CHAPTER 1
Introduction

1.1 Background

Over the past two to three decades, project delivery has evolved dramatically as public owners developed various alternative project delivery (APD) methods designed to help achieve certain project goals, such as accelerating delivery timelines, incentivizing private-sector innovation, minimizing delays and cost overruns, reducing claims and disputes, attracting and facilitating private financing, and enhancing lifecycle considerations.

These APD methods generally entail strategies by which public owners shift more responsibility, opportunity, and risk to the private sector. While some level of risk-shifting has no doubt been necessary to incentivize private-sector innovation, in many cases public owners have arguably attempted to transfer too much risk to their private-sector partners, often for items or events over which contractors have limited to no control and for which they cannot in practice include a large enough contingency in their pricing proposals to make the risk versus reward tradeoff attractive.

This perceived risk imbalance has caused major issues in the highway construction industry, particularly for large-scale and complex projects for which fixed-price APD methods are frequently used. Such market issues include higher bid/proposal prices, failed solicitations, reduced competition, and market exits. If these issues are not resolved, the potential for APD methods to generate value may go unrealized or may result in major disputes during project execution.

To address these concerns, a research team was engaged under NCHRP Project 23-22 to develop practical guidance to help state departments of transportation (DOTs)/public owners increase the likelihood of a successful solicitation that attracts a suitable number of competitive bids for large projects delivered using APD methods and that ultimately results in positive project performance outcomes. This Guide is an outgrowth of that research effort.

1.2 Research Summary

1.2.1 Research Approach

To develop this Guide, the research team conducted a literature review of relevant past research studies, guidance documents, and industry/trade publications related to risk allocation and mitigation strategies, as well as a content analysis of the contract and solicitation documents used on contemporary public-private partnership (P3) and large design-build (DB) projects to identify how risks are being allocated and treated by the contracting parties. The team further prepared and implemented a data collection plan consisting of a survey and structured interviews with owner and industry practitioners to:

• Determine how owner and industry practitioners perceive, prioritize, and account for risk when assessing projects, and

• Identify what tools and practices have been successfully applied to communicate and manage project risks during the planning, procurement, and post-award phases of a project.

To ensure a diverse set of perspectives was considered, survey and interview feedback were obtained from representatives of state DOTs, design firms, construction contractors, and concessionaires/developers.

Building from the insights drawn from the literature review, content analysis of solicitation and contract documents, and practitioner surveys and interviews, the research team developed the methodology presented herein. Various strategies and tools are described that owners may apply to identify, assess, and mitigate or manage risks in projects delivered using APD methods, including DB, construction manager/general contractor (CM/GC), progressive design-build (PDB), and P3. The identified tools represent effective practices that can be applied at different stages of the project lifecycle to manage risk, promote competition, and help achieve project delivery goals.

1.2.2 Terminology

To facilitate the data collection effort and ensure a common understanding of terms, the research team adopted the following definitions to characterize the different APD methods owners are using to deliver their capital projects/programs (Table 1.1).

This Guide largely distinguishes these APD methods based on how and when the owner and its industry partner agree to the price of the work. For “fixed price” DB and P3 projects, the price is set at the time of contractor selection and contract award. In contrast, “progressive” methods

Long Description.

The PDMs and respective definitions are as follows:

Construction Manager slash General Contractor (CM slash GC): APDM in which the owner engages a contractor at the early stages of design to provide preconstruction services. Such services typically entail providing input to the owner and design team regarding constructability, scheduling, pricing, and phasing. When the project scope is sufficiently defined, the owner and contractor will negotiate a price for the construction of the project. [Also commonly referred to as “Construction Manager at Risk” (CMAR), and “General Contractor/Construction Manager” (GC/CM)]. DB (Fixed Price DB). APDM in which the owner procures both design and construction services in the same contract from a single legal entity referred to as the design-builder, who commits to a fixed price (and schedule) for the entirety of the work at the time of selection. (This method is also commonly referred to as “traditional” DB to contrast it with the newer “progressive” DB variant.)

