COMPARATIVE STUDY OF TIME AND COST OVERRUNS IN BUILDING PROJECTS PROCURED BY PRIVATE PUBLIC PARTNERSHIP PROCUREMENT
TABLE OF CONTENTS
1.2 DEFINITION OF P3, DBB &DB
1.3 PROBLEM STATEMENT
1.4 RESEARCH OBJECTIVE
1.5 RESEARCH LIMITATIONS AND SCOPE
2.1 PREVIOUS RESEARCH ON DESIGN-BUILD AND DESIGN-BID- BUILD
2.2 P3 STUDIES IN NORTH AMERICA
2.3 P3 STUDIES IN EUROPE AND AUSTRALIA
2.4 GAPS IN LITERATURE AND SUMMARY
CHAPTER 3: METHODOLOGY
3.1 LITERATURE REVIEW OF PREVIOUS STUDIES ON DBB ANDDB HIGHWAY PROJECTS
3.2 DEVELOPMENT OF INPUT AND OUTPUTMETRICS
3.3 CRITERIA FOR SELECTION OF SAMPLEPROJECTS
3.3.1 Projects Constructed in NorthAmerica
3.3.2 Projects Constructed Between 1990 and2010
3.3.3 Projects with Construction Costs above US$90Million
3.3.4 Highway and Bridge Projects Without a Large SignatureTunnel
3.3.5 Projects Procured Under a DBFOM ProcurementModel
3.4 DATA COLLECTION FOR SAMPLEPROJECTS
3.4.1 Literature Review
3.5 DATA ANALYSIS OF COLLECTEDDATA
3.6 COMPARISON OF P3 RESEARCH RESULTS WITH PREVIOUS STUDIES ON DBB AND DB HIGHWAYPROJECTS
CHAPTER 4: ANALYSIS & RESULTS
CHAPTER 5: CONCLUSION
5.2 RECOMMENDATIONS FOR FUTURERESEARCH
Public-Private Partnerships (P3) in Europe have become a trend in the past two decades and are gaining attention in the transportation industry with some large scale projects being delivered by this approach. This is due to the need for alternative funding sources for public projects and for improved efficiency of these projects in order to save time and money. Several research studies have been done, including mature markets in Europe and Australia, on the cost and schedule performance of transportation projects but no similar study has been conducted in Europe. This study focuses on cost and schedule performance of twelve P3 transportation projects during their construction phase, costing over $100 million each, consisting of roads and bridges only with no signature tunnels. The P3 approach applied in this study is the Design-Build-Finance-Operate-Maintain (DBFOM) model and the results obtained are compared with similar research studies on Europen Design-Build (DB) and Design-Bid-Build (DBB) projects.ThescheduleperformanceforP3projectsinthisstudywasfoundtobe
-0.23 percent versus estimated as compared to the 4.34 percent for the DBB projects and 11.04 percent for the DB projects in the Shrestha study, indicating P3 projects are completed in less time than other methods. The cost performance in this study was 0.81 percent for the P3 projects while in the Shrestha study the average cost increase for the four DB projects was found to be 1.49 percent while for the DBB projects it was 12.71 percent, again indicating P3 projects reduce cost compared to other delivery approaches. The limited number of projects availableforthisstudydoesnotallowustodrawanexplicitconclusiononthe
performance of P3s in Europe but paves the way for future studies to explore more data as it becomes available. However, the results in this study show that P3 projects have good cost and schedule adherence to the contract requirements. This study gives us an initial comparison of P3 performance with the more traditional approach and shows us the empirical benefits and limitations of the P3 approach in the highway construction industry.
Highway construction in Europe has mainly been developed by the traditional delivery methods such as Design-Bid-Build (DBB) and Design-Build (DB). These approaches have been successful to an extent but they are not meeting the current rapidly growing requirements with the required efficiency. The transportation industry is facing an infrastructure funding gap of $138 billion for 2008-2035 (National Surface Transportation Infrastructure Financing Commission, 2009). The motor-fuel and road taxes are not able to support the present demand for transportation infrastructure and hence transportation officials are looking for delivery methods that best utilize the existing funds and become a source of funds aswell.
