As public infrastructure in the U.S. continues to age, public-private partnerships have become an increasingly popular procurement vehicle for state and local governments. In the right circumstances, a P3 may be a valuable tool to assist the public sector in delivering critical transportation and other public infrastructure projects--perhaps years, if not decades, ahead of schedule.
While early project delivery is attractive to the construction industry, the risk profiles and allocations of a P3 often differ significantly from a traditionally-procured project. Understanding the contractual framework and principal risk items is essential to any construction firm interested in dipping its toe into the P3 waters.
Each P3 procurement is driven by the rules established by the public owner, which vary from project to project. Nonetheless, many involve a similar contractual framework. Included in a typical P3 are three primary, project-specific contracts that are of paramount importance to parties focused on design and construction:
Through the P3 agreement (between the public owner and the developer’s special-purpose project company), the owner “concedes” the project for an extended term to the project company. The developer is responsible for securing all or a portion of the project’s financing, generally through a combination of debt and equity. Under the design-build-finance-operate-maintain (DBFOM) model, the project’s revenue streams (e.g., tolls, fare box collections or lease payments) are used to service the debt and provide a return on equity.
Throughout this process, much attention is paid to terms relating to design and construction. These issues are central to the viability of the project and, obviously, of greatest importance to a proposal team’s contractors and designers. The following are a sampling of the issues regularly addressed as part of these exchanges, many of which are not unique to the P3 realm:
As discussions with the owner progress, a developer will usually engage with its design-builder to craft the terms of their relationship. These negotiations place intense focus on risk allocations, establishing both the central terms of the eventual agreement between these two parties if the team is awarded the P3 agreement, and the basis for developing a design-build price. Often referred to as a drop-down agreement (because the design- and construction-related terms of the P3 agreement largely “drop down” to the design-builder), this agreement involves an entire set of additional risk allocations.
Though investment interest in new public infrastructure includes firms with some ability to manage construction risks (e.g., a development arm of a construction firm), a large segment of P3 equity comes from unaffiliated investors seeking to flow down as much risk as possible to their design-build teammate. While each project and circumstance is different, issues typically negotiated between a developer and design-builder include the following:
A developer will usually have a separate drop-down agreement with an operations and maintenance contractor, which, as the name suggests, will operate and maintain the P3 project for the life of the concession. While the design-builder and O&M contractor have distinct roles, the overall team benefits from their cooperation and regular interaction.
With an eye toward minimizing life cycle costs, the O&M contractor will want to have input on design. Additionally, the O&M contractor will need to access the project during the design-build phase, particularly as substantial completion nears. For example, on rail and mass transit projects, the O&M contractor must train its staff and test the system to ensure it can meet the operational standards of the P3 agreement. Similarly, the design-builder will need to enter portions of the completed project (or even close down a portion temporarily) to address punch list and warranty items.
This is where an “interface” agreement--among the developer, design-builder and O&M contractor--comes into play. This agreement typically addresses cooperation in design development, project testing, and overlapping work activities. It also allocates liability for design modifications that place an unanticipated burden on one of the parties.
A public-private partnership may be the right vehicle to advance an infrastructure project on an accelerated basis. But before a construction firm dives too deeply into a P3 pursuit, it should:
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