National Academies Press: OpenBook

Evaluating and Implementing Airport Privatization and Public-Private Partnerships (2021)

Chapter:Chapter 9 - Contract Management and Oversight

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Suggested Citation:"Chapter 9 - Contract Management and Oversight." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 9 - Contract Management and Oversight." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 9 - Contract Management and Oversight." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 9 - Contract Management and Oversight." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 9 - Contract Management and Oversight." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Suggested Citation:"Chapter 9 - Contract Management and Oversight." National Academies of Sciences, Engineering, and Medicine. 2021. Evaluating and Implementing Airport Privatization and Public-Private Partnerships. Washington, DC: The National Academies Press. doi: 10.17226/26179.
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Page88

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83 C H A P T E R 9 Introduction A P3 does not end with the cutting of the ribbon on a new facility. It is typically a long- term relationship that includes the operation of the facility, maintenance, modernization, and handback requirements. Considering how the airport owner will oversee these aspects and measure the performance of the private operator is a key part of the process. Particularly as the individuals (and even the organizations in the event of a sale of the lease) are likely to change over time, codifying the responsibilities of the airport and the developer and having a clear process to resolve disputes is essential for success. In this chapter, you will learn more about what to expect in construction and beyond and how to prepare your airport to success- fully manage a P3 contract. At the conclusion of this chapter, users should be able to • Explain the airport owner’s responsibilities during the contract management phase and how to determine if external resources are necessary to manage oversight and monitor key performance indicators. • Understand the ongoing dispute and negotiation process that occurs after financial close and throughout the term of the project. Contract Management and Oversight Chapter 4: Project Planning • Determining Project Goals and Project Delivery Goals • Organizational Capacity • P3-Enabling Authority, Policies, and Procedures • Internal Resources • External Resources • Building Internal Capacity and Engaging Advisors Chapter 5: Selecting a Project Delivery Method • Project Suitability for Alternative Project Delivery • Opposition or Lack of Buy-In • Aligning Stakeholder Interests • Determining P3 Feasibility • Evaluating Project Delivery Options • Leveraging a P3 to Address “Non-Core” Airport Needs Chapter 6: Structuring the Procurement Process Chapter 7: Procurement— Advertisement to Shortlist • Ensuring Transparency and Accountability • Project Advertisement • Evaluation of Proposals and Shortlist • Collaborative Dialogue • Performance-Based Requirements • Stimulating Innovative Approaches • Essential Procurement Documents Chapter 8: Procurement— Preferred Proponent to Financial Close • Reaching Commercial and Financial Close • Protests • Third-Party Disputes • Commercial Close • Financial Close • Work During the Negotiation Period • The Federal Aviation Administration’s Airport Investment Partnership Program Chapter 9: Contract Management and Oversight • Contract Management • Dispute Resolution • Meeting Key Performance Indicators • Assessing Market Interest • Selecting the Procurement Approach • Payment Mechanisms • Incentives and Disincentives • Essential Procurement Documents • Risk Allocation and Its Role in Procurement • Understanding the Risks • Unsolicited Proposals • Private Negotiations • Educating Decision- Makers

