Who Pays When a Capital Project Overruns? 4 Procurement Approaches and 58 Risks Every Owner Must Know

Procurement is a strategic and not an administrative step — it is the mechanism by which your company distributes financial risk across the life cycle of a capital project. This is an introduction to the four prevalent approaches and the project owner's exposure to the 58 generic risks based on the approach taken.

Risk assessment in progress: of the 58 generic capital project risks identified, 55 are likely to increase costs for the owner. How many can be contractually allocated to the contractor depends on the procurement approach chosen — and the preparation that precedes it.

Clearbrane LLC - Starting a Capital Project

Jonathan, CEO of Clearbrane LLC, knew by heart the operation and the business case — but that night, he recognised a different kind of knowledge gap. A capital project of this scale was not simply a large expenditure; it was a financial commitment that would shape the company's balance sheet, credit position, and competitive standing for years before Cleanbrane saw a single dollar of return. Executed well, the Vietnam facility would give Cleanbrane a structural cost and proximity advantage that no competitor could replicate quickly. Executed poorly, the same project could consume the company's liquidity, strain its banking covenants, and turn a strategic asset into a source of sustained financial pressure.

Before today, he had assumed that engaging the right designer and contractor would be sufficient — that his role was to set the direction and let the experts run the project. He no longer believed that is sufficient. A project of this consequence required him to understand the risk landscape himself — not to become a technical expert, but to lead with the clarity that the decsion demanded.

Procurement Approaches

No matter which procurement approach a project adopts, the twelve-stage life cycle does not change. What changes is who — owner or contractor — leads and drives each phase.

Choosing a procurement approach means choosing how to structure the engagement with contractors and consultants. The right choice depends on (i) the capability of the owner's team, (ii) the complexity of the project, (iii) the level of transparency and cost control required, and (iv) whether the risk allocation is commercially realistic for both parties. There is no universally best approach.

For most capital projects, there are four commonly adopted approaches. Megaprojects — typically defined as projects exceeding $1 billion — may require hybrid or bespoke structures, such as programme management contracts or alliance contracting, to manage the scale and complexity that standard forms do not adequately address.  For our discussion, we focus on projects from a few million to a few hundred thousand of dollars.

Design-Bid-Build (DBB)

What: The traditional sequential model. The owner engages design consultants to prepare the full design and compile detailed drawings and specifications as tender documents. The package is then put to competitive tender and awarded to the lowest responsive bidder.

How risks are allocated: The owner bears most of the risk — from the buildability of the design to the completeness of the contract documentation. Anything not drawn or specified is not priced. Missed items, whether due to gaps in scope, unresolved user requirements, or design errors and omissions, become variation orders. The less resolved the owner's requirements at the outset, the more costly that interface becomes during construction.

Advantage: When the owner's requirements are thoroughly resolved before the first line of design is drawn and competitive market conditions are healthy, DBB can produce the lowest contractor price — because the contractor has priced a known scope with minimal risk premium.

Design-Build (DB)

What: Detail design and construction are both undertaken by the contractor. The owner or owner's consultants prepare the design intent drawings and performance specifications; the contractor develops the design to construction detail and builds to the defined outcome.

How risks are allocated: Combining design and construction under one party eliminates the design-construction interface risk and consolidates accountability. The contractor embeds a higher contingency — typically 5–15% — to absorb the design risk assumed.

One clarification is important for first-time owners: "Design" in DB refers to building design, not operational process design. The contractor will present options within the defined scope and design intent for the owner to select and confirm. Changes arising from a revised operational programme or user requirements after contract award still generate variation orders.

Advantage: Research shows DB can deliver better cost control than DBB, provided the owner's user requirements and programme do not change after contract award.

