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Current Design-Build Practices for Transportation Projects
10. Risk Allocation
The following is an overview of each agency's risk allocation process. This information is based on responses to the questions in Section 9 of Appendix 3.
Most of the agencies initially interviewed had implemented a systematic process for identification and allocation of risks, and advocated the use of such a process by any agency as an integral part of the design-build process.
The approach to risk allocation taken by an agency depends in large part on its project goals. Where cost certainty is one of the most important goals, the agency may decide that it is cost-effective to transfer risk to the design-builder even though it knows it will have to pay for that risk. Where schedule is paramount, a similar analysis applies. The FHWA's design-build regulations provide factors that should be considered in risk allocation. (See 23 CFR 636.114.)
The risk allocation process usually starts with identification of risks, categorizing the probability of occurrence, and determining how significant the impact would be if the risk occurred. Risks that are generally perceived as the most problematic for transportation project include right-of-way, utilities, differing site conditions, hazardous materials and force majeure events. Once risks are identified and categorized, the owner will focus its attention on the high probability, high impact risks, addressing possibilities to reduce the likelihood of the occurrence and deciding how to allocate risks between the parties (or how to share the risk with third parties).
Agencies developing toll and other revenue-financed projects typically take a much more aggressive approach in transferring risk than agencies developing projects based on their overall program. As an example, while agencies such as AZ DOT, UT DOT and UTA allowed time extensions for force majeure events affecting the critical path, agencies such as the TCA and ACTA allowed time extensions only for specifically listed force majeure events (major items such as major earthquakes and injunctions). The decision to allow only limited time extensions was influenced by the capitalized interest requirements that would have otherwise been placed on the project, as well as a belief that, even though the design-builder cannot control the original occurrence, it has the ability to control how the impacts of the event are managed.
Some agencies allow price increases for changes in the scope of work caused by force majeure events, based on the premise that they would like the contractor to bid solely on the work described and the fact that under a "traditional" contract matters such as changes in law affecting the project design would require a change order. Some agencies do not allow price increases for such changes, limiting the relief allowed to time extensions. At least one agency would limit payments for any changed work to direct costs, without markup. Some agencies have agreed to assume liability for delay damages due to force majeure events (i.e., "acts of God") such as injunctions against the project. This approach is likely to be requested by the proposers if they perceive that the project is likely to be challenged in court.
To a certain extent, decisions regarding risk are driven by the desire to give the contractor maximum flexibility. The project schedule, budget and matters such as public impacts also impact the decision-making process. Right-of-way and utility risk can be eliminated by early acquisition and clearing of the right-of-way, but for some projects, the completion schedule and/or budget may not permit early work. In addition, project owners may prefer to have the contractor involved in the right-of-way acquisition process, in order to allow the contractor maximum flexibility regarding alignment. Utility work may be included in the contractor's scope in part because of the contractor's ability to "design around" utility conflicts, as well as the fact that the relocation work will cause less disruption to the traveling public if it is coordinated with the project construction.
"Traditional" construction contractors have significant concerns regarding attempts to transfer liability for differing site conditions to them. Contractors generally take the position that it is more cost effective for project owners to retain the risk of differing site conditions rather than pay a risk premium to their contractors. For non-design-build federal-aid highway projects, Congress adopted this concept wholesale, and has specifically required agencies to assume site conditions risk. However, for design-build projects site conditions issues can be problematic, due to the design-builder's control over the project design. As a result, it may not be in the project owner's best interest to assume this risk. However, it is always advisable for owners to take steps to reduce the risk of unforeseen conditions, including performing geotechnical surveys, provide the results to the proposers, and allowing the design-builder to rely on the survey results to a certain extent. In some cases, the design-builder will be allowed a price increase and/or time extension if the actual site conditions differ from those reasonably assumed by the design-builder based on the data provided. In other cases the design-builder will be given relief only if they can establish that the boring data was incorrect, leading to incorrect conclusions regarding the actual conditions. In some cases the contractor is entitled to a price increase only for major problems (for example, for the Alameda Corridor the contractor was entitled to a price increase only if differing site conditions resulted in cost increases greater than $10 million. In other cases the contractor must look to a specific pot of money (a contingency pool) for compensation, and following exhaustion of that pool of funds cannot receive additional relief.
