Issues Involving Surety for Public Transportation Projects (2012)

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55 any such capacity issue.180 Importantly, and without exception, each of the sureties interviewed identified strong support for bonding megaprojects, and stated that they had sufficient market capacity, through the use of co-suretyship arrangements, to provide surety bonds for these large infrastructure projects.181 With respect to bonding capacity, the sureties who service large national accounts generally, not surpris- ingly, hold the view that the surety market has ade- quate capacity to issue billion dollar bonds. In other words, in their view, sureties will find a product that meets the needs of the obligee. This is particularly true where most megaprojects involve the use of JVs, co- sureties, and reinsurance to “spread” the potential for surety losses. Some sureties say that they are asked to, and do, in fact, bond megaprojects upwards of $750 million at 100 percent of the contract value. The FMI Annual Surety report supports this contention, finding current ample capacity in the surety industry for megaproject bonds.182 As a result of an extended period of above-average prof- its for the surety industry as a whole, starting in 2004, and including reinsurers, as well as the availability of co-surety arrangements and a “return to underwriting basics,” surety industry analysis predicts that the surety industry is poised to provide bonds at whatever level is required for megaprojects.183 This may change as we move into a projected loss cycle, expected to peak in 2012 before subsiding.184 With this backdrop, then, why do some owners and contractors feel that bonds are not currently available for megaprojects? Some interviewees attributed this disconnect to the facts that megaprojects are each in- credibly unique, and that individual experiences on a project where a bond was not obtained (for reasons un- related to capacity of the market) and the sensationalis- tic publicizing of certain projects where bonds were not obtained has skewed the overall perception. Another contributing factor may be that the recent market cycles and sureties’ reaction to them has caused this misconception. One surety executive explained that over the last 10 years the lack of new capacity in the surety industry may have created the perception that the industry could not accommodate megaproject bonds. This is especially true where, in the post-Enron era, 180 Marc Ramsey, 2010 Surety Market Report, available at http://www.constructionexec.com/Issues/November_2010/ Special_Section8.aspx. 181 Co-suretyship involves two sureties being jointly and severally liable for the bonded obligation. 182 Surety Firms Weigh in on Construction Markets and Contractors: FMI Surety Providers Survey, at 2, https://www.asaonline.com/eweb/upload/SuretySurvey_2010Ap ril.pdf. 183 Id. at 4. 184 WILLIAM J. MCCONNELL, P.E., 2010 STATE OF THE CONSTRUCTION & SURETY INDUSTRY REPORT 26–32, http://www.phillysuretyclaims.org/wp-content/uploads/2010/ 11/2010-State-of-the-Construction-Surety-Industry-Report.pdf. some reinsurers exited from the market entirely and some sureties unilaterally reduced their capacity. It is reported that one surety even wrote letters saying the maximum bond it would issue was $250 million. As the loss results have improved since 2004, how- ever, sureties’ appetite for risk has increased and the ability to obtain larger and larger bonds has improved. With the right JV partners and the right surety, surety executives predict it is probable that a $1 billion bond could be obtained. As we move into the forecasted loss cycle, however, the surety market may tighten up, with the consequence that bonds for megaprojects may once again become harder to obtain.185 IX. CASE STUDY: THE USE OF SURETY BONDS ON LARGE AND INNOVATIVELY DELIVERED PROJECTS As discussed in previous chapters, using 100 percent performance and payment bonds can create challenges for public agencies on certain types of construction pro- jects. At the top of the list is the megaproject, where the contract price is so high that either 1) the surety mar- ket does not have the capacity to readily provide 100 percent bond coverage, or, if there is sufficient market capacity, 2) competition will be reduced if the agency requires 100 percent bond coverage. If the agency de- cides to use performance and payment bonds with penal sums less than the contract price, then it faces the chal- lenging prospect of balancing market concerns (i.e., surety capacity and competition) with the need to pro- tect its interests in the event of a contractor default. In addition to handling the challenges that big-dollar projects can create, agencies also struggle to deal with using surety bonds on certain types of delivery sys- tems—most notably CMAR and PPP projects. Agencies that use these delivery systems face commercial issues over which contracting party (if any) will provide per- formance and payment bonds, who is the beneficiary of the bond, and whether other forms of performance se- curity are more practical and effective. Many projects provide interesting examples of how agencies have dealt with these challenges. The five case studies discussed below involve recent, and, in some cases ongoing, projects, and show the spectrum of con- siderations that can arise under different delivery ap- proaches: • A Virginia heavy rail project using a negotiated DB process. • A Washington State highway tunnel project using a competitive DB approach. • A Texas light rail project using a negotiated facil- ity provider delivery approach, with the facility pro- vider having responsibility for designing, building, op- erating, and maintaining a new light rail system, as well as purchasing rolling stock. 185 Id. at 26–32.

