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How to Obtain Best Value for Government Projects

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David M. Lick
Foster Swift Municipal Law News
April 14, 2017

In the rapid expansion of infrastructure in decades prior to the 1990s, the emphasis was on obtaining federal grants to fund whatever design was submitted. The focus of federal grants or traditional bonding was to obtain funding to a set design. For instance, once a wastewater treatment was designed, grants or bonds were applied to pay for the expected cost. Today’s emphasis is the opposite. Governments are cost conscious and there are few grants available.

In the last couple of decades governments have utilized the design-build concept to obtain buildings and infrastructure. The design-build concept places the designer and contractor on one team in answer to the government’s request. The performance specifications are “build to performance” rather than “build to a particular design.” The design-build methodology shifts most of the risk to the design-builder team. The design-build methodology is more efficient, cheaper, and provides faster delivery.

In the recent decade, governments have begun to utilize a public-private partnership (P3) which by its definition usually requires a design-build methodology of delivery. The public-private partnership model often includes finance by the private entity and sometimes includes operation and maintenance of the project by the private entity. When a P3 model is utilized that includes operation and maintenance for the structure for a period of years, there is an incentive to design the building to optimal durability. This concept of optimal durability balances yearly maintenance vs. upfront capital cost. When the project also includes private financing by the private sector with revenue payback over a period of years, the value of the project is further enhanced by an incentive for low financing cost, efficiencies, and speed of delivery. A P3 project that includes design-build-financing-operation and maintenance is known as DBFOM.

By definition, P3 is an entrepreneurial concept that has built-in incentives or best-value procurement. It starts with competition for all aspects of the project, including design, construction, finance, and operation and maintenance of the project. This is unlike other delivery methodologies that only concentrate on competition for the lowest construction price. Another aspect is incentivized performance through pay-for-success concepts which include performance specifications for the private sector to accomplish specific goals. If the goals are not accomplished, payment is not made, or at least payment is reduced. Performance is enhanced through private enterprise’s vast experience and economies of scale. A federal bureau prison awarded a $36.8 million contract to a private company to replace HVAC systems, upgrade lighting and water infrastructure, and replace a steam facility. The costs will be paid through the energy savings that the company has committed to produce. The facilities are expected to earn the money back within 20 years.

Additional value can also be obtained from the private sector’s ability to use tax credits and other tax incentives. All of this can also evolve where the rewards are shared with the governmental entity from the private sector performance. On balance, many believe that public private partnerships save costs, and are delivered faster with fewer disputes. P3 can be summarized as cheaper, better, faster in delivery and performance.