Progressive DB: A variation of DB in which the design-builder is engaged early in the project development process (often through a Phase 1 Preconstruction Services Contract) and then collaborates with the owner to validate the basis of design and to advance or “progress” towards a final design and associated contract price.

P3: A contractual agreement that centralizes project delivery under a single contract with a developer or concessionaire (which may entail a consortium of multiple firms) to assume design, construction, operations, maintenance, and/or financing responsibilities of a public facility. Common P3 structures include design-build-finance-operate-maintain and design-build-finance.

(Although the P3 financial model has traditionally been fixed at the time of concessionaire selection and award, P3 agreements are increasingly being implemented using progressive processes by which the owner engages a developer in a collaborative “predevelopment” phase to assess project feasibility before entering into a comprehensive development agreement.)

(including CM/GC, progressive DB, and progressive P3) typically entail a preconstruction (or predevelopment) services phase through which the owner and its industry partner collaboratively advance the scope and design of the project and subsequently negotiate a contract price for the work.

1.2.3 Key Research Findings

Key findings from the research are summarized in the following list. Complete details are available in NCHRP Web-Only Document 434: Defining Contractual Risk Profiles to Increase Competition on Alternative Project Delivery Methods, which can be found on the National Academies Press website (nationalacademies.org/publications).

1. Key Risks.
   1. The predominant risks on APD projects, from the perspective of both DOT and industry representatives, include unforeseen or differing site conditions, utility conflicts/relocations, right-of-way (ROW) acquisition, status of National Environmental Policy Act (NEPA) and other permits, railroads, hazardous materials, and protected species.
   2. Industry practitioners further identified as additional key risk issues: size and complexity of the project, culture/experience of owner staff, changes in law, constructability issues, and political risks/opposition.
2. Factors Cited by Contractors/Developers that Limit Project Pursuits. Contractors and developers cited several factors and issues that can drive their decisions regarding whether to pursue project opportunities, particularly for fixed-price DB or P3 projects. Such considerations included the following:
   1. Ownerʼs reputation. Contractor interviewees stressed that the ownerʼs reputation for experience with APD methods was possibly the most significant factor when they decided whether to pursue a given project. One industry interviewee commented:

      The first thing that we look at is who the authority is and whatʼs their level of experience and expertise. Who have they brought on board to help guide them through the process? Thatʼs very key because they are going to be our partner and for P3s they are going to be our partner for 30 or 50 years. We have to make sure there is alignment with values, goals and objectives.

      Industry design professionals further reinforced this issue, stating that, if the general engineering consultant team representing the owner is unknown, inexperienced with APDs, or is incentivized (under cost-plus fee agreements) to excessively comment on submittals or over-inspect the work, this would be another consideration for declining to pursue a project.

   2. Political environment. In addition to the reputation of the owner and its consultant, industry interviewees also strongly emphasized the political environment, as well as the projectʼs champion:

      We want to look at the project champion and community support, or whatʼs driving the project. Whoʼs against the project? But you really want a high-level and stable project champion, and with two-to-four-year election cycles, this can be challenging.

   3. Project size, complexity, and risk profile. Large APD projects (>$1B) with significant third party, geotechnical, utility, ROW, or hazardous materials risks are much more challenging under a fixed-price/lump-sum contract.
   4. Surety input. The surety industry has changed dramatically in recent years, making larger lump-sum/fixed-price projects challenging. Any “ultra mega” project (i.e., greater than $2B) is extremely challenging from a surety standpoint (with multiple caveats depending on project specifics). Smaller lump-sum/fixed-price DB contracts ($500M-$1B) are perceived as being more manageable.

