Summary

Project Background and Objectives

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 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 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 this concern, the objective of this research was to develop practical guidance to help state DOTs/owners increase the likelihood of a successful solicitation that attracts a suitable number of competitive bids for large projects delivered using APD methods. Key tasks to achieve this objective included development of:

• A methodology to assist DOTs with understanding the risk inherent in a project delivered using an APD method, including how owners and contractors may assess and prioritize these risks differently, and identifying potential ways to align owner and industry objectives to mitigate and/or manage that risk.
• A guide addressing 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; and 3) what tools and techniques owners can use to apply the methodology and effectively manage the risk post-award.

Research Approach

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 P3 and large 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 input was obtained from representatives of state DOTs, design firms, construction contractors, and concessionaires/developers. Interviews were conducted with a cross-section of selected DOTs with active DB or P3 programs as well as with industry representatives from large to mid-sized construction firms. We selected participants for interviews and forums based on their project and market experience – seeking a diversity of experiences in alternative project delivery (i.e., both “good” and “bad”).

Building from the insights drawn from the literature review, content analysis of contracts, and practitioner surveys and interviews, the research team developed a methodology consisting of various strategies and tools to identify, assess and mitigate or manage risks in projects delivered using APD methods such as design-build, CM/GC, progressive DB (PDB) and public-private partnerships (P3). The identified tools represent effective practices that can be applied at different stages of the project lifecycle to minimize negative impacts to project stakeholders and promote competition and cost-effective solutions.

Terminology

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

Glossary of APD Methods

Note that throughout this report, and in the associated Guidebook, the team 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 award. In contrast, “progressive” methods (including CM/GC, progressive DB, and progressive P3) typically entail a preconstruction (or pre-development) 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.

Key Findings

Some of the key findings from the data collection and practitioner input included the following:

1. Key Risks
   1. The predominant risks, from both DOT and industry perspectives, include unforeseen or differing site conditions, utility conflicts/relocations, right-of-way acquisition, NEPA permitting, 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. Risk Allocation Strategies
   1. There is no single standard approach to risk allocation. Owner strategies for risk allocation can vary significantly based on owner preferences or APD type.
   2. For fixed price DB projects, some owners have been moving away from their prior risk transfer approaches towards either risk retention strategies by which the agency commits, for example, to a date certain for specific ROW or utility relocations, or sharing strategies entailing deductibles, allowances, and contingency risk pools for geotechnical, utility, and right-of-way issues.
3. Practices for Aligning Risk Perceptions and Enhancing Competition
   1. Best practice recommendations from owners on how to improve risk management and competition on fixed-price APDs includes:
      • Early industry outreach, including pre-solicitation one-on-one meetings with industry teams
      • Negotiation of risks and risk-sharing strategies
      • Streamlined RFP criteria and processes and include risk management criteria
      • Use of reliance (vs reference) information for selected risks
      • Improved project budgeting focusing on key risks and market validation of pricing

3. 2. Recommendations from industry on strategies to improve competition and obtain better value for money:
      • Pre-solicitation one-on-one meetings
      • Less restrictive qualifications criteria
      • More owner front-end investigation to improve the quality and accuracy of survey data, geotechnical data, utility and ROW acquisition information
      • More effective oversight of consultant performance as owner representatives
      • Use of allowances for utilities and hazardous materials, and date certain commitments for ROW acquisition and utility relocations
      • Improved transparency regarding project risks in RFP documents.
4. Progressive Delivery Methods
   1. 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.
   2. While owners are supportive of progressive methods, some did express the following concerns:
      • The lack of competitive tension may compromise the public owner’s ability to obtain a reasonable price.
      • The owners generally perceived progressive methods as being less effective than fixed price DB at incentivizing innovation.
      • The consensus-driven design process may lead to scope creep and cost and schedule growth (i.e., design churn) unless strong owner oversight and cost controls are in place.
      • Owners continue to grapple with the negotiation of construction costs for CM/GC and PDB projects. There was a general recognition that DOT owners are often at a disadvantage when it comes to negotiating construction costs.
      • Doubts were raised regarding the experience of the ICE industry (abilities vary widely). The general perception was that more standardization across agencies of the ICE process would be helpful.
      • Concerns were also raised regarding the potential need to exercise off-ramps in PDB and CM/GC contracts, which could expose the owner to additional cost, schedule, and reputational risk.

4. 3. With a few exceptions, large/international contractors and developers voiced strong support for progressive DB and CM/GC, with several noting that the preconstruction phases have been encouraging thus far in their ability to “de-risk” projects and allow for reductions in project contingency.
   4. While agreeing that progressive methods could serve as a good option for projects with particularly high risk profiles, smaller/regional contractors nevertheless expressed the opinion that:
      • Fixed price DB typically provides owners with the highest likelihood of cost and schedule control.
      • Progressive methods generally provide minimal incentive for the integrated project team (owner, designer, contractor) to find cost savings and minimize scope growth.
   5. Some general concerns voiced by industry (both large and small contractors) included the following:
      • If project budgets are based on outdated estimates, it can lead to surprises and funding challenges when the PDB or CM/GC team provides an estimate that is far higher.
      • The disparity in the level of experience between the owner’s pricing team and the industry team can be problematic when negotiating construction price.
        • Owners are often surprised and overwhelmed by the number of risks that contractors are considering, and the depth to which they are being assessed, when they develop their estimates and contingency calculations.
        • Although the risk workshops are helpful, the owner’s staff often “check out” after the first few hours of reviewing risks.
        • Owners have a hard time understanding the time and cost implications of risks.
      • Qualifications of ICEs can vary widely.
   6. Recommendations from industry for owners to improve the implementation of progressive APD projects include:
      • Retaining the ICE early in project development (same timing as the contractor) and requiring that the ICE have construction estimating qualifications;
      • Reaching agreement between the ICE and contractor on how to structure the cost model and cost breakdown structure to make valid cost comparisons; and
      • Using allowances and provisional sum risk-sharing strategies to address quantities that remain uncertain even under a progressive APD model.