- How to Shift the Risk out of the Government for Government Projects
- November 11, 2016 | Author: David M. Lick
- Law Firm: Foster, Swift, Collins & Smith, P.C. - Lansing Office
- Previously, the government assumed the risks for its projects. The risk included obtaining the best design from one architect, proper construction completion from a contractor, and the least cost financing. The risk included cost overruns, timely completion and ownership of any failures or defaults. The government’s resolution of failure or default was often lengthy litigation.
Presently, many local government entities are utilizing design-build to shift the risk to one entity for the design and the construction. The emphasis in design-build often includes performance specifications requiring that the design-builder design and construct to a certain level of performance rather than constructing to a design.
Design-build methodology minimizes change orders and cost overruns. When the design-build methodology is coupled with the private sector’s obligation to finance, operate, and maintain the structure, the issues of risk related to best-value procurement and optimum building durability are obtained. When design-build is coupled with private sector obligation to finance, operate, and maintain the project, it is usually described as a public private partnership (P3). The risk for design, construction, operation and finance is shifted from the public sector to the private entity which the private entity assumes in exchange for the opportunity to earn a return on its investment. The governmental entity is assured of the benefit of its bargains through the power of contract with performance specifications, and enforcement terms.
The risk of loss versus the risk of success in a P3 is obtained through cost benefit analysis performed by multiple entities. Each party that has skin in the game, the contractor, the lender, the insurance company, and the governmental owner will perform a cost benefit or risk analysis. In government financed projects under previous delivery methodology, only the government entity and bonding company would perform a cost benefit analysis. There are fewer “white elephants” in P3 project delivery methodology because there are multiple-party incentives for the project to succeed. While there is less incidence of default or failure in P3 projects, even a default or failure does not result in harm to the government, but rather to the private shareholders and lenders who take the risk. The P3 concept is one of collaboration. Collaboration reduces conflict (risk), while obtaining accountability through transparent real-time reporting.
Finally, where the governmental entity sufficiently buys into the public private partnership concept, there is a great incentive to focus on the goal, which oftentimes reduces the time for governmental approvals. Reduction in project approval times reduces the risk of withdrawal by the private financing entity - again reducing the risk of project failure.