We can lower infrastructure price tag if bids focus on long-term cost

We can lower infrastructure price tag if bids focus on long-term cost
© Greg Nash

As American infrastructure continues to decline, the endless debate whether “public” or “private” infrastructure is “cheaper” is much more amusing than substantive. The participants in this debate keep talking past each other. Our MIT research explored how project delivery and finance methods affect levels of service and life cycle cash flow.

The shape of a typical cash flow for initial design and construction of an infrastructure project is stable. For every $10 government spends on design, it spends more than $100 on initial construction. The initial delivery time frame for a typical design-bid-build project is eight years. But, the cost of a typical infrastructure facility extends far beyond eight years.

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In-service costs over a facility’s 35-year life, with a typical refit/repair mid-way through that life, are more than 10 times the cost of design and construction. For every $110 government spends on design construction, it spends more than $1,100 on operation, maintenance and repair. On a life cycle basis, a commitment of $10 to fund the design of an infrastructure facility typically leads to further commitments of more than $100 to construct it and more than $1,100 to operate, maintain and repair it over its useful life, including a refit/repair mid-way through that life.

 

Typical cash flows for a publicly funded concession have the same shape, over 35 years. When contracting on a concession basis, public owners include a substantial refit of the asset and a contractually required maintenance and repair effort just before turnover to the government. Concession contracts make payment contingent on full performance of government requirements as to levels of service and asset condition.

But, there are substantial differences between the cash flows for a concession contract that combines design, construction and long-term costs into a single contract obligation. The cost of design and construction is typically reduced by about 10 percent when these activities are integrated in a single effort — known as “design build.”

Instead of spending $110, typical concession costs are $99 for design and construction, a 10 percent reduction. Our research also showed that the cost of maintenance and repair is substantially reduced when design-build is further integrated across the life cycle. Savings of 25 percent on operation, maintenance and repair costs are typical.

Typical cash flows for a privately funded concession contract to design, build, finance, operate and maintain an infrastructure facility has the same shape, except with a 3 percent financing premium across the concession.

So when we think about the realities of paying for infrastructure, it is easy to forget that although a project may appear to cost $110 to design and build, it will cost upward of $1,200 when operation, maintenance and repair are factored in.

Taxpayers are footing the bill, no matter how government delivers infrastructure.

Under the design-bid-build project structure the U.S. has relied on, head to head competition gets the lowest construction price. But, the “lowest price” is obtained for the one specific design produced by the design team. This distinction is important. There may be other designs that would have produced a lower construction cost. These remain unknown and unpriced. There is no competition in design-bid-build to produce the design with the “lowest price.”

The design-bid-build process doesn’t require the designer or contractor to make binding commitments about operation, maintenance and repair costs in a “public” competition. Minimizing these costs are not among their contractual responsibilities.

There are clear benefits to injecting competition into our infrastructure projects. When teams compete over the life cycle of a project, competitors are planning far forward, not only to the construction phase, but to the long operation, maintenance and repair phase. Winning designs are scrubbed for cost to build, repair and maintain. Designs are configured for ease of construction, repair and maintenance. Commitments are in place to perform those services as budgeted. The entire life cycle is wrapped up in a competitive package, under the pressure of competition.

More than two hundred years of experience in the United States shows that there are multiple ways to deliver and finance infrastructure, and do it well. And we know how to compete to include operation, maintenance and repair costs in competitions for infrastructure.

A good U.S. example is Seattle’s Tolt River Water Treatment Project. The city first built its best estimate of life cycle cash flow, assuming “public” delivery. The city then announced that it would accept “concession” delivery proposals — but only if they produced a life cycle cost savings of at least 15 percent. The winning proposals reduced the city’s life cycle cost by nearly 40 percent. Competition works.

The argument whether “public” or “private” delivery is “best” is irrelevant. Best value is the goal: the most advantageous life cycle combination of level of service and price. Competitive models allow governments to get a definitive answer for each and every significant infrastructure project.

Use competition. Prove it — to taxpayers.

John Brown Miller, Ph.D., was previously a professor of civil engineering at MIT, chairman of the American Bar Association Section of Public Contract Law and is an expert on infrastructure procurement. This is the second part of a three-part series on infrastructure. Explore the rest of the series:“Our infrastructure is doomed from the start,” and “Federal funds might delay state infrastructure problems, but they’ll never solve them.”