56 • A Colorado rail project using a DBFOM delivery system, procured on a competitive best value basis. • A Rhode Island intermodal facility that connects a previously existing Interstate highway and airport with a new train station and rental car garage, delivered through a CMAR approach. The Texas and Colorado projects are both part of FTA’s Penta-P initiative. Each case study begins with a brief discussion of pertinent aspects of the project and the procurement and delivery processes. Contract terms that affect liabil- ity (i.e., that could affect surety underwriting) are also discussed. Each case study ends with an explanation of how the agency handled performance security and bonding, as well as any applicable legislative issues associated with bonding the project. A. Dulles Corridor Metrorail Project (Silver Line)—Northern Virginia The Metropolitan Washington Airports Authority (MWAA) is in the process of constructing a 23-mi exten- sion to the existing Metrorail system, with the project being commonly known as the “Dulles Corridor Metro- rail Project.” 186 When completed, the project will be turned over to another agency, the WMATA, for O&M and will be known as the “Silver Line.” The project will provide transit from East Falls Church, Virginia, to Washington Dulles International Airport (IAD) and west to Ashburn, Virginia. In doing so, it will service Tyson’s Corner (a major commerce center in Northern Virginia) and offer a one-seat ride from IAD to down- town Washington, DC. The project is broken into two phases and is expected to have a total cost of approximately $6 billion. Phase 1 of the project is about 13 mi long, will have four stations in the Tysons Corner area, and will extend to Wiehle Avenue in Reston. It is expected to be completed by 2013. Phase 2 will extend the transit system to IAD and eastern Loudoun County, Virginia. Construction and DB solicitations for Phase 2 were expected to be issued in summer 2011 and construction to begin in 2012. Dulles Transit Partners, LLC (DTP), a consortium of Bechtel Infrastructure Corporation and Washington Group International, Inc, is the Phase 1 design-builder. A June 2004 Comprehensive Agreement executed under Virginia’s Public-Private Transportation Act called for DTP to perform a variety of services, including 1) cer- tain development services (i.e., support of financing, permits, and ROWs); 2) preliminary engineering; and 3) developing a fixed-price DB proposal for Phase 1 based on that preliminary engineering. Based on the work done under the Comprehensive Agreement, MWAA and DTP executed a DB contract on June 17, 2007, in the approximate amount of $1.6 billion. 186 Much of the information in this § 9.1 is based upon Mr. Loulakis’s direct knowledge derived from serving as lead coun- sel for MWAA in drafting and negotiating the design-build contract on this project. The critical element for Phase 1 project financing was the ability of MWAA to obtain $900 million from FTA under an FFGA. Because MWAA expected the FFGA to be issued by February 2008, the DB contract and $1.6 billion price were predicated on, among other things 1) DTP obtaining a full release by February 2008, and 2) the assumption that DTP could start util- ity relocation (U/R) and ROW acquisition by August 2007 through task orders issued on a cost-reimbursable basis under the Comprehensive Agreement. Since MWAA had ultimate financial responsibility for U/R and ROW, the cost-reimbursable contracting approach offered under the Comprehensive Agreement enabled MWAA to have DTP serve as MWAA’s representative in performing this work, with MWAA ultimately control- ling the pace and disposition of the negotiations for land and relocations.187 Although DTP started U/R and ROW work as planned in August 2007, there were substantial delays to the FFGA process. To accommodate these delays, MWAA and DTP entered into a series of interim agreements, whereby certain work preparatory to final engineering and construction was authorized and, as applicable, Letters of No Prejudice (LONPs) were sought from and approved by FTA. An amended and restated DB contract was executed by the parties on July 25, 2008, to reflect the changes and expectations for a new full release date. The FFGA was ultimately signed on March 10, 2009, and full release under the DB contract was issued shortly thereafter. As of spring 2011, the project is ongoing and appears to be on budget and on schedule. The Phase 1 DB contract had several unique risk- sharing clauses affecting the commercial relationship between DTP and MWAA, including 1) indexing of cer- tain commodities, 2) sharing of certain differing site conditions and time-related impacts, 3) the use of al- lowances for almost $600 million of work (where MWAA bore procurement risk and DTP bore execution risk) and 4) an early-completion bonus. From a liability per- spective, the DB contract contained an overall liability cap of $500 million, with DTP’s liability for latent de- fects expiring 5 years from substantial completion. Liq- uidated damages were staged at $25,000 to $100,000 per day at various points and capped at $60 million. Because this was a negotiated procurement, there was substantial dialogue between MWAA and DTP about how to most effectively handle performance secu- 187 In addition to control over the U/R and ROW process, two factors influenced MWAA to use the Comprehensive Agreement and to create a cost reimbursable contracting rela- tionship. First, this process allowed MWAA to strip away from the fixed design-build price the substantial contingencies DTP would have had if this work were part of the fixed price design- build scope. Second, using the Comprehensive Agreement en- abled DTP to start work on these critical activities several months in advance of the design-build work. The MWAA team viewed this as mitigating the impact to project schedule that could come from having this work performed concurrently with the release of the design-build package.

