The recent
bridge collapse on Interstate 5 in Washington state was the just the
latest reminder of the overall problem that is afflicting nearly every state
in the union. Unfortunately, with so much to do, there is not an
overabundance of options to pay for it all. Costs are estimated in the
trillions over the next 10 years for repairs needed to substantially improve
the country's aging transportation, energy, and water infrastructure. This
is the harsh reality in an era fraught with governmental quibbling and a
federal budget for public infrastructure investments that is far less than
it was decades ago.
However, public-private partnerships (P3) are continually gaining ground
in the United States as a viable alternative for funding a vast array of
institutional and healthcare projects as well as overcoming budgetary gaps.
For years, countries worldwide have used P3 to facilitate multimillion
dollar construction efforts. Today, the transition to this form of financing
in America is increasingly gaining traction due to its ability to transfer
risk and funding from the public to the private sector in exchange for
future revenues.
A hypothetical example entails the building of a public facility by a
private developer, which would then retain rights of ownership and/or act as
the facility's landlord for a specified period of time. In this type of
arrangement, the owner would then collect mutually agreed upon fees from the
entity using the facility and possibly even additional restitution for the
performance of maintenance or other operational services. Other all-around
benefits include greater access to capital in an economic climate that is
still suffering from the downturn and the sharing of risks that accompany
any large-scale building project.
Facilitating P3
As imagined, such agreements can also be very difficult to formulate
given their complex nature and all the various contributors needed to make
them a success. First, the stakeholders involved can number in the dozens,
often including federal, state, and local government officials, contractors,
lawyers, financial investors, owners, architects, and designers—all with
their own perspectives and goals layered within the area's unique political
environment.
In addition, the legislation for such endeavors can vary widely according
to the individual state, municipality, and project type. For instance,
Florida, Texas, and Virginia currently offer advanced
design-build-finance options, while Ohio and Illinois recently passed P3
legislation. Unfortunately, many other states still lag behind the learning
curve in this area and are only now beginning to explore P3 advantages and
possibilities.
Consequently, contractors and owners alike are often reluctant to
participate in such opportunities given the complicated nature of P3 deals
and their unfamiliarity with arrangements expanding beyond traditional
project delivery models. But difficult market conditions have coupled with a
better industry understanding of P3 dynamics and government incentives
driven by new regulations to increasingly spur its adoption in the
commercial building sector.
Transfer of Risks
Another key concern is the "transfer of risks" that are commonly
associated with P3 building projects. Most arrangements proceed with the
public entity retaining all the risks, the transfer of risks to the private
industry partner, or an agreement of shared risks. Education, knowledge, and
familiarity with P3 landscapes are integral for laying the groundwork
for mutually beneficial partnerships that are not only exceedingly complex
but also can last for decades.
As a result, it is imperative to clearly define expectations and each
partner's responsibilities long before the work begins. That's because the
added risks for contractors involved in a long-term P3 program are likely to
be significantly different and far more extensive than the standard
professional liabilities associated with traditional design-build
activities.
Rectification Coverage
However, as P3 continues to evolve, so do the professional liability
insurance products that protect against design liability and other
liabilities associated with offering professional services. Insurers are now
offering coverage enhancements that go beyond typical professional liability
insurance for the entire design and construction team. One type of coverage
is referred to as "rectification coverage." Simply put, rectification
coverage will pay the costs to remedy a design defect identified during the
course of construction. It is added to the typical project professional
liability policy and usually covers both the design and construction
teams—minimizing the likelihood of project delays and potential costly
liability claims. Of course, the insurer must determine that the design
defect or error is likely to result in a third-party claim if not remedied;
otherwise, coverage does not apply. Even with the above to finance a loss,
insurance should never be substituted for thorough project risk management.
Risk Allocation and Prioritization
Furthermore, active involvement is also a necessity during the risk
allocation process, which involves identifying potential challenges
throughout the project life cycle and then assigning well-defined "relief
and compensation events" to remediate those problems. These can include, but
are not limited to, the:
-
Conflicts and delays caused by unknown historical,
archaeological, endangered species, and utility conditions
-
Delays resulting from public protests, related legal
actions, and eminent domain proceedings
-
Design and survey data inaccuracies
-
Long-term maintenance, structure, and litigation
exposure liabilities
-
Extraordinary guarantees
Subsequently, contractors and owners alike need to select partners with
extreme diligence. Construction managers and related stakeholders must be
aware that the lessons learned with previous projects will not necessarily
apply to the P3 arena. Divorce is not an option, especially with contracts
that can span 20 years or more and can include a broad spectrum of
construction, operations, and maintenance services.
Since municipal projects
can take years of planning and multimillion dollar investments before they
finally reach the groundbreaking stage, priorities should also entail the
thorough understanding of the owner's ecosystem and the political and public
sentiment surrounding the project. These are among the many questions that a
contractor should ask before even considering P3 involvement:
- How
committed is the federal, state, and local government to the completion of
this structure?
- How is the public involved, and how will they be
affected by the outcome?
- Who are all the P3 players?
- What is the status and source of the financing backing the project?
- What legislation is in place, and how is it likely to change
during the project's life cycle?
- Who's in charge and what is their
level of commitment?
Conclusion
Going forward, P3 will likely become
an integral nationwide method for securing the finances and resources needed
to update the country's crumbling infrastructure. The key for contractors
and construction managers is the understanding of its numerous complexities,
the various liabilities that can arise during any project phase, and the
need to take advantage of the developing professional liability insurance
products that can minimize the impact of financial loss.
The depth and
choice of partnerships should be considered at every level. All contract
negotiations require clearly defined roles in the mitigation of problems. It
would also be a mistake to proceed without professional liability insurance
advice. This includes experts who thoroughly understand the complexities of
P3 arrangements and the safety nets needed to safeguard against the myriad
of challenges that can arise throughout the lengthy duration of such
agreements. The truth is that the failure to act wisely, professionally, and
with forethought at the planning stages can result in decades—not years—of
financial shortfalls.