the Development & Community Services Building (DCSB) Project on hold January 24, 2003 in response to cost cutting measures across all City departments to position itself against potential fiscal impacts the California State Budget crisis may have imposed on City funding resources. During this period, the Redevelopment Agency remarketed its $25.00M debt to the City releasing sufficient general fund resources to potentially fund the DCSB Project and mitigate the State�s potential fiscal impact against its completion.

New Project Architect and Project Resumption � During the DCSB Project hold period, the City Council approved a Professional Services Agreement (PSA) on October 14, 2003 with Leo A. Daly (Daly) as the new Project Architect substituting for WWCOT. Based on the DSCB Oversight Committee�s recommendation, Daly demonstrated its in-house qualifications, project expertise, and ability to successfully complete the project design on an equivalent cost basis as that for WWCOT, including the added cost for a feasibility study. The Project was officially resumed on November 6, 2003.

Feasibility Study Results and Abbreviated Design Development Phase - With the benefit of 20/20 hindsight, Daly collaborated with staff and the DCSB Oversight Committee (Committee) to identify opportunities to improve the WWCOT design development program without compromising quality, aesthetics, and program function, and to strategically pursue design changes that would net real construction cost benefits. The results of this feasibility study included:

City Council approved a PSA amendment with Daly on March 2, 2004 based on the feasibility study results and benefits in performing an Abbreviated Design Development Phase effort. The decision to perform this design effort was predicated on opportunities to improve the project�s design function and efficiency and with the understanding that construction cost savings would be more than double the cost for this additional design activity and related pre-construction services. At the time this was estimated to net about $400,000 to $800,000 in construction cost savings. In the Analysis section that follows, the estimated savings has been determined to be approximately $1.67M.

At this same March 2, 2004 meeting, City Council initiated its own cost reduction measures directing staff to reduce the construction budget by $600,000. This reduced the Project budget from $25.14M to $24.54M.[1]

Although not a primary focus of this report, it will be demonstrated throughout this report that City Council made the right business decision to retain Leo A. Daly to complete the DCSB project design effort. In part, this is substantiated by the following results.

Abbreviated Design Development Phase Results � Daly met its design responsibility through its Abbreviated Design Development Phase effort and the value management review process. Daly effectively modified and improved the design program without compromising quality, program, and function while reducing construction costs. In fact, more program space was accommodated within a smaller building program. Some of the primary modifications and cost savings that resulted from this redesign effort included:

Collectively, these design efficiencies account for approximately $1.67M of the $2.82M total construction budget variance between the Daly and WWCOT program and represent construction savings for key design components.[5] However, these savings are not to be confused with, or added to, the $2.47M construction budget reductions realized through the value management process.

Design Development Program � An overview of the DCSB Design Development Program will be provided by Leo A. Daly in a Power Point presentation at the October 5, 2004 City Council meeting. Therefore, a detailed discussion will not be provided herein. However, key highlights of the Program are listed below for general information.

Market Conditions � According to Cummin, LLC�s[6] August 2004 report entitled �Current Construction Market Analysis, �The Perfect Storm��, factors contributing to the recent construction cost �spike� include:

A surge in materials price escalation in the first half of this year has driven the cost for common construction materials such as structural steel, reinforcing steel, miscellaneous scrap metals, concrete, drywall, lumber, and concrete has wreaked havoc on the cost stability for construction projects. China and India�s demand for steel, rebar, and concrete, coupled with a continued surge in home building driven by limited housing supply and historically low interest rates, and record crude oil prices in the second quarter of 2004, have caused material shortages and price volatility.

As examples of material increases, Engineering News Record[7] (ENR) publications reported its 20-city average annual price tracking increases of 48% for plywood, 41% for scrap metal, 28% for lumber, and 17% for ductile iron. Steel prices jumped between 20 to 60% in the first quarter of 2004 alone, affecting everything from girders to door hardware. Construction products made from copper, aluminum, and stainless steel have seen commodity price increases from 15 to 45%. For office building projects such as the DCSB, steel accounts for about 5 to 10% of a project�s average construction cost.

Although materials price escalation has garnered a majority of the construction news headlines, labor costs are also contributing to the construction industry�s growing inflationary cost. Some of the strongest pressure is on the west coast. The average union wage in California has increased 6.4% since last year.[8]

In its August 2004 report, Cummings concluded �Although China�s growth in [Gross Domestic Product] has appeared to stabilize, there is still cause for concern over the anticipated weakening dollar and higher energy costs. The construction volume in California may be slowing in its rate of growth, but employment has not been able to keep up. � Steel has stabilized in recent price spikes. However the new concern will be the current cement shortage and its availability as well as its price.�

Future Market Trend - Staff offers no position concerning the future trend for changes to construction materials costs but contends that in the long run, construction costs will continue to increase, if simply not for the impact of inflation alone. Even if the construction materials market eventually drops 20 to 25% from the recent collective price spike, there would remain a 20% net gain. Industry reports and information vary as to the impact and timing of individual pricing trends for various construction materials. To off-set future price stability, staff has conservatively included a 5.0% construction cost escalation factor, or about $860,000, through July 2005 in the current Design Development Phase construction budget.