57 rity. With respect to the work done under the Compre- hensive Agreement, DTP’s services were deemed to be professional services and no performance bonds were required. For the cost-reimbursable U/R work that DTP managed, DTP did obtain performance and payment bonds from its subcontractors. With respect to the DB contract, both corporate members of DTP agreed to provide parent company guarantees that fully stood behind DTP’s contractual obligations on a joint and several basis. Given this, and the fact that the mid-2007 surety market was not ame- nable to providing bonds in excess of approximately $500 million, MWAA agreed that having performance and payment bonds, each in the amount of $250 million, would provide sufficient security for the project. The parties also agreed to “stepdown” these amounts 1 year after substantial completion to a total amount of $50 million. As discussed in Section III, the premium charged by the surety for furnishing the bonds was not a function of the penal sums of the bonds. Rather, it was based on the $1.6 billion contract price and the lengthy time of performance. MWAA’s decision to rely upon reduced bonding and parental guarantees was not only influenced by the market conditions, but also by 1) the corporate balance sheets, past performance, and reputational risks of the guarantors; 2) the likelihood that the projected cash flow curves and retainage would not give rise to a claim in excess of such amounts; and 3) DTP’s procurement policies, which mandated that every subcontractor pro- vide 100 percent performance and payment bonds for its work. Citing these and other factors, MWAA re- quested that FTA waive its 100 percent performance bond requirement for the Dulles project. In considering this waiver request, FTA required MWAA to 1) identify the value of the construction work DTP was to perform directly, 2) demonstrate that 100 percent of the value of all subcontracted work would be covered by separate 100 percent performance bonds, and 3) require that all subcontract performance bonds have MWAA as a “joint beneficiary” of the bond. MWAA demonstrated that the value of construction work to be performed directly by DTP was $274 million, which had been included as part of the open-book price negotiation for the DB contract, and that the majority of this work consisted of civil earthworks and structural concrete work. DTP also confirmed that MWAA would be added as a joint beneficiary to subcontractor performance bonds using a dual obligee rider to each bond. Based upon MWAA’s responses, FTA granted a waiver, although it did increase the penal amount of DTP’s bonds from the $250 million originally requested to $274 million, reflecting the amount of DTP’s self- perform construction work. FTA was also willing to al- low MWAA to convert the bonds from separate per- formance and payment bonds to a combined perform- ance and payment bond, which resulted in some commercial concessions being given to MWAA from DTP. Section 22.5 of the July 25, 2008, amended and restated DB contract contains the final bonding re- quirements for this project: Within fifteen (15) days of Full Notice to Proceed, Con- tractor shall deliver to Owner a combined Performance and Payment Bond in the amount of Two Hundred Sev- enty-Four Million Dollars ($274,000,000). The Surety’s obligations under the Payment Bond component will be maintained, and shall remain in full force and effect, un- til one (1) year after the Substantial Completion Date. The Surety’s obligations under the Performance Bond component will be maintained, and shall remain in full force and effect, until three (3) years after the Substantial Completion Date, provided, however, that as of the date that is one (1) year after the Substantial Completion Date, the Surety’s penal sum under the Performance Bond component shall be reduced to Fifty Million Dollars ($50,000,000). The Performance and Payment Bond shall be in the form set forth in Exhibit 22.5.1. B. SR-99 Bored Tunnel Alternative Design-Build Project—Seattle, Washington The SR-99 Bored Tunnel Alternative Design-Build Project (SR-99 Bored Tunnel Project), also known as the “Alaskan Way Viaduct and Seawall Replacement Pro- gram,” is the result of a May 12, 2009, agreement among the State of Washington, King County, and the City of Seattle to replace the Alaskan Way Viaduct (SR- 99) with a two-level, 1.7-mi bored tunnel and a new seawall.188 The original SR-99 was constructed in the 1950s and is a 2-mi long, double-tiered viaduct that parallels the Alaskan Way. It carries about 110,000 vehicles each day and is partially supported by the seawall, which was built from concrete and timber in the 1930s and extends along Seattle’s waterfront. Studies in the 1990s showed that the viaduct was nearing the end of its use- ful life. The 2001 Nisqually earthquake further dam- aged the viaduct, causing the Washington State DOT (WSDOT) to close it for inspection and make some lim- ited repairs. The condition of SR-99 and the seawall prompted substantial discussion about how to address the situation, with options ranging from a cut-and-cover tunnel to replacement of the existing viaduct with a new elevated structure. WSDOT, which was responsible for administering the procurement of the SR-99 Bored Tunnel Project, determined that a two-phase DB process was the best delivery approach for the project. It first issued a re- quest for qualifications (RFQ) on September 15, 2009, with the RFQ culminating in a shortlist of four propos- ers: Seattle Tunneling Group (STG),189 Vinci/Traylor/Skanska (VTS JV),190 AWV Joint Venture 188 Certain information for this § 9.2 has been derived from Mr. Loulakis’s participation in WSDOT’s CEVP risk advisory workshops. 189 STG is a joint venture consisting of S.A. Healy Company; FCC Construction, S.A.; Parsons Transportation Group, Inc.; and Halcrow, Inc. 190 VTS JV is a joint venture consisting of VINCI Construc- tion Grand Projects; Traylor Bros., Inc.; and Skanska USA.