84 Evaluating and Implementing Airport Privatization and Public-Private Partnerships Contract Management Over the project’s term, the contract management process plays a key role in minimizing risks and ensuring that the relevant agreements are administered in accordance with the goals for the project that were conceived during procurement. Contract management refers to the procedures to ensure decisions made during the project accord with the terms and conditions of the applicable agreements, including the lease agreement with the private partner and those with oversight agencies and other third parties affected by the work. A contract management team is typically composed of the airport owner’s internal staff, out- side consultants, or a blend of the two. It consists of technical reviewers, who perform design and construction review and evaluate compliance with operating and maintenance standards, and contract managers, who ensure that decisions conform to the commercial terms and condi- tions. The technical review team is critical for the DB component of construction, as the technical reviewers evaluate design submittals to verify conformance to the technical specifications. Large-scale projects often employ individuals with contract expertise and knowledge of the underlying agreements to oversee the private partner’s operations and provide direction where necessary. One practice that airports undertaking P3 projects may consider beneficial is having individuals who drafted the relevant procurement documents and agreements retain a role in the contract management process. Continuity between the drafters and project administrators helps convey the airport owner’s intentions into project delivery and execution. Over the operations and/or maintenance term, reviewers evaluate whether the private partner is carrying out its responsibilities in accordance with the specified conditions. Technical reviewers assess these functions to measure compliance as well as to determine whether the private partner has met the preconditions for availability payments or other payment mechanisms. For example, the contract managers would verify terminal capacity, security wait times, aircraft movements, ramp time, or other metrics depending on the specific terms of the lease agreement. Figure 16 summarizes the roles and responsibilities of the parties typically engaged in a P3 during the contract management phase. Implementing a contract management process and engaging individuals dedicated to contract management helps administer agreements in a manner that accords with the airport owner’s goals. Without adherence to the contractual terms, the airport owner risks that the project will not serve its intended purpose. Moreover, contract management ensures consistency in the Communicate and problem solve daily Conduct regular face-to-face meetings Complete annual performance reviews Source Responsibility Developer Airport Owner Third Party Shared Develop management plans and procedures Collect monitoring data Develop status reports Self-report violations Set performance standards Review plans, procedures, and status reports Perform audits and inspections Assess penalties and awards Perform independent audits and inspections Collect data Resolve disputes Figure 16. Roles and responsibilities during the contract management phase.

Contract Management and Oversight 85 project’s application. Without dedicating a specific point person or team to manage the agree- ment, the contract suffers from multiple interpretations, many of which may be contradictory. Ultimately, this can result in risk for the owner when it seeks to enforce a particular condition, particularly when it has not done so consistently in the past. In addition to technical compliance, a critical function of contract management is the processing of change orders that amend the contract and often provide additional compen- sation to the private partner. Change orders are the most common source of disputes in P3 projects. Where disputes arise, contract managers develop a position based on the contract provision at issue and may seek legal counsel where necessary, particularly where there is a potential ambiguity in the relevant language. From the airport owner’s perspective, the contract manager’s tasks include minimizing claims and disputes. As a result, contract managers evaluate how an interpretation is likely to be understood and tailor a response that is least likely to result in the imposition of an owner-directed change for which compensation may become due. Where an undisputed change has occurred—for example, where the airport authority adds scope or other requirements to the project—contract managers process a change order so that the contractor is duly paid for any additional work that is involved. The private partner is respon- sible for establishing entitlement to a change order as well as the amount of the change. Efficient contract management requires verification that the private partner has submitted all required information that serves as a predicate to authorizing a change, much of which may be governed by statute. Additionally, contract managers act as a liaison between oversight agencies and the private partner. A significant component of the contract management process is to ensure that the lease agreements are implemented in compliance with applicable regulations and do not compromise any aspects of compliance necessary to continue operating or that affect funding. The complex regulatory web of an airport requires that a contract manager possess considerable knowledge of the regulations applicable to the project and act in accordance with those regulations when evaluating and rendering decisions on contract-related issues. Finally, the contract management process closes with the handback of the facility to the public airport agency. Handback occurs at the end of the term set in the lease agreement, though often, depending on the applicable law, the term may be extended by agreement. Handback will often describe the required condition of the project, as well as specifications governing the required processes, such as training, access to books and records, and the completion of administra- tive functions required for the public agency to assume operation of the facility. The handback process may commence years before the handback date, depending on the complexity of the requirements and the extent to which training and other operations need significant lead time for a seamless transition. Handback may involve third-party independent review of the con- dition of the asset and the steps required to transfer possession. Dispute Resolution An important component of managing the delivery of an airport P3 that often goes over- looked during procurement is dispute resolution. Inevitably, disputes arise concerning the interpretation and implementation of the technical specifications and operating standards, often stemming from the differing incentives of the airport owner and contractor. The owner wants to obtain the highest quality for the least money; the contractor wants to maximize profit. Disputes can arise where an owner denies a contractor’s request for a change order premised on an allegation that the owner has interpreted the contract in a manner that adds costs to the work. Disputes may additionally arise where the owner believes that the

