Managing Enhanced Risk in the Mega Project Era (2022)

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4 NCHRP LRD 86 allocating risks within contract documents can prevent signi- cant ramications to the project from the occurrence of a risk, since the party with primary responsibility for managing the risk is identied prior to the commencement of construction. Contract provisions should be carefully draed based on risk assessment and allocation models. Specic procedures could be used to identify “red-ag clauses” that are oen encountered in construction contracts and that may result in unintended con- sequences if the contractual language is not specic and clear. Researchers also recommend “must have” contract clauses such as diering site conditions, in addition to noting the importance of lessons learned from previous construction projects. C. Effect of Project Size and Complexity on Project Risk Profile Although similar risk management strategies may be uti- lized on a wide variety of transportation construction projects, eective risk management strategies can dier signicantly depending on the complexity and size of the project. Results of the projects studied show that rights-of-way (ROW)13 and utility risks were the biggest risk factors in high and medium cost projects, while geotechnical risks appeared to be the biggest risk identied for low-cost range projects. In complex projects, risks have been categorized into three main types: market re- lated (including demand, nancial, and supply risks), comple- tion related (technical, construction, and operational risks), and institutional related (regulatory, social acceptability, and sover- eign risks). ese risks may be allocated to specic parties as a method to control and cope with risks in larger projects.14 Risks could also be categorized pertinent to the phases of the projects. Subsequent sections of this legal digest will be divided based on these phases and their pertinent risks. Each subsection will dis- cuss the impact of the size and complexity of a project on the allocation of various types of project risks. D. Effect of Choice of Project Delivery Method on Project Risk Profile Along with the size and complexity of a project, the project delivery method aects the risk prole and allocation of a transportation project. e necessity of thorough risk assess- ments when choosing project delivery methods is crucial, as is addressing and allocating risks through properly draed con- tracts.15 us, understanding the types of risk factors inher- ent in dierent project delivery methods is crucial to proper contract formation. Research on three major project delivery methods, DBB, DB, and CM/GC, has revealed that the four risk factors with the most inuence on all three delivery methods were (1) unexpected utility encounters, (2) third-party delays, 13 In this digest, the abbreviation ROW is used for both the plural “rights-of-way” and the singular noun/adjective “right-of-way.” 14 Miller & Lessard, supra note 11. 15 Nancy C. Smith & Stephanie W. Kam, Risk Sharing and Transfer Using Alternative Project Delivery Methods and Contracting, TR News 316 (July 2018). managers from various transportation agencies. is digest discusses in detail how various contract provisions are used to allocate risks in transportation mega projects, considering the project delivery method, the size and complexity of the project, and pertinent legislation. It provides excerpts of example con- tract provisions used on these mega projects to allocate risks. Appendix B includes six case summaries regarding projects of varying sizes, locations, and project delivery method use repre- sentative of the 35 projects studied. A. The Risk Management Cycle Understanding how risk management is generally ap- proached in transportation construction projects is a signicant starting point when navigating best practices for risk allocation through contract documents. Managing risks includes the pro- cess of assessing, analyzing, mitigating, and controlling risks to ensure that projects are delivered successfully, on time and within budget. Key elements to the successful management of risks in transportation projects include a well-organized risk management program, a culture that extends to all agency em- ployees, and the proactive implementation of these programs to improve outcomes.10 e performance of early risk assessment is a recurring theme in many articles, reports, and publications; demonstrating how construction projects are more successfully completed when risk factors are managed prior to the com- mencement of the contractor’s work.11 is same theme was found weaving through the interviews that were conducted with project participants for this legal digest. More than 75 percent of the projects included a formal risk management process. e formal processes were conducted by outside consultants, or by utilizing the transportation agency and/or FHWA standard risk management process. B. Contracts as Vehicles for Allocating and Managing Risks A plethora of literature discusses the importance of properly constructed and carefully worded contract clauses to prevent the misallocation of risks in construction projects.12 Properly 10 Matthew R. Hallowell, Keith R. Molenaar & Bernard R. Fortunato, Enterprise Risk Management Strategies for State Departments of Transportation, 29 J. Manag. Eng. 114 (2013). See also, interviews and surveys conducted with transportation agencies across the nation, as part of a study prepared for the American Association of State Highway and Transportation Ocials (AASHTO) Standing Committee on Planning, David Rose, Keith R. Molenaar, Amy Javernick-Will, Matthew Hallowell, Christopher Senesi & Tim McGuire, Successful Implementation of Enterprise Risk Management in State Transportation Agencies, NCHRP 08-36, Task 121, AASHTO, April 2015. 11 Roger Miller & Donald Lessard, Understanding and Managing Risks in Large Engineering Projects, 19 Int’l J. Proj. Mgmt. 437 (2001); Shawn L. Kildare & George P. Blank, Implementing Risk Management on Transit Mega-Projects, AACE International Transactions, R131 (2006); Jungeun Park, Beomsuk Park, Yongwoon Cha & Changtaek Hyun, Risk Factors Assessment Considering Change Degree for Mega- Projects, 218 Procd. Soc. Behav. 50 (2016). 12 Scott R. Fradin, Properly Draed Construction Contracts Can Limit Development Risks, 24 Real Estate Fin. 19 (2007).

