Comparative Evaluation of Alternative Financing Costs and Benefits for Complex Transportation Projects.
II. PROBLEM TITLE
Comparative Evaluation of Alternative Financing Costs and Benefits for Complex Transportation Projects
III. RESEARCH PROBLEM STATEMENT
SHRP2 Renewal Project R-10 (Project Management Strategies for Complex Projects) found that the means by which a complex transportation project is financed can have a pronounced effect on the ultimate cost to design and construct it, as well as the final scope of work. It also found that financing and project delivery method were highly correlated. While financing state and federal highway projects is usually via public funding, airports, seaports, and transit agencies as well as transportation agencies at the municipal level have a variety financing instruments that are available and the use of public private partnerships (P3) is increasing in the highway sector. Each financing alternative carries with it a different set of constraints and each constraint creates an impact on the project delivery process. For example a transportation project funded with municipal bonds must be delivered at a cost that does not exceed the bonded amount. Additionally, the financing charges for the bonds themselves become a component of the overall cost to deliver that bit of public infrastructure. Hence, since financing costs are a direct function of time, selecting a project delivery method that accelerates the delivery period can accrue a marked savings in the overall project cost by reducing construction carrying costs. This in turn releases funding for additional infrastructure projects. This effect is more pronounced in public projects with a tangible revenue stream such as toll roads, transit systems, and airport parking structures. Starting the revenue stream as early as possible reduces the period over which the capital investment is amortized and again accrues a benefit through reduced carrying costs.
SHRP 2 R-10also found that the real impact of construction financing is not well understood by the groups that make project delivery method selection decisions for public transportation agencies. Thus, research is needed to articulate the impact of project delivery method on the cost of financing so that the potential benefits and costs can be utilized in the decision-making process. Additionally, the impact of financing constraints on the final scope of work must also be studied to assist decision-makers in identifying projects that are good candidates for alternative financing. The research must also delve into the traditional state and federally funded project delivery methods to identify aspects of those methods where better understanding of the impact of financing on design and construction costs. For example, the traditional design-bid-build progress payment system with retainage clauses forces construction contractor to finance portions of a project using short-term unsecured loans (these current cost about 18% per annum) or through self-financing. The cost of the capital used to make payrolls and pay subcontractors and suppliers (called “carrying costs”) is added to the cost of the construction contract at bid time. Thus, an agency that enforces a mandatory retainage of 10% is forcing the contractor to finance 10% of the project costs and is paying the cost of financing in increased bid costs.
The proposed research will detail the various traditional and alternative financing methods available to public agencies in practice; correlate them with the project characteristics, such as project delivery methods, where they would apply; and quantify the constraints, costs and benefit of each option. The target population will include all modes of transportation and extend into private and semi-private entities that furnish transportation services. It will then evaluate the impact of each financing method in the context of each project delivery method and detail the cost impact of pairing a given finance method with a given project delivery method. It will also assemble quantitative cost and schedule data from public agencies and develop simple algorithms that can be used by agencies as part of the project delivery method selection process. Finally it will identify and recommend those pairings that appear to produce a minimizing of financing costs. The proposed research should address the following questions:
· What are the best practices for financing transportation projects?
· Are there different financing schemes that only apply to single modes of transportation or specifically formed legal entities?
· What are the roles of the engineers in selecting a project delivery method for a project whose financing method is fixed?
· What are the advantages and disadvantages of various financing methods DBB, CMR and DB?
· What types of projects are good candidates for project delivery with each type of financing scenario?
· What are the barriers to changing the aspects of current complex project delivery that drive up the cost to finance a project and how can they be surmounted?
IV. RESEARCH OBJECTIVE
The main research objective is to produce a guide that explains the impact of alternative financing constraints within possible project delivery method decisions on the cost of financing to the engineers that make the project delivery decision. One of the major outcomes of this study is the discovery surmountable barriers to implementation. A second outcome will be a critical analysis of those features of current project delivery that unnecessarily drive up the cost of design and construction. The study will then assemble a set of best practices and conduct a comparative analysis that can be utilized by agencies wishing to implement consideration of financing costs in their transportation project delivery programs. The primary deliverable will be a guide that details the salient research findings and recommendation along with quantitative measures of effectiveness.
Specific Tasks of the research to accomplish the main objective include:
· Task 1 – Define the state-of-the-practice in construction financing through a comprehensive literature, the collection and analysis of relevant procurement documents, typical design and construction contracts. Review of enabling legislation and identify barriers to changing procurement requirements that trigger unrecognized financing costs;
· Task 2 – Survey all state DOTs, transit agencies, airport authorities, and other public transportation agencies to identify the specific traditional and alternative financing practices that are currently used in conjunction with the various project delivery methods and other project delivery characteristics.
· Task 3 - Select a representative set of case study projects from public transportation agencies with a varied set of construction financing experience that can be studied in depth to identify both best practices and lessons learned;
· Task 4 - Prepare a research work plan that describes the details of the research methodology and methods for identifying best practices and developing conclusions;
· Task 5 - Execute the research work plan and prepare an interim research report that articulates the data collection and analysis as well as emerging conclusions, best practices, lessons learned and a proposed outline for the guidebook;
· Task 6 - Prepare the draft report evaluating the impact on construction financing costs of typical project delivery decisions such as selection of the project delivery method. Incorporate review comments as required and validate the report’s efficacy on a range of US projects.
· Task 7 - Publish a monograph (20-30 pages) on the impact on construction financing costs of a cross-section of typical complex project delivery decisions and a final research report that details the full results of the research.
V. ESTIMATE OF PROBLEM FUNDING AND RESEARCH PERIOD
Recommended funding for the project is $400,000 to $500,000
It is estimated that 30 months will be required to perform the research.
The anticipated budget and schedule are based on assumptions for required resources to support limited on-site collection of performance contract case study project data, the assembly of the contents of the monograph and validation of the findings in the simulation with the case study DOT. .
VI. URGENCY, PAYOFF POTENTIAL, AND IMPLEMENTATION
The intent of this project is to educate public agencies engineers on the impact of the project delivery method selection decision on the cost of construction financing. Understanding the relationship will add another layer of sophistication to the decision-making process and create a more financially efficient environment in which an infrastructure project can be delivered. The result will likely be the initiation of efforts to eliminate barriers and articulate potential benefits to upper management and legislative authorities.
The payoff of this research is likely to be significant in that it comes at a time when a large influence can be applied to the programs all 50 states. By evaluating the costs and benefits of traditional and alternative construction financing, it will highlight areas where rules, regulations, and policies can be amended to more efficiently use available public capital. It creates another benefit in that it provides a full suite of possible financing options and instruments that may be used for projects that traditionally use other methods.
VII. PERSON(S) DEVELOPING THE PROBLEM
Douglas D. Gransberg, PhD, PE, Professor, Iowa State University
VIII. PROBLEM MONITOR
TRB Committees AFH10: Construction Management and AFH15: Project Delivery Methods are submitting this problem statement through the sponsorship of the XXXX Department of Transportation.
IX. DATE AND SUBMITTED BY