58 (KBB),191 and Seattle Tunnel Partners (STP).192 On May 26, 2010, WSDOT issued an RFP to the shortlisted pro- posers. The RFP contained a price/technical evaluation process, with a stipend of $4 million to the unsuccessful proposers, and required a 5 percent proposal bond to be submitted with the proposals.193 In mid-December 2010, WSDOT named STP the ap- parent best-value bidder. STP exceeded several of the RFP’s requirements by proposing to build a tunnel that included an 8-ft-wide safety shoulder in each direction of traffic and to open the tunnel to traffic by late 2015— a year sooner than the RFP required. STP’s lump-sum proposal price was just under $1.09 billion, with allow- ances included for inflation, bonding, and insurance requirements. The DB contract was signed on January 6, 2011. Because the National Environmental Policy Act (NEPA) documentation and environmental permits for the project were not complete as of the date of contract execution, and to comply with the requirements of FHWA, the DB contract called for WSDOT to use a two- phase Notice to Proceed (NTP) process. The first NTP, which was issued in February 2011, authorized STP to proceed with certain preliminary engineering and other work that would support WSDOT’s NEPA documenta- tion for the Final Environmental Impact Statement. This ensured that no commitments were made to any alternative (including the no-build alternative) being evaluated in the NEPA process prior to the conclusion of the process and enabled WSDOT to continue to inves- tigate the comparative merits of all alternatives pre- sented in the NEPA document. The second NTP would be issued only if the final NEPA documents chose the preferred alternative (i.e., the bored tunnel alternative) as the selected alternative, whereupon STP would per- form the final design and construction to complete the project. If the no-build alternative was selected, the DB contract would be terminated for convenience. The SR-99 Bored Tunnel DB contract has several unique incentive clauses, including a shared savings allowance of $40 million that is split 75 percent to the contractor and daily early-completion bonuses of $100,000, up to a maximum of $25 million. From a li- ability perspective, the contract contains several overall liability caps, including a $500 million ceiling to com- plete the project and perform warranty obligations. Liquidated damages are staged at $50,000 to $100,000 per day for late substantial completion. Other damages relate to failure to achieve designated contract mile- 191 KBB is a joint venture consisting of Kiewit Pacific Co., Bilfinger Berger Ingenieurbau, and AECOM. 192 The joint venture originally consisted of Dragados-USA, HNTB Corporation, and Arup. A change to the team was al- lowed by WSDOT after the shortlisting, with the joint venture partners now being Dragados USA and Tutor Perini Corpora- tion, with major subcontractors being Frank Coluccio Con- struction and Mowat Construction for construction and HNTB Corporation and Intecsa-Inarsa for design. 193 VTS JV and KBB dropped out and did not submit pro- posals. stones. The overall cap on liquidated damages is $75 million. The approach to determining the bonding for the SR- 99 Bored Tunnel Project is unique and among the most interesting of the large projects evaluated in this digest. This is largely based on an amendment to Washington State’s bonding statute, which was passed in July 2009 as SSB 5499. This law permits WSDOT to allow con- tractors to provide surety bonds at less than 100 per- cent of the full price of contracts exceeding $250 million: If surety bonds at less than the full contract price are au- thorized, the contractor must provide both a performance bond and a payment bond. The Department must set the amount of the performance bond to adequately cover 100 percent of the state’s exposure to loss but no less than $250 million. The payment bond must be set at no less than the performance bond amount. The Department must develop risk assessment guidelines for the purposes of assessing the state’s exposure to loss on highway con- struction contracts. The Office of Financial Management (OFM) must approve the guidelines before the Depart- ment may authorize contractors to provide surety bonds at less than the full price of a contract. The legislative history of this bill explained that this change was based on “recent activity in the surety mar- ket and on industry information” that sureties “do not generally sell bonds in which the value of the bond ex- ceeds $500 million.” It further cited that WSDOT indi- cated that the “maximum risk at any given time on a highway construction project…is about 30 percent of the contract amount.”194 194 WASH. REV. CODE 39.08.030(3) states in full as follows: (a) On highway construction contracts administered by the department of transportation with an estimated contract price of two hundred fifty million dollars or more, the department may authorize bonds in an amount less than the full contract price of the project. If a bond less than the full contract price is authorized by the department, the bond must be in the form of a performance bond and a separate payment bond. The depart- ment shall fix the amount of the performance bond on a con- tract-by-contract basis to adequately protect one hundred per- cent of the state’s exposure to loss. The amount of the performance bond must not be less than two hundred fifty mil- lion dollars. The payment bond must be in an amount fixed by the department but must not be less than the amount of the per- formance bond. The secretary of transportation must approve each performance bond and payment bond authorized to be less than the full contract price of a project. Before the secretary may approve any bond authorized to be less than the full con- tract price of a project, the office of financial management shall review and approve the analysis supporting the amount of the bond set by the department to ensure that one hundred percent of the state’s exposure to loss is adequately protected. All the requirements of this chapter apply respectively to the individual performance and payment bonds. The performance bond is solely for the protection of the department. The payment bond is solely for the protection of laborers, mechanics, subcontractors, and suppliers mentioned in RCW 39.08.010 (b) The department shall develop risk assessment guidelines and gain approval of these guidelines from the office of financial management before implementing (a) of this subsection. The guidelines must include a clear process for how the department measures the state’s exposure to loss and how the performance bond amount, determined under (a) of this subsection, ade-