NCHRP LRD 86 3 MANAGING ENHANCED RISK IN THE MEGA PROJECT ERA Ghada M. Gad, Hajer Dawoody, and Omar Shabana, California State Polytechnic University, Pomona; Christine Ryan, Patricia M. de la Peña, and Edmund Caplicki, Nossaman LLP; and Edward Minchin, Celia Planeta, and Wren Weber, University of Florida I. INTRODUCTION Managing risks is central to ensuring the success of high- way construction projects. is has become even more evident as projects that drastically increased in size and complexity have become more common. Known generally to the trans- portation industry as “mega projects,” the number of such highway projects is on the rise. Merriam-Webster denes “mega project” as “a major project or undertaking (as in business or construction).”1 e U.S. Department of Transportation Federal Highway Administration (FHWA) explains that Prior to the enactment of the Safe, Accountable, Flexible, Ecient Transportation Equity Act: A Legacy for Users (SAFETEA-LU),2 projects with over 1 billion in construction costs were designated as ‘mega projects.’ SAFETEA-LU lowered the monetary threshold to $500 million or greater, and the term ‘mega project’ has since been eliminated and replaced with the term “major project.”3 “Major projects are typically large, complex projects designed to address major highway needs and require the investment of signicant nancial resources.”4 Projects that are high prole, of signicant importance to the region, and require a signicant investment by the owner may be included in this category even if the cost estimates are under $500 million. ese projects are oen complex, engendering higher levels of risk and uncertain- ties, and requiring higher management skills, while involving a large number of stakeholders from public and private sectors.5 In addition, such projects may have signicant impacts on soci- ety and the economy.6 As of May 2020, the FHWA had recorded 1 Merriam-Webster’s Collegiate Dictionary, (11th edition, 2020). 2 Pub. L. 109-59, 119 Stat. 1144 (2005) and extensions. 3 Federal Highway Administration, Major Projects, https://www. wa.dot.gov/majorprojects (last visited Nov. 2021); see also, 23 U.S.C. § 106(h) (2021). is digest continues the use of the term “mega project” due to its familiarity in the industry. 4 Federal Highway Administration, Project Management Plan Guidance, 82 Fed. Reg. 23,485 (May 22, 2017). 5 Richard J. Capka, Federal Highway Administration, Mega projects - ey are a Dierent Breed, Public Roads, July /Aug 2004, available at https://www. wa.dot.gov/publications/publicroads/04jul/01.cfm (last visited Nov. 2021). 6 Serghei Floricel & Roger Miller, Strategizing for anticipated risks and turbulence in large-scale engineering projects, 19 Int’l J. Proj. Mgmt. 445 (2001); Mendel Giezen, William Salet & Luca Bertolini, Adding value to the decision- making process of mega projects: Fostering strategic ambiguity, redundancy, and resilience, 44 Transport. Pol. 169 (2015); Hanyang Ma, Saixing Zeng, Han Lin, Honyquan Chen & Jonathan J. Shi, e societal governance of mega project social responsibility, 35 Int’l J. Proj. Mgmt. 1365 (2017). 93 active major projects on its list compared to only 17 projects in 2004.7 Risk allocation becomes increasingly crucial and dicult for mega projects, as the potential time and cost implications of risks on such projects may be astronomical. us, proper risk allocation is key to preventing excessive damages, litigation, and project failures. ere is a wealth of research and literature on risk management and allocation on transportation projects generally.8 However, there is an evident gap of practical advice on how to best manage risks and allocate them in contractual documents, specically pertaining to the variation in project size, complexity, and alternative project delivery methods. is digest is intended to (i) identify changes in the risk proles of transportation projects attendant to the increase in size and complexity, as well as the evolving project delivery methods, and (ii) recommend specic risk allocation strategies for mega project contract development that consider statutory require- ments governing these projects. e research team for this digest followed a methodology that included a comprehensive literature review, and case studies of 35 representative mega highway projects of varying size, scope, complexity, and delivery methods from across the United States.9 e projects studied were diverse enough to cap- ture variations in (1) project sizes in dollars (from $100 million to $3.8 billion dollars), (2) project delivery methods design-bid- build (DBB), design-build (DB), construction manager/general contractor (CM/GC), and public-private partnerships (P3s) and, (3) geographic locations (16 states). e project scopes of work included, among other things, new construction, bridge replacement, and freeway lighting. e case studies encom- passed (1) content analysis of bid and contract documents and risk registers, and (2) follow-up interviews with project 7 See, Federal Highway Administration, Active Major Project Status Report, https:// waapps. wa.dot.gov/foisp/publicActive.do. (last visited Nov. 2021). 8 See, e.g., Gary Fick, Ells T. Cockler, Steve Trost & Lee Vanzler, NCHRP Report 652: Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts, Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, Washington, D.C., 2010, [hereinaer NCHRP Report 652]; Larry omas, NCHRP LRD 74: Liability of State Departments of Transporta- tion for Design Errors, Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, Washington, D.C., 2017, [hereinaer NCHRP LRD 74]; Eric M. Kerness, NCHRP LRD 67: Permissible Changes in Scope of Work for Construction Contracts, Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, Washington, D.C., 2015. 9 See Appendix A for the list of projects studied.