New Study Has IPD on Top: But Not as Dramatically as Advertised in Some Quarters

In their focus on public-private partnerships, Douglas and Sykes of Farella Braun + Martel tout 30% life-cycle savings for P3 concessions over traditional delivery models.  This claim is based, in part, on a study from a Bay Area Council white paper: "Framework Conditions for Foreign and Domestic Private Investment in California's Infrastructue: Seizing the P3 Opportunity."  The council updated their white paper in 2012 with a report entitled "Accelerating Job Creation in California Through Infrastructure Investment."   There, the council cites the Long Beach Courthouse study which promised 25% life cycle cost savings, and a pre-bid study prepared by the joint venture team for the Presidio Parkway in San Francisco, which promised a 23% savings in construction costs over a traditional delivery method.

How reliable are these reports of 25% savings for construction and life-cycle costs.

On December 17, 2013 Julia Holden-Davis gave a presentation to Division 4 members regarding a recent study by Mounir El Asmar, professor at School of Sustainable Engineering and the Built Environment at the University of Arizona, Awad S. Hannah, professor in the College of Engineering at the University of Wisconsin-Madison, and Wei-Yin Loh, also professor at the University of Wisconsin-Madison.  The study, Quantifying Performance for the Integrated Project Delivery System as Compared to Established Delivery Systems appeared in the November issue of the Journal of Construction Engineering and Management, Vol. 139, Issue 11 (Nov. '13).  Unfortunately the article itself is behind a pay-wall.

Julia purchased a copy and studied it.  Here is her excellent summary.



A few points to note:

The report compared 12 IPD projects to 23 non-IPD projects, mainly in California and the mid-west.  The authors looked at 304 variables, including, of course cost and schedule.  The study suggests caution is in order when evaluating hyperbolic claims of "faster and cheaper."

 Asmar/Hannah/Loh conclude:

1. There was no significant cost difference between IPD and other delivery systems (CMR, DB, DBB).  The authors indicate that this confirms prior literature.

2. IPD projects slightly faster (but not dramatic)

3.  IPD'ish projects fared best of all in many of the metrics used.

4.  IPD had best results for quality, but no significant difference in latent defects.

5. The overall user experience with IPD was qualitatively better.

"Americanizing" P3.

My posting of the Douglas/Sykes article, wherein I remarked on the three year negotiation period for the P3 at the Rialto water and wastewater system, sparked the following email exchange.

Scott Douglas: 

“You raise a good point re the 3-year negotiation period on the Rialto deal.  The promise of P3s is that projects can get built quicker, cheaper and better.  Once P3s become more common, the negotiation period should shorten.  And if the folks at Rialto had gone a traditional, public-funding route – assuming it had the financial capacity to raise funds for the project – it may have been quicker from the time it was initially conceived until completion, but it would have cost the city more – a properly structured P3 deal should result in overall reduction in lifecycle costs by 15 to 30%.  Clearly, there needs to be further development of P3s in CA and elsewhere in the US – the industry refers to this as “Americanizing” P3s – but P3s are needed here to address our aging infrastructure and the new infrastructure needed by the public.”

Roland Nikles

“Have you run across some studies on the savings over life-cycle costs that seem solid.   They did a pretty well documented report on the Long Beach Courthouse, but reading through that report the "science" of it is pretty thin.  When public entities outsource things like water and wastewater systems, some of the "savings," I assume, will be attributable to lower labor costs--non-union, no pensions--which raises larger issues.  Same thing for privatizing jails, as the Reason Foundation suggests;  and there you have the additional issues of do we want private corporations having control over such things as parole and health care in prisons? 

I think it's important to get the metrics on this right, because if there truly is a 30% life cycle savings, public construction should make a wholesale shift towards PPP right now.  No?  But before we make such a wholesale change, we should be paying attention to the metrics and make sure they are right.  I think a lot of the "savings" talk comes not from professors at Universities, but from companies who want to do these projects and their consultants.  

We are concerned about contractors hiding pools of profit in hard bid or GMP projects.  I think we can't begin to imagine the hidden pools of profit that can sneak into a 30 year P3 concession, and the ultimate cost differential for taxpayers.”

Today, at the annual meeting of the Western Region of the DBIA, I listened to Sandra Beck, an architect with the building program department at the University of California.  They have significant experience with Design-Build at this point.  One of the points she addressed was “the myth” that design-build is per se faster, better, and less expensive.  She said “You get what you pay for” and that she views savings that can be achieved as a nuance. 

The situation may be different for 30 year concessions.  If awarding concessions for the design, construction, operation, and maintenance truly can achieve the large savings that some promise, we should confirm this ASAP and get on with making the change. However, my guess is that “Americanizing” of P3 will develop slowly.  

Who will gather and keep the metrics?

Litigators Adding Value to the Economy

I always marvel at how the economy is a boot-strap operation.  As pointed out in the Douglas/Sykes article in our last post, economists for the AGC tout how for every dollar spent on construction, $3.4 dollars are added to the GDP.  A multiplier of 3.4 for construction ... not bad.

Well, that's nothing.

