Public-private partnerships (PPP) offer potentially huge rewards for Design-Build Contractors that understand how to target, bid and manage the PPP process. The first part of this two-part article addressed upfront considerations and the basic contract agreements typically used in connection with PPP projects. This second part will address best practices and ways to mitigate the risks associated with PPP project performance.
Is The Project Public Or Private?
Whether a Concession Agreement is a public or private contract often has a major impact on the terms and conditions of the Concession Agreement and the Design-Build Contract. Public projects are typically subject to state procurement laws, which often limit or prohibit the use of various contractual clauses or remedies that may affect the ultimate pricing of contract work. For instance, a public PPP project may be subject to prompt pay requirements, prevailing wage requirements, subcontracting socioeconomic programs, a “no damages for delay” clause, a mandatory differing site conditions clause, and payment bond requirements in lieu of mechanic’s lien rights. Whether a given PPP project is a public procurement is likely controlled by the State’s enabling legislation. It is important for any stakeholder to analyze and understand the State’s statutory and regulatory requirements as they pertain to the Concessionaire and the Design-Build Contractor before bidding as part of a PPP team.
Will The Project Receive Federal Credit Assistance?
When conducting business in the United States, contractors have to be familiar not only with potentially applicable State requirements, but with various Federal Government rules and regulations as well. If a PPP project involves a highway or railway, for instance, the Federal Highway Administration (FHWA) may make funding available through the Transportation Infrastructure and Innovation Act (i.e., TIFIA loans), loan guarantees and/or standby letters of credit to qualifying private developers. When federal assistance is being provided, public owners, at a minimum, must include a clause in a Concession contract that requires the Concessionaire to comply with “laws applicable to a transportation project that has received or receives federal-aid funds.” The Concessionaire then will flow down this provision to the Design-Build Contractor. As a result, a Design-Build Contractor needs to understand what federal requirements are applicable to a PPP project before submitting its final proposal and committing to its price. Given the stake involved in most PPP projects, the Design-Build Contractor must ensure that its bid properly construes applicable Davis-Bacon prevailing wage rates for labor, Buy America requirements for material purchases, subcontracting participation requirements by qualified disadvantaged business enterprises and any other uniquely federal requirements that might apply to the project.
How Will The Project Manage Design?
Significant savings can be realized when the design-build delivery model is used properly. Achieving and maximizing such savings are the hallmark of a successful PPP. The design-build delivery method is specifically tailored to achieve cost advantages during the design phase and construction period by enabling value engineering and constructability reviews to occur in a collaborative manner before 100% design drawings are complete. Moreover, the delivery method facilitates prompt identification and correction of design errors or necessary redesign caused by unexpected field conditions by placing the designers and the construction personnel on the same team.
These advantages enable the Design-Build Contractor to better manage the inherent cost and schedule risks on PPP projects. These advantages can be lost, however, if the Public Owner interferes with the design through unreasonable oversight of the Design-Build Contractor.
The Public Owner typically reserves the right to review the design at various stages of its development for compliance with the contractual design standards, performance requirements, governmental approvals, and applicable laws. In order to avoid unnecessary interference with the design process, both the Concession Agreement and Design-Build Contract should clearly spell out the applicable design and performance standards that the designer of record is to follow. Any oversight of the design process should be limited to a determination of whether the specified standards have been followed or achieved. Clarity in this regard is essential. If properly addressed in the contract documents, the Public Owner’s demand for performance to standards not spelled out in the contract, or attempts to impose preferences on the design, should result in a change order adjusting the contract price and/or the time for performance. The Concession Agreement and the Design-Build Contract should also provide a clear and speedy procedure to address design-related disputes (e.g., through a standing Dispute Board).
In addition to articulating a clear design review standard, clarity with regard to the timing of conducting the design review process in a PPP project is vital. In connection with the traditional design-bid-build delivery system, Public Owners have ample time to review design submittals from their design consultants. Altering the nature and timing of the design review traditionally conducted by Public Owner engineering departments is a challenge. Many fast-track Design-Build Contracts have been negatively impacted by Public Owners who ignore or fail to heed contractually required turnaround times for review. As such, the participants in PPPs would do well to obtain a meaningful commitment from the Public Owner to devote the resources necessary to ensure timely review of submittals. Best practices suggest that the parties agree up front on how to address delays to the design review process. For instance, the parties might agree that any submittal is deemed approved upon expiration of the contract review period, so long as this constructive approval does not constitute a waiver of the Design-Build Contractor’s duty to comply fully with the specifications, governmental approvals and applicable law. Alternatively, in the absence of constructive approval, the Concession Agreement and the Design-Build Contract both could be drafted to identify an untimely design review as a Compensation Event and/or a Delay Event. Such an agreement would protect the Design-Build Contractor against the Public Owner’s breach and provide an incentive for the Public Owner to meet its contractual obligations.
Over the shoulder design review can be a two-edged sword. In many circumstances, an over the shoulder review by the Public Owner can facilitate design review, minimize formal written comments and/or help avoid outright rejection and re-submittal of a design submittal. This same type of review, however, can also lead to a proliferation of changes, incorporation of owner design preferences, and increased project delays — resulting in discord among the parties.
