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It’s been said that you can’t do today’s job with yesterday’s methods and be in business tomorrow. To that end, it’s no surprise public-private partnerships are rapidly emerging as a way for municipalities to attract talent and jobs to their communities.

Current constraints on government capacity are driving the public sector toward the innovation, quality risk allocation and new revenue sources derived from P3s. Contractors that successfully navigate P3s can end up in a strong position going forward. This success is connected to the evaluation of certain risks, which can be segmented into three areas: procurement, performance and permanency of participation.

Procurement Risks

The P3 procurement process typically includes a municipal-driven RFP or RFQ. Because this process is a resource-intensive commitment, key initial considerations must be examined. How committed is the public sector to the project? Is there a public champion in a position to take action? Has any screening or short listing taken place? How sophisticated is the public partner in terms of capacity and its objectives? The answers to these questions can help a prospective construction partner decide if proceeding with the proposal process is worthwhile.

A widely published RFP/RFQ is not just an attempt to generate responses; it also demonstrates the intent of the municipality to proceed. Additionally, it is equally important that a public champion for the project be easily identified. This could be a high-level elected official with the authority necessary to get the project approved. The political process cannot be discounted and the absence of a committed public participant is a glaring red flag of risk.

Indications of “short-listing” also should be considered. Given the resource consumption of the P3 procurement process and the need for varsity-level teams, the applicant pool is often limited. In turn, the probability of being selected increases. In addition, RFPs/RFQs containing the details necessary for tailored responses, as to design and financial structuring, represent a demonstration of the public sector’s capacity and commitment to the project.

Performance Risks

Construction partners also must review risk allocations tied to the actual performance of a project. Under the P3 model, project responsibilities should be held by the party best suited to accomplish the task. Permitting, related approvals and design-build factors unique to consortium participation all require detailed front-end analysis.

The risk of construction delays and city-initiated revisions can put unique pressures on a construction partner. Typically, the municipal partner should hold obligations to identify all permitting burdens, secure their issuance and assume any risks tied to delay on this basis. Contractors should refrain from assuming permitting and approval duties where they may otherwise hold them in traditional projects.

Within the consortium, construction team members also should properly allocate design risks. Project requirements such as adequate technology and design sufficiency to meet public sector needs may be assumed by the private sector consortium. As part of that consortium, construction partners need to make sure any internal risk allocations are properly placed.

Additionally, in defense of ongoing reputational value, construction partners should benefit from ensuring design work transparency and be fully engaged in the refinement process throughout the performance stage.

Permanency of Participation

The remaining category of risk is connected to the life cycle, operational and residual concerns of the P3 project. One key argument in support of P3s is that the development team is economically connected to the long-term efficiency and quality of the project. Therefore, it may cost more to develop a particular efficiency, but savings can be realized over the project’s anticipated life cycle. For the construction partner, this risk can present itself in the early bidding stages when a low-cost bid may trump quality work.

Also, it is not uncommon for a P3 agreement to run for a 30-year term, including operations and maintenance obligations. If that aspect of the structure does not contain provisions to share unanticipated residual value or tail-end losses, then it is possible for the final verdict to become highly negative and impact the reputational value of the consortium partners long after their work is done. This can exclude construction partners from additional public projects if the public partner reaches the conclusion that private sector risk considerations were not properly valued.

Tail-end flexibility as to shared risks and rewards can tend to facilitate trust and future opportunities.

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