2. 5. Environmental processes. For fixed-price DB, contractors may be hesitant to pursue an opportunity if the NEPA and other environmental documents (or state environmental process if there is no federal funding) are not advanced sufficiently or permits await approval prior to the completion of the procurement process.
   6. Availability of suitable teaming partners. When weighing opportunities, contractors will also consider the experience and suitability of available teaming partners, including a joint venture partner, if necessary, a strong design partner (for DB), and key subcontractors.
   7. Procurement schedule. Consideration will be given to the reasonableness of the procurement schedule, including whether there is sufficient time for investigations, industry review and input, one-on-one meetings with the owner, and preparation of qualifications and/or technical packages.
   8. Risk-sharing provisions. Contractors will consider if risk assessments are sufficiently advanced, with equitable contract risk apportionment provisions or risk caps in place, or if such items are open to negotiation as part of the procurement.
   9. Transparency. A transparent evaluation and selection process should be described in the procurement documents.
3. Additional Factors Cited by Designers. Industry design professionals generally agreed with the factors identified by the contractors/developers as discussed earlier. In addition, they also identified the following additional risk issues that might affect their decision to pursue a particular APD procurement as part of an industry team:
   1. Unlimited or unreasonable or liability insurance provision levels (and/or lack of caps).
   2. The contractorʼs lack of experience with APD methods, placing unreasonable or misallocated risks on the designer of record (e.g., for quantities, estimates, schedules).
   3. Incentive-based compensation schemes that rely on estimated quantities at 30% design under a lump-sum agreement.
   4. Elevated Warranty or Standard of Care provisions for DB that do not consider obvious differences in standard of care for design versus construction services.
4. Practices for Aligning Risk Perceptions and Enhancing Competition
   1. Owner terms and conditions are evolving from risk transfer approaches for fixed-price APD methods towards risk allocation strategies where the owner commits, for example, to a date certain for specific ROW or utility relocations, or risk-sharing strategies entailing deductibles, allowances, and contingency risk pools for geotechnical, utility, and ROW issues.
   2. Both owners and industry support the use of various strategies or tools at discrete stages of project delivery to improve risk management and competition. These tools are identified in Chapter 2 of this Guide and discussed at greater length in the appendices.
   3. For fixed-price APD methods, an owner should assess a projectʼs technical readiness at the planning and development stage in terms of the quality of information available to address risks, the ownerʼs ability to acquire additional information before or during procurement, and the level of coordination necessary to both define and mitigate risk. This assessment will then inform the projectʼs risk profile and support subsequent risk allocation or risk-sharing decisions. Chapter 3 of this guide addresses a framework for determining an optimal risk allocation strategy based on project readiness.
   4. Transportation owners are using or moving towards the use of progressive delivery methods (either CM/GC, progressive DB, or progressive P3s) as a way to better mitigate risks and potentially reduce contingency pricing on projects with significant third-party risks, design uncertainty, and/or complexity. Owners and industry have largely voiced support for such progressive delivery methods, with several noting that the preconstruction/predevelopment phases have been encouraging thus far in their ability to attract bidders, “de-risk” projects, and reduce project contingency. Some concerns remain regarding the lack of competitive tension when negotiating the final costs, the need for agreement on a cost model to make valid cost comparisons, and the need for strong owner oversight and cost controls during the preconstruction phase.

1.3 Structure of This Guide

To address the findings noted earlier, this Guide presents practical strategies and tools to help DOTs/owners increase the likelihood of a solicitation that attracts a suitable number of competitive bids and that ultimately results in positive project performance outcomes. To achieve this objective, the Guide addresses the following:

1. How owners can integrate risk analysis into their project development processes to determine the optimal risk allocation for a given APD project.
2. How owners can incorporate risk allocation into procurement documents in a manner that attracts competition and minimizes risk premiums.
3. The tools and techniques owners can use to apply the methodology and effectively manage the risk post-award.

Following the Introduction, the remaining chapters within this Guide are organized as follows:

• Chapter 2 describes the processes and tools owners may use to integrate risk management practices throughout the lifecycle of an APD project to effectively allocate, communicate, and manage project risks to increase competition and minimize risk premiums. Processes for a fixed-price DB project are addressed first, followed by more collaborative or progressive approaches, such as CM/GC or progressive DB.
• Chapter 3 then focuses on specific risk issues that often impact large APD projects and provides a framework for considering how to align contractual risk allocation strategies to the technical readiness of a given project.

The Guide also includes appendices presenting summaries of key tools relevant to fixed-price and progressive APD methods, as well as information and example contract provisions relevant to risk allocation strategies.