Absorption of Risk
Assuming a risk (or risks) and the associated potential financial burden. The term is used in allocating risks among various parties by determining which party is available to absorb and manage – and therefore is responsible for – a specific risk.
A business arrangement in which an asset is always available to deliver a defined level of service to an owner in return for a steady stream of payments, often used in DBOF and in P3 projects.
The documentation developed by an owner when evaluating the financial implications of a public-private partnership (P3) for financing a capital project. The business case considers the discount rate applied to cash flows expected from a project, efficiency factors resulting from delivery of the project by a third party, the potential for capital and operations-and-maintenance cost savings, and any risk premiums to compensate for transferring risk from the project owner to the third party.
Collaborative Delivery Methods
Approaches to procuring and delivering a capital project that involve close collaboration among the owner, the designer, and the contractor – from design through completion. These include construction management at-risk (CMAR), design-build (DB) – both fixed-price and progressive, design-build-operate (DBO), and public-private partnerships (P3). Collaborative project delivery methods differ from the design-bid-build (DBB) method in two important ways: first, construction personnel become involved early in the design process; and second, selection of the collaborative-delivery firm is generally based on best value, rather than on the lowest bid.
The indirect results of alleged failures. Collaborative-delivery contracts hold neither the owner nor the design-builder or CMAR firm responsible for the indirect results of its alleged failures.Due to the subjective nature and varying scope of state laws, it may be desirable to include in the contract a waiver of consequential damages, which clearly defines the types of damage that are expressly excluded.
Construction Management At-Risk (CMAR)
A collaborative project-delivery method in which the owner retains an engineering firm and a CMAR firm under two separate contracts; one for design and one for construction. CMAR project delivery is most often chosen when the owner wants to capture some of the benefits of design-build delivery, while maintaining direct control of project definition and design.
A business arrangement in which an owner makes payments to a service provider in return for the actual level of service provided.
A commonly used delivery method in which an owner first procures and contracts with an engineer to prepare detailed design plans and specifications for a project. The owner then conducts a second procurement process and contracts with a separate firm to construct the project, based on the plans and specifications completed by the engineer.
A delivery method in which an owner enters into a single contract with a design-builder to design, permit, construct, test, and commission a project. Within design-build project delivery there are two basic variations: progressive and fixed-price.
Traditionally the engineer of record for the design of a project, who signs off on the finished project.
A delivery method that combines the components of design-build – designing, permitting, procurement, construction, testing, and commissioning – with operation and maintenance (O&M) services into a single contract. The owner’s final acceptance of the project does not conclude with the delivery and related services, but continues through a defined operational term.
A further extension of design-build-operate delivery, in which an owner enters into a single contract with a DBOF team for the design, construction, long-term operations and maintenance, and financing of a project. The financing arrangement may encompass either the entire project – in which case fees paid to the DBOF team encompass all costs for constructing the project – or a long-term financing structure with repayment of the financing costs over the contractual period for long-term operations .
A separate (and inserted) contractual relationship with an entity for the purpose of providing specific services to integrate and facilitate work components in a collaborative-delivery project.
Fixed-Price Design-Build (FPDB)
A project-delivery method in which a single fixed price, which encompasses both designing and constructing the project, is established when the contract is signed. FPDB is used when the owner has defined the project requirements and scope of work sufficiently for proposing firms to accurately predict the project cost early in the procurement process. The owner’s requirements, as expressed in procurement documents, may be either prescriptive (well defined) or performance-based, which encourages and allows more innovation on the design-builder’s part. The fixed price is an established price for a fixed scope of work, and it may or may not include allowances.
The ratio of the equity contribution to the amount of long-term debt in a P3 project, a key consideration that functions much like the down payment required for a residential mortgage.
