The PPP structures discussed in this report can be divided for analytical purposes into two general types: 1) innovative contracting techniques that involve non-traditional forms of project delivery; and 2) innovative financing techniques that involve some form of private debt or equity investment in the project. The primary types of innovative contracting techniques are D/B, DBOM, cost-plus-time bidding (also referred to as "A+B Contracting), construction manager/general contractor (CM/GC), and construction manager at risk (CM at Risk).
Since the 1950s, most public highway improvements projects in the United States have been procured on a design-bid-build basis. Under this conventional approach, the state or local highway authority is responsible for developing design plans for the project (through its in-house engineering staff or outside con-tractors). Based on those design plans, the public authority then solicits competitive bids from private con-tractors for the construction work. The construction work typically is awarded on a low-bid basis, and the project is financed with federal, state, or local funds. Upon completion of construction, the public authority performs an inspection to ensure that the facility has been constructed in compliance with the design plans and then operates and maintains the facility for its useful life. Under this traditional procurement methodology, the public-sector sponsor retains the design risk, the design and construction work is procured sequentially, and the public sector retains responsibility for operating and maintaining the infrastructure.
The potential advantages of this conventional procurement approach are numerous. First, the public authority has complete control over the design of the highway improvement. Second, the low-bid procurement process is designed to produce the lowest overall project cost. Third, the process is designed to ensure competition among private contractors, promote local public policy objectives (such as ensuring that smaller local contractors have equal access to such construction opportunities), and facilitate transparency in the procurement process. Fourth, the institutional framework for highway construction has been established around this traditional procurement methodology. In other words, state and local highway agencies are structured and staffed to procure highway projects in this traditional fashion.
The conventional method of procurement, however, can have a number of potential disadvantages, particularly with respect to large and complex projects. First, the public sector is subject to significant financial exposure from change orders and delay claims. These claims can have an enormous adverse impact on project schedule and total project cost. Such claims typically arise because of unanticipated design flaws or site conditions that the construction contractor uses as a basis for seeking additional funds above the original bid price. Second, the conventional method relies on complete public financing of the project. Third, it does not take advantage of potential synergies between the design and construction phases of the project because these phases are performed sequentially and often by different entities. There is no "single point of contact" that will be responsible for both design and build risks. Fourth, the traditional method does not reward expertise, quality, and innovation in the evaluation of bids.
These contracting methods all involve greater roles for the private sector than under the traditional design- bid-build method of highway construction contracting. It is estimated that innovative contracting methods can achieve costs savings of up to 20 percent compared to conventional procurement.