Research Products

Based on the findings summarized above, the research team developed a methodology to assist DOTs with identifying, assessing, mitigating and allocating risks in projects delivered using both fixed-price and progressive APD methods. The methodology components include various strategies and tools that can be applied at different stages of the project lifecycle to reduce the uncertainty associated with project risks, better align stakeholders’ perceptions of risks, and equitably allocate risks in construction contracts to stimulate competition, reduce excessive bid premiums, and result in fewer disputes and improved project outcomes.

The methodology is set forth in the standalone Guidebook produced under this research. The Guidebook includes:

• Detailed information on specific tools that may be applied at specific stages of project delivery, along with examples of how DOTs have applied such tools in practice
• Example contract provisions to assist agencies with risk management and contractual risk allocation.

The anticipated benefits of the Guidebook include:

• Enhanced understanding of project risks, and risk management and mitigation strategies,
• More effective risk allocation based on project readiness, and
• Better alignment between project risk profile, delivery method, and risk allocation and mitigation practices to help agencies increase competition and generate the most value out of projects delivered using APD methods.

1 Background

1.1 Introduction

The delivery of public infrastructure projects has evolved dramatically over the past two to three decades as owners focused on finding ways to accelerate project timelines, incentivize private sector innovation, minimize delays and cost overruns, reduce claims and disputes, attract and facilitate private financing options, and enhance lifecycle considerations – among other goals.

An outgrowth of this focus has been the development of procurement and contracting options that can be used in a variety of ways for a wide spectrum of projects. These options have generally pivoted off strategies entailing the transfer of more responsibility and thus risk to the private sector and/or the promotion of a more “relational approach” between the owner and its private sector partners.

For all the benefits these approaches have provided, the shifting of more and more risk to the private sector has become a major industry concern. Although 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 bid a large enough contingency to make the risk versus reward tradeoff attractive.

This perceived risk imbalance has in recent years driven several large companies to announce their withdrawal from the P3 market as well as a growing reluctance to pursue large, complex, fixed-price designbuild projects, which often pose risks related to:

• Lack of project readiness with regard to third-party coordination, site investigations, right-of-way acquisition, and similar matters that can lead to a variety of technical risks that are difficult for the private sector to manage.
• Launching projects without solid financial plans resulting in project delays and/or cancellations.
• Changes in political support resulting in delayed and/or cancelled procurements.
• Changes in law that can lead to major project impacts after contracts are in place.
• Unreasonable delays in resolving project disputes, which may force the design-builder to either carry the often-sizable costs for lengthy periods of time or simply to stop work due to cash flow limitations.
• Ineffective project management by the owner or owner’s representative that do not match the urgency of the design-builder’s design and submittal review processes and schedule.

At best, attempting to transfer many of these risks without contract protections or relief mechanisms can result in reduced competition and/or high contingency pricing, both of which will likely reduce the overall project value to owners.

Public owners, generally, have heard such concerns from the industry but also have seen the results of “risk gone bad” on projects to the point that “there must be a better way” conversations are ramping up across the transportation sector. A variety of approaches are being used to help address these concerns, most notably a movement towards improved risk management and allocation strategies and more relational contracting approaches such as progressive design-build and progressive P3s.

1.2 Research Objectives

To increase the likelihood of a successful solicitation that attracts a suitable number of responsive and competitive bids, guidance is needed to assist owners with identifying, assessing, and equitably allocating risks on large projects delivered using alternative project delivery (APD) methods.

To this end, NCHRP Project 23-22 entails the development of:

1. A methodology to assist DOTs with:
   1. 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
   2. Identifying potential ways to mitigate and/or manage that risk.
2. A guide addressing:

2. 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.

1.3 Research Approach

1.3.1 Literature Review

The research team kicked off the project with a state of practice literature review and content analysis of contract documents to identify the state of the practice in the risk allocation practices, strategies and tools used to reduce uncertainty and manage the key risks on projects delivered using APD methods.

This effort entailed a thorough 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.

Based on input from the research panel on the project workplan, the research team expanded its investigation of APD methods beyond fixed-price DB and P3 (as included in the original problem statement) to also include CM/GC and progressive DB. A content analysis of the literature and documents reviewed is provided in Chapter 2.

