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At the Global Infrastructure Facility (GIF) Advisory Council Meeting in March, we talked about construction risk and the way it shapes the delivery environment early in a project’s investment life. As a practicing engineer accustomed to attacking construction risk at the granular level, I enjoyed the broader discussion, particularly from the banking and credit perspective (meeting outcomes).
Unfortunately, construction risk realization will continue to be the norm. Perhaps we need to consider taking the longer view to reach potential investors by aligning the risk environment with risk tolerance.
Here are three ways to do this:
1. Standardization in procurement
Increasing the use of standardized clauses and other project inputs bears fruit in efficiencies and helps consolidate expectations between the various stakeholders. The International Federation of Consulting Engineers (FIDIC), one of the GIF’s advisory partners, firmly believes in this approach. FIDIC publishes international standard forms of contract and business practice documents, including policy statements, position papers, guidelines, and training manuals and resource kits. FIDIC model contracts have been developed over the last 50 years and today are considered the industry standard by many owners and project sponsors, including the World Bank Group.
I highly encourage project owners, sponsors, investors, and advisors to use and incorporate FIDIC contracts in their infrastructure projects. Potential advantages include growing the pool of interested constructors and suppliers while reducing the burden of conflict resolution when construction risk is realized.
Several other fantastic new resources are the World Bank Group’s new Guidance on PPP Contractual Provisions and the associated GIF Briefings document: Contractual Considerations for Bond and Corporate Financing in PPPs, on the specific considerations required for bond-financed and corporately-financed projects.
2. Bidders and sponsors should buy quality for the longer horizon
Infrastructure assets are long-lived investments, which is why many owners and concessionaires emphasize a quality build upfront in order to enjoy reduced maintenance expenses and user reliability during operations. Not surprisingly, the predictability of operational costs encourages interest from investors seeking long-term investments with low volatility. All the more reason for bidders (or sponsors) to insist upon a qualified engineering firm to manage the design and supervise the construction process. Using a quality-based selection (QBS) approach to engineering and design inputs results in economic value added over the asset life cycle.
The American Council of Engineering Companies (ACEC) has done extensive studies on QBS and found that over the life of a project, engineering services account for less than one-half of 1% of total project costs, yet engineering may be the greatest driver of overall project costs. A well-designed project by a highly-qualified engineering firm will stay on time and on budget , solve construction and operational challenges, experience fewer change orders during construction, enhance performance of the completed project, and lower long-term maintenance and repair costs. A 2009 study by the University of Colorado and Georgia Tech found that using a QBS process to procure engineering services results in lower construction costs and fewer schedule delays, meaning real cost savings.
3. Arbitration
I’m not sure how much the poet Robert Burns knew about building infrastructure, but his quote “The best laid plans of mice and men oft-go astray” couldn’t be more appropriate for the planning of construction risk. After more than 20 years working in the construction process, the one thing I have found for certain is uncertainty will be found on the job site. The development and inventorying of risk mitigation plans is best practice for quality engineering and construction firms. Look for experience and evidence of this when procuring engineering and construction firms for your team.
One omnipresent risk with any build is the dispute resolution process and managing its impact on project schedule and cost. Fortunately, FIDIC provides a way to preserve project value through the use of a standardized dispute resolution process that often eliminates delays and allows for decision making on-site at the project.
For disputes requiring more attention, FIDIC maintains a pool of certified adjudicators that can quickly mobilize to support project teams and resolve matters . Project teams can enhance their resolution speed by pre-positioning adjudicators with a dispute resolution board.
For more information, reach out to FIDIC or one of the many FIDIC-approved dispute adjudicators.
About the International Federation of Consulting Engineers
Founded in 1913, FIDIC is a GIF Advisory Council member consisting of consulting engineering firms from over 97 countries. FIDIC’s mission is to work with our stakeholders to improve the business climate in which we all operate. FIDIC hosts business and training events worldwide, including our flagship annual infrastructure conference held this year in Jakarta. These events are open to the infrastructure community and we encourage our industry partners to attend to further our collective pursuit of sustainable infrastructure.
Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.
Related posts:
PPP contract clauses unveiled: The World Bank’s 2017 Guidance on PPP Contractual Provisions
Three common design fails in infrastructure PPP projects: An engineer’s perspective
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