15 Dec Public-Private Partnerships (P3): Is it Possible to Transfer Risk?
Today’s topic comes from an article from Construction Dive titled Pursuing a better balance of risk for P3 projects
Public-Private Partnerships (P3)
In an effort to combat poor performance an approach to contracting has been used labeled public private partnerships (P3). According to PPP Knowledge Lab P3’s are “long-term contracts between a private party and a government entity, for providing a public asset or service, in which the private [contractor] party bears significant risk and management responsibility, and pay is linked to performance”. After the initial testing of P3 contracts, many large construction companies have avoided further participation due to their experience losses. One of the main issues cited with P3 projects is the process of transferring risk, which contractors feel is disproportionate to the benefit.
The Problem: Attempting to Transfer Risk
Due to the setup and approach of P3 projects, the clients often attempt to transfer the majority of risks to the contractor through the contract, even when the risk is not caused by the contractor. It is understandable why contractors may feel an imbalance, as the type of risks that contractors are having a difficult time dealing with appear to be risk caused by factors outside of their control, the majority which seem to be caused by the client (Construction Dive, 2020):
- Lack of project readiness.
- Changes in political support for some projects.
- Unreasonable delays in solving project issues, including disputes.
- Launching projects without a solid financial plan or adequate funding mechanisms.
- Contractual transfer of difficult or insurmountable technical risks to the private sector.
The result of attempting to transfer risk has shown to be an unsuccessful practice which produces no winners. Two recent cases include:
- The Maryland Purple Line project which started in 2017 intending to be completed in 2022. The project eventually halted in 2020 as the contractors disputed $800 million in unpaid overrun fees. After client disputes in court, the contractor decided to leave the project which has been left in limbo ever since.
- The Denver Airport project amounted to $1.8 billion. The contractor was fired after seeking $288 million in change orders and termination costs. The change orders which were primarily caused by client issues plagued the project. The project now on hold, is attempting hire another contactor to resume work.
P3 projects are costing both sides losses not only in enormous fees caused by the process of litigation, but unpaid work done by the contractor and loss in potential revenue and value for the owner. A lesson learned from P3 projects is that the practice of transferring risk is not possible. In addition, when the client attempts to transfer risk, it seems to promote and find other poor practices:
- A lack of planning and proper identification of risk and risk mitigation upfront.
- A lack of accountability from the client’s stakeholder for increased cost and time due to their decision making.
- A lack of transparency in up-to-date project tracking and sources of overrun throughout the entire project.
Risk is caused by a lack of expertise and understanding, meaning risk can never be transferred. Since the vendor is the expert, they do not have any risk within their scope of work. The project risk is coming from the nonexpert client stakeholders for example design errors, changing requirement, delayed approval, etc. When the client tries to transfer their risk to the vendor, it gives the impression that the vendor can take accountability for the client’s risk [lack of expertise/understanding], which they cannot. Thus, the only way for vendors to deal with the “transferred” risk is by increasing their cost through contingency. As research has shown that over 90% of risk is caused by the client, transferring risk has been disastrous.
A Potential Solution: Transparency Created by Expertise
The alternative of transferring risk would be to create transparency, having each party be responsible for the cost of risk [overrun in time and money] they cause to the project. Risk mitigation would then be placed with the contractor. Being the expert, the contractor should be the party best fit to do so as they should have little risk due to their technical expertise and understanding of the entire project.
The expert contractor’s responsibility in providing transparency and mitigating risk would include:
- Proper planning and measuring [detailed schedule and a simplified milestone schedule]
- The identification of unknowns and their expectations of from each stakeholder [actions with dates]
- Weekly risk mitigation, notifying project stakeholders beforehand of potential risk causing activities
If an expert contractor is capable to fulfill their responsibility in creating such transparency, the documented results show it would solve the current issues seen today including the legal disputes, client stakeholder caused risk, and poor project performance.
A Proven Method that Does Not Transfer Risk
The Best Value Approach (BVA) is a proven method that hires contractors based on their expertise and places the contractor in the role of the expert. The BVA utilizes a system which allows contractors to clarify and plan a project before execution. After execution the BVA tracks and mitigates risk throughout the project through a licensed reporting system. The documented performance of the system is as follows:
- 2,000 projects valued at $6.6B over 30 years.
- 94% of projects finishing on time, on budget and with a satisfied client.
- 65 ASU Intellectual property Licenses.
- 384+ academic journal papers and cases studies.
To learn more about the Best Value Approach and how it brings accountability and utilizes proactive expert contractors, go to:
- Free membership for latest tips and news: https://pbsrg.com/membership/
- For latest books, events, and licensed partners: https://pbsrg.com/resources/
- Latest BVA journal publications: www.cibw117.org/
- Annual Best Value Conference in January: https://bestvalueconference.ksm-inc.com/
- Latest presentations and videos: https://www.youtube.com/channel/UCxBi26nXLDTqG4ZRV6p0iiQ