59 In compliance with this statute, WSDOT developed draft Surety Bond Risk Assessment Guidelines (dated June 18, 2009) that outline the process for examining bond amounts. The general purpose of these guidelines is to identify the additional costs that the state would incur in the worst-case event of a contractor defaulting and abandoning the project. The guidelines have three components: 1. Identify the worst-case scenario in terms of type of contract action that results in a default that implicates bond funds. 2. Identify all possible cost items associated with the worst-case scenario identified above. 3. Identify the point in contract time that the sum of the cost items is at its greatest point, thereby identify- ing the State’s maximum risk of loss. This maximum risk of loss would help to determine the amount of the performance bond required for any particular project. In a December 2009 report entitled, “SR-99 Bored Tunnel Alternative—Revised Surety Bond Assessment,” Parsons Brinckerhoff submitted to WSDOT the analysis called for by the WSDOT Guidelines. The Assessment Report noted that while there were a number of scenar- ios that could occur after a contractor default, the worst-case scenario arose if a new contractor needed to be hired to finish the project. It further concluded that the “absolute worst-case scenario” would be the com- plete failure of the tunnel boring machine (TBM) during the construction of the tunnel or the TBM being dam- aged to the point where it would need substantial re- pairs and major component replacement. This scenario would entail hiring a new contractor, buying a com- pletely new TBM, digging a hole to remove the old TBM, installing a new TBM, and continuing tunneling operations. Because the WSDOT Guidelines state that “contrac- tor default is most likely to occur just after the project has been initiated, or at the end of project stages,” the assessment report looked at what would happen if the contractor defaulted 1 month into the project and just before the tunneling began. It also analyzed four situa- tions where the TBM breaks before completion of the project: 500 ft into the tunnel; the middle of the tunnel (i.e., 5,000 ft into the tunnel); 1,500 ft from the end of the tunnel; and 500 ft from the end of the tunnel. For each scenario, it considered how much WSDOT would spend in finding and contracting with a replacement contractor, focusing on the following cost categories: • Demobilization. • Mobilization. • Contract document update. • Reduced competition for a replacement contractor. • Administrative maintenance. • Worksite maintenance. quately protects one hundred percent of the state’s exposure to loss. • ROW considerations. • Rework. • Third-party damages. • Annual escalation. • Liquidated damages outstanding. • Economic loss. • Current facility risk. • Financial risk. • SR 99 general engineering consultant team costs. • State legal costs. • Consequential damages. The assessment report also considered the cost of the TBM failure for the four tunnel-related scenarios. The worst-case scenario was found to be a failure that occurred 500 ft into the tunnel. The assessment report concluded that this would result in a 3-year pro- ject delay (1.5 years to procure a new TBM, 6 months to obtain a new contractor, and 1 year for lost tunneling efficiency). The total cost of the default was $467 mil- lion, or 37.85 percent of the then-projected DB contract value. It therefore recommended that performance and payment bonds equal to $250 million, or 37.85 percent of the total contract value, whichever was greater, would be sufficient to protect the State. Based on this information, and a lump-sum contract value of approximately $1.1 billion, WSDOT could pre- sumably have required bonds in the amount of $416 million and satisfied the state’s statutory requirements. The DB contract ultimately required payment and per- formance bonds each in the amount of $500 million, with the two JV partners, Dragados USA and Tutor Perini Corporation, being jointly and severally liable for contract performance as well. C. Houston METRO 4-Lines Project, Houston, Texas In 2005 the Texas legislature passed the Hybrid De- livery System Act, which gave the Metropolitan Transit Authority of Harris County (Houston METRO) the au- thority to allow private entities to act as facility provid- ers and develop, design, construct, equip, finance, oper- ate, and/or maintain qualifying transportation facilities.195 Houston METRO elected to use this new hybrid delivery process for a major expansion of its light rail system, which at the time consisted of the 7- mi Red Line running along Main Street in downtown Houston. Houston METRO issued an RFP in August 2006, seeking a facility provider for its light rail expansion. It received three proposals, and Washington Group Tran- sit Management Company was ultimately awarded an agreement to perform certain predevelopment services, including negotiating a final development agreement for the project. On April 30, 2008, after it became ap- parent that the parties would not be able to reach 195 Informational sources for § 9.3 include senior individuals at FTA, Houston METRO, and HRT, as well as Internet arti- cles reporting on this project.

