The Design & Construction Management Professional Reporter: December 2017
Inside this Issue:
Design-Build & Public-Private Partnerships: Managing Cost Overrun Risk for Project Owners On Infrastructure Megaprojects
By: John Reilly P.E., C.P.Eng. and David J. Hatem, PC, Esq.
Cost overrun risk for owners has been a significant concern, prompting development of a number of best practices to more realistically identify and quantify risks that impact cost and schedule on megaprojects and to prudently allocate those risks among project participants.
Design-build (DB) and public-private partnership (P3) projects present owners with the opportunity to transfer substantial design and construction risks to private sector participants. Examination of the contemporary practices of owners in achieving that objective and whether they improve owner “cost overrun” exposure is necessary. Many owner procurements, contractual and other practices will likely result in retention or a subtle reversion of cost overrun risk to the megaproject owner.
The premise of this paper is that while many owners regard DB and P3s as opportunities to transfer to the private sector significant design and construction risks that could result in cost overruns, unbalanced risk allocation, and other imprudent procurement, contractual and implementation practices are likely to result in retention/reversion of substantial owner risk for cost overruns.
The chronic experience of cost overruns on infrastructure and other complex megaprojects is well-documented, (Reilly, 2001; Flyvbjerg, Holm & Buhl, 2002; Butts & Linton, 2003b; 2009) in which overruns, in a significant numbers of cases, are of the order of +100% over the initial budget. Myriad and diverse reasons account for such cost overruns on megaprojects, in many cases relating to the size, complexity and long time-frames of such projects involving, as a consequence, changes in political environments among other factors.
The focus of this paper is infrastructure megaprojects and two significant sources of cost overruns: (i) defective design and (ii) differing subsurface conditions. In the United States, a great deal of the cost overrun experience has occurred in the context of the use of the design-bid-build (DBB) method and, for the most part, the adverse impact of that experience has been borne by the owner since, in DBB, the risk of cost overruns for defective design (“design adequacy risk”) typically resides with the owner and, subject to particular risk allocation contractual regimes, cost increases due to materially different subsurface conditions are substantially borne by the owner as well (Hatem, 2010a; 2017).
In response to megaproject cost overruns, a number of proactive management practices have been implemented in recent decades, including management strategies such as partnering, strategic team alignment, risk management, improved contracting, risk-based cost validation methods and, better communications and public outreach methods (Egan, 1998; Reilly, 1999; 2000; 2003b; Flyvbjerg, Bruzelius & Rothengatter, 2003; Reilly & Brown 2004a). The extent to which those practices have mitigated cost overrun exposure for owners is still being evaluated – however owners’ heightened awareness of cost outcomes, which have substantially exceeded authorised budgets, has increased the use of such practices to help mitigate cost overruns, potential risks and, to improve clarity of contractual requirements and obligations.
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