Alternative Project Delivery/Contracting Methods

Alternative delivery and contracting methods have been used to implement many projects. One purpose of these alternative approaches was to assign certain project risks, traditionally borne by Project Sponsors, to contractors. For instance, a single D/B contractor becomes responsible for coordinating the design and construction activities that traditionally involved separate entities for design and numerous construction contractors coordinated by the Project Sponsor. The TDP Turnkey Evaluation Guidelines [Ref. 3-26] identified 24 areas of risk associated with MCPs. Table 3-2 [Ref. 2-49] relates examples of instruments for managing those risks and defines possible responsibilities for the Project Sponsor and contractors for alternative delivery methods.

Several of the instruments in Table 3-2 relate to project delivery and contracting methods that are alternatives (described in Chapter 2) to the conventional D/B/B approach that include the following:

 Design/Build (D/B)

 Design/Build/Operate/Maintain (D/B/O/M)

 Concessions – for example, D/B/O/M/Finance (DBOM/F) or Build-Operate- Transfer (BOT)

 Construction Manager At Risk (CMR)/Construction Manager/General Contractor (CM/GC)

One advantage in using D/B, D/B/O/M, or concessions is that the Project Sponsor’s project cost risk is reduced earlier in the process because bids are received early – after basic design has been completed. In addition, these contracts may include contractual monetary incentives (and penalty clauses defining liquidated damages) related to the time of completion, retention of key personnel, and adherence to DBE participation commitments, etc. The pre-qualification process combined with best value selection approaches that normally are part of the procurement process significantly increases the assurance that the selected contractor and its approach are best suited to the project. A fundamental effect that occurs when considering risks under alternative project delivery approaches is that the Project Sponsor not only quantifies risk or makes it explicit through such means as legal contracting language, but, more important, shares the risk with, or transparently shifts the risk to, the contractor. Because the contractor wishes to know in advance who is bearing which risk, it will charge the Project Sponsor accordingly in its bid prices. A beneficial result of a thorough risk analysis and allocation process is a rational assessment of the appropriate risks for the owner to retain, share, or transfer to the contractor. Industry input and review process during procurement will optimized this process.

Table 3-2. Instruments for Managing Risk Problem

Category Managing Risk Instrument for Risk Related to Transit MCP Project Sponsor Responsibility Responsibility Contractor

Political Assurance FFGA Record of Decision Letter of Credit Board Resolution Political Full

Funding Full May Participate

Speculative Effort Before RFP Before RFP

Margin of Safety Reserve Funds Contingency Funds Dedicated Taxes Bonding Insurance Multiple Contracts Indexing

Financing Full May Participate

Inflation Prior to Award After Award

Act of God Full -Insurance

Hedging Seismic Apply Standard Meet Standard

Right-of-Way Full Up to Full

Failure to Complete

May Share Full (capped)

Explication/

Allocation Fixed-Price Contract Contract Agreements Liability Caps Public/Private Partnership Subordinated Debt

Regulations Regulatory

Changes Only Full Compliance

System Integration Traditional Turnkey

Changed Req’ts Full

Operating Design/Build D/B/O/M

Market (Ridership

or Revenue) Design/Build D/B/O/M (limited)

Contract Performance Project Mgmt. Oversight Pre-Qualifications Corporate Guarantees Schedule/Cost Reporting QA/QC Construction Performance

May Share Full

Subsystem Test Full

System Integration

Test Identify Sub-System Defects Correct Sub-System Defects Schedule Define

Requirements

Conditional Requirements Risk

Minimization Risk Isolation Information Accommodation Incentive Clause

Bid Exceed Est. Full

Geotechnical Discretionary Discretionary

Hazard. Materials Discretionary Discretionary

Underground Utilities

Discretionary Discretionary

In addition to the transfer of certain elements of coordination risk to contractors under these alternative contracting forms, other benefits arise, largely due to the increased scrutiny associated with contractual risk allocation. A benefit of Project Sponsor risk assessment and allocation has been the reduction of large risk premiums in bid prices, since Project Sponsors often assume or share risks previously assigned to contractors that contractors were not able to control. Examples include responsibility for unidentified conditions such as hazardous materials, geological aberrations, or heretofore-unknown archeological finds.