EPCM (Engineering, Procurement and Construction Management)

What: Structurally different from DBB and DB: the EPCM firm manages the project on the owner's behalf — covering engineering, procurement administration, and construction supervision — but does not hold construction contracts and bears no construction cost risk. Think of it as engaging an expert technical team to run the project rather than building that capability internally. EPCM is particularly suited to projects that require process engineering— for example, in a pharmaceutical facility, an EPCM firm can engineer a small-scale process into a fully scaled-up production process, then translate that into detailed design and construction drawings. The EPCM firm charges a management fee, typically 2–5% of total project cost; all construction cost variance remains on the owner's balance sheet. A related model is EPC, which omits the Management function, where the firm delivers engineering and procurement but construction is managed directly by the owner.

How risks are allocated: Almost all project risks pass through to the owner. The owner depends on the professionalism and experience of the EPCM firm to produce correct and comprehensive drawings and details, to identify, structure, and allocate risks appropriately to the trade contractors it manages. The quality of that risk management is only as good as the firm engaged and the owner's ability to hold the EPCM firm accountable.  Most EPCM caps their contractual liabilities at a factor to the EPCM contract value.

Advantage: EPCM suits complex projects where flexibility and owner control are priorities, and it is the dominant delivery model in heavy industrial sectors. It requires an owner with sufficient internal capability to hold the management firm accountable. Without that, the model provides management oversight without cost protection.

CMAR / Guaranteed Maximum Price (GMP)

What: The contractor is engaged during the early design stage, once project scope and user requirements are sufficiently established, to provide cost and buildability input. A Guaranteed Maximum Price is then established once the scope is sufficiently defined.

How risks are allocated: Cost overruns above the GMP within the contracted scope are the contractor's risk; savings are typically shared between both parties. However, the GMP is only as firm as the scope definition beneath it. A GMP established on immature scope is not a cost ceiling — it is a starting point for negotiations over what is and is not included.

Advantage: The GMP mechanism provides early cost visibility and reduces the change-order incentive present in DBB.

Caveat: However, GMP does not guarantee the ultimate project cost. Consider a 300-bed hospital: 20 general wards, 8 operating theatres, pharmacy, imaging suite. The room count is clear. A GMP is set. The contractor has a cost ceiling. Yet such projects routinely end significantly above the original GMP. Subsurface conditions require more expensive piling than assumed — unforeseen conditions are almost universally excluded from GMP scope. Regulatory authorities require upgraded filtration standards after GMP is signed. Medical equipment interfaces, radiation shielding, and IT infrastructure are listed as owner-furnished but with ambiguous contractor interface responsibilities. Clinical staff reviewing the design during construction identify hundreds of operational changes — each individually small, but each a scope change under the contract.

For example, why is an extra door between two operating theatres a scope change, when the contract includes those theatres? The GMP is calculated against specific documents, ie drawings and specifications as they exist at the time of signing — not the project as the owner imagined it, or as operations will later need it to function. A connecting door not shown on the drawings or mentioned in the operational requirement is priced it as new scope. The contractor is contractually entitled to price it separately. Multiplied across hundreds of such decisions made by clinical users, regulators, and management during construction, the cumulative cost is significant.

Risks Associated with a Capital Project

In the context of the project life cycle, the most common capital project risks are set out below relevant to the procurement approaches discussed. Of the 58 types identified, 55 are likely to increase project costs for the owner — either borne solely by the owner or shared with the contractor.  The good news is most of these 58 risks can be mitigated.

• 17 can be substantially mitigated through a well-defined project brief and an aligned, engaged owner team;

• 17 can be mitigated through the selection of an appropriate procurement method and deliberately structured contract terms;

• 14 can be mitigated through group-wide risk policies and strategies, where applicable;

• 6 can be mitigated by commissioning a comprehensive site survey prior to acquisition;

• 1 represents a cost increase borne solely by the owner that cannot be contractually allocated, insured against, or otherwise managed.

58 Generic Capital Project Risks: Owner Exposure, Primary Bearer, and Mitigation Reference

Subscribe to our Insights newsletter to download the full risk list and the mitigation measures available to the project owner.

