Roger Boothe, Director, Infrastructure P3, Cost & Project Management, Altus Group
Infrastructure projects are akin to icebergs, in that there is typically a lot more going on beneath the surfacethat you don’t see. Recent world events have created a new environment in which project and commercial risk must be newly understood, priced, and allocated through proper management and contracts. To do this, a fundamental understanding of market dynamics, coupled with emergingtechnology, is key.
The Planning Phase
The New Environment – What We Don’t Know
With infrastructure, there isalways a multitude of unknown risks that occur during projects.The new reality presents a challenge to the way we manage and deal with such risks.
Insurance and Project Security Packages – Most proponents are realizing their insurance coverage doesn’t address pandemics. For projects in procurement, owners may look to require such coverage, but can such insurance products be found? With respect to contractual and project security, it’s conceivable that there’ll be pressure to increase this in orderto achieve financial ratings.
Contractual and Risk Pricing – In the U.S., projects such as Maryland’s Purple Linehave applied for Force Majeure relief related to COVID-19, but it will likely be months before legal wrangling renders an outcome. Meanwhile, projects in procurement are including specific language regarding pandemics in their contracts, whereasprojects past financial close are lamenting the lack of specificity in their contract language. Clear risk allocation and responsibility will be a necessity for projects going forward.
A key tool for early risk assessment is the various software packages available.Recent updatesare driving technology forward, while the traditional standbys for management of project information flows continue to improve their products, while also being challenged by new entrants.
Duration of Impact – We don’t know when this pandemic will dissipate orwhen global economies will recover,and what this means for private investment.
Other potential impacts, including rising international tensions and civil unrest within the U.S., add layers of uncertainty toproject planning and procurement.
Commercial Models in Procurement – With respect to transportation, the key unknown is how quickly demand will rebound across modes. Long-term structural changes to workand travel may impact revenue streams.
The Business Environment – What is Probable?
Project Planning Timelines – The feasibility, planning, and permitting for infrastructure projects can take years and is often longer than the delivery phase. Upon completion, the procurement phase can move as quickly as 12 months, depending onthe form of procurement. We have no reason to expect this will change. Owners may seek to accelerate the process to get projects moving sooner. In the U.S., there is a push to urge the Federal and State governments to streamline the approval process, particularly with respect to environmental approvals. An emerging approach to expediting timelines is the concept of collaborative contracting in various forms (Progressive Design/Build, Alliance Contracting, etc.). These approaches delay delivery of a “hard bid” until the end of a pre-development period, where risks can be better understood.
Contract Clarity and Flexibility in Delivery – It is certain that project planning and feasibility will include an appreciation of the risks related to business environment issues. The impact of the added measures required at site and the inefficiency this causeswill undoubtedly lead to increased costs and extended delivery schedules. Due to unknown future impacts, there needs to be flexibility in the contract in addressing these matters and clarity on time and dollar impacts.
Changes in project priorities for infrastructure is still important. Canadian and U.S. governments are talking about using infrastructure investment as a tool to support a softer economic environment. The public/private mix of that investment comes into question, and we expect the majority of projects that have been delayed by current events to move forward, specificallyfor healthcare, broadband and public works.
Summary of the Key Project Risks for Rethinking
Several areas of risk allocation must be considered for infrastructure projects in the new environment, including:
Demand and User Risk – What are the economics of asset types on user pay/revenue models and the new pricing and lender demands in terms of additional security, or the commercial terms?
Design and technical – A number of questions come to mind:
• Will long-term changes to commuting patterns influence the Purpose and Need, project alignment, and typical section of a project?
•To what extent will connected autonomous vehicles be accommodated?
• Will emergency response requirements impact design?
Construction – In construction safety protocols, all means, methods, inspection and reporting procedures, schedules, and costs will be impacted by the new environment. The question is for how long and will the new long-term requirements impact productivity? The answer is yes depending on asset type.
This is where technology advances can shine. Active Work Zone Protection systems bring a new level of safety based on electronic detection to linear projects. Use of drones for inspection can significantly improve productivity. GPR for subsurface testing can broaden and augment the body of knowledge collected for due diligence.
Operations & Maintenance (O&M) and Lifecycle – Will changes in usage mean longer O&M standard intervals, and changes to maintenance practices, standards and materials? Will this impact cost concession lengths, payment mechanisms and performance requirements? Potentially yes.
Contracts and Pricing – Pricing incorporates risk, and the unknowns of the new business environment means more risk to price. Project security packages without clear risk allocation in contracts and compensation make it difficult to see how contractors can currently commit to fixed-price, date-certain contracts on large infrastructure projects. This also applies to O&M.
Private Financing – Will there still be the same appetite from lenders for the infrastructure space? It is conceivable that there will be a tightening of terms as lenders take a different look at the risk transfer.
Changing Project Needs and Asset Use – The Halton Courthouse Project was atthebid and developer selection before it was cancelled. The reason given was that the ministry wished to reallocate the funds from this project to invest in the use of virtual hearings.