Rising costs may lead to more progressive design-build projects

Rising construction costs may prompt more contractors to insist on progressive design-build delivery methods to reduce their exposure to budget overruns.

Contractors in fixed-price contracts are under pressure from escalating project costs, Fitch Ratings said Monday in a commentary on North American infrastructure project costs, which focused largely on private energy projects and contractors.

“Construction costs are increasing and the contractors face the impact,” said Fitch analyst Anubhav Arora. “In a case where they’re locked into a fixed-price contract, it could put financial strain on those contractors,” he said. Contractors may be less willing to enter into the fixed-price contracts going forward, he said. “We could see more progressive design-build contracts, where a certain part of the cost would be locked in at financial close while the remaining costs would get locked in as the project progresses.

“We have seen some of this already but this is what we think could happen more as well,” Arora added.

The producer price index for materials and services used in nonresidential construction rose 0.2% in August and 2.5% from August 2024, according to a September analysis by the Associated General Contractors of America. “Extreme increases” in steel and aluminum prices drove the increases, the group said. “There is a limit to how many price increases the market can absorb before owners put projects on hold,” said AGC of America CEO Jeffrey Shoaf in a statement.

The Trump administration in June imposed 50% tariffs on steel and aluminum, up from the 25% rate that took effect on March 12.

Most public agencies use traditional design-bid-build structures, in which the public entity completes the design of the project before awarding a contract, which usually by law must go the lowest responsible bidder. Under a progressive design-build method, a private partner is brought in early in the project for design and preconstruction work. Once a design is roughly half complete, the public agency and private partner will negotiate a total maximum price and then move to the second phase to complete the design and construction.

The use of progressive design-build structures by states and local governments has grown in recent years as more states, like California and Nebraska, have passed laws authorizing them.

Maryland has opted to use the method in its Francis Scott Key Bridge replacement, tapping Kiewit as its contractor.

In a Senate Environment and Public Works hearing in July, Samantha Biddle, deputy secretary of the Maryland Department of Transportation, told lawmakers the final price tag still remains unknown.

“Due to the progressive design-build process that we’re working through, we are currently still tracking the initial cost estimate from earlier on in the bridge rebuild process,” Biddle said. The Trump administration has started to scrutinize the project, and in September Transportation Secretary Sean Duffy wrote a letter to Gov. Wes Moore asking for a meeting to go over price estimates and timeline.
 
Rising infrastructure costs is one of the reasons for the record level of municipal bonds coming to market in the last two years, according to market participants.