By submitting this form, you consent to receive our newsletter and marketing emails.

CONCLUSION

Owner Readiness and Involvement: The Highly Controllable Variable That Determines Outcomes

Across all four procurement methods, the variable that most consistently explains project outcomes is owner readiness — the quality of preparation, decision-making, and sustained involvement. Poor estimates and poorly defined scope are the largest single contributors to project failure. An owner's failure to respond to contractor queries on time can be as costly as a contractor's error.

Six dimensions of owner readiness determine whether any procurement approach can succeed:

•       Team in place before contracting.  A capital project needs a single point of accountability with construction project experience — not an operational leader stretched across other responsibilities. This is precisely where an experienced capital project advisor or owner's representative delivers disproportionate value: providing the project leadership capability the owner does not yet have in-house, representing the owner's interests before and during contractor engagement.

•       Scope comprehensively defined before signing.  No contract type removes the owner from the consequences of unclear scope. A GMP — the approach most associated with cost certainty — only guarantees the price against the scope that was defined when it was set. An extra door between operating theatres, a higher-specification HVAC zone identified during detailed design, a utility connection the drawings did not fully specify — each is a scope change under the contract, however minor it appears. The same applies under DB, DBB, and EPCM: what is not defined at contract time will cost more when it is. The right level of definition varies by contract type — DBB requires near-complete design before tender; GMP requires enough definition to bound the scope at signing; DB requires a complete performance brief — but the consistent failure across all methods is entering any contract before the owner's requirements are genuinely settled. A classic GMP case: the $1.27 billion Parkland Hospital in Dallas invested in putting 800 clinical staff through physical mock-up rooms before construction specifically to surface and resolve these gaps before the GMP was set.

•       Risk allocation understood, not just assigned.  Procurement contracts allocate execution risk — uncertainty arising from the gap between what is designed and what gets built: subsurface conditions, material price movement, labour productivity, weather, and similar variables. Different contract types place this execution risk differently. What no contract type absorbs, in any form, is the owner's undecided requirements. A scope change arising from the owner changing their requirements — adding a room, upgrading a specification, restructuring a workflow — falls entirely outside contractual risk allocation. It generates additional cost under every procurement model without exception. Choosing a contract type just means choosing how execution risk is shared; it does not substitute for resolving what the project actually needs to deliver.

•       Decision speed.  Construction timelines are unforgiving. Delayed owner decisions — on equipment specifications, material selections, regulatory submissions — translate directly into contractor delay claims.

•       Technical fluency.  Owners who cannot evaluate contractor proposals, review designs, or assess change order claims cannot protect their own interests regardless of contract structure. This means either developing that capability internally or ensuring the owner's representative carries it.  Wherever possible, the latest the future facility team come onboard is when construction starts.

•       Independent challenge.  Internal reviews of a project's assumptions tend to reinforce rather than challenge them, because reviewers share the same data and the same incentive to proceed. An external advisor with no stake in project approval — reviewing cost assumptions, schedule, and local market conditions before commitment — is one of the highest-return investments an owner can make at this stage.

The Winning First Step - "Go Slow to Go Far"

The question for any owner committing to a major capital project is not which contract to sign. It is whether to invest the preparation time that the data consistently shows is the primary determinant of whether the project succeeds.

Jonathan understood this. The night he sat with those numbers, he was not looking for a designer or contractor. He was looking for the clarity that a designer or contractor would need from him — before any contract was signed.

That is precisely where experienced preparation matters most. An adviser who has sat on both sides of the table — who understands what operations actually require, what contractors actually price, and where the gap between the two becomes a variation order — can compress months of costly ambiguity into a brief that holds. Before the first design consultant is appointed, before a procurement strategy is selected, and long before a contract is signed — the most consequential step an owner can take is to define, with rigour and independence, what the project must actually deliver.

If you are at the early stages of a capital project and want to understand whether your team is ready to brief it well, [Strategy to Built's four-week readiness diagnostic] is the right starting point.