The taxes in the US compared to the taxes in other countries could give us a picture of the current reduction in available funds through gasoline taxes in US. Figure 1 shows the vehicle fuel retail prices indicating the wholesale and distribution price and the taxes added to the gasoline price in the US and various countries. It shows that the taxes on gasoline in the US account for a very small percentage of the total retail price per liter of fuel compared to other countries. The European countries lead the way with taxes being more than the wholesale and distribution cost by about 200 percent for most of them. The graph in Figure 1 is based on 2006 USdollars.
Figure 1. Vehicle Fuel Retail Prices (International Fuel Prices 2007)
Source: VTPI, Fuel Taxes: Increasing Fuel Taxes and Fees, 2011
The trend for gasoline taxes in the US has been fairly even for the past five decades (shown in Figure 2). Taxes are shown in 2004 US dollars per gallon. The total fuel costs have been rising significantly since 2003; however fuel taxes have been flat. Funds for construction of new transportation infrastructure depend highly on the taxes derived from fuel consumption in the US, and hence fuel taxes need to be in rationality with the rising need for new facilities and for operation and maintenance of existing ones. The requirement to increase fuel prices and its advantages are mentioned in the 2011 report by Victoria Transport Policy Institute (VTPI) on Fuel Taxes saying “Higher fuel prices encourage more efficient transportation and fuel conservation. For oil consuming nations, reduced fuel consumption reduces the economic costs of importing petroleum. For oil producing countries it leaves more product to export, increasing revenues and income.Forallcountries, reducing total vehicle mileage reduces costs such as traffic congestion, road and parking facility costs, accident and pollution costs, helps maintain a diverse transportation system (walking, cycling and public transport), and reduces sprawl.”
Figure 2. U.S. Fuel and Fuel Tax Cost Trends
Source: VTPI, Fuel Taxes: Increasing Fuel Taxes and Fees, 2011
Figure 3 shows the Highway Construction Price Index (HCPI) from 1956 to 2007 – illustrating the rising demand for funding of transportation infrastructure in the US. The data for the graph is published by the Bureau of Economic Analysis and shows a considerable growth in the price index from 1956 through 2007, taking the index value for 2009 to be 100. A steep increase in the HCPI is observed from 2003 to 2007, due to a rise in wages paid to the construction workers. This increase was also due to the increase in prices of materials used in highway construction. The price of petroleum rose by 21 percent, which eventually led to a rise in prices of asphalt and diesel used in construction activities. Prices of iron and steel rose 13 percent annually. Sand, gravel,cementandconcreteroseby7percenteachyear,architecturaland
structural metal prices rose by 6 percent. The overall costs of highway and road construction increased at a pace of 10 percent annually from 2003 to 2007 compared to 2.4 percent increase in the two decades preceding 2003 (CBO, 2010).
Figure 3. Highway Construction Price Index, 1956 to 2007
Source: CBO, 2010
According to the report by Robert A. Sunshine, Congressional Budget Office (CBO, October 2007), the rise in highway construction cost from 2003 to 2007 more than offsets an increase in nominal spending on these facilities with spending in constant dollar falling by an average of 1.6 percent per year. This is illustrated in Figure 4 with the trend of constant dollars and nominal dollars shown from 1956 to 2007 in billions of 2009 dollars. Figure 4 shows total public spending, comprised of expenditures by the federal, state and local governments. Thetotalspendingincludespurchase,construction,rehabilitation,or
improvements of physical assets and equipment. The constant dollars shown in the graph have been adjusted to reflect the effects of inflation between the year the spending occurred and the base year 2009. Spending expressed in nominal dollars is the spending without the effect ofinflation.