If the risk analysis and allocation process is effectively applied to alternative delivery mechanisms, incentives to improve quality, cost-effectiveness and timeliness of a project result. Effective risk allocation can minimize risk premiums and delineate rational strategic risk-sharing plans for difficult to control items such as hazardous materials. As an example, early in the process for the Largo Metrorail Extension, WMATA determined which risks it wished to assume and segregated those elements into a D/B/B site preparation contract reducing risk premiums on the D/B portion of the work.

To the extent that risk is effectively allocated to those parties most able to reduce the probability of adverse consequence or withstand the costs of such consequences, real savings and increased certainty (reduced risk) are possible. There are several key elements necessary to realize this potential. First is the appropriate assignment of risk as indicated. Next is early identification of the risk elements where additional information will increase the contractor’s certainty and reduce any risk premiums. Another critical aspect is assuring that the Project Sponsor’s contract management and oversight activities do not interfere with the contractor’s ability to control its assigned risks, as this may altogether void or reduce the risk transfer.

TDP participants have implemented new approaches to transit development, including such turnkey methods as public/private partnerships, as in the case of the Los Angeles Union Station Gateway, or contractor-based funding/ financing, as in the case of the New Jersey Transit Hudson-Bergen Line. One innovative transit alternative delivery programs involved the FTA’s Penta-P program. The Denver Regional Transit District in Colorado pursued a long-term concession agreement under an availability payment structure, where the private party will finance, design, construct, operate, and maintain two new commuter rail lines – the East and Gold. Partnerships such as these allow for sharing of risk and responsibilities, and, given appropriate procurement, contracting and oversight, establish a level of mutual concern, trust, and a new spirit of cooperation. Properly constructed partnerships should align both the Project Sponsor and the contractor goals and focus on mutually agreeable outcomes.

Tools to mitigate risks that are included in most alternative delivery contracts include:  Insurance – used to offset professional liability for design and the risk of injuries

and property damage during construction and the O&M of the completed transit project. Project-oriented insurance alternatives allow each contractor to have its own insurance (conventional) and to have a coordinated program provided by the Project Sponsor that covers all project participants (OCIP). It is also common for transit agencies to be self-insured for all or part of its risks associated with O&M.  Performance Bonds – FTA requirements are defined in its third-party contracting

Circular 4220.1F, Section 11 [Ref. 2-21]. The practice of surety bonding was developed within the context of traditional procurement approaches, wherein the design and individual construction activities are performed by separate entities and in separate stages of project development. In this environment, the bond provides protection against a construction contractor’s failure to meet the design specifications produced by the design firm. An issue that has arisen with large single-contractor (e.g., D/B and turnkey) procurements is the capacity of the surety industry to insure for the full value of the contract. This particularly creates a problem for large contract sizes – it limits the number of proposers who can compete and may impose an unnecessarily high cost for such bonds, which do not provide sufficient incremental value. Reduction of bond requirements in such circumstances may be considered in discussion with the FTA.

 Parent Guarantees – Parent company guarantees are a standard requirement of most procurements that involve either large projects or those being submitted from a consortium that has developed a special purpose entity. This formal back-up guarantee holds the large parent company liable for assuring that the contract terms are met.

 Financial Guarantees – Where the private party is responsible for providing financing for the project there is also the requirement to provide alternative forms of security such as irrevocable letters of credit from major banks. The government may draw on these letters of credit in the event the private party fails to close the transaction.

 Partnering – a process to improve the relationship between Project Sponsors and their contractors (see Section 3.6.4).

 Contingencies – incorporated in cost estimates and schedules to account for the risk associated with uncertainties, be they design application, unknown site conditions, etc.