By Reece Bailey, Executive Vice President, Sector Leader, Major/Mega Projects, EXP
For the next ten years, the infrastructure development program across Canada is unparalleled in size, schedule, complexity and cost. Unlike previous programs, this could be a result of underfunding. Regardless of its cause, the outcome remains the same; Canada needs adequate infrastructure to maintain its ability to compete globally and grow as a nation.
The importance of sharing risk in delivery models
Risk plays an essential role in Design-Build (BD) and Public-Private Partnership (P3) models. As projects grow in scale, funding and impact, we continue to assess how risk can best be shared among the market. To reallocate and share risks, it is important to understand the various project models and lessons learned that can be applied to establish a better risk-sharing model.
This article will focus on Toronto, as it continues with Capital Expansion Projects, as well as several other large DB/P3 infrastructure projects.
Delivery models require due diligence before selection, as each should be determined by what is best for the client. With changing markets, contractors have adapted to better understand the impacts of risk and outcomes associated with various delivery models. At EXP, we are seeing contractors hesitant to become involved with Design-Build models, as the risk is too high. With a void in the market, there is a reduced degree of competition that should exist for these contracts to sustain a healthy tender price pressure balance.
From a major projects’ perspective, safety is essential. To enhance the risk-sharing model, it is important to place safety at the front, as there is a direct correlation between safety and risk. From our experience on projects in various delivery models, we see that when risk-sharing is regarded as a necessity, we move more seamlessly as a single team towards project success. We were able to understand, from dynamic perspectives, risk associated with these infrastructure projects, and why varying elements and processes included and introduced higher risks. For example, during the tender process, risk tends to be high. This could be caused by many elements, including uncertainty, available data and information related to the Project Agreement (PA). With a large team of contributors, we want to try to alleviate conflicting requirements, differing codes and standards and inconsistency in the objectives of the project. In my experience, risk uncertainty often reduces once the project has commenced. This occurrence is likely due to risks being actualized in that they become reality and the foreseen risk happens, or a foreseen risk is retired once clarity is established after the project commences with the result that the levels of risk reduction as the project progresses. The first challenge to real risk-sharing is examining how the project agreements are compiled and the level of detail within them that is issued to the market to be tendered against. Alternatively, the project definition and requirements could be developed in tandem with the Contracting Authorities (CA) and the Design-Builder, creating a collaborative setting.
The other major risk components on these projects are utilities, permits, soil conditions, Canadian weather and integration. While there are many other elements of risk, these are significant aspects that should be addressed. Once you break ground, these risks often reduce drastically. However, subway systems such as the upcoming underground Transit Systems under tender or upcoming projects in Toronto, means the project is only going to break ground at key points such as the launch and extraction shafts. The risks associated with construction below ground exist for most of the project.
To improve the risk-sharing model, one option is to engage in more incentivized and cooperative models. Some varying models offer possible solutions, including the Alliance Model, Cost-Plus and Progressive Design-Build (PDB), all of which have benefits in terms of sharing risks and improving the certainty of design unknowns. While each of these offers opportunities to minimize risk, they also pose risks and should be carefully selected based on the clients’ and contractors’ capacity for risk and desired outcomes.
The Progressive Design Build Model offers a high level of engagement between the owner, designer and contractor. One element required for each project is certainty. A PDB method begins early and follows a step-by-step process, where the design is developed alongside the CA and their advisors with risks identified and resolved with all parties working together. This allows the design to progress to a level that allows the DB Contractor to price the project with far more certainty, in short – a “no surprises” approach.
All team members involved in a large infrastructure project are assessing many factors at once. In addition to collaboration, teams are configuring the schedule and time required to complete all the tasks needed to be completed including, supply chain, labour and logistics and in the fast-paced world of DB ‘time is money.’ There is not a perfect equation for schedule adherence. However, the collaborative nature of Progressive Design Build helps to mitigate risks early on, since construction estimating is conducted in the project’s preliminary phases of the design. This permits consideration for material costs, adjustments to scope, budget and schedule – which aligns with more certainty and predictability. For example, for engineers who are considering the complexities of relocation or support-in-place of utilities for a project, it is important to have a concept design that has had the time to be tested, that has been shown to the utility companies in real-time to make sure they are comfortable with a proposed process and understand the design which in turn helps alleviate delays later.
There are many options to alleviate the concerns around risk allocation associated with major infrastructure projects. As an industry, we need to work together to come to a model that suits all parties or at the very least allows all to start working as a collective together with the same end goals and the same desire to get the job done. We need a solution that allows these incredible projects to get built but does not put companies out of business because of poor financial results. We need a solution that does not rely on litigation to make up for losses and we need a solution that forces trust through shared interests, shared goals and shared risks. One solution could be the Progressive Design-Build process. This will force collaboration between owners and contractors, it lends itself well to the large infrastructure projects and will encourage contractors to bid for these large projects which in turn promotes healthy competition throughout the tender process.