Figure 4. Total Public Spending for Highway Capital, in Constant and Nominal Dollars, 1956 to 2007
Source: Congressional Budget Office, 2010
The graph in Figure 5 shows the federal spending on highway projects from 1985 to 2000 as compared to the spending by the state and local governments. The federal spending has been fairly constant over the given period; meaning the state and local governments have been left to take the burden of required investment in the highway construction industry. The spending includes the construction of new facilities and also the operation and maintenance of the existing ones. Both categories need more financial support from the federal government. With this much unavailable, yet necessary federal funding,
policymakers have reached a point where they are in search of innovative project delivery methods which are efficient in both cost and time.
Figure 5. Spending on Highways by Federal and State & Local governments in Billions of 1996 Dollars
Source: Government Transportation Financial Statistics 2001. BTS, US DOT
A project delivery method is a process of designing and constructing a facility. “The project delivery method is the process by which a construction project is comprehensively designed and constructed for an owner—including project scope definition; organization of designers, constructors, and various consultants; sequencing of design and construction operations; execution of design and construction; and closeout and start-up. In some cases, the project delivery method may encompass operation and maintenance.” (TRCP Report 131). Another definition that describes project delivery method is given by Texas Department of Transportation (DOT) “A project delivery method equates toa
procurement approach and defines the relationships, roles and responsibilities of project team members and sequences of activities required to complete a project. A contracting approach is a specific procedure used under the large umbrella of a procurement method to provide techniques for bidding, managing and specifying a project” (Walewski, Gibson, and Jasper2001).
The project delivery approach most talked about by practitioners in Europe at present is the Public-Private Partnership (P3/PPP). Since 1990, several government projects have been accepted to be delivered through the P3 approach by the transportation officials because of the severe economic constraints. The key element that differentiates this delivery approach from the more traditional methods like Design-Build (DB) and Design-Bid-Build (DBB) is the Finance element. In P3s the private entity not only designs and builds the government project but also finances it. The other important difference is that the DB and the DBB projects have been operated and maintained by government-managed entities but in the P3 method, the private entity would assume the responsibility of the operation and maintenance of the project for a certain contractual period. These projects are either tolled (toll – the fees collected from the user of the road by the public or the private entity that constructed the facility), or progressive payments (progressive payments – periodic payments made to the contractor by the owner of the facility) are made to the private entity by thegovernment.
In the last few decades, the Public-Private Partnership approach has been accepted around the globe including mature markets like Europe and Australia. In these markets, many research studies have been accomplished reporting the
efficiency of P3s in the construction world as compared to the traditional delivery methods. While in Europe, comparisons have been made between the Design-Bid-Build, Design-Build and other traditional delivery methods, to date no comparisons have been made on the performance of Public-Private Partnership delivery method concentrated on the transportation sector with the non-traditional delivery methods. This could be because of the limited number of completed transportation P3 projects available for study. In the past two decades, a number of transportation P3 projects have been completed through the construction phase that allowed an initial investigation on the construction performance (concentrated on Cost and Schedule) of the P3 projects. Hence this appears to be the first comprehensive study that compares the cost and schedule performance of Europen highway P3 projects to the more traditional DB and DBB projects.
The Federal Highway Administration (FHWA) in the US has taken steps towards trying innovative approaches to project development and delivery as a way to expedite the delivery of much needed transportation projects. For this, FHWA developed a Special Experimental Project (SEP) programs in which the federal as well as the state transportation agencies test and then evaluate new methods of delivering the projects. The SEP-14 was established by the FHWA in 1990 with the objective of reducing life-cycle costs of projects while maintaining product quality and contractor profitability. The projects under this program included roads, highways, bridges, tunnels, Intelligent Transportation Systems, etc. that ranged from micro projects (less than $2 million) to mega projects
(greater than $100 million). Under SEP-14, 282 Design-Build projects were proposed to be constructed in different states which included 19 mega projects. These 19 mega projects representing only 7 percent of the total number of projects accounted for 73 percent of the total investment in the transportation infrastructure projects which was greater than $10 billion (Design-Build Effectiveness Study, 2006 byFHWA).
