Alternative Procurement Approaches for Building Tomorrow's Treatment Plants
In the face of an aging fleet of water and wastewater treatment plants nationally – coupled with increasingly stringent federal performance standards – public works agencies are more challenged than ever to coordinate the upgrade or replacement of major utilities.
By Sean Coffey and Richard Coen
In the face of an aging fleet of water and wastewater treatment plants nationally – coupled with increasingly stringent federal performance standards – public works agencies are more challenged than ever to coordinate the upgrade or replacement of major utilities. If communities meet these challenges, they are left with the ongoing burden of operating and maintaining high-tech equipment and a computer-controlled plant.
Typically, when a municipality needs to replace a water or wastewater treatment plant it procures the design and construction work through a process commonly known as "design-bid-build" procurement.
Although traditional design-bid-build continues to be a popular method, a growing number of municipalities today are also benefiting from alternative procurements, which enable communities to save money and shift risk to the private sector. A host of factors are contributing to the increasing attractiveness of bringing these projects to fruition through alternative procurements.
|Table 1: Potential risk shifting achievable under the DBO approach.|
|Many of the risks typically associated with the design, construction and operation of a treatment facility can be moved over to the contractor in the DBO process. Check marks in the "Contractor" column show risks that can be shifted to the contractor; check marks in the "City" column are those risks the municipality might expect to retain.|
Taking the First Step
The need for a new treatment plant often originates with a new permit, or more often a consent agreement leading to compliance with the new permit between a regulatory agency and the municipality. Under the consent agreement, the municipality agrees to meet certain wastewater discharge or drinking water quality requirements under a long-term schedule. The municipality will hire engineers to develop a facility plan that will lay out the necessary improvements to the current municipal system in order to comply with the permit requirements, among other items. In some cases, the current system must be completely replaced in order to meet the new permit.
Once the municipality has determined that it needs a new plant or major upgrade, it must decide how to get the job done. In recent years, municipal budgets have been strained by the economic recession, reduced tax and rate revenue and other financial setbacks, as well as substantial cuts in funding from state governments suffering their own financial strain.
As a result, the cost of a new plant is likely more of a factor in the analysis of how to go about the project than in the past. In addition to costs, municipalities must consider a host of other issues associated with such a project, including how to ensure that it is completed in a timely manner, how to obtain regulatory permits, how to finance the project and how to operate and maintain the new equipment in the long term.
Traditional Design-Bid-Build Approach
The traditional design-bid-build concept for constructing a new treatment plant has historically been the most common approach taken by municipalities. Under this scenario, the municipality will request proposals from engineers to produce plans for the design of the plant. Once an engineer has been selected, the plans produced, and the necessary construction and environmental permits obtained, those plans are bid out to contractors to propose the construction of the plant. Once a contractor is selected and builds the plant based on the engineer's plans, the municipality will assume operation of the new plant.
In many parts of the country, alternatives to the design-bid-build approach have been put into practice. These alternatives can generally be described as public-private partnerships. A public-private partnership allows the municipality to shift much of the risk associated with designing, building and often operating the new plant from the municipality to the selected private sector bidder while yielding significant cost savings to the municipality. Public-private partnerships may take several different forms, including design-build partnerships and construction manager at risk contracts. In some circumstances, the municipality will actually privatize the treatment plant and system by conveying ownership to the private entity.
Advantages of the DBO Approach
Another type of public-private-partnership is known as design-build-operate. The DBO approach offers many advantages over traditional design-bid-build. In a DBO, the municipality contracts with one entity to design, build and operate the new or upgraded plant (usually for a period of 10 or more years). Often, the contracting private entity is the operator, which then partners or subcontracts with design and construction firms for those aspects of the project. Regardless of how the contracting entity arranges for the delivery of design, construction and operating services, the municipality need only look to its contracting partner for responsibility in the event of a dispute.
The sole-source accountability provided by the DBO approach greatly reduces the frequency of the expensive, time consuming and frustratingly common experience of owners when the facility does not perform in some respect. For example, the design engineer blames the operator, who blames the construction contractor, who blames the design engineer. If properly structured during the proposal process and reflected in a carefully drafted contract, the DBO approach can not only save the municipality significant capital costs, but it can also shift schedule, permitting, maintenance, regulatory and other risks from the municipality to the contractor (see Table). In addition, the operating portion of the agreement can enable a community to project operating and personnel costs for 10 or more years, which indexes operating cost increases and shifts personnel out of the municipal payroll and often underfunded retirement system.
Communities that have pursued the DBO approach have experienced capital cost savings well into eight figures in comparison to the traditional design-bid-build approach, comprising as much as 20 to 30 percent of original capital cost estimates. The DBO approach has also delivered new projects more expeditiously than under the traditional approach, helping municipalities avoid regulatory fines and putting the system back in compliance with applicable permits. Coupled with the benefits of controlling operating costs and reducing municipal retirement obligations in these trying times, municipalities should give DBOs a close look when evaluating necessary improvements to wastewater and drinking water facilities. WW
About the Authors: Sean Coffey and Rich Coen are partners at Burns & Levinson LLP in the firm's Providence, RI, office, representing municipalities in public-private partnerships to build water and wastewater treatment plants and other utilities and public works projects in Rhode Island and elsewhere. For more information, visit www.burnslev.com.