86 Evaluating and Implementing Airport Privatization and Public-Private Partnerships contractor is not achieving the performance metrics required for full payment, such as when there is a dispute over whether the facility is sufficiently “available” to merit an availability payment. P3 agreements have procedures for addressing disputes that don’t involve litigation, which can severely damage the relationship between the airport owner and private partner. This pro- cess often starts with the change order requests, wherein the contractor formally requests addi- tional compensation, or the process by which an owner informs the private partner that it is non-compliant with the relevant agreement. Where resolution is not reached on these issues by the project management staff, many P3 agreements provide for escalation of the dispute through a ladder consisting of multiple steps in which individuals of increasing authority attempt to settle the issue. If the dispute reaches the final step of the process and is not resolved, the agreement may have a provision that allows for the submission of the dispute to a neutral person or panel to hear arguments and render an advisory opinion. Another alternative or additional step may be the referral of the dispute to a third party unrelated to the project for non-binding media- tion or binding arbitration, subject to limitations that may affect the airport owner’s ability to do so. The final and often least desirable option is litigation, in which the dispute is formally adjudicated in court. Agreements may contain tolling provisions whereby all claims are stayed and the statute of limitations defense waived until the completion of certain milestones, for example, the completion of construction or at specified intervals during an operation and maintenance term. Agreements generally specify the venue for disputes and the choice of the law that will govern. These issues are considered by legal counsel during the contract prepara- tion stage. Settlement of disputes before they reach litigation or trial is nearly always the optimal result. A critical consideration, however, is the concurrence of the federal and/or local agencies in charge of grant money to the project or that otherwise have oversight authority. Federal agen- cies generally have stringent reimbursement requirements and procedures for contract price increases that should be followed strictly when negotiating a settlement to a dispute. This will often entail requiring the private partner to submit detailed substantiation for its claims, including records establishing the amounts payable and thorough vetting by the owner to ensure that it is compliant with the oversight agency’s requirements. Lessons Learned: Denver International Airport Great Hall Terminal Redevelopment, Denver, Colorado Understanding the strengths, weaknesses, and interests of the private partner and alignment of objectives with public sector interest is critical for a successful P3. Denver International Airport’s chief executive officer pointed out that By choosing a foreign company, we [found] some cultural differences, but also differences in business approach, practices, and there are language gaps that have impacted our collaboration. [Great Hall Partners] had to learn our democratic processes, and the complexity of the Freedom of Information Act and [the impact it] has on communication, how vocal our stakeholders can be, and the extent of approval and outreach needed for our city. Working with a U.S. public agency that prides itself on transparency has its own challenges. These differences in approach proved to be particularly onerous to overcome during the dispute resolution process.