To further increase private participation in public projects, FHWA initiated the SEP-15 program in which the goal was to increase project delivery flexibility, encourage innovation, attract private investment in transportation improvements, improve schedule containment of projects, and promote public- private partnerships. The key motive of the P3 delivery approach is to increase the life-cycle cost efficiency (Nossaman LLP website, 2012). Design-Build-Finance- Operate-Maintain (DBFOM) is the approach that undertakes the oversight of the project over a longer period, and shares and possibly transfers much of the risks from the Public side to the Private side. Texas, Virginia, Florida and Colorado have procured new transportation infrastructure projects that involve private investment as outlined in the SEP-15 program. Eight P3 projects worth $13 billion are under construction in the above mentioned states (ARTBA, May 2011) as shown in Figure 6. These projects include the toll roads as well as projects on availability payments from the publicentity.
Figure 6. P3 projects under construction in the US
Source: ARTBA, May 2011
In a recent article, published in the China Daily, March 2012; Zhang Yuwei reports that China, after evaluating the crumbling infrastructure of the US is considering investing into infrastructure projects in the US. This article states that about one third of the roads in the US are in poor or mediocre condition, and one fourth of the bridges are said to be either structurally deficient or functionally obsolete. Also, it states that in the annual infrastructure report of American Society of Civil Engineers (ASCE), the US transit system is rated as “D” which is a major concern for the US. The overall US infrastructure rating has fallen from 8th to 16th position in 2011-12 rankings in the past three years according to the World Economic Forum’s economic competitiveness ranking (Figure 7). The Yuwei report also states that China’s Ministry of Railways intends to spendabout
$300 billion on building transport systems through 2020; conversely the US Federal Railroad Administration commits $8 billion in similar projects in 2012. Experts say that US government lacks in funding and hence, Yuan Ning, president of China Construction America suggests collaborating through public-private partnership. The San Francisco-Oakland Bay Bridge is one of the examples of P3 betweenaChineseprivateentityandtheUSgovernment.Thecostoftheproject
was about $7.2 billion – having the Chinese contractor build it saved about $400 million, according to the California Department of Transportation.
Figure 7. Infrastructure Ranking of US in the World
Source: The Global Competitive Report 2011-12, World Economic Forum
The growing implementation of P3 approach in the highway construction industry makes it necessary to compare the cost and schedule control performance of this method to the more traditional DB and DBB method. The study objective is to bridge the gap of missing studies in Europen highway construction industry on P3s and serve as a basis to future studies that could further develop the methodology for P3 cost and scheduleperformance.
Public-Private Partnership (P3) can be a term which has no specific definition attached to it. Many definitions are available by practitioners and policymakerstoexpressthePublic-PrivatePartnershipdeliveryapproach.Acar
- et al. define P3 as, “..an umbrella term referring to a variety of collaborative undertakings between public, private, and/or nonprofit organizations, ranging from simple coordination efforts between two organizations from differentsectors
and organizations representing all three sectors” (Acar M. et. al., 2008). According to E.S. Savas, “The term public-private partnership is particularly malleable as a form of privatization. It is defined broadly as an arrangement in which a government and a private entity, for-profit or nonprofit, jointly perform orundertakeatraditionallypublicactivity.Itisdefinedasacomplexrelationship
- often involving at least one government unit and a consortium of private firms” (Savas, 2010). These are some of the definitions that do not talk about the finance, operations or maintenance aspect of the delivery approach but only about the involvement of the private entity in the public sector projects. Indeed, as per Zarco-Jasso, there are eight different ways in which there could be a relation between the public and the private entity. The key elements associated with a project, which are control, funding and ownership could be handled by either the Private or the Public partner in the Private public partnership giving eight types of P3 (Zacro-Jasso, 2005). Hence, the above mentioned definitions do not lead us to a precise explanation of the P3 deliveryapproach.
In 1992, the Private Financing Initiative (PFI) program was introduced in the United Kingdom with the vision of encouraging public-private partnership in the UK. PFI was designed to increase private sector involvement in the provision of public services. The report by Grahame Allen, The Private Finance Initiative, describes the most common form of PFI in which the private sector designs, builds, finances and operates (DBFO) facilities based on output specifications decided by the public sector (Allen, 2001).
