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Phyllis Harden

Legislative & Special Projects, Pine Bluff Sand & Gravel
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P3 Considerations for Contractors

P3 Roles for Contractors

In traditional public works financing and in the first generation of P3s, the owner usually took responsibility for important preconstruction activities such as permitting and differing site conditions. However, PPPs have evolved to shift more risk to developers, who are, in turn, trying to shift more risk to contractors. A contractor's role in a PPP could simply be that of a low-bid subcontractor or as a design-build contractor, or any other traditional contractor role. The design-build process shifts design responsibility to the contractor, theoretically reducing the number of change orders and identification of design flaws during construction. In essence, the design and construction of the job is outsourced by the owner. The contractor can then be in control of and responsible for the price, process, and completion, all of which are critical to both cost reduction and revenue generation in a PPP.  

Another PPP model could have the contractor or consortium design, build, operate, and maintain the project for a public entity wherein the long-term physical performance risks are shifted to the operator. Concession agreements offer an exclusive right to a consortium to plan, finance, construct, build, and operate a facility for a fixed period of time. This approach offers flexibility to the operators and encourages innovation in design, construction, operation, and maintenance because the bottom line drives innovation. Additionally, an option employed in Florida has been a design-build finance operation in which the state retains control but the contractor foregoes payment for a couple of years after the construction is completed. There are also other models being utilized. In each model it is important to remember that the contractor should evaluate both the typical construction risks and the atypical risks (such as long-term maintenance requirements) and work to reduce those risks. Because each PPP is uniquely structured, it is important to know exactly who you are working for and what risks you have assumed. Be careful to recognize any long-term liabilities that may be transferred by contract or MOU. 

Understanding the Contractor's Role

In a PPP project the contractor may face many new challenges, including public relations, providing equity investments, and managing gaps in insurance. It is important to understand the MOUs and/or contracts with financial partners and other team members outlining the rights of the contractor in the deal. Knowing up front whether or not you are "just a contractor" with typical responsibilities, or if you are investing, taking on unusual risk, etc is critical. These are key questions that must be determined through a teaming agreement/MOU. The agreement may require equity investment or significant upfront costs. These costs, along with your "sweat equity," can easily exceed a million dollars and can take years to bear fruit. You have to be able to determine if there is value in putting equity into the deal and if your contractual incentives are aligned with the lead financial partner. Once again, this highlights the need for the contractor to be at the table at the outset - both in negotiating the teaming/MOU with team members and in negotiating the contract with the public entity. 

Challenges to Implementing P3s

Once PPP legislation is approved, the focus shifts to approving and building a specific PPP project or projects. The main goal is to convince the public that your state's particular PPP approach is sound and has benefits such as delivering new capacity, incorporating new technologies, and meeting new federal, state or local standards. Since this is a new method of financing and delivering projects, the public is skeptical. Because the public will pay for it through user fees, they are fearful of the cost of future fee increases. In addition, all the interest groups that are devoted to stopping any infrastructure project from moving forward use the uneasiness about PPPs as another justification to stop the project. It is incumbent upon those who want to advance these projects to educate the public and local lawmakers about the benefits and risks that this innovative approach delivers and counter the misinformation that the opposition may put forth. As it is with anything new, the public needs to get comfortable with PPPs as a worthy approach, and, with success, more PPP projects will likely follow. Conversely, if the public is not convinced of their merits, and P3s are unsuccessful, few, if any PPP projects will follow.

Partnering

Partnering with a developer, concessionaire or financier, engineer, supplier, and other team members is important in participating in PPPs. The rewards from PPP contracting come from accurately identifying, analyzing, and pricing risks at all levels. Because of the increased complexity of the contractor's role, partnering among team members is critical to the project's success. Knowing the capabilities and vulnerabilities of your team will help you to evaluate holes in the team's capabilities, risks to team participants, mutual (and some-times conflicting) long-term commitments or pay schedules - all of which are critical to mutually understanding project milestones.

AGC promotes partnering in public and private work. Partnering is a voluntary system for handling normal, everyday problems in a mutually agreeable manner before they turn into major issues that create disputes. Partnering is not dispute resolution; it is dispute prevention. Because of the common goals and interests in PPPs, all stakeholders need to resolve issues quickly and fairly. Partnering begins before construction starts. Common goals are identified, communications standards are established, and dispute resolution standards are developed. Partnering continues throughout the project, thus ensuring that all parties adhere to the agreement, that there are no lingering issues, and that potential conflicts can be identified. With private interests taking on many roles in PPPs, the success of the partnering process will likely determine the success of the project.

How and When Contractors Should Get Involved

Public-private partnership projects encompass a different relationship than typical publicly-financed projects. Contractors work for a concessionaire or equity contributor/financier. Team roles and responsibilities need to be specified in the contract or MOU. Specific responsibilities, such as who is going to pay for development costs, need to be established as early as possible. It is critical that contractors are at the table to shape the deal and make sure the risks are appropriately allocated and that their sureties and insurers are fully informed of the terms of the agreements. Construction is a business of high risk and P3 opportunities should be evaluated based on the experience of individual firms involved.

