- Briefing Room
With the design-build-finance (DBF) procurement model, a single contract is awarded for the design, construction, and full or partial financing of a facility. Responsibility for the long-term maintenance and operation of the facility remains with the project sponsor, but could be included in a separate agreement. This approach takes advantage of the efficiencies of the design-build (DB) approach and also allows the project sponsor to defer financing either completely or partially during the construction period.
With DBF delivery, the design-builder assumes responsibility for the majority of the design work, all construction activities, the short-term financing for all or a portion of the project, together with the risk of providing these services for a fixed fee. When using DBF delivery, owners usually retain responsibility for the long-term operation and maintenance of the project. In some cases; however, separate operations and maintenance, agreements have been combined with design-build-finance contracts (see below).
There are two primary reasons that project sponsors use DBF procurements:
In cases where a project sponsor has cash flow constraints, it will identify the level of funding that it has available for the project at the time the procurement is released and require the design-build entity to finance any development costs in excess of that amount over a specified period of time. In other cases, an owner may specify the maximum amount that it can pay a design-builder each year for a project. That specified amount and the overall cost of the project would, in turn, drive the length of the repayment period.
Other DBF procurements may be motivated by the sponsor's desire to defer payment for the project. This motivation could be due to lack of current funding or the desire to use the deferred payment to incentivize the design-builder to accelerate the construction of the DBF project. Deferred payment DBF arrangements approximate design-build-finance-operate-maintain (DBFOM) P3 procurements, but without the design-builder assuming long-term operations or revenue risk. In this case, the project sponsor issues a procurement asking bidders to provide the cost for developing the project today, with the payment of that amount promised at a later time. By accepting a deferred payment, DBF partners assume additional risks beyond those of a traditional DB contract, including the risk associated with future appropriations expected to make project funding available.
The advantages to DBF are similar to those of the DB approach, in that the project sponsor can capitalize on the efficiencies of having the design-builder undertake the design and construction of the project simultaneously. With the DBF approach, the short-term financing of all or a portion of the project is also assumed by the private sector. This allows sponsors to advance the construction of the project prior to assembling all the funding required for the project. The DBF model is particularly beneficial if short-term gap financing provided by the design-builder allows the sponsor to expedite project implementation.
Private design-builders may use different approaches to finance their costs for DBF procurements. In some cases they may provide self-financing and front their own implementation costs until the sponsor is able to repay them. In others, the design-builder may borrow funds through existing commercial credit lines or use a combination of the two approaches. In cases where larger amounts of money are involved over longer periods of time, design-builders may arrange project-specific financing (bonding). Creditors would price loans based on the risks involved with the project sponsor's ability to meet its payments to the design-builder. This option includes the potential to access tax-exempt debt issued through a nonprofit public benefit corporation pursuant to IRS Revenue Ruling 63-20.
The decision over which of these financing approaches is used is made directly by design-builders and is driven largely by their size, the amount of cash and credit they have access to, and their tolerance for risk.
A DBF arrangement is a deferred payment and is not considered debt under usury law. Legally, the project sponsor is purchasing construction services and deferring payment for them. Rather than lending money, the practice involves accepting payment at a later date. The payments themselves can range from small deferred amounts, to a schedule of payments over time or payment at the end of the project. For this reason, DB legislation does not usually address financing.
As with DB procurements, DBF procurements are awarded based on best value. This approach, which is encouraged by federal guidelines, takes into account both the technical capabilities and qualifications of the DB team, as well as cost. In this case, a proposer's bid price will include its financing costs in addition to the design and construction of the project. There is no universally accepted approach for determining best value, with the request for proposal usually specifying the relationship between technical factors and price.
Design-build-finance procurements can be combined with long-term operations and maintenance contracting to generate additional project benefits from a lifecycle asset management perspective. Design build finance coupled with an O&M contract brings together the inherent cost and schedule efficiencies of design build with the specified performance guarantee of a long-term maintenance agreement and reduced sponsor operational burden. In addition to design and construction services (as well as short-term financing), the developer is responsible for the maintenance, preservation, or rehabilitation of the facility, as well as operational aspects such as toll operations and collection and incident management. Its compensation may be specified contractually and based on maintaining and operating the facility to certain performance requirements. Because the same developer remains vested in the physical condition and performance of the facility after construction is completed, the initial level of design and construction quality may incorporate longer-term performance and condition considerations.
The following project has combined a design-build-finance procurement with long-term operations and maintenance:
Design Build Finance (DBF):