The US DOT report on P3s defines them as “a public-private partnership is a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed” (USDOT, 2007). A report from the General Accounting Office states that “P3 is a contractual arrangement between public and private- sector entities, typically involving a government agency contracting with a business or non-profit entity in order to renovate, construct, operate, maintain, and/or manage a facility or system, in whole or in part, that provides a public service” (GAO, 1999). The two definitions above also mention that these agreements allow the private entity to invest a substantial amount in the project, helping the public entity to gain a different source of revenue and labor without making a substantial capital investment. This arrangement impacts positively the project delivery schedules, especially with the use of improved technological and managerialresources.
“Public–Private Partnerships allow private companies to build, own and operate public projects such as schools and hospitals on behalf of the public sector. P3 contracts commonly require the private agent to take responsibilities for the performance of the asset over a long term, at least for a significant part of its useful life, so that efficiencies arising from long- term investment andasset
management can be realized” (Nisar, 2007). Also, according to Frédéric Blanc- Brude et al., public–private partnerships are defined as “infrastructure projects procured under DBFO/M-type contracts that bundle Design, Build, Finance and Operation/Maintenance” (Blanc-Brude et. al., 2009). The National PPP forum in Australia defines P3 as “a contracting arrangement in which a private party, normally a consortium structured around a Special Purpose Vehicle (SPV), takes responsibility for financing and long term maintenance or operation of a facility to provide long term service outcomes. This may involve the private entity taking responsibility for the design and construction of a component of new infrastructure; and/or taking over a long-term lease or concession over existing assets; and/or the development of a new long- term contract to operate and manage the infrastructure. Typical forms of procurement include: Design, Build, Finance and Operate/Maintain (DBFO/M), Build-Own-Operate and Transfer (BOOT) or Build-Own-Operate (BOO)” (National PPP Forum, 2008). These definitions of P3 take into account all five aspects of the delivery of a project – Design, Build, Finance, Operation and/or Maintenance – which is the P3 model that is considered in thisstudy.
In the Design-Bid-Build method the owner procures the design and the construction of the project through different entities. The construction phase of the project is not initiated until the design is completely ready. A descriptive definition is given in the TRCP Report 131 characterizing DBB as a method in which “an owner retains a designer to furnish complete design services and then advertisesandawardsaseparateconstructioncontractthatisbasedonthe
designer’s completed construction documents. The owner is responsible for the details of design and warrants the quality of the construction design documents to the construction contractor” (TCRP 131, 2009). In theory, DBB method has various advantages compared to other delivery methods (Kay, 2009 & Beard et. al., 2001):
- It encourages competition amongst bidders and after the design is complete for the contractors tobid.
- The design firm is obligated to protect the long-term interests of theclient.
- Being an age old delivery method, most of the public entities have established their rules and guidelines for permits and use and hence DBB does not have to deal with many legal or politicalissues.
- The contractors could come up with good cost estimates as they have access to the complete design of theproject.
On the other hand, disadvantages associated to DBB delivery method are (Kay, 2009 & Beard et. al.,2001):
- The public sector retains all the risks of design defects and design changes and not thecontractor.
- The restriction of activities to be performed sequentially increases the project durationconsiderably.
- Since the owner is carrying the major risk in the project, he has to identify the inadequacies in the work performed by the contractors as well as the subcontractors.
The contractual flowchart for DBB project is as shown in Figure 8.
Figure 8. Contractual Flowchart for DBB projects
In the Design-Build method, the owner gives the responsibility of the design and construction to a single entity in which the project enters the construction phase after a certain percentage completion of the project. TRCP Report 131 defines DB method in three major steps: “First, the owner develops an RFQ/RFP that describes essential project requirements in performance terms. Second, proposals are evaluated. Finally, with evaluation complete, the owner must engage in some process that leads to contract award for both design and construction services” (TCRP 131, 2009). The key advantages associated with DB delivery approach are (Kay, 2009 & Beard et. al., 2001):
- The designer and the owner are involved at a very early stage of a project with almost the same starting point which leaves little room for potential discrepancies betweenthem.
