It is difficult to pick up the local business journal or attend a networking function without reading and hearing about the latest and greatest P3 project. P3 – or public-private partnership – projects are becoming increasingly popular as cash-strapped governmental bodies and budget conscious private sector entities are looking for creative ways to finance projects and encourage investment and development within their communities.

Many contractors find P3 projects appealing due to the perception that they combine the best part of public projects (safe, reliable funding) and the best part of private development (highly profitable investments), all while benefiting the public. While that is true in many cases, P3 projects also come with increased risk for contractors. This is because the main stakeholders, the municipality and the private sector partner, are each working outside their traditional roles and, thus, are quick to shift or push off additional or extraordinary risk. Such risk often lands squarely in the lap of contractors.

Understanding and assessing such risk, however, can be problematic as no P3 project is alike. Every P3 arrangement is – at its core – just a contractual relationship between a private sector entity and a public sector entity to develop, construct, renovate and/or maintain an asset for public benefit. Each project, however, can be structured dramatically differently as municipalities and their private sector counterparts negotiate financing, control and responsibility of the project overall. Construction is a risky business, but successful contractors know how to assess, manage and pass off such risk. Contractors looking to successively participate in P3 projects need to understand the project’s overall structure and identify how the balancing of risk and responsibility between the private sector entity and a public sector entity may affect them. Three contractual provisions regularly affected by the uniqueness of P3 arrangements which contractors should be careful to understand and review are:

• bonding and insurance;
• indemnity; and
• dispute resolution clauses.

Bonding and Insurance

Contractors must carefully assess both bonding and insurance requirements before entering into any P3 project relationship.

A common misconception among contractors new to the P3 world is that bonds will not be a required element because the project is not a traditional “public project.” This is often not the case. While laws change by jurisdiction, it is all too common that the governmental body will want, or be obligated, to require bonding from the private sector partner for the full project value. Due to the high cost of bonds, this is a requirement often shifted to the contractor.

Municipalities may also require contractors to carry liability insurance at coverage levels higher than what contractors working exclusively in private sector development are expected to hold. Long-term P3 projects provide even further issues as contractors, who will be expected to maintain bonding and insurance for the entirety of the project, also face increasing premiums, interest rate changes and diminished bonding capacity.

Savvy contractors will try to negotiate reimbursement for any bonding or insurance costs that exceed their standard levels of coverage. Contractors should work closely with their insurer and insurance specialists before being involved in a P3 project bid to better assess risks or actual costs.

Indemnity

As with traditional developments, in P3 projects, the owner/developer will require the contractor to protect and indemnify the owner/developer from any third-party claims or liabilities that result from the contractor’s performance or non-performance during the project. Unlike with traditional developments, however, the indemnified parties will typically cover both the private sector owner/developer as well as the municipality and their respective organizations, employees and assets. Moreover, traditional efforts to manage risk may not be available. Many state and local governments have sovereign immunity statutes that limit the types of claims and amount of liability public entities may assume. As such, mutual indemnities may not be available or, at best, limited.

In addition, contractors should be mindful that their indemnification could cover performance or non-performance of obligations seemingly “outside” of their construction contract. It is rather common for certain types P3 projects to include in the contractual agreement between the governmental body and private sector partner, additional contracting requirements, such as prevailing wage rates and local hiring requirements, that are merely referenced in the contractor’s construction contract. If a contractor fails to meet these additional requirements, the indemnified party could suffer a loss that triggers the contractor’s indemnity.

To manage and mitigate risk, contractors should require public entities to provide notice of any triggered indemnification claims. Additionally, private entities should review all agreements referenced in their construction contract and negotiate management over any indemnification claims. Failure to do so may expand contractor’s risk for assumed liabilities.

Dispute Resolution

Risk shifting involved in P3 projects often leads to heightened tension and disagreements, which are further exacerbated by the fact that the general public is often paying very close attention. To avoid unnecessary stress and heartache, contractors should pay close attention to dispute resolution procedures in P3 projects.

Mediation is often a preliminary requirement before parties may engage arbitration or litigation. Mediation requires parties to make a good faith effort to settle or agree. Agreements reached in mediation, however, may not be binding on either party. Arbitration provisions appoint a third-party, ideally with expertise in P3 projects, which hears both sides and decides relief. Arbitration has procedural requirements for timing and notice, but the parties often can mutually agree to modify or waive any requirements. Arbitrators’ decisions are binding on both parties and is confidential. Litigation uses the public court system and thus, unlike mediation and arbitration, is of public record, unless sealed by a judge or magistrate. Like arbitration, litigation has procedural requirements for timing and notice (which may be more stringent for government entities), and a court’s decisions is binding on both parties.

Contractors should be keen to understand what dispute resolution methods are required under their contract and whether there are specific individuals who are required to participate and/or deadlines affiliated with making claims and resolving disputes. Failure to make a claim on time, or to show up with the right decision maker, for example, could mean a contractor has forfeited its right to pursue a claim. Contractors should also review these provisions to ensure they do not assume extraordinary procedural and financial requirements that may frustrate their ability to pursue a claim.

Contractors should also be keenly aware that, while P3 projects are not traditional public projects, they are projects involving public entities and thus are subject to local open record laws. All communications with the public entity may be subject to review by the press and general public.

P3s have many benefits to contractors. Successful P3 participation requires strategy and appropriate measures to protect contractors from unforeseen risks and liabilities. Contractors who successfully manage risks will not drop the ball, but will successfully hand off risk and achieve P3 project success.