By KERRY SMITH, EDITOR, ST. LOUIS CONSTRUCTION NEWS AND REVIEW MAGAZINE
Public-private partnerships – P3s, for short – offer owners, investors and contractors the opportunity to make large-scale construction ventures happen while allocating risk across the entire project team.
Funding capacity and risk allocation are undoubtedly two of the biggest drivers of a decision to structure a mega-project as a P3. Associated General Contractors of America’s Brian Turmail, vice president of public affairs and strategic initiatives, says P3s enable owners to move forward on a project without having to secure full financing on their own.
“However, P3 projects can be risky because they are often run by internationally based financiers who do not know or understand construction,” Turmail says. “These financiers come up with contracts that are typically very long – hundreds of pages – and are non-standard, and they tend to pass all the risks of the project to the construction teams. For instance, inappropriate risks like underground utilities or all permitting might be shifted to the lead builder.”
Material quantities and subsequent pricing risks are often also passed to the contract on P3s, according to Turmail. “Because these projects are typically enormous, involve a lot of money and are often extremely complex, the quantities involved for these massive projects have very expensive ramifications,” he adds. “When the assumptions are off, even by a little, it can have massive impact on the project overall.”
Because P3 construction projects, by their nature, often take multiple years to build, says Turmail, this also increases risk.
To balance project risk, a growing number of mega-projects structured as P3s are being delivered via design-build rather than traditional design-bid-build. Advantages to design-build mega-project delivery, says Bill Hasbrook, include proper risk allocation, team-wide accountability and shared goals with a stake in the project’s outcome. Hasbrook is a board member of the Design-Build Institute of America and vice president in the Austin office of San Diego-based Kleinfelder, Inc., a professional services firm that performs engineering, construction management, design and environmental due diligence.
“You don’t have to use design-build project delivery for every P3,” says Hasbrook, “but it is a solid tool to have in your toolbox and use when you need it. Design-build can often help you leverage your dollars more effectively. For public sector entities, it does a great job of freeing up the money you would have ordinarily spent on the construction project on another budgeted need.”
For example, LaGuardia Airport’s nearly completed $4 billion, 1.3 million-square-foot Terminal B, a six-year construction project, is a P3 known as LaGuardia Gateway Partners with design-build delivery. Its operators, the Port Authority of New York and New Jersey, and its owner, the City of New York, are partners with a Paris-based global investor and asset manager, a Swedish construction and development company and a Vancouver, Canada airport management, development and investment firm. Design-build project delivery within the shell of a P3 holds all entities accountable to stay on track and within budget. The terminal will reach completion later this summer.
“The Design-Build Institute is an interesting organization because we don’t cater to just one entity,” Hasbrook says. “We cater to the design-build method itself. We have a three-legged stool that includes owner, designer and builder. Design-Build Done Right® best practices ensure that owners and practitioners will unlock the inherent value of design-build project delivery.”
Four key risk-oriented questions should guide contractors when considering whether to bid on a job, says Hasbrook: 1) Can I insure the risk? 2) If I can’t insure it, can I quantify the risk and put a dollar amount in my bid? 3) If I can’t insure it and can’t quantify it, can I still handle the risk? and 4) If I can’t do any of these, should I walk away from the project?
“There’s no cookie cutter answer to any project,” he adds. “Each stands on its own.”
Texas Facilities Commission Director of Public-Private Partnerships Jon Conant says the TFC builds and maintains state facilities in 258 cities for more than 100 state agencies totaling 26 million square feet. “Balancing a portfolio of built and owned facilities versus leasing buildings from the private sector is always a debate for governments,” says Conant. “With limited funding, the cost of ownership and maintenance is constantly competing with funding requests for essential services. The P3 model is becoming attractive to states as they see the risk transfer results in a lower cost of the risk retained by the state compared to traditional delivery methods.”
In a traditional design-bid-build, the owner must specify all the details and let the project as a hard bid. Conant says an interesting advantage to a P3 project is that the owner doesn’t have to price a project upfront before all the cost unknowns are determined, thus shifting the cost risk across the P3 partners.
The Center for Alternative Finance and Procurement, managed by the TFC as a 2015 unfunded mandate by the Texas Legislature, connects governmental entities with qualified consultants and other professional resources to assist in determining the scope and merits of a P3 delivery over other delivery methods using a pre-solicitation evaluation process. The Center may also participate in the evaluation of proposals received and in the negotiations of agreements to ensure that government achieves the best value for taxpayers’ money.
A local example is the Highland Mall redevelopment project in Austin. The City of Austin is transforming the retail center into a mixed-use development with offices for city departments.
“We’re here to support governmental entities if they decide to use an alternative delivery method,” says Conant. “We have a bench of advisors – financial, technical, legal and real estate – who can help connect government with qualified private sector advisors to ensure success. P3 is a delivery method that tends to provide faster delivery and better value through risk transfer on complex projects, but it is not a magic wand…you must have the resources to be able to utilize it.”