60 agreement on the terms of a development agreement, Houston METRO apparently terminated the agreement and began negotiations with Parsons Transportation Group, Inc. (Parsons). About a month later, Houston METRO and Parsons entered into an agreement whereby Parsons was to perform certain predevelop- ment services while proceeding with the negotiations of a development agreement. On April 21, 2009, Houston METRO and Parsons en- tered into a $1.46 billion Development Agreement for Parsons to act as the Facility Provider on the project. This contract provided for designing, building, and po- tentially financing, operating, and maintaining four new lines (North Corridor, Southeast Corridor, Uptown Corridor, and East End Corridor).196 The lines total ap- proximately 20 mi, along with approximately 32 sta- tions and storage and inspection facilities. The project also encompassed a major renovation to the existing operations center and the purchase of more than 100 light rail vehicles, including some vehicles for the exist- ing Red Line. As might be expected, the Development Agreement reflects a complex structure that contains multiple con- tracting relationships. In addition to Parsons, as the Facility Provider, three entities designated as “Primary Contractors” have separate contracts, designated as “Implementation Agreements,” with Houston METRO:197 • Design-Build Contract: The design-builder is the JV known as Houston Rapid Transit (HRT), the mem- bers of which include Parsons, Granite Construction Company, Kiewit Texas Construction L.P., and Stacy and Witbeck, Inc. Parsons is the managing member of HRT. The Design-Build Contract was originally in the amount of $1.28 billion. • Vehicle Supply Contract: Houston METRO deter- mined that the light rail vehicles were to be obtained from Construcciones y Auxiliar de Ferrocarriles (CAF). The primary contractor for this work was Houston LRV 100, L.L.C., an entity that has CAF USA, Inc. (a sub- sidiary of CAF) as its economic member and Parsons as its noneconomic member. • Ownership and Maintenance (O&M) Contract: The O&M contractor is Houston Operation and Mainte- nance, LLC, the initial equity of which is held 70 per- 196 While the Development Agreement mentions financing, Parsons never took any responsibility for performing this activ- ity. Likewise, as discussed in note 13, while the Development Agreement mentions operation and maintenance, Parsons did not ultimately take on this responsibility, as the O&M Con- tract was signed directly by Houston METRO with Operation and Maintenance, LLC, an entity essentially owned and con- trolled by Veolia Transportation Services, Inc. 197 While the Design-Build Contract and the Vehicle Supply Contract were initially entered into between Houston METRO and Parsons, they were immediately assigned, and all rights and obligations of Parsons thereunder were transferred to HRT and to Houston LVR 100 LLC, respectively. cent by Veolia Transportation Services, Inc., and 30 percent by Parsons.198 The Development Agreement makes it clear that Parsons is not a guarantor of the underlying perform- ance of any of the Primary Contractors, and that Hous- ton METRO retains the right to pursue any of the Pri- mary Contractors to the extent that they are responsible for problems. However, it is also clear that the success of the overall project can be affected by the cooperation of all parties involved in the project and by Parsons’ efforts to integrate the schedules of the Pri- mary Contractors through implementing processes to resolve issues and conflicts among them. In this regard, Parsons has the duty to manage, coordinate and inte- grate these interfaces and work activities: The success of the Project will…require joint efforts by the Primary Contractors and the Facility Provider. The Facility Provider is responsible for management, coordi- nation and integration of the entire (p)roject until five years after the Revenue Service Date for all Facilities, and shall take appropriate steps so that all required ef- forts by the Primary Contractors are undertaken in ac- cordance with the terms and conditions of (the Develop- ment Agreement), the Implementation Agreements and the Interface Agreement. The FP shall take the appropri- ate action to resolve conflicts and disputes between or among the Primary Contractors regarding liability for problems with the Project expeditiously, eliminating the need for Metro to involve itself in such matters.199 A few elements of the Implementation Agreements are worthy of note. The Design-Build Contract’s $1.28 billion contract price consists of $831 million for fixed- price work, with the $449 million balance for allow- ances that are subject to adjustment. HRT provided a 5- year warranty on each LRT facility, with the overall limitation of liability on the contract being 15 percent of the contract price. Liquidated damages were set at $40,000 per day for each LRT facility, up to a maximum of $10 million per facility. There are also $50 million in performance incentives available to HRT under the con- tract. The limitations of liability for the O&M Contract and Development Agreement were 15 percent and 20 percent of the contract value, respectively.200 As of the date of this digest, Houston METRO is still awaiting FTA’s approval of an FFGA for the North and 198 Other than providing its initial equity contribution and having voting rights on some major issues affecting the LLC, Parsons does not have any economic interest in this LLC, and it is, for practical purposes, owned and controlled by Veolia Transportation Services, Inc. 199 Excerpted from § 4.1 of the Development Agreement. 200 While the design and construction of this project has been proceeding well, it should be noted that a major issue arose with respect to the LRV purchases. In September 2010, FTA concluded that Houston METRO’s contract for the LRV purchases was flawed in that, among other things, it violated the Buy America Act and FTA’s competition rules. This ulti- mately resulted in a termination of the contract with Houston LRV 100 L.L.C. and a reprocurement of the LRVs for the pro- ject. On April 6, 2011, Houston METRO awarded Siemens an $83 million contract for the purchase of 19 LRVs.