LADOTD (May 2009)
LADOTD may allow an adjustment to the contract for time or compensation in the event that site conditions differ materially from information about the site provided by the Department in the contact or if unknown physical conditions of an unusual nature, differing materially from those ordinarily encountered, are encountered at the site. Anticipated profits are excluded from any such adjustment but cost of delays will be included.
One instance of a Differing Site Condition exists when the information indicated in the geotechnical borings and/or tests provided by LADOTD are inaccurate at the specific location(s) of those borings or tests, to the extent that correct information would have resulted in accurate assumptions. The LADOTD represents that the information represented by the borings and tests provided by the Department are accurate at the location of the borings and tests. Any extrapolation of such information to other locations by the design-builder is at the design-builder's risk. Furthermore, the design-builder is required to determine what additional geotechnical information (if any) is required to support its design and is responsible for obtaining such information and for the accuracy of such information.
Reference - Differing Site Condition special provisions: see the NCHRP Project No. 20-7 / Task 172, Recommended AASHTO Design-Build Procurement Guide (or the January 2008 AASHTO Guide for Design-Build Procurement), sample special provision Number 015-DSC-01 Differing Site Condition Colorado DOT 2000 and 016-DSC-02 Differing Site Condition South Dakota DOT 2000.
Hazardous materials remediation is another issue of major concern to the contracting industry. Where the risk is low, owners usually allow a price increase based on time and materials records, or unit prices included in the proposal. Solutions for higher risk projects include extensive specifications regarding management of remediation work, including the obligation to show that the work was necessary and could not have been avoided or mitigated. For the case of the Alameda Corridor, the owner limited the contractor's price increase for unplanned remediation work to 90% of costs, without markup, in order to give the contractor an incentive to manage the work properly. (This approach did not produce the desired result, and the agency now believes that the contractor should bear a higher share of the remediation cost.)
ACTA (Jan 2002)
Conducted workshops to identify risk, determine high risk items, examine approaches to mitigate risks, and allocate risks among parties including the project owner, contractor, and insurers, and then reconsidered its decisions during the industry review process
FDOT (Jan 2002)
"Districts use a team of professionals to develop the RFP. Part of this process includes the District looking at the individual project and making decisions as to how the Department can minimize risks for us and the contractor, and ultimately, spelling out who has what responsibility."
LADOTD (May 2009)
The LADOTD requires the design-builder to report and respond to all hazardous materials spills. If the design-builder fails to report or respond to a spill, it is responsible for bearing the full cost of remediation. For spills the design-builder does report and respond to, the LADOTD is responsible for delay costs and expenses due to the discovery of hazardous materials that are not identified in the contract documents. The design-builder is responsible for all costs and expenses, including delay costs and expenses, for all hazardous material spills identified in the contract documents or that are caused by the design-builder or its subcontractors.
NAVFAC (Jan 2002)
"NAVFAC uses a Functional Analysis Concept Development (FACD) procedure for all projects at the beginning of the design phase to identify potential problems and reduce risk. FACD combines system design and costing with value engineering methodology in an architectural charrette format (workshops where various design solutions are discussed). It is a concentrated study that employs an iterative and interactive process utilizing a wide variety of tools (e.g., studies, ad hoc workshops, focus groups, brainstorming, cost modeling, value analysis, mind mapping, role playing, etc.)"
NC DOT (Jan 2003)
Thus far, risk allocation relative to specific projects has been discussed in the pre-RFP meetings with the short listed teams. Adjustments have been made to the RFP where possible to minimize the risk. The Department does evaluate risk during the scoping process to ensure that risk allocation is reasonable and appropriate.
TCA (Jan 2002)
Numerous discussions regarding risk allocation in determining contract terms, risk allocation decisions re-examined during industry discussions.
UT DOT (Jan 2002)
Conducted workshops. For I-15, the UT DOT RFP conducted a process of risk identification, risk assessment, risk allocation (UT DOT or design-builder), and risk mitigation measures. It was during this process that the risk mitigation approaches to ROW and utilities were developed.
UTA (Jan 2002)
Used partnering sessions to identify risk and mitigation plans.
WSDOT (Jan 2002)
"During the initial scoping of a project a risk allocation matrix is laid out. In reviewing the risk allocated to the owner (WSDOT) the decision is made how far the initial design must be taken to satisfactorily address these risks. Should the time required to address the risk extend beyond the time required to fully design the project then the decision would be made to utilize design-bid-build."
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