Consider the case of Muniz v. UPS, decided by the 9th Circuit on December 5, 2013.  Muniz sued her employer, UPS, for gender discrimination.  She was demoted by two classification levels.  Her complaint alleged damages in excess of $25,000, and the jury granted her wish:  she recoverd $27,280.  Her lawyers submitted a fee request for $1.9 million, and the court awarded them $697,971.80 in attorneys fees.  Of course, that's just one half of the equation.  UPS's lawyers, Paul Hastings, don't come cheap.  Let's call it another million, just to be conservative.  And this doesn't count the appeal.

So the $27,280 lawsuit gave rise to economic activity in excess of $2 million ... a multiplier of 74!  Now there's a boost to GDP worth shouting about.

Farella Braun's Focus on P3's, Part II: Sales Lingo, War Stories from the Rialto, and "Best Practices" Too

Scott Douglas and Jeffrey Sykes of Farella Braun + Martel have their second installment on Public Private Partnership, published in the Fall edition of the California Public Law Journal, vol. 36, No. 4, p. 38 (2013) [the link is to a more user friendly site].  For Part I in this series see our earlier review here.

Part II  has three parts:  (1) Pros and Cons of P3's--although this is mostly pros; (2) a recent "success story", the City of Rialto's 30 year concession for a municipal water and wastewater treatment system; and (3) P3 "best practices."

Part one is a useful run down of all the buzzwords used in selling P3's.  Take a look at the footnotes for some good references on P3 data in the UK, Canada, and Australia.   The article raises some unanswered questions.  For example, one of the key selling points is speed of development;  however, three years is cited as the time it took to negotiate the $176 milllion municipal water and wastewater system in the City of Rialto. With traditional project delivery, the city can hire an engineering team immediately with standard agreements, and while the design is completed the city can arrange it's bond financing, and contractors can be selected with competitive bidding using standard form agreements.  It's not clear that a 3 year process to line up a P3 agreement would be particularly faster.  A P3 converts a pretty straightforward construction project into a very complicated financing deal.  Maybe it can save time and money, but it's unlikely that a smallish city will have the expertise to evaluate how good a deal they are getting, and it's not intuitively obvious that it will save time and money.    

Take a look at the "best practices" section, it's very good.

Food for Thought: How Do We Handle Change Orders in IPD?

Now that Thanksgiving is over, it's no more food for thought, and back to thought for food!  

I'm working on revisions to the Consensus Docs 300 Agreement for integrated project delivery and am thinking about how to handle change orders in that Agreement.  

The document includes the following structure in broad strokes: 

• The Owner establishes the program, including an "Allowable Cost" and enters into a single integrated agreement with the architect and contractor at the outset of the project.  Everybody signs one agreement.  Major trade contractors are brought on board early and may sign joining agreements.  Together they form and IPD Team
• The IPD Team undertakes a validation study of the owner's program and comes up with an Expected Cost for the Project.  
• The Core Group (everybody is equal, but some are more equal than others) establishes a Target Cost to shoot for during the design process. 
• The Core Group establishes a financial incentive plan to get everyone collaborating in a feel good manner towards the Target Cost.
• Everybody uses Target Value Design and innovates to drive the cost down towards the Target Cost.  
• At some point before start of construction, and before financial close on the construction loan, the parties agree on an Estimated Maximum Price.  This is to put the bankers at ease. 
• The EMP may or may not be binding, i.e. like a GMP.  If it is not binding, the parties will have their profit/fee at risk to cover overruns--but they will be paid the Cost of the Work no matter what (i.e. owner is ultimate guarantor if the wheels come off).  The EMP will usually be higher than the Target Cost, but lower than the Expected Cost, and lower than the Allowable Cost. 
• A Risk Pool plan will establish the goals of profit participation (pain share/gain share)

So this is where the change order question comes in.  The current CD 300 has a changes provision that reads very much like a GMP contract changes provision.  I.e. every time the owner twitches and it looks like there is an impact on costs, there is a change order request.  However, this does not really seem appropriate for an integrated, collaborative agreement outlined above.  

The contractor will be paid its cost of the work for any change in scope, but there is the issue of how much the Target Cost, Expected Cost, EMP, or Allowable Cost should be adjusted--or if they should be adjusted.  One or all?  This matters because the Target Cost and Expected Cost will be used to determine the pain/gain share.  If we monkey with the work that makes up the original Expected Cost it will be difficult to measure how much innovation has happened and how this should be rewarded. 

It's not obvious how to articulate this in the agreement.  

• Allowable Cost:  this should not usually need modification, assuming the Expected Cost and Target Cost are significantly lower than the Allowable Cost the Project will still be completed within the Allowable Cost.
• Expected Cost:  in the case where a change does not exceed the “cost savings” that has been achieved from the original Expected Cost, no adjustment to the Expected Cost should be required.  i.e. no need to automatically change the Expected Cost if we are still below the original Expected Cost.
• EMP:  same rationale comes into play; if the IPD team has innovated savings, an owner change that spends some of these savings by adding new scope should not necessarily result in an increase of the EMP.  Does this depend on what the anticipated cost was at the time the EMP was set? 
• Contractor’s and architect’s fee:  if fee is originally set on the expected cost, the fee increases/construction dollar in ground as the target cost is lowered and achieved.  Should the contractor or architect be entitled to new fee if scope is added that moves the cost back up toward the originally expected cost?  Why?  How much?  Contractors and architects, of course, will want to share in the cost savings they helped create that the owner is now taking advantage of.  

Food for thought.