61 Southeast Corridors, which are part of FTA’s Penta-P initiative. HRT has been advancing certain early work (e.g., U/R) during the 2 years since the contract was executed through the use of LONPs, with Houston METRO directly funding this work. The LONP process has allowed the project to maintain the guaranteed completion dates. Additionally, because of local funding issues, Houston METRO totally suspended work on the Uptown Corridor. As for performance security, each agreement con- tained a different approach. The Development Agree- ment did not require surety bonds; it required Parsons to provide a parent company guarantee. The O&M Con- tract likewise provided for a parent company guarantee from the parent of Veolia Transportation Services, Inc., but required performance and payment bonds in the event the O&M contractor performed any actual con- struction work undertaken during the performance of the O&M term. The Design-Build Contract required parent company guarantees, as well as performance and payment bonds for the first phase of utility reloca- tion work that was to be performed prior to full notice to proceed on the overall project. Houston METRO’s decision to use parent guarantees as opposed to surety bonds was based in large measure on preproposal surveys that indicated the surety mar- ket could not respond to a 100 percent performance bond on a project of this magnitude. Houston METRO believed that Texas law allows a public agency that cannot obtain performance bonds to go forward without the bond, with the understanding that the agency takes on the risk of the contractor’s failing to perform or pay its subcontractors. Houston METRO concluded that these market conditions, coupled with guarantees from financially sound parent companies, adequately pro- tected the public’s interest. The decision not to use performance bonds was widely criticized by, among others, the Texas Construc- tion Association (which represents subcontractors and suppliers) and those involved in the surety industry.201 The SFAA wrote a lengthy letter arguing that Texas law mandates that bonds be supplied on the project and that there was adequate surety capacity to cover the entirety of the construction work on the project. There were also newspaper articles that cited the risk to tax- payers for not having a bond in place. As the project moved forward, the decision on bond- ing was reconsidered. By April 2010, Houston METRO and HRT had concluded major negotiations that con- verted approximately $400 million of allowances into fixed-price work. As part of this, Houston METRO di- rected HRT to provide 100 percent performance bonds for the full construction value of the project as of the date of the full notice to proceed for the project, which was expected to be received at or about the time the FFGA approval was expected. There was a modification 201 Houston Metro Project, “Parent Guarantees,” TEXAS CONSTRUCTION ASSOCIATION QUARTERLY (Fall 2009), http://www.texcon.org/Fall%2009%20Newsletter%20WIP.pdf. to the Design-Build Contract to reflect this requirement as well as the conversion of the allowances to fixed pric- ing. D. Eagle—Denver, Colorado FasTracks is the voter-approved transit program de- veloped by the Denver RTD to expand rail and bus ser- vices throughout eight counties in the Denver area.202 FasTracks will ultimately consist of 122 mi of commuter rail and light rail; 18 mi of bus rapid transit services; related facilities, such as parking garages; and the re- development of Denver Union Station. As of the date of this digest, the Eagle Project is the largest of the FasTracks projects. It consists of 47 mi of new commuter rail, including 1) the East Corridor, from Denver Union Station to Denver International Airport; 2) the Gold Line, from Denver Union Station to Arvada- Wheat Ridge; 3) a short segment of the Northwest Rail corridor to south Westminster; and 4) the commuter rail maintenance facility in north Denver. As the first DBFOM public rail project in the United States, the scope of work under the Eagle Project also includes the purchase of rolling stock and a 40-year concession to operate and maintain rail service. The East Corridor and Gold Line were selected by FTA in July 2007 to be part of FTA’s Penta-P initiative. Denver RTD issued an RFP on September 30, 2009, for the project, with selection based upon a best-value process that scored the financial proposal 60 percent and the technical proposal 40 percent. The RFP pro- vided for a $2.5 million stipend to the unsuccessful pro- posers. Of the two entities that proposed, DTP, a con- sortium of Fluor Enterprises Inc., and Macquarie Capital Group Ltd., was found to have offered the best value.203 DTP’s proposal not only ranked higher techni- cally, but had a lower cost than the other proposal (Mountain-Air Transit Partners). DTP’s proposal price of $2.085 billion was $300 million lower than RTD’s budget estimate, and had a January 2016 completion date, 11 months earlier than RTD required in the RFP. DTP also brought private financing to the table, with RTD making annual payments to DTP based on DTP’s performance in meeting RTD’s service standards. Phase I of the project includes property acquisition, construction of the East Corridor, construction of the Maintenance Facility and control center, the purchase of certain rail vehicles, and the electrical systems at Denver Union Station. This work began in August 2010. Phase II of the project includes the Gold Line and the short segment of Northwest Rail, and is scheduled to begin following the award of an FFGA by FTA. RTD 202 Informational sources for § 9.4 include a variety of Inter- net articles reporting on this project. 203 Other major members of DTP’s team include Balfour Beatty plc. (part of the design-build entity as well as the opera- tions/maintenance entity); Alternative Concepts, Inc. (O&M services); Hyundai-Rotem USA (manufacturer of the electrified commuter rail cars); and Ames Construction (a design-build subcontractor).

