• ICE qualifications. The ICE should have construction estimating experience (not simply be a PM/CM) and use standard industry estimating software when preparing its estimates. The ICE team should not be the same personnel as those who prepared the owner’s original budget estimate (to avoid “pride of ownership” issues)
• Cost model. The contractor and ICE should come to an upfront agreement as to how they will be structuring the cost model for the project and how cost comparisons will be performed. Often, the variance between a contractor’s estimate and that of the owner comes down to just a handful of items. It is therefore important for the ICE to also have a detailed, bottom-up estimate that is generally structured in the same manner as that of the contractor to allow the parties to drill into what is driving the variance (e.g., assumptions regarding productivity, means and methods, etc.)
• Risk sharing strategies. Allowances and provisional sums should be used more frequently (similar to the early days of fixed price DB) to address quantities that are highly uncertain. Unit costs should be broken out for certain items (e.g., pile length) and attached to provisional sums.
• Performance and payment bonds. The participants shared the view that owners would benefit from an increased understanding of:
  • How challenging it can be for contractors to obtain 100% performance and payment bonds for a mega project.
  • What the owner is really spending on these bonds, particularly as 100% of the project is never at risk at any point in time.
  • Alternative forms of security.
• Rethinking “competition”. Owners need to redefine how they think about “competition”. Instead of focusing on simply increasing the number of proposers, owners should focus on how to increase the quality of proposals. Quality of competition can be enhanced by providing more information to proposers and allowing proposers to rely on such information.
• Staffing model. Projects where the owner is primarily represented by internal staff (as opposed to third-party PM/CM teams) are perceived as being more successful. The owners’ internal personnel are perceived as being more vested in, and accountable for, the success of the project. There is less risk of delayed owner decision-making. With outsourced PM/CM firms, there can be questions regarding delegation of authority and the issue escalation process.

6 Conclusions and Suggested Research

Over the past two to three decades, project delivery has evolved dramatically as public owners developed alternative project delivery options 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 options have generally entailed strategies to shift more responsibility and thus 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 bid a large enough contingency 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 explore and attempt to address these market issues, this research first entailed a literature review and data collection effort designed to:

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

Based on these findings, a methodology and associated Guide were developed to help DOTs implement strategies to improve existing risk management practices, sharpen risk mitigation and allocation strategies, and enhance competition.

6.1 Key Findings

Some of the key findings from the data and practitioner input for this research are summarized as follows:

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

2. 2. 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
   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.

4. 2. • 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 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.
   3. With a few exceptions, large/international contractors and developers voiced strong support for progressive DB and CM/GC, with several noting that the pre-construction 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 cost and schedule control.
      • Progressive methods generally provide minimal incentives 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.

4. 5. • • 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.

6.2 Guidebook

Building from the insights drawn from the literature review, content analysis of contracts and practitioner input, the team developed a methodology to help owners identify, assess, mitigate and allocate risks in projects delivered using both fixed-price and progressive APD methods. The methodology components include strategies, methods and tools that have been successfully employed by practitioners to manage risk, stimulate competition, and improve project outcomes. These tools are aimed at aligning stakeholders’ perspectives of risks, managing risks at various stages in a project’s lifecycle, and equitably allocating 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.

6.3 Suggested Future Research

Additional research areas that would further support the methodology developed under this study include the following:

• Industry practitioners stressed the significant role sureties play in the feasibility of very large, fixed price DB or P3 contracts. More research is needed to fully understand:

• • The impact sureties can have on project size/packaging strategies,
  • Performance bonds and how much of the contract value needs to be fully bonded at any point of time
  • The viability of alternative forms of security (e.g., letter of credit, performance guaranties, etc.)
• Much interest was expressed by both owner and industry practitioners in the use of progressive delivery methods (such as PDB and CM/GC) to facilitate the delivery of very large, complex projects. However, few mega highway projects have been completed to date using such methods. As larger, progressive DB projects advance through the execution process (e.g., the BrentSpence Corridor Bridge project and the Francis Scott Key Bridge Replacement project), their performance should be evaluated in terms of budget and schedule metrics (budget to negotiated price, GMP to final cost, and planned to actual schedule for preconstruction and construction phases) and lessons learned identified.
• The Guidebook provides summary level of information on the use of Independent Cost Estimators (ICE) to assist owners with determining a reasonable construction phase price for PDB and CM/GC projects. More research and guidance could be developed to further assist owners with reviewing contractor overhead, profit and other indirect cost rates, and understanding how contractors develop their cost models.
• Another area of research could entail techniques for quantifying the optimal allowance or deductible amounts to use with risk-sharing strategies as a means to incentivize performance.

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