Furniture Fixture & Equipment (FF&E) Program and Recommendations � This section provides a discussion of two primary FF&E elements for City Council�s consideration � 1) audio visual system and 2) private office and work station furniture systems.

Audio Visual System - The initial DCSB program has tremendously evolved since its 1998 inception and did not include provisions for a community room. Consequently, there was no specific budget established to accommodate equipment and infrastructure for this program space as well as other functional areas such as conference rooms. This function has since become a primary program space within the DCSB and it is anticipated it will be heavily used by the general public.

Consequently, the City retained an Audio Visual (AV) systems consultant through Leo A. Daly to develop a program for the community room, the One Stop Permit Center (OSPC), and twelve conference rooms. System recommendations were comparable, both in quality and function, to other public agencies and represented $483,600 in total cost.

Primarily for current budgetary concerns, the Oversight Committee directed staff to provide all necessary conduit and cabling infrastructure to meet the future functional requirements for these areas but only procure essential equipment for the community room and OSPC. The resulting audio visual system budget has been established at $270,000[9] and is part of the $2.17M FF&E budget.

Private Offices & Work Station Systems � The Development Oversight Committee recently requested staff to investigate the benefits of using the Wells Fargo building�s furniture for the new DCSB. Staff is evaluating furniture inventory and cost information concerning the combined use of new and existing private office and work station furniture versus all new furniture. Staff will submit objective findings and recommendations in a separate Oversight Committee and City Council memorandum for its consideration and subsequent direction. A budget of approximately $1.76M for furniture requirements has been provided in the $2.17M FF&E budget.

Based on City Council�s approval to commence the Construction Documents Design Phase efforts, the following milestone activities are anticipated.

As a direct consequence of the most recent construction estimate being over budget, and the value management effort, review, and approval process to mitigate this overage, the occupancy date slipped approximately two months from its previous August 2006 occupancy date to October 2006. These pricing activities are on the critical path.

With the current high cost of construction materials as a primary contributor, the DCSB Project is faced with a potential fiscal impact above the approved $24.54M project budget. However, in spite of record high construction materials costs, staff remains optimistic that future costs will stabilize and may even cool but most likely not to the previous 2002 levels.

Although the project is currently estimated to be over budget, staff is not requesting any increase to project funding at this time. However, staff recommends City Council to enable the project to maintain its forward momentum and authorize completion of the Construction Documents (CD) Phase and development of the Guaranteed Maximum Price (GMP). This provides an opportunity to test the market during the first quarter of 2005 to identify the real construction cost and take advantage of any favorable material cost reductions.

Approval to proceed with the project will require budget expenditures of approximately $795,000 for architectural, engineering, and requisite consultant services to complete the CD Design Phase and GMP effort. Placing the project on hold once again or even shelving the project has distinct fiscal disadvantages that may prove unfavorable in the long run. Future premium increases for insurance and capital, increasing construction labor rates, and the additional administrative costs to resume a project taken off the shelf collectively support a decision to continue with the project at this time.

Staff implemented several measures to mitigate and control construction costs in an effort to maintain project viability in spite of challenging market conditions that have plagued owners and developers for more than a year. These measures are cited in the �Program Measures to Reduce Overall Project Cost� section below.

While not guaranteeing the project to be less costly in the future, another tenable option is to shelve the project for a period of two to three years. This will not substantially affect the design documents from a code enforcement standpoint. However, additional administrative and design related costs to restart the project and projected increased costs for insurance, capital, and construction labor rates should be considered as inherent future cost risks.

Staff will be in a better position to recommend shelving the project after the GMP has been developed and negotiated since the construction costs will be actual (contractually) in lieu of estimated. However, staff is ardently committed to providing the public with a quality facility and would rather shelve the project before imposing drastic design modifications that would compromise the project�s long-term quality and aesthetics than subject the project�s completion to one that is based on a cost-driven design.

Design Development Project & Construction Budget Summary � Attachment A is a summary comparison of the $25.50M Schematic Design Budget approved by City Council on December 10, 2002 with the Design Development budgets based on the WWCOT and Leo A. Daly design programs.[10] It is important to note that the WWCOT construction portion of the project budget (Column B) was escalated through July 2005 but without performing any value management review effort. Columns C and D of Attachment A represent the Daly project budgets with and without value engineering, respectively. Both �Daly� project budgets are lower than the �WWCOT� project budget.

The Daly project budget is approximately $3.56M or 14.5% over the currently approved $24.54M budget. Staff maintains that this overage is due to the current market conditions the construction industry has been facing for more than a year and further compounded by a recent reduction to the project budget. Without changing the building�s exterior design character, interior program, or significant scope reductions, the project value may remain within a narrow pricing level band for the near future.

It is worthy to mention that $4.15M of the project budget is set aside for escalation through July 2005, an A/E design contingency, estimating contingency, construction contingency, and project contingency. This represents about 17.3% of the total project budget and considered a normal percentage and function of the project budget. This amount will be reduced to approximately 8.0% of the project budget at the completion of the design and GMP development effort.

