Design-build risk abounds, but can be mitigated
This feature is part of a series that takes an in-depth look at risk in construction. To view other posts in the series, check out the spotlight page.
“There is no such thing as risk.” That was the bold message delivered by Grant Holland of Mott MacDonald at last month’s annual Design-Build Institute of America conference in New Orleans. “You cannot quantify, in definitive terms, a particular risk on a project. Every stakeholder has a different view of that risk, they value it differently and they price it differently.”
Instead, the vice president of the United Kingdom-based consultancy’s advisory practice told attendees, “a risk profile is in the eye of the beholder.” In his 25 years of working on U.S. state department of transportation design-build projects, Holland said he’s seen models change from being focused on “risk transfer” to “risk mitigation.”
Common risks embedded in massive design-build and public-private partnerships, for example, tend to be pretty uniform across all projects. “Whether it’s environmental risks, utilities risks, design risks, resources and labor risks — they tend to be constant throughout projects.” At this point in the delivery method’s evolution, he said, it’s less about identifying risks and more about coming up with ways to mitigate them.
One of the more recent methods for doing so, Holland continued, is through allowances. The public sector stakeholder might throw out a number in the early stages of a project that serves as wiggle room. “Whether it’s $2 million or $5 million or whatever number the owner thinks is right” to serve as a ballpark estimation of possible risks, the owner tells the builder to “put it in your bid." Then it’s on the contractor to spend that amount on risks.
After that certain amount, a cost-sharing mechanism often now comes into place, in which the stakeholders distribute the burdens when they exceed a set number. Holland said he’s seen this method employed on all tiers of projects, and has seen it put in place for all risks combined, individual risks, and in a number of different scenarios, including for “unexposed ordinance risks, of all things."
Just transferring risks, rather than mitigating them, becomes a problem considering they are hard to define and vary among stakeholders. Despite knowing what they are, putting the onus on individuals becomes challenging in the design-build environment, especially as projects become more sophisticated.
That’s especially the case when contractors display various levels of “risk tolerance,” Holland continued. “Certain contractors will take a more tolerant approach to certain types of risks as opposed to the overall basket of risks, and what they are willing to accept varies both among contractors and across projects.”
He named Kiewit as an example of one of many contractors he’s seen come to an owner on a particular project and say, “'there is no way on the face of the Earth that we can move this project forward given that risk.' But on the other side of the country, they’ll come in and say nothing at all. It’s the exact same risk, but they don’t balk at it.”
Owners must then determine the level of tolerance among bidders. Do they give the job to the most tolerant, or do they listen to each short-lister’s concerns and really evaluate what’s going on? In Holland’s view, the latter approach is taking more and more precedent as projects get bigger and there are a lot higher dollar amounts.
Take the Virginia Department of Transportation, for instance, Holland went on. A colleague of his, Dusty Holcombe, now the vice president of transportation infrastructure at RS&H, described his days at VDOT working on P3s to Holland as being a time when listening counted a whole lot for all involved.
“One contractor would come to VDOT and mention a problem, saying they couldn’t continue, and VDOT would say, ‘sure, we have to take a look at it,' " he said. "But then another would say the same, and VDOT would decide it definitely needed to take a hard look right away. But after a third short-listed bidder identifies a problem, it’s on the owner to go back and completely recalibrate things.”
The process has come a long way during the span of Holland’s career, he said. One caveat he mentioned, though, is when there are risks associated with operations and maintenance. “I haven’t seen evidence that either the contractor community or public owners truly understand the risks associated with O&M tails. I don’t know how they can price it, I don’t know how they can evaluate it, but that is the area that we are going to begin evolving to, and that will be the next conversation on risks.”
That brought Holland to the delivery method’s evolving take on various-sized projects. He brought up the “big, sexy, career-making projects” to which the industry is progressing toward continually, but noted that design-build is also adapting its model to smaller and smaller jobs as well. “We used to not touch anything less than $100 million for infrastructure,” he continued. “Now we’re down to the $5 million range common in commercial design-build work.”
Larry Hurley, moderator of the panel Holland spoke at and president of H2 Consultants, chimed in with an anecdote about the changes he’s seen in the decades he’s been involved in transportation P3 work. “The Salt Lake City I-15 was the first $1B project that I remember working on,” he said. “At the same exact time, we were working on a $15 million contract for an entrance road to Yellowstone National Park, and that was a good-size contract for us at the time. It was a tremendous jump for us when we were doing maybe $130M a year in revenue.”
Holland said the reason design-build stakeholders are able to adapt the delivery method’s success to more small, varied jobs is that over the years it has increasingly gained experience inching it toward a “standard contract” regarding risk, or a kind of institutional framework for how to move all types of projects forward.
“Underneath that framework we’re able to begin developing the contractual procurement models that allow us to reduce the overhead down to smaller and smaller design-build projects," he said. "So that’s a trend we’re going to see significantly in coming years.”
He juxtaposed that trend with the trend with that of mega-projects— there are more than a dozen above $4 billion in Texas alone, Hurley said — and stressed the sheer magnitude of the risks involved in such high-dollar projects. “They’ll always be extremely expensive, and they’ll have overhead in the procurement and contracts to negotiate — it’s just the nature of those projects. And that makes those smaller projects more appealing," he concluded.