Best practices suggest that there be some relatively quick contractual mechanism for resolving technical disputes related to whether the design is in compliance with the contract requirements. This can help avoid re-designs and re-submittals, while preserving design and construction budgets and maintaining the overall schedule. Where dispute review boards are not used, one alternative approach is to have senior representatives from the Public Owner, Concessionaire and the Design-Build Contractor meet in an attempt to reach a mutually satisfactory resolution that permits work to proceed. If this cannot be achieved, the contract should provide for the appointment of a technical expert who can at least provide the parties with a non-binding opinion after meeting with the parties and reviewing the submittals. The Public Owner and/or Concessionaire can disagree with the decision and direct the performance of work as they like, but there must be a clear written directive that permits the Design-Build Contractor to exercise its rights under the disputes process, while performing as directed.
Who Is Responsible For Impacts If The Project’s Footprint Changes?
For PPP transportation projects in particular, the acquisition of right of way is often an important component of the Concession Agreement. Untimely acquisition of property can cause critical path delays or cause work to be conducted out of sequence with resulting productivity losses. Either impact is detrimental to the project and potentially catastrophic for the Design-Build Contractor and project subcontractors. The planned right of way is customarily identified in the Final Environmental Impact Statement/Report and in the Concession Agreement, and is subject to modifications made necessary through development of geometric approval drawings, or by change orders.
Most of the risk associated with the acquisition of right of way is associated with: (i) unforeseeable costs and/or (ii) schedule delays. With regard to cost risk, Concessionaires have taken different approaches. Some Concessionaires take full responsibility for the acquisition cost of all property within the planned right of way. Other Concessionaires only accept the financial risk up to an agreed upon monetary threshold and pass the risk of any cost over the threshold to the Design-Build Contractor. More creatively, a Concession Agreement may provide that the Public Owner agrees to pay the increase in cost over any agreed upon right of way price, so long as the Public Owner also receives any savings if the costs are less than the initial price. It is further possible for the parties to agree to a sharing formula depending on the percentage of increase or decrease in right of way cost in comparison with an initial estimate. Although the formula for risk assumption may vary, best practices dictate that the responsibility be clearly defined in the Concession Agreement.
The risk of schedule delay caused by right of way acquisition has similarly been allocated in various ways. When the Project right of way has not been secured prior to award of the Concession Agreement and the requirement to secure the right of way is flowed to the Design-Build Contractor, the Design-Build Contractor usually accepts the risk that certain parcels may be delayed due to the need for condemnation actions or prolonged negotiations with difficult property owners. On the other hand, even where the Concessionaire agrees to obtain the right of way, the Concessionaire may not accept liability in the event that parcels are not delivered in a timely manner. When negotiating the Concession Agreement and the Design-Build Contract, parties should clearly address issues including which party is responsible for securing the right of way, when the right of way parcels will be available, and who bears the risk for late delivery.
Other foreseeable problems should be addressed and the obligations should be flowed down to the party best suited to bear the risk. For example, although a state government may have the right to award a Concession Agreement for a toll road, the toll road may feature one or more exits onto roads that are under the jurisdiction of a local government. How the ramp connects with these roads and other requirements that may be imposed, such as interchange landscaping and sidewalks, must be carefully considered as the Concessionaire and Design-Build Contractor may be obligated to meet the state government’s obligations towards the local government.
When Do Liquidated Damages Begin To Run?
The failure to achieve either Substantial Completion or Final Acceptance by a specific date normally results in the assessment of significant liquidated damages. Consequently, the contractual definitions of Substantial Completion and Final Acceptance are among the most important terms in the Design-Build Contract. These definitions not only impact the assessment of liquidated damages, but the milestone dates typically trigger the commencement of the warranty period, as well as responsibility for utility costs, operations and maintenance. Particular care should be taken in negotiating the definition of each term in the Design-Build Contract.
Design-Build Contractors are accustomed to seeing a definition of Substantial Completion that does not incorporate punch list or other Work scope that does not impact the owner’s ability to occupy or utilize the Work safely for the intended purpose. On a PPP Project, revenue operations are of paramount importance to the Concessionaire and its Lenders. Therefore, it makes sense that any substantial liability for liquidated damages cease once the project can be safely utilized for the collection of revenue. Some Concession Agreements and Design-Build Contracts, however, have deviated from the traditional approach by requiring the completion of work that is not essential to safe commercial operation as a condition of Substantial Completion. At a minimum, the Design-Build Contractor should negotiate a substantially reduced sum for liquidated damages once the project is taken over and operated.
Final Acceptance on a PPP project is defined as the completion of all of the Scope of Work, other than that required for Substantial Completion, completion of punch list items, and delivery of project documentation, including final as-built drawings, warranties, operating manuals, and certificates of acceptance by the Public Owner. Most Concession Agreements and Design-Build Contracts assess liquidated damages for failure to achieve the Final Acceptance Date, in an amount sufficient to cover the contract administration costs being incurred as the project closes out. Problems can arise when the definition of Final Acceptance varies from this definition. For instance, the Design-Build Contractor’s risk exposure to liquidated damages increases significantly if the contract requires resolution of all claims or liens against the Concessionaire or its property rights as a condition of Final Acceptance. Best practices suggest that both the Concession Agreement and the Design-Build Contract permit the Concessionaire and the Design-Build Contractor respectively to reserve specifically identified claims against the Public Owner or the Concessionaire and still be able to achieve Final Acceptance. The recognition of a reservation of express claims would not place either the Public Owner or the Concessionaire in a position where damages for non-performance were being sustained and therefore no entitlement to liquidated damages should exist.
If the best practices discussed above are used throughout the process of drafting and negotiating the Contract documents and careful consideration is given to how risk is allocated, the Design-Build Contractor can markedly improve its prospects for successful and profitable completion of a PPP project.