Guaranteed Maximum Price (GMP)
An approach to pricing services in a collaborative-delivery proposal and contract. The GMP is the sum of all reimbursable costs, plus a fee that usually includes overhead and profit. Costs incurred above the GMP are the responsibility of the design-builder or CMAR firm, unless they result from an owner-approved change in project scope. GMP pricing is commonly used when an owner chooses either progressive design-build or construction management at-risk project delivery.
A contract – commonly used in DBO and P3 projects in which the design and construction entity is separate from the operations entity – between a design-builder or CMAR firm and the operations entity. The interface agreement describes the conditions for testing, turnover, and warranty of a facility and typically covers contractual obligations for both parties, including risk transfer from design and construction to long-term operations and maintenance.
A business arrangement of two or more firms that agree to form a new entity for a specific business purpose. The parties to the joint venture manage the enterprise – sharing all profits, losses, expenses, and assets – and have joint-and-several liability to the owner. Joint ventures can be formed for any collaborative project-delivery method; they usually involve an engineering firm and construction firm.
Compensation paid by a design-builder or CMAR firm to an owner, in lieu of all liability for any extra costs, losses, expenses, claims, penalties, and a
The act of taking measures to minimize the extent of damage resulting from an adverse event. Collaborative-delivery contracts spell out, for each foreseeable adverse event, which party can most efficiently be responsible for taking loss-control measures.
The act of taking measures to prevent, or reduce the likelihood of, adverse events. Collaborative-delivery contracts spell out, for each foreseeable adverse event, which party can most efficiently be responsible for taking loss-control measures.
Materials Cost Escalation
Unforeseen increases in the cost of materials, which can be an issue, particularly in contracts that span several years. The materials escalation clause in a collaborative-delivery contract may be premised on agreed-to cost components in the fixed price or GMP.
Owner’s Advisor (OA)
An individual or firm retained to provide technical and management resources to an owner and to serve as its representative and advisor during procurement, contracting, and/or management of a project.
Changes, within the scope of work, that an owner is contractually entitled to request. Owner-directed changes may result in additional compensation owed to the design-builder or CMAR firm.
Criteria in an RFP or FPDB procurement that focus on measurable plant-performance criteria and operational objectives, rather than on specific details. These criteria include technical requirements, standard construction specifications, and minimum quality standards. Performance-based FPDB procurement allows and encourages more innovation than does prescriptive procurement.
An element in the contract between the design-builder and the owner that requires the firm to demonstrate that the project will operate as intended, consistent with the technical and operational criteria and project design. If the project does not meet the defined performance standards, the design-builder may be required to pay liquidated damages and to make any modifications needed for the project to perform as intended.
Specific details within an RFP (typically in FPDB procurement) that may include design drawings and/or a description of specific design approaches. Proposing firms may be required to include their own designs – depending on the requirements stated in the RFP – in their proposals. A proposing firm can submit design documentation to validate its conformance with the owner’s requirements and design preferences.
Detailed operational and technical requirements on which the design of process systems and equipment is based. These requirements address all input (influent or raw water) and output material (NPDES permit or finished-water quality standards).
Progressive Design-Build (PDB)
A two-phase delivery method in which the project’s design, cost-estimating, construction schedule, and final GMP or fixed price are developed during the first phase. If the owner and design-builder agree on the schedule and the GMP or fixed price during the first phase, the final design, construction, and commissioning are completed during the second phase.
A legal arrangement in P3 project delivery that defines all the elements of any collaborative-delivery project. (In financing arrangements other than P3, the project agreement is usually referred to as a contract.) The project agreement also specifies risk allocation between the owner and the P3 firm, the basis of payment for services, and the term (in years) during which the P3 arrangement will remain in place.
The business entity with which an owner enters into an agreement for the delivery of services for a specific project using a public-private partnership (P3). The Project Company has full responsibility for design, construction and, typically, operations and maintenance. P3s are unique: they often include some form of short- or long-term financing – a combination of equity invested by the project company or its sponsors and debt sourced from third parties. The Project Company is sometimes referred to as the special-purpose entity or special-purpose vehicle.
