Analysis
Day after day, economic news seems to get worse. Short-term borrowing costs remain volatile and long-term municipal debt gets harder to come by. Shell-shocked institutional investors are generally sitting on the sidelines, continuing to nudge the cost of municipal paper higher. Municipal financings in late 2008 were off 41 percent, presumably as a direct result of the volatile market and growing concern about the long-term economic outlook. As revenues decline for water and wastewater enterprise funds across the country, managers are re-visiting their strategies for capital investment, and re-prioritizing their capital improvement plans. If the last recession in 2001 is any indicator, capital project delivery will decline 20 to 30 percent in the water and wastewater business over the next year or two according to some industry prognosticators. Is there a silver lining among all these dark clouds over capital project delivery in the water and wastewater industry? Perhaps.
Despite today’s uncertainties, one trend unlikely to go downhill soon is the growing popularity of alternative methods for project delivery — especially design-build or variations such as design-build-operate (DBO), among owners responsible for water and wastewater infrastructure. Why? More owners continue to discover the inherent advantages — with real potential to save time and money in project completion — of using alternative project delivery methods such as design-build and DBO. These methodologies allow owners to do more with less.
Growing Popularity
R.W. Beck recently updated its “2006 Alternative Project Delivery Survey” to better understand how well-known and accepted alternative project delivery methods are among utilities, and to assess trends in their use among the nation’s water and wastewater utilities. (R.W. Beck’s “2009 Alternative Project Delivery Survey” was in production as DATELINE went to press). In 2006, two-thirds of the nation’s water and wastewater utilities said they were either “very” or “somewhat familiar” with these options, with most positive responses coming from large utilities. Just over one half of all utilities surveyed had implemented at least one alternative delivery project before 2006.
These are not negligible numbers, but the preliminary results of the updated survey conducted in late 2008 — which will be discussed at a session at DBIA’s water/wastewater conference — showed even greater interest in alternative delivery methods among owners responsible for infrastructure projects. If nothing else, the two sets of results reveal that, within a brief, three-year period, dynamic industry trends pointed to greater awareness among project owners in pursuing the apparent advantages offered by alternative project delivery.
Even as tight credit markets and a weak economy might cause utilities and cities to reconsider planning for new projects, the development and expansion of water and wastewater infrastructure continued to move forward at a steady pace in late 2008. And of those who had already implemented a design-build project or another alternative method in the past, 95 percent said they were more likely to do so again according to R. W. Beck’s market research.
New Rules
Growing national interest in alternative delivery may also reflect changes in state legislation. Some utilities have faced legal obstacles in the past when it came to selecting a desired method of project delivery. A Texas law passed in 2007, for instance, overturned legislation that had been in place prohibiting design-build. Following passage, many of the larger utilities in Texas are considering alternative project delivery as allowed by the new law. One example is the San Antonio Water System (SAWS) which is considering design-build for a 20 mgd brackish groundwater desalination facility.
The advantages of alternative project delivery most consistently cited by water and wastewater project owners include time and cost savings, contractor selection using best value techniques, appropriately transferring performance risk, fostering design innovation and helping to fill any lack of staff capability and/or capacity to manage large, complex infrastructure projects. And, given today’s tough economy, it seems likely that such benefits will only add momentum to the trend of increased use of alternative project delivery by focusing project owner concerns on finding the best means for efficiently delivering successful infrastructure projects. As more utilities and cities gain exposure to success stories of how early adopters of design-build benefited in the long term, and new state laws loosen permission for different project delivery methods, the trend of the increasing use of design-build is likely to continue.
Time and Money
One key benefit of design-build often cited by owners is shorter project completion schedules. An example is Southern California’s Mission Springs Water District (MSWD) which has experienced consistent growth since the 1950s, accelerated with the housing boom over the past several years. To keep up with anticipated water services demand and to assist staff in ultimately meeting the needs of new developments, MSWD delivered two new pre-stressed concrete reservoirs and associated valves, booster pump stations, wells and transmission pipelines utilizing design-build. Allowing the design and construction phases of the project to occur simultaneously — a key difference from traditional design-bid-build — saves a project owner considerable time in the project delivery cycle.