1.3.2 Data Collection

To supplement the literature review results, the team prepared and implemented a data collection plan to further:

• 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, development, procurement, execution and post-award phases of a project.

The data collection plan incorporated the following techniques:

1. A short electronic survey with survey questions designed to understand how owners and industry representatives perceive risk on APD projects, and
2. Individual structured interviews as well as roundtable discussions to probe practitioners for more specific information and perceptions regarding typical risk allocation strategies and the tools used to communicate and manage project risk throughout the project lifecycle.

The survey and interview questionnaires can be found in Appendices B and C respectively.

Survey

Separate surveys were distributed to owner and industry practitioners. For benchmarking and trend identification purposes, the survey results were analyzed to identify any commonalities and differences in how owners and industry perceive and account for risk, as well as the extent to which specific project characteristics, project delivery methods, payment mechanisms, and similar factors can influence those perceptions. A discussion of the survey feedback is provided in Chapter 3. Raw survey results are provided in Appendix D.

Interviews

Expanding upon the themes covered in the survey and literature review efforts, structured interviews were conducted to obtain more in-depth information regarding the various risk factors that can affect project procurements and post-award project execution, as well as examples of successfully applied tools and practices to mitigate/allocate these risks.

In advance of the scheduled interviews, the team prepared and distributed a topic-driven agenda to provide participants with the opportunity to assemble any necessary information, data, or subject matter experts prior to the interviews.

To ensure a diverse set of perspectives was considered, input was obtained from representatives of owners/state DOTs, design firms, construction contractors, and concessionaires/developers. Interviews were conducted with a cross-section of selected DOTs with active DB and/or P3 programs (e.g., GDOT, VDOT, FDOT Colorado DOT, Ohio DOT, Michigan DOT, MoDOT, TxDOT, Caltrans, MDSHA) 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 views in alternative project delivery experience (i.e., both “good” and “bad”). Interview findings are discussed in Chapter 3 of this report. Interviews summaries are provided in Appendix E.

1.3.3 Guidebook Development

Methodology Framework and Components

A key premise underpinning this research is that current practices are resulting in risk transfer to highway developers, designers and contractors, which has caused major issues in the highway market, particularly for large-scale and complex projects where 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 of APD methods to generate value may go unrealized or may result in major disputes during project execution.

Building from the insights drawn from the literature review and practitioner surveys and interviews, the research team developed a methodology framework consisting of the strategies and tools that can be used at each stage of a project lifecycle (e.g., project initiation, planning and development, procurement, execution, and operations) to identify, assess, and mitigate or manage the risks on projects delivered using APD methods, such as design-build, CM/GC, and public-private partnerships. An overview of these methodology components is provided in Chapter 4.

Practitioner Feedback on Draft Methodology

To obtain feedback on the proposed methodology components and the ultimate Guidebook to be developed under this research project, the team conducted additional focus groups with owner and industry practitioners.

In facilitating the roundtable discussions, the team shared the draft methodology components and asked participants to identify:

• What practices/tools they have used to align risk perception and promote competition.
• Any additional tools or practices that they have successfully used that were not identified by the team; and
• What content they would like to see in the Guide to be developed under this research.

Additional questions posed to the industry roundtable participants included:

• What risks do owners tend to misallocate?
• What are your perspectives on the benefits and challenges of progressive APD methods vs fixed price?
• What are your perspectives on various risk “sharing” strategies (e.g., allowances, risk pools, deductible schemes, relief mechanisms)?
• What influence does the surety industry have on contract size, risk allocation, choice of delivery method?
• What success factors would you suggest to owners to improve competition, reduce costs, and result in better project outcomes?

Findings and observations from these roundtable discussions are presented in Chapter 5.

Guidebook Development

The draft methodology framework was revised to reflect practitioner feedback and used to form the foundation of a standalone Guide intended to help owners identify, allocate and manage risk in a manner that attracts competition and enhances project value.

1.4 Structure of this Report and Final Deliverables

Following this Introduction, the remaining chapters within this Draft Final Report are organized as follows:

• Chapter 2 presents a summary of the pertinent documents collected as part of the literature review along with associated findings.
• Chapter 3 summarizes key survey and interview findings stemming from the data collection effort. The summary presented herein focuses on findings that directly informed the research team’s subsequent identification of recommended methodology components.