Public Relations/Government Relations/Community Outreach

Often the increased risks and responsibilities and the desire to win the project require the project team to become experts in new areas such as public or government relations and community outreach. The experience of the team building the project is just the tip of the iceberg.

P3 projects tend to be controversial because of their size and/or how they are being financed or procured. Some projects even shift the responsibility of acquiring the right-of-way to the private consortium. These circumstances frequently require significant outreach to the impacted communities to explain why the particular project will be a benefit and why the different approach. If this outreach is not done effectively, it is unlikely that the public entity will move forward with the project. Therefore, it is essential that the private consortium work with the public entity to reach out to the public.

Construction teams are often local teams who are well-known in the community. Contractors, knowledgeable about local zoning laws and procedural requirements, are experts in gaining public consensus for community improvements. Contractors can significantly increase the public acceptance of a project, especially when the developer or concessionaire is not local. This is one of the significant contributions that contractors bring to a team. Contractors should not undervalue this contribution.

Role of Equity Investments by Contractors

While not common, some project teams want contractors to provide equity up front. Putting your money at risk early in the process is a new element of risk for public works contractors, or even for contractors who work for private owners. In some cases contractors may be called upon to pay for design long before the public entity even considers a project. It is not unusual for bidding preparation to cost more than a million dollars. Stipends are offered on some projects, but they are often a pool of funds divided among all bidders. Understand up front if stipends will be paid and how the stipend pool will be allocated to bidders. In a project that involves a consortium that packages an unsolicited proposal, it may take years before your development or design investment bears fruit.

Contractors may be called upon to finance a portion of public projects where states or localities receive annual apportionments of project funds. The demand for the public improvement drives the public entity to accelerate the project ahead of the public funding being made available. In this case, the contractor must evaluate the ability of the public entity to make good on multiyear commitments.

No matter the structure of the deal, it is imperative to know who you are working for, how and when you will be paid, and the limitations and strengths of everyone on the team. The success of the project depends heavily on the strength of the team.

Private funding for projects frequently comes from financiers who will not need contractor equity. Major players in public-private transportation projects approach it differently - some have requested equity, while others do not require upfront equity but need the contractor's expertise and local knowledge. Almost always, however, the financier or concessionaire will require the contractor to take significant construction risk (see more detail below).

For the success of the project and contractors alike, it is important to go to developers and provide expertise early. In many situations, contractors have taken the lead in the construction processes, including early input on design, materials, quantities, scheduling, and maintenance that can make the difference between a successful or disastrous project.

Sizing Up the Risk

Fully understanding and anticipating risks will make the difference between success and failure for the contractor. Risk-shifting is complicated, and it varies depending on the strength and experience of the consortium, public owners, and the contractors.

When contractors work with developers and concessionaires, it is important to know how the enabling legislation, contracts, laws, and circumstances dictate the roles and responsibilities of the parties involved in the contract. Risk-shifting is further complicated by the levels of agreements, and, like any other type of construction project, shifting away risk is always preferable. Risks not shifted away must be accurately priced into the construction costs.

It is important to remember that many of the risks typically borne by the public entity in public works contracting are candidates for risk-shifting. Public entities are trying to get the public use of an asset with as little cost and responsibility as possible. If successful, they can focus their resources on other projects in the area.

Monitoring Risk

The table below identifies many of these risks and who is likely to be responsible for the risk.

As illustrated in this chart, many risks that are typically held by the public entity are often shifted to the private consortium in a PPP. As these risks are allocated in negotiations with the public entity, it is important to stress again that contractors should be a part of these negotiations from the outset. Contractors must have a "seat at the table." Furthermore, contractors should have input as to which other stakeholders need to be at the table. Those who have "skin in the game" and are taking on additional risk should be part of the negotiations. Including the appropriate stakeholders in the negotiations will ultimately minimize the number of delays a project may encounter and, therefore, limit the cost incurred by delays. To allow the most efficient development of a project, the risk should be held by the entity best able to mitigate each risk type (contractor, con-cessionaire, or public owner).

Operation and Future Maintenance

If the owner requests such services, the contractor may well find itself providing "professional" services consistent with its expertise but outside the scope of its risk management program. The fine line between professional and other risks is elusive. Professional services are generally under-stood to be those requiring "extensive training, study, and mastery of specialized knowledge," or "certification or licensing," or compliance with ethical standards set by an association. If the con-tractor's failure to perform such a service properly could result in bodily injury, property damage, or economic loss, the contractor may have a "professional" risk.

Before a contractor expands its role in what would otherwise be a public project, the contractor should carefully identify any potentially costly gaps in its insurance coverage. Commercial general liability (CGL) policies typically exclude coverage for professional risks, and many contractors have little or no coverage for such risks. Contractors can purchase professional liability policies, but such policies tend to be costly, have higher deductibles, and provide lower limits of coverage. They also differ from the CGL policies in other ways that can make the two difficult to dovetail with each other.

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