With the size and frequency of large-scale civil infrastructure projects increasing over the past decade, Travelers Canada, one of the country’s leading surety providers, has released critical learnings for how to bring mega-civil projects to a successful (and profitable) conclusion.
Travelers recently compiled data from 224 heavy civil construction projects in North America over a 17-year span from 2004-2020. The insurer focused on projects with contract values between $250 million and $2 billion, including bridges, highways, rail/light rail, tunnels, and other similar large-scale civil work.
“At Travelers, we’re privileged in that we [work with] a very large portion of the construction market in North America,” said Ray Bassett (pictured), vice president and chief strategy officer for the Construction Services Group at Travelers. “We’re the largest provider of surety credit in North America, and we have close to 5,000 contractor clients of all scales, in all sectors, across all parts of those markets.
“We get very granular reporting [from our clients], including confidential information from companies on the way that each construction project performs over time. We see margin, we see cost, we see schedule extensions, and disputed receivables […] and we mined that data over [a 17-year span] to see what trends we could identify.”
Through that exercise, Travelers found that many contractors working on large-scale civil infrastructure projects – things like highways and bridges – were not performing well or generating adequate financial returns. The data showed that project procurement type (from public-private partnership (P3) to design-build, design-bid-build, progressive design build, and construction manager/general contractor) plays a significant role in a job’s success.
“Contractors get into trouble when they fix a price on [a heavy civil construction project] before the design has matured,” Bassett told Insurance Business. “When they’re being asked to fix a price on work where the design is 30% complete, that seems to be the biggest correlation for failure. Where you have design that’s well advanced or complete, most often, if the contractors can see it, they can bid it, and they can execute it. That’s what the data showed us.
“As public owners look to push the infrastructure envelope to spend more, whether it’s stimulus or just economic recovery, it’s important that they pay attention to the procurement model. Models that ask the contractors in this heavy civil construction space to fix prices early on, before they have a well-developed design, are [more likely to see] trouble, and end up with disputes, delays, cost overruns, contractors not performing well, and grief for the project owner.”
According to Travelers’ data, the worst performing procurement type from 2004-2020 was P3, which has been used heavily in civil infrastructure projects across Canada. This is because P3s typically follow the design build model, and contractors struggle to meet commitments made on price and financing that were agreed before the design was finalized.
In contrast, the construction manager/general contractor procurement models, the more traditional design-bid-build methodology, and the progressive design build procurement model proved to be more successful options for project owners and contractors. In these procurement models, there is more collaboration, and the price is only fixed when the design is very near completion.
The findings of the study – especially around the poor performance of large P3 projects – highlight the importance of surety and warranty products as risk management tools.
“From the perspective of the people who use surety bonds – for example, a public project owner – they hired a contractor, and what they want from us is the guarantee that the contractor will perform the work, and if they don’t, we answer for that. That’s the basic relationship,” explained Bassett. “In a place where we’ve got procurement models that are not appropriate for performance - you’ve got this early commitment of price when the design has not evolved - the owners are at risk as well, [and they could also face] delays, disputes, budget overruns, and so on.
“The sureties issue a bond, which is the formal instrument (the guarantee), but really what we do is pre-qualify. We look at the organizations and say: ‘Do they know how to operate the company in this uncertainty, and are they likely to be able to perform even with a few bumps and bruises through the project?’ And if we think they can, then we issue the bond. Public owners want bonds now more than ever, because of the uncertainty of the procurement models [and] this pre-screening and pre-qualification by the surety industry is more valuable than ever.”
As Canada recovers from the COVID-19 pandemic, there will likely be increased spending on civil infrastructure, and Travelers is encouraging all parties to consider which procurement method will get the best performance out of the market. In some instances, P3 has been successful in Canada, especially in social infrastructure like schools, hospitals, jails, and public buildings, where the method can provide good value for taxpayers.
“I think the jury’s out on whether the P3 model, as it is now, is the right model to use to dump a significant investment into the marketplace, because you’re putting the money in and you’re asking for a fixed price with the design at 30%,” said Bassett. “And we know that’s not a recipe for success for anybody: the owner thinks they win, but they don’t, contractors don’t win, and designers can’t keep up.
“In certain sectors, P3 is fine, and the data will tell you that. Lots of contractors have done well in that space … but it’s a coin toss on whether contractors can make any money on a light rail transit project, for example, or a highway interchange or a bridge. Our message is, if you’re going to put the money in, then align the procurement method with a way that has design well advanced (complete or nearly complete) before you have the pricing fixed, because that way, we know that the market can perform, and you’re going to get the value that you hope for from your investment.”
