State departments of transportation (DOTs) are increasing their use of alternative project delivery (APD) methods such as design-build and public-private partnerships to deliver construction projects. A critical element in the development of a solicitation by the state DOT/owner is the assessment and assignment of financial risk to the selected contractor. How risk is allocated and the degree to which risk is transferred from the state DOT/owner to the contractor significantly influences potential bidders’ decisions to propose on a project and how to structure and price their proposal. Bidder pricing typically increases with the amount of risk being assumed. The state DOT/owner needs to balance project risk and the cost of the project; a project that is “risk-free” for the state DOT/owner is also likely to be unaffordable.
APD is typically used for large construction projects, but only a limited number of private engineering and construction companies have the financial capacity to assume significant financial risk. Assigning increasing levels of financial risk to the contractor with commensurate increases in bid prices can be expected to reduce the number of competitive bids and may also attract unqualified and/or unresponsive bidders. The likely impacts to the state DOT/owner include unsuccessful solicitations, higher bid prices, and significant project delays. One likely impact to bidders is unrecoverable costs for the preparation of bids, which can be substantial. Research is needed to develop guidelines for state DOTs/owners on how to (a) assess project risk and apportion that risk between the owner and the contractor, and (b) effectively convey risk within the procurement documents to attract responsive and competitive bids when APD is used.
The objectives of this research are the following:
1. Develop a methodology to identify, assess, and quantify risk within completed and active projects delivered with APD methods. Application of this methodology shall assist state DOTs with understanding risk inherent in a project and identify potential ways to mitigate or manage that risk, including allocating some degree of risk to the contractor. The methodology shall integrate processes that consider the perspectives of state DOTs/owners and potential bidders.
2. Produce a guide for state DOTs/owners on how to integrate risk analyses within their project development processes and how to effectively incorporate risk allocation in procurement documents. The guide shall also provide tools and techniques to aid the state DOT/owner in applying the methodology and effectively managing risk post-award.
STATUS: Research in progress.