- For many projects the construction stage starts sooner, often times after thirty percent of the design had been completed, which saves time and construction inflationcosts.
- The designer and contractor working together at an early stage of the project, have opportunities for innovation and valueengineering.
The disadvantages of the DB delivery method are (Kay, 2009 & Beard et. al., 2001):
- The qualification criteria to bid for a DB project do not allow many firms to participate and hence does not encourage as much competition. Also, the smaller firms can be left out of the competition as the larger design and construction firms take the lead, having resource departments that strictly deal with DBprojects.
- The contract between the public and private entity has to be scrutinized in- depth to avoid issues in the future. This is an intense negotiation period which could last for several months, where potential risks are carefully studied by each entity. Hence, a lot of time is invested before the commencement of construction which is not the case inDBBs.
- The contractor in some cases could dominate the contracted design firm and influence the design according to its own convenience, while the owner would not have much of a say once the contract is signed. Hence, this potential risk should be addressed in thecontract.
The contractual flowchart for DB delivery method is shown in Figure 9.
Figure 9. Contractual Flowchart for DB projects
The key benefit of DB over DBB is the integration of design and construction during the project development lifecycle. In the case of DBB projects, they are separated. The DB approach allows parallel processing of activities, while DBB keeps the process sequential. As given in the Design-Build Effectiveness Study of FHWA in 2007, the difference in the sequencing of activities involved in the two delivery methods are shown with a simple figure (Figure 10). The overlap of the Final Design and Project Clearances phase with the Construction phase saves a significant amount of time in the DB process, while considerable time is lost in the selection of a Design firm and later again during the selection of the contractor to construct thefacility.
Figure 10. Workflow in DB and DBB projects
Source: USDOT, FHWA, Design-Build Effectiveness Study, 2006
Policymakers in the Europe are in search of a delivery method for the transportation infrastructure industry that would make the construction and maintenance of these structures more efficient in cost, time and quality. The issue is most critical with large highway projects which require large amounts of time and money yet have to deal with limited availability of resources.
Delivery methods like Design-Build and Design-Bid-Build are traditional delivery methods that have been popular in Europe for decades and many studies have been conducted comparing the performance of DB versus the DBB method as mentioned further in this study.
On the other hand, Public-Private Partnership delivery method is gaining attention as it serves as an alternative technological, methodological and funding
source for a public project from a private source. This long-term delivery method needs to be assessed for its performance and efficiency in cost and time, compared to the Traditional delivery methods like DB andDBB.
The objective of this research is to assist practitioners determine the level of performance and efficiency of the Public-Private Partnership delivery approach. The P3 model considered in this research includes all five elements of delivery – Design, Build, Finance, Operation and Maintenance. The parameters for studying the performance of the delivery approach are chosen as cost and schedule of Construction portion of selected projects from an exhaustive list of highway DBFOM projects. Inference will be made on the cost and schedule performance of Public-Private Partnership approach as compared to the Design-Build and Design-Bid-Build deliverymethods.
This research has its criteria for selection of completed projects which allows it to have the sample of Public-Private Partnership projects accomplished between 1990 and 2010 in the Europen continent which are greaterthan
$90 million. The sample of projects does not include projects using DBFO or DBOM delivery approach or any project that at any stage was funded by a public entity. This research is based on DBFOM model of Public-Private Partnership. This study focuses only on highway projects with roads and bridges and not projects involving significant tunnels, as tunnels involve a different level of
complications and engineering and can affect the overall cost and schedule estimation in a dramatic way.
The study concentrates only on the construction aspect of the DBFOM delivery approach because there are not enough projects available at present to analyze the Operation and Maintenance portions of the P3 delivery approach. Also, the data collected in this research is primarily gathered from Public agencies and other publicly available sources. As with other similar studies, the private sector is reluctant to share information and requested data that might provide insight into their operations.