As water utilities continue to harness the benefits of collaborative delivery methods to implement their capital projects, new variants are emerging that provide owners with a broader scope of services. Collaborative delivery methods have evolved significantly in recent years as municipalities struggle to meet the challenges of providing reliable, cost-effective water and wastewater service to their customers despite aging infrastructure, increasing regulations, and limited staffing and expertise.
Design-build (DB) approaches now come in many flavors. The original fixed-price DB model – though still widely used and very effective for many project applications – is now complemented by the increasingly popular progressive DB method, which provides a more collaborative environment for owners, designers, and contractors. For those owners lacking staff (or interest) in operating their utilities, the design-build-operate (DBO) approach adds long-term operations and maintenance (O&M) services to the single-entity contract. In most cases, DBO projects are operator-led and implemented under a fixed-price environment for both the capital and O&M components.
Over time, the DBO approach in the United States logically expanded to meet the financing needs of some owners, resulting in the design-build-operate-finance (DBOF) model which includes short- and long-term financing and the public sector retention of facility ownership. These days, the term “P3” (originally coined from “public-private partnership”) connotes a contractual relationship where a project developer (often the financier or a special-purpose entity) leads a team of designers, contractors, and operators in providing a total solution with guaranteed private sector financing. Under the P3 approach, ownership of the facilities may remain with the municipality, but in many cases the P3 entity assumes ownership during the contract term – thus taking advantage of tax benefits – with ownership usually reverting to the municipality for a predetermined value. While common in Europe, the application of the P3 approach for U.S. water infrastructure remains rare.
Despite its uniqueness, the P3 approach has recently received growing attention from municipal owners, but with a twist. Historically, P3 models, like their DBO/F predecessors, utilized fixed-price procurement approaches under which guaranteed pricing would be provided by the P3 entity for capital, O&M, and project financing during the proposal period. As was the case with DB, when viewed from a collaborative lens, the P3 model has evolved, resulting in a “progressive” P3 approach.
As with progressive DB, a progressive P3 approach incorporates a two-step process to first collaboratively develop the facility design to a level that supports development of a “guaranteed maximum price” (GMP). Should the GMP be acceptable to the owner, the project moves forward. Progressive P3 utilizes the same “open-book” approach to GMP development, but expands the process for costs associated with operations, maintenance, repair and replacement, and financing. Unlike DBO, this approach gives the owner access to the entire cost model from a lifecycle perspective, as opposed to the “black box” DBO service fee pricing received during a procurement.
The progressive P3 approach is especially attractive for owners facing the constraint of an absolute affordability threshold. During the procurement phase, the municipality can establish an “affordability cap” which becomes the barometer for all preconstruction-phase services. A robust lifecycle cost model is developed and monitored at each key milestone (e.g., conceptual design, basis of design, 30%, 60%, etc.) so as to avoid any surprises during GMP development. Because the open-book approach under this model applies to O&M costs as well as capital costs, tradeoffs can be analyzed early on to optimize the overall lifecycle cost profile. (e.g., level of automation, redundancy, energy and chemical consumption, etc.) Lastly, the private financing approach is also transparent, providing the municipal owner insight into the use of short- and long-term taxable and tax-exempt debt instruments, cash flow requirements, and user rate implications.
Because the progressive P3 model is somewhat in its infancy, little guidance regarding best practices exists. However, because the approach is somewhat of an amalgamation of more proven delivery methods, certain guiding principles apply:
- A clear rationale and justification for the use of the unique P3 model must be developed by the owner. Project objectives need to align closely with the benefits of any delivery model.
- An affordability cap should be established to guide the development of the GMP from a lifecycle cost perspective. This approach also provides a degree of project cost certainty to those stakeholders that may be wary of the progressive approach compared to fixed-price methods.
- A two-stage procurement process should be utilized to shortlist only the most qualified P3 teams and provide them with a better probability of success, considering potentially high proposal development costs.
- An evaluation and selection process based primarily on qualitative, non-price criteria including team experience, preconstruction-phase service approach/process, schedule, etc., should be applied.
- A robust risk management process should be developed and implemented early on in the project and frequently maintained to protect all stakeholders.
Currently, the progressive P3 approach may only be a good fit for a small group of owners, but for those municipalities requiring a broad, full-service solution coupled with a collaborative, transparent process, this model is worth exploring.