Managing Enhanced Risk in the Mega Project Era (2022)

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NCHRP LRD 86 5 approved by the government agency.17 If governmental approv- als are required to be obtained aer contract execution, delays will occur if approvals are not given within a reasonable time frame.ere is also the risk that the nal approval will require modications to the proposed schematic design or other as- sumptions on which the proposals (and related pricing) were based. Since governmental approvals come from third parties and the process for obtaining the approvals can be cumbersome and time consuming, the contract will need to allocate the risks for obtaining any approvals that have not been obtained prior to contract execution, as well address potential delays in obtaining these approvals. While the risk can be shared, contractors oen are responsible for obtaining governmental approvals, particu- larly for DB and P3 projects. When the owner takes on responsi- bility for obtaining approvals, it is usually specied that only the owner must do so or would assist the contractor with obtaining them. e risk allocation for governmental approvals oen is dependent upon the type of governmental approval involved, the schedule for delivery of the project, and the project delivery method. a. Project Delivery Method e type of project delivery method will necessarily aect how governmental approvals will be obtained. Where govern- mental approvals will be required to accommodate project de- sign and the contractor is responsible for developing or com- pleting the design, such as for DB or P3 projects, the contractor will likely be responsible for obtaining those governmental ap- provals. For most of the DB and P3 projects surveyed, the owner took responsibility for obtaining certain specied approvals and, where the approvals were not already in hand at contract execution, the owner was contractually obligated to provide those approvals by a certain specied date. In addition, because the contractor is responsible for nal design of these types of projects, the DB and P3 contracts require the contractor to be responsible for obtaining any amendments or modications to any owner-provided approvals that are necessary to accommo- date the contractor’s nal design. (See Excerpt 1 from the Ari- zona Department of Transportation (ADOT) South Mountain P3 agreement.) Where the contractor is responsible for obtaining any gov- ernmental approvals, in addition to describing the contractor’s obligations, many of the contracts surveyed include provisions describing the owner’s obligations, such as provisions that re- quire the owner to assist the contractor in obtaining the approv- als and any modications to the approvals. In such cases, the contract may provide for reimbursement to the owner for its reasonable costs in providing such assistance. On many of the DB and P3 projects reviewed, the contractors were responsible for preparing permit applications yet, to allow the proposers to better assess the risks they would be bearing, the project owners 17 Thomas J. Kelleher, Jr., Thomas E. Abernathy, Hubert j. Bell, Jr., and Steven A. Reed, Smith, Currie & Hancock, Federal Government Construction Contracts: A Practical Guide for the Industry Professional, (Wiley, 2nd ed. 2010). (3) diering site conditions, and (4) delays in government ap- provals.16 Results of the interviews conducted under this project reported the highest risks as the utility and ROW risks, followed by geotechnical risks. e most common risk identied with respect to DB projects was geotechnical risk, followed by util- ity and ROW risks. For P3 projects, the most frequently cited risks were ROW and utility risks. For CM/GC, the most refer- enced risks were related to stang and management, as well as project cost estimates. Mitigation measures for these risks will be addressed in Section II of this digest, using specic contract requirements and provisions. II. RISK ALLOCATION STRATEGIES USING VARIOUS CONTRACT PROVISIONS Understanding how risk can best be allocated between the owner and contractor using specic contract provisions, is an important step to properly managing risks during project devel- opment. Eectively and eciently managing project risks mini- mizes litigation, reduces nancial liabilities, and ultimately helps to ensure a project’s success. Based on the ndings of this study, the following sections will discuss dierent approaches used to best manage and allocate common types of risks addressed in contracts for the development of transportation projects. ese sections are categorized based on project phases, starting from planning to pre-award, and then to post award. A. Planning e risks and respective contract provisions covered in this section are pertinent to the planning phase of the project. ese include government approvals that need to be secured early on, environmental requirements and approvals, project funding, hazardous materials management, as well as agree- ments with third parties (including ROW, utilities, and railroad agreements). 1. Governmental Approvals Transportation projects require dierent governmental ap- provals. Depending on the project type and scope, the extent of governmental involvement and the intricacies of the required approvals for the project will vary. A governmental approval may take the form of a permit, license, consent, or agreement that is provided by a federal, state, or local agency that autho- rizes or pertains to the work or the project. Governmental ap- provals include environmental approvals and permits, as well as municipal approvals for various aspects of a project, such as trac signals or aesthetic treatments. For contractors, obtaining governmental approvals entails submitting documents for review and approval by a particular governmental agency, which can create a potential source for delay. is is because contractors may not be able to proceed on a construction project until certain required submittals are 16 Dai Tran & Keith Molenaar, Critical Risk Factors in Project Delivery Method Selection for Highway Projects, Construction Res. Congress, ASCE (2012), at 331.

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).