62 is seeking $1 billion through the FFGA and expected to receive FTA approval of the FFGA in 2011. The July 9, 2010, contract between RTD and DTP is framed as a “Concession and Lease Agreement” and is quite complex. One notable feature is the liquidated damages regime. The daily liquidated damages to be paid to RTD by DTP for late completion of the construc- tion is the amount of 0.05 percent of the sum of specific amounts identified in the agreement and defined as “Maximum Annual Early Work Construction Payment Amounts,” capped at 5 percent of those amounts. Like- wise, for late delivery of a rail car, liquidated damages were in the amount of 0.5 percent of the price per de- layed car per week of delay, with the total liquidated damages not to exceed 7.5 percent of the aggregate value of the total number of rail cars ordered by RTD. Two types of performance security are required un- der the contract. The first is a Proposer’s Security in the amount of $25 million, which was to be posted either in cash or an LOC. This security was to ensure that DTP would take the project to financial closing (which was to occur after contract execution). The second performance security is the financial backstop for DTP’s performance of the design and con- struction portion of the work. Colorado law (Colorado Revised Statutes § 38-26-106) required any construction contractor on a public project to provide a performance bond in the penal sum of not less than 50 percent of the contract value. In conducting its evaluation of market conditions for the Eagle Project, RTD learned that it would have difficulty in meeting these requirements. As a result, it introduced legislation that would change this for large projects. Senate Bill 09-248, which was enacted on April 21, 2009, changed the 50 percent bond- ing requirement for projects having a total value of $500 million or more, and stated that “…a bond or other acceptable surety, including but not limited to a letter of credit, may be issued in a penal sum not less than one-half of the maximum amount payable under the terms of the contract in any calendar year in which the contract is performed.”204 The Eagle Project contract uses this statute and al- lows DTP to post either a performance bond or LOC in an amount that varies per year, based on the amount of work placed per year, with the bond expiring after final completion of the construction.205 204 The legislative history shows that RTD’s general counsel, Marla Lien, testified in favor of the bill. She stated that RTD experienced troubles encountered while seeking bonding for the FasTracks program, and that relaxing the 100 percent performance bond requirement would improve the surety proc- ess and lead to potential cost savings on large public works projects. Likewise, a representative of Marsh & McLennan, Inc., a major surety broker, testified in favor of the bill, dis- cussing the inability to secure surety bonds for large construc- tion projects and surety bond amounts for several recent public works projects. 205 The contract defined the term “Construction Security” as: E. InterLink—Warwick, Rhode Island InterLink is an innovative intermodal project located in Warwick, Rhode Island, that is contiguous to I-95, U.S. Route 1, and the T.F. Green Airport. 206 This com- plex and high-profile project, which is about a 10- minute drive from Providence, has several components, including 1) an MBTA commuter train platform for ser- vice between Warwick, Providence, and Boston using Amtrak rails; 2) a 3,200 car, six-story parking garage for rental cars and public vehicles that straddles the Amtrak train tracks; 3) a three-story building contain- ing services for rental car customers; and 4) an intercity bus stop. The project also has a 1,250-ft, glass-enclosed, climate-controlled elevated walkway with moving side- walks to connect the southern edge of the airport ter- minal to parking, rental car, and train facilities. The project owner is the Rhode Island Airport Cor- poration (RIAC), with major funding through the FHWA and the Rhode Island DOT (RIDOT). RIAC han- dled the project’s contract, construction, and overall project management and delivery, and is in charge of operations at the airport and the intermodal facility. RIDOT owned the land where the airport and intermo- dal facility are situated, and managed the project dur- ing the planning, programming, environmental, and design phases. Rather than using the traditional DBB approach, RIAC selected a CMAR delivery system. The RIAC Pro- curement Manual authorized the agency to decide upon a delivery system based upon project-specific factors. RIAC determined that CMAR was the most cost- effective method to ensure project completion within a set schedule and budget, basing its decision on, among other things, the following: A bond substantially in the form attached as Appendix G to Volume I of the RFP in favor of RTD (or in favor of RTD, the Concessionaire, the Agent Bank and the Design/Build Contrac- tor as multiple obligees) or a letter of credit or other surety (in such form as may be reasonably required by RTD) in a penal amount equal to not less than the greater of (a) 50% of the total Earned Value of the Work scheduled under the Original Base- line Schedule (or, as the case may be, Revised Baseline Sched- ule) to be performed under the Design/Build Contract and any other contracts entered into by the Concessionaire for construc- tion, erection, repair, maintenance or improvement of any build- ing, road, viaduct, tunnel, excavation or other public works in any calendar year in which such contract is performed and (b) 5% of the total Earned Value for all Work not yet performed un- der the Design/Build Contract and any other contracts entered into by the Concessionaire for construction, erection, repair, maintenance or improvement of any building, road, viaduct, tunnel, excavation or other public works in any calendar year in which such contract is performed, in each case (x) calculated as of the first day of the calendar year, (y) not including the Phase 1 Work prior to the Phase 1 Effective Date or the Phase 2 Work prior to the Phase 2 Effective Date and (z) in compliance with Section 38-26-106, Colorado Revised Statutes. 206 Informational sources for § 9.5 include senior individuals at RIAC, as well as Internet articles reporting on this project.