Contract Management and Oversight 87 In August 2019, Denver International Airport terminated the Great Hall contract for convenience after schedule delays due to substandard concrete discovered in the existing terminal structure. The delays started 4 months after construction started when the developer discovered the concrete issues in the existing structure. Denver International Airport and the developer then engaged in a dispute resolution process over the course of 9 months until Denver International Airport decided that the combination of delays and increased costs were not compatible with its budget and intended goals. Denver International Airport “expects to pay between $170 million to $210 million to terminate the deal with Great Hall Partners” (Williamson, 2019). The return on investment over the 34-year term expected by Great Hall Partners is a part of the final termination fee. Best Practice: Meeting Key Performance Indicators Key performance indicators (KPIs) are the metrics used to align the intended risk allocation for the project with contract performance. KPIs are most important for projects using an avail- ability payment in which the airport disburses a periodic payment based on contract respon- siveness to compensate the developer for designing, constructing, financing, and operating/ maintaining an asset. When KPIs are linked to compensation, the developer and its lenders are keenly interested in meeting those requirements to receive full payment. KPIs should be • Objectively measurable. • Based on events within the control of the contractor. As with any risk transferred, the private contractor should not be held to account for issues beyond its control. • Easily monitored, for example, the private operation agreement for the terminal at Orlando- Sanford International Airport included a complex operating cost-sharing methodology that requires annual audits to reconcile. • Weighted to reflect the relative operational importance of each metric. • Tied to financial impacts for the contractor, whether they are positive or negative. • Constructed to include a process to alter the metrics or the targets as conditions change. Over the course of a decades-long relationship, the relative importance of some metrics may shift, or the performance targets may prove suboptimal. Lessons Learned: Los Angeles International Airport Automated People Mover Key Performance Indicators, Los Angeles, California For the automated people mover project at Los Angeles International Airport, the private developer—LAX Integrated Express Solutions—must meet a target of 99.5% or greater system availability during its operations, or deductions in availability payment will result. In addition to this, LAX Integrated Express Solutions will also accrue non- compliance points for breaching key obligations. The accumulation of these points will trigger assigned and agreed-upon enforcement measures such as increased Los Angeles World Airports’ oversight, remediation plans, increased financier oversight, and possible termination. Table 6 shows an example of the non-compliance events, or KPIs, that the airport owner uses to determine whether the developer is responsive during the contract term.

88 Evaluating and Implementing Airport Privatization and Public-Private Partnerships The following checklist provides a guide for developing, procuring, and monitoring the P3 contract: • During the planning phase: – Determine internal capacity for oversight, review, and reporting – Come to a clear understanding of performance measures – Establish key performance metrics that align with the chosen payment mechanism, incentives/disincentives, and overall project goals • During the procurement phase: – Consider the selection of external advisors to ensure contract continuity and interpretation – Communicate expectations regarding oversight, reporting, and handback to proposers – Assemble internal contract management staff ready to begin after financial close – Determine a process for monitoring performance – Determine how payments and penalties for performance would be assessed – Design dispute resolution processes • After financial close: – Continued reporting by the private developer – Continued monitoring by airport – Continued dispute and negotiations over change orders, claims, and other ongoing issues Category Task Minimum Requirements Interval of Recurrence Non- Compliance Deductions in $ Local Hire Requirement Meet the 30% minimum annualization of local workers required by Section 9.9.21 20 + 5 for every 1% below the requirement N/A $50,000 + $2,500 for every 1% below the requirement D&C Period Planned Lane Closure No lane shall be closed outside the time period detailed in the approved traffic control plan on World Way upper & lower levels 10 15 minutes $50,000 Pedestrian Walkways Moving walkway shall be repaired within 5 hours of initial failure 2 3 hours $2,500 Automated No automated people 80 + 6.7 every Refer to the $750,000 + People Mover Operating System Shutdown mover operating system shutdown greater than 6 hours but less than or equal to 24 hours hour shutdown continues beyond 6 hours up to 24 hours total formula points $125,000 every hour shutdown continues beyond 6 hours up to 24 hours total 1 See https://onlinepubs.trb.org/onlinepubs/acrp/InsightEvents/17-01/DevelopmentAgreements/LAX_RFP_APM.pdf Table 6. Non-compliance events for automated people mover project at Los Angeles International Airport.

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A public-private partnership (P3) can be a dynamic tool to help infrastructure owners achieve a range of objectives on projects, such as incorporating lifecycle project costs into decision-making, benefiting from innovation in design and construction techniques, or sharing certain performance risks.

The TRB Airport Cooperative Research Program's ACRP Research Report 227: Evaluating and Implementing Airport Privatization and Public-Private Partnerships expands upon research presented in ACRP Report 66: Considering and Evaluating Airport Privatization.

Supplemental materials to the report include a Comparative Deal Matrix database, a website for the P3 Readiness Assessment, and a presentation that communicates research findings to key technical and non-technical industry stakeholders.

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