Report: P3 megaprojects often lose money for contractors

Dive Brief:

• Timed to the $1 trillion infrastructure bill advancing in the House, a new study takes a look at the pros and cons of different delivery methods for extremely large civil projects. The study, which has not yet been published, found that public-private partnerships (P3s) have proven to be the most money-losing procurement method for design-build contractors.
• The study from insurance company Travelers examined 224 heavy civil building projects between 2004 and 2020 that had contract values between $250 million and $2 billion. They encompassed bridge, highway, rail, tunnel and other large-scale civil work, and most were projects on which Travelers had been the surety or co-surety.
• Over the past 15 years infrastructure projects greater than $250 million in contract value — especially bridge, highway and transit work — have been the public construction industry’s worst-performing segment for contractors, the study found.

Dive Insight:

Large construction projects primarily involve design-build work, where a design firm and contractor join forces, either through a joint venture or in a prime contractor/subcontractor relationship, to design and construct the project. The design-build team owns the design and the related risk. Contractors with design liability tend to see their profits fall significantly compared to those who share risk, the study shows.

“We discovered that many of these large design-build projects in the civil space, whether done through an owner or public-private partnership, performed quite poorly. And we wanted to investigate,” said Stan Halliday, chief underwriting officer for construction surety with Travelers.

“The way procurements work resulted in the design firm and contractor providing bids on designs that were roughly 30% complete. In many of the jobs, design-builders often underestimated the quantity risk and design risk they were assuming. Those jobs were not very successful for the design-builder, and in many cases didn’t even make back their costs.”

The much-delayed Purple Line project in Maryland is an example of a design-build P3 that has struggled to stay on budget and on schedule. Last May, the design-build arm of the P3, Purple Line Transit Constructors (PLTC) exited the project.

PLTC, a design-build joint venture between Fluor, The Lane Construction Corp. and Traylor Bros., said that it was not able to successfully negotiate time extensions for schedule delays and for the extra costs it had incurred on the project.

The Maryland DOT is currently selecting a new contractor for the $5.6 billion project and recently announced that construction would resume early next year.

More challenges

Despite these findings, there are many reasons why large civil projects go over budget and schedule that are not related to design-build, Lisa Washington, executive director of the Design-Build Institute of America, told Construction Dive.

“P3 megaprojects, by definition, are large and complex and provide far more challenges for the project team,” she said.

If an owner uses design-build only to shift risk to the team, the project is far more likely to fail, she said. In fact, research by CII/Pankow shows there are common elements that determine a project failure:

• Lack of experience with the project delivery system or project management in general.
• Poor communication between the owner and the builder.
• Understaffing or turnover within the owner, designer or builder’s organization.

Successful design-build projects require a “mindshift” that requires collaboration and communication from all stakeholders, she added.

“The most important decision any project owner makes is choosing the correct delivery method,” she said. “Every project is unique, and the challenges facing megaprojects even more so.”

For these reasons, DBIA offers its Design-Build-Done Right best practices to help construction teams understand when design-build is a good fit and when it’s not, she said.

The right method for the job

Halliday agreed that procurement type matters. Travelers’ data shows collaborative models such as progressive design-build and CM/GC at-risk produce more predictable results and fewer claims than design-build or design-build within public-private partnerships.

Travelers’ goal for the study was to spur owners to rethink how they’re procuring work in order to ensure greater success for all stakeholders in a given project, Halliday said.

“I don’t think anyone wins when you have a situation where there’s a large claim with a substantial amount of money in dispute, often hundreds of millions of dollars on an important public works project,” Halliday said. “Travelers’ primary interest is to raise awareness and to convince both owners and contractors to be more open to collaborative procurement methods that will give them greater time and budget certainty on their projects.”