Saving time often also means saving money. Unlike design-bid-build projects, owners of DBO projects benefit from organic collaboration and communication among all elements of the design, construction and operations team throughout project development and implementation phases. Through a well-structured procurement, competition among proposers stimulates innovative project approaches. The potential to save significantly on first and life cycle costs is well documented from prior successful DBO projects.
Owners who have not pursued design-build, due to their familiarity and comfort with design-bid-build or the greater amount of control they believe that method affords them, may feel renewed pressure to reconsider their options while planning the completion of new capital projects in the current economy. One positive result of the economic downturn is the potential for a higher degree of competition between contractors looking for work. This increased competition could foster an environment of lower construction costs. For utilities with sufficient resources to implement new projects, now may be an excellent time to consider using alternative project delivery to expedite bringing projects to bid, to take maximum advantage of a favorable bidding climate.
Furthermore, with the change in administration, the notion of federal funding for a major infrastructure renewal program to create jobs and stimulate the economy is gaining traction. But even an extraordinary amount of federal funding will not match the total investment required nationwide to address all of the needs of the water and wastewater industry. In short, there will be brisk competition for funding that might become available for infrastructure projects in any economic stimulus program.
Those utilities able to bring projects to market the quickest might improve their chances to receive a slice of any economic stimulus pie. The clear record of expedited time to market of alternative project delivery methods such as design-build and DBO suggests that owners might wish to seriously consider its merits as a way to participate in any economic stimulus funding that might become available in 2009.
Managing Risk
Owners less willing to assume project risks in today’s environment can also benefit by selecting an alternative project delivery method. Building its desalination facility also represents risk for SAWS, with staff somewhat unfamiliar with the advanced technology envisioned for the project. In selecting its alternative method of delivery, SAWS will transfer the project’s performance risk to a single entity that will be directly responsible for the design and construction necessary to bring a series of complex facilities on-line successfully. Using design-build, it will transfer the risks related to cost, schedule, and project performance to the selected design-build contractor.
Another example is the City of Rialto, Calif., which did not have sufficient staff for its wastewater treatment plant expansion and modernization (from 8 to 16 mgd, including the addition of new solids handling capacity and retrofitting a cogeneration plant with fuel cell installation). The city selected design-build and an experienced contractor who assumed performance risk. The number of city staff dedicated to the project for oversight, management and coordination has been minimized and has reduced project cost.
A Brighter Future
Today’s harsh economic environment is making utilities and municipalities take a deep breath in considering how to make the best investments in capital projects. Owners tell us that successful design-build projects demand well-informed planning and careful consideration of desired outcomes as a fundamental first step. Interestingly, those few owners surveyed in 2006 who expressed dissatisfaction with an alternative delivery project experience suggested they had not taken sufficient time to become as familiar with the process as they could have. Perhaps the most important lesson learned: successful alternative project delivery hinges on developing and implementing a good project plan.
Even when the economy rebounds we predict that the popularity of alternative project methods will stay strong. The water and wastewater industry is feeling greater pressure to complete more projects and meet demands associated with growing populations, aging infrastructure, permitting requirements and, increasingly, environmental sustainability. And, our free market didn’t serve up design-build and other alternative project delivery methods by chance. Rather, it was driven by a desire to bring innovation and competitiveness to the industry by seeking efficient, timely, affordable and attractive project delivery solutions for project owners.
Development of water and wastewater projects didn’t face a noticeable downturn in late 2008. The relatively long development cycle for capital projects — project owners now beginning to implement the procurement process have already entered the bond markets and set rates in anticipation of construction — means the selection of design and construction teams happening today is now the result of considerable earlier momentum. But it will be worth watching the market carefully in the months ahead when we can expect to see the results of capital planning decisions made by cities and utilities today. It will be interesting to see if owners continue to trend toward greater use of alternative delivery methods in order to achieve their service and financial objectives in today’s challenging economy. Our prediction is yes: the increasing use of design-build and DBO will continue in the water and wastewater industry because, under the right circumstances, it can efficiently and effectively complete infrastructure projects in any economy. As our research shows, the vast majority of owners who have used alternative project delivery such as design-build have enjoyed successful project completion and will use it again.
Stephen Gates is senior vice president at R.W. Beck: www.RWBeck.com.