Project Implementation Plan
The document developed by the owner as a road map to successfully completing a project. The document defines the owner’s capabilities and its goals, priorities, and drivers for the project, along with its process for selecting a delivery method, procuring a design-builder or CMAR firm, and managing the project.
A firm or entity that is capable of performing all of the services requested in an RFP for P3 services and that responds to the RFP. The entity may be a single firm, joint venture, or consortium encompassing firms that will perform design, construction, operations and maintenance, equity investment, and overall management of the completed asset. The proponent is sometimes referred to as the proposer.
Proprietary Processes or Equipment
Equipment or a system or process owned by a business entity and sold commercially in the open marketplace through direct licensing to the purchaser.
Public-Private Partnership (P3)
A project with a contractual relationship between a public and a private entity that relies on collaborative interaction, generally design-build or DBO.
Quantity and Quality of Untreated Water or Wastewater Influent
The measurement and characteristics of untreated water or wastewater entering a facility, which affect the facility’s ability to perform as required.
The possibility of loss or injury. Effective risk management for a capital project requires recognizing and understanding what could potentially go wrong and then determining which individual or entity is responsible for owning, mitigating, or managing the risk. This understanding is often based on a thorough evaluation of the project, in conjunction with each party’s experience in similar projects – a combination of precedent and lessons learned.
Risk Allocation Principles
The rules or guidelines underlying the process of determining which party in an agreement will assume each envisioned risk. In collaborative-delivery contracts, risks should be allocated to the party best positioned to manage them; it is critical that all parties understand and agree to the designated allocation of risk.
A table, created by either the owner or the collaborative-delivery firm and agreed to by both parties, that identifies potential project risks and allocates responsibility for each between the owner and the firm, with the objective of reducing the project’s risk-related costs by addressing them at the outset.
In allocating risk – for example, between an owner and a project-delivery firm – holding one party responsible for a specific risk that is not within that party’s ability to control.
A legal right, which an insurance carrier frequently reserves, to pursue a third party that caused an insurance loss to the insured, as a means of recovering the amount of the claim the carrier paid to the insured. Collaborative-delivery contracts generally include waivers of subrogation by both parties, which prohibit each party’s insurer from attempting to recover a claim paid to the other party.
A performance security, issued by a third party called a surety, that protects the owner by guaranteeing that the design-builder will perform its contractual obligations in designing and constructing the project, or that the CMAR firm will perform its obligations in constructing the project.
Milestone at which an operating facility is “handed back” to a public owner at the end of a private operations and maintenance contract term. May also apply to the transition from one operator to another. Typically associated with pre-defined facility condition or useful life requirements that must be met.
Those acts, omissions, conditions, events, or circumstances that are beyond the control of the collaborative-delivery firm – and are not the fault of either the firm or others for whom the firm is responsible. Examples of uncontrollable circumstances include acts or omissions of the owner or anyone under the owner’s control, changes in the scope of work, differing site conditions, hazardous conditions, wars, floods, labor disputes, unusual transportation delay, epidemics, earthquakes, adverse weather conditions that cannot reasonably be anticipated, and other circumstances beyond the reasonable control of the design-builder or CMAR firm. An uncontrollable circumstance might lead the firm to seek a change order that would provide schedule and cost relief under the contract.
Value for Money
The result of a calculation to determine whether the potentially higher cost of private financing in a P3 project will be offset by potential benefits that the owner has identified as valuable (such as risk transfer, innovation, or schedule savings).
Waiver of Consequential Damages
A standard contract term incorporated in collaborative-delivery contracts in which each party – the owner and the design-builder or CMAR firm – agrees not to hold the other party responsible for incidental, indirect, special, punitive, or consequential damages resulting from its failure to meet contractual obligations. Matters that are considered as part of such a waiver include, but are not limited to, harm to reputation, economic losses, loss of use of a facility, loss of market position, loss of customers, or debt-service costs.