Attachment B is a summary of how the project scope may be modified and current funding sources increased to eliminate the current $3.56M shortage. Major scope reduction considerations include the removal of the LEED program and eliminating off-site street improvements along Third Street and Orange Grove Avenue. These represent approximate project values of $1.10M and $380,000, respectively. If these scope reductions were considered, a return of the $600,000 withdrawn from the project budget in May 2004 with an additional $1.5M from the Capital Project Contingency Fund will result in a fully funded project budget of $26.63M, or about 8.5% over the current approved budget.

Construction Budget Comparison - The construction budget for the WWCOT program was based on design documents completed in October 2002. Turner�s $17.7M baseline construction estimate[11] was escalated by 30% through August 2004 to reflect current market conditions and further escalated another 5.0% from August 2004 through July 2005 for an �apples to apples� comparison with the current Daly construction budget.

WWCOT�s $22.5M[12] final construction budget is more than $2.4M, or 12.0%, above Daly�s $20.1M construction budget and is a further testament to the validity of the City�s decision to substitute Daly for WWCOT. Daly successfully met its design obligation to reduce the construction cost without compromising quality, aesthetics, and program functionality.

Program Measures to Reduce Overall Project Cost � Other cost cutting measures to reduce the project budget are listed below with their respective �savings� integrated into the current project budget being to City Council[13]. At this time, staff does not recommend any further scope reductions or quality level changes that may compromise the long term quality, aesthetics, and functional program requirements. The measures listed below have been discussed and a consensus reached with either the DOC Committee and/or the Oversight Committee. These measures include:

Potential Future Funding Sources � Should the City Council direct staff to proceed with the CD Design Phase effort and the resulting GMP exceeds the construction budget, City Council retains its options to shelve the project, command that further value management opportunities be explored, and/or consider the following potential funding sources, subject to City Council policy recommendations, to offset any project overage identified at that time.

Other On-going Cost Considerations � As a point of information only, the current Public Works and Building Department temporary facility lease totals $214,500 from the period August 1, 2004 through July 31, 2006.[14] The City owns the temporary facility occupied by the CDD Administration department.

RECOMMENDATION

AUTHORIZE STAFF TO PROCEED WITH THE CONSTRUCTION DOCUMENTS PHASE PROGRAM AND TO DEVELOP THE GUARANTEED MAXIMUM PRICE FOR THE DEVELOPMENT & COMMUNITY SERVICES BUILDING PROJECT

[1] The $600,000 was transferred to the Capital Project Contingency Fund, Account No. 370.CP01A.70020.0000. This action reduced the Project budget by 2.5% and the construction budget by 3.7%.

[2] This $910,000 amount is net of the savings from structural steel and HVAC equipment reductions. Construction unit pricing of $171.42/s.f. for the Core & Shell and $71.16/s.f. for Tenant Improvements derived from the detailed construction budget estimate was used to determine building size reduction cost savings and already accounts for structural steel and HVAC equipment costs.

[3] The City executed a 2004 Savings by Design Owner Agreement with Southern California Gas Company and will receive a �Whole Building Incentive� of $28,000 based on the building�s energy efficient design.

[4] The primary exterior cladding material change from cement plaster to pre-cast concrete will maximize service life, minimize maintenance, and provide a more civic-oriented architectural style.

[5] The construction budget for the WWCOT program was escalated to reflect market changes since October 2002 and compared to the construction budget for the Daly program. The result is that the construction budgets for the WWCOT and Daly programs are cost equivalent. The $1,665,000 savings identified for key design modifications in the Daly program were offset by the aggregate cost of other design elements. Ultimately, it was through the value management efforts that enabled the Daly program to be more cost effective than the WWCOT program.

[6] Cummin, LLC is an Orange County, CA cost consulting firm providing cost estimating and other related services to the real estate and construction market.

[7] Information gleaned from various articles in the March 22, 2004 and June 28, 2004 Engineering News Record.

[8] Reference June 28, 2004 Engineering News Record, pp. 32-33.

[9] This budget is about 56% of the AV consultant�s recommended program and excludes costs for conduit, cabling, and architectural items related to installation. Those costs are part of the current construction budget.

[10] It is worthy to mention that the current value-engineered �Daly� project budget of $28.1M (see Attachment A, Column D) is about 10.2% higher than the Schematic Design Budget approved more than 21 months ago. This can be considered very reasonable in light of current market conditions and its impact over this same period for materials, insurance, fuel, labor, and construction activity levels.

[11] The original $18.2M draft construction budget estimate was issued in January 2003 with the project put on hold that same month. This estimate was carefully reviewed and subsequently revised to $17.7M and finalized in April 2004.

[12] Detailed construction cost information was intentionally not provided in this report for simplification purposes only. Staff will provide this information if requested.

[13] The potential savings for Items 3a, 3b, and 3e are not reflected in the current construction estimate but ill be incorporated into the subsequent GMP.

[14] Lease payments are $106,600 for the period 08-01-04 through 07-31-05, $80,000 for the period 08-01-05 through 04-30-06, and $27,900 for the period 05-01-06 through 07-31-06.

Council Agenda - City of Burbank

Tuesday, October 5, 2004

PURPOSE

BACKGROUND

RECOMMENDATION