by Michael Himmel, Senior Associate
I recently had the opportunity to attend CCPPP’s (The Canadian Council for Public-Private Partnerships) annual conference. This is typically the venue to check the pulse of major infrastructure project delivery in Canada.
In the past the conference has focused on contrasting the success of major infrastructure projects delivered as Public Private Partnerships (e.g. DBFOM, DBFM, DBF) against the typically poor performance of traditional delivery methods (e.g. DBB, DB). However, a new term stood out for me this year: “Traditional P3 Projects”.
A theme emerged in this year’s program surrounding the benefits of more collaborative contracting models. Public procurement agencies such as Infrastructure Ontario and Infrastructure BC have reacted to an industry wide reticence to bid on large, fixed price P3 contracts by introducing collaborative models such as Progressive Design Build and Alliance contracting into the Canadian market. CCPPP has been keen to embrace collaborative models such as these under the umbrella of P3 projects despite the lack of significant private finance which has previously been used as a marker to distinguish between P3 and traditional delivery. Consequently, the industry is now discussing progressive and collaborative delivery models in contrast to traditional P3 models.
“The Progressive Design Build model begins with a pre-qualified design-build contractor being selected to work collaboratively with the owner to develop the project design. When the design is sufficiently progressed a guaranteed maximum price (or fixed price) is set through negotiation. If the owner accepts the guaranteed maximum price then the project moves forward into final design and construction. Otherwise the owner has the option to use an off-ramp to initiate a competitive procurement using the design completed to date.”
The adoption of collaborative models is occurring in response to a pressing need emerging from market conditions – the private sector is no longer enthusiastically responding to RFPs for large traditional P3 procurements. This is being driven by three main factors:
There is a growing sentiment that the degree of risk transfer present in past projects is inappropriate for the private sector to bear.
Construction market capacity constraints (driven by the volume of public and private sector projects and labour shortages) means that contractors are being more selective in the types of opportunities they pursue.
The pipeline of projects in the Canadian market is increasingly comprised of large linear projects that carry large utilities, geotechnical and permitting risks – precisely the types of risks the private sector is not interested in carrying.
Collaborative models are appealing to owners because they allow for much greater collaboration with private sector partners to optimize scope, define risk, and explore innovation opportunities early on in project development. Private sector partners acknowledge those benefits too, but also appreciate the shift of project risk back to owners (either wholesale or through risk sharing mechanisms) in collaborative models.
The uptake of collaborative models in Canada is still in its infancy. Metrolinx is the only public agency with a collaborative model project under construction (Alliance Model for the Union Station Enhancement Project). Early indications from Phil Verster speaking on a panel at the CCPPP conference were positive about Metrolinx’s experience with the Alliance Model so far. But it will be some time before more projects can be procured and delivered for the track record of this new approach to be known.
“In Alliance Contracting & Integrated Project Delivery Model (typically referred to as Integrated Project Delivery in the US) the owner executes an agreement with a private sector delivery team to work collaboratively in the development of the project. The delivery team is selected based on qualifications and they work with the owner in a single integrated delivery team governed by a project board with representation from each party. Project costs are recorded on an open-book basis and the private sector party is reimbursed for all of their actual direct costs (excluding profit). An incentive mechanism is put into place where the private sector partner is rewarded for achieving project objectives such as on-time and on-budget delivery.”
Collaborative models will need to overcome significant challenges before they can enjoy widespread use in Canada. For instance, a broadly accepted methodology for assessing Value for Money exists for traditional P3 projects but has not been established for collaborative models. Value for Money especially deserves scrutiny in collaborative models where pricing is often established through a negotiation process rather than a competitive bid environment. It’s possible that increased early contractor involvement can actually help to reduce prices but a solid method for quantifying this benefit is needed. Additionally, the presence of private finance has been seen to be a powerful motivator for on-time delivery of projects but collaborative models do not always include this feature. Whether collaborative models contain the necessary incentives to deliver the desired project outcomes is not yet known in the Canadian context.
Procurement agencies in Canada are presently exploring solutions to these challenges. For instance, David Hubner of Infrastructure BC, speaking on a conference panel, described how they are exploring the concept of a competitive Progressive Design Build model where the owner collaborates with two design-build contractors to develop design concepts. The aim of this approach is to introduce more competition into the setting of the final price.
“In the Delivery Partner model the owner retains the services of a professional services firm with expertise in project delivery and program management, and then they work together to establish a contracting strategy for project delivery. Part of the Delivery Partner’s compensation is (typically) based on achieving project objectives such as on-time and on-budget delivery. This model is usually employed for large, complex initiatives that need to be managed as a program of multiple projects. Under the Delivery Partner model, constructors may be procured through other collaborative models, or else through conventional methods (DBB, DB, DBF, DBFM etc.).”
The adoption of collaborative models is being driven by necessity in response to present market conditions. But this response presents a real opportunity to improve outcomes in major infrastructure project delivery. Increased collaboration between the public and private sector early in project development can certainly lead to greater project innovation, and defining scope with greater understanding of costing can help lead to better project decisions. But regardless of the model employed, I think the best outcome of this emerging trend is that procurement agencies in Canada have more options and are taking more care to select the optimal model for particular projects.