Choosing the Right Model for Each Project – IO’s Procurement and Project Delivery Approach
IO considers a range of procurement options in delivering its major infrastructure projects. This approach ensures that IO can select the best option for each project. It is recognized around the world for its success in delivering projects through its made-in-Ontario P3 program along with completing thousands of smaller projects using more traditional approaches.
IO aims to build on its success by adapting and expanding on its approaches to suit the realities of a changing marketplace and the current infrastructure needs of government.
Four core objectives have always been at the heart of our approach:
- Creating competition and enabling innovation;
- Allocating project risks to the right party and appropriately incentivizing/ensuring performance;
- Taking a total lifecycle approach to assets – by integrating responsibility for the design, construction, and maintenance where possible;
- Providing as much cost certainty as possible for taxpayers.
This glossary includes models that cover the entire industry spectrum, ranging from more traditional all-public approaches to public-private partnerships, as well as private approaches. Ontario’s approach to P3s always maintains public ownership of the asset. As such, not all of the models below are used by Infrastructure Ontario. Those that are considered and used by IO are identified as such.
Design-Bid Build (DBB)
The DBB is a traditional procurement option in which the Owner awards two distinct and sequential contracts for the design and construction work:
- The first contract is with a design firm to develop a full detailed design and to assist the Owner in putting the construction of the project out to tender; and
- The second contract is with a general contractor to build in accordance with that design.
- Under the DBB model, the operations, maintenance and financing of the project would remain the responsibility of the Owner.
IO commonly uses this ‘traditional’ procurement approach for many smaller scale projects in its role of maintaining and modernizing the buildings and various facilities within Ontario’s general real estate portfolio.
Delivery model features and considerations
- Significant Market Experience: Well-understood and commonly used approach by the public sector
- Control: Significant degree of Owner control of project
- Flexibility: Flexibility to respond to changing conditions and citizen concerns
- Upfront Time and Resources: Less upfront time and resources spent on projecting future operational requirements and risks
- Integration: DBB requires completed design before awarding construction contract
- Constructability: No opportunity for the construction contractor and designer to collaborate and incorporate constructability considerations into the design
- Risk Transfer: Owner retains the majority of the project risks (e.g., cost/schedule overruns)
- Cost Certainty: Construction budget not determined until the design is complete and the construction contract is awarded
- Lifecycle Considerations: No optimization of lifecycle costs and long-term quality/performance by integrating construction and maintenance
- Performance Guarantee: No “guarantee” of asset performance and quality during operations
- Innovation: Less opportunity for private sector innovation
Design-Build (DB)
The DB model awards the design and construction work under a single contract. Consortiums, joint ventures and/or subcontracting arrangements may be established between two or more companies to pool the resources and expertise necessary to deliver the project. Under a DB contract, the Owner continues to operate, maintain, and refurbish the asset once construction is complete. Furthermore, the Owner is responsible for financing the entire construction project.
IO and Metrolinx have used this model for transit projects.
Delivery model features and considerations
- Efficiency and Cost Savings: Integration of design and construction creates efficiencies and cost savings
- Cost and Schedule Certainty: More certainty on final construction price and completion than DBB
- Constructability: Enhanced constructability of design plans compared to DBB
- Delivery Schedule: Can accelerate project delivery schedule compared to DBB
- Risk Reduction: Reduced design and construction risk for the Owner compared to DBB
- Lifecycle Considerations: No optimization of lifecycle costs and long-term quality/performance by integrating construction and maintenance
- Performance Guarantee: No long-term “guarantee” of asset performance and quality during operations
- Innovation: Less opportunity for private sector innovation to create efficiencies during the operations period than the Alliance/IPD, DBFM, DBFOM and concession models
Integrated Project Delivery (IPD) / Alliance
The IPD/Alliance contract is formed by the Owner, designer, construction contractor, suppliers and potentially stakeholders (e.g., local organization, community stakeholder, funding organization, etc.) to plan, design, construct and commission a capital project. Compensation under an IPD/Alliance model is directly tied to cost, schedule and profitability milestones of the overall project.
The fundamental difference between an IPD/Alliance and traditional contracts is the underlying principle: a non-adversarial approach between the contracting parties. This is achieved through establishment of IPD/Alliance principles, good faith commitments, and adoption of no-dispute provisions. The Alliance contract and supporting structures promote a positive culture based on “no-fault, no-blame” and unanimous decision-making, and require all Participants to find the “best for project” solutions. The collaboration requires a greater time commitment on the Owner’s part, but efficiencies and win-win situations are maximized.
IO and Metrolinx have adopted an Alliance model for the Union Station Enhancement Project.
Delivery model features and considerations
- Common Goals: The primary parties are incentivized to achieve the same set of goals that they set or agreed to
- Visibility of Project Requirements: Earlier involvement of all parties at preliminary design may provide greater visibility into project requirements compared to other models
- Innovation: Collaborative process may encourage a greater degree of innovation
- Flexibility: There is flexibility to adapt to scope changes, risks and opportunities as they arise during delivery of the project
- Risk Sharing: Higher degree of risk sharing compared to DBB and DB - may be desirable when risks are difficult to quantify, as they allow the Owner to incentivize the primary parties to manage risks without incurring a significant risk premium
- Collaboration: Integrated governance structure aims to reduce threat of disputes compared to traditional adversarial contracting approaches
- Constructability: Increased constructability of the design as communication between designers, constructors, and the client is instantaneous
- Integration of Resources: Can be beneficial for projects that are significant in size and complexity – integrated approach enables pooling of resources and expertise and ensures no duplication of resources between parties
- Cost and Schedule Risk: Cost and schedule risks are shared under IPD/Alliance contracts which exposes the Owner to ‘uncapped risk’
- ‘Soft’ Target Cost: An approach to the selection of IPD/Alliance members, which does not evaluate price elements combined with any imbalance between the commercial capabilities of the NOPs and the Owner, may result in a ‘soft’ TOC which inflates the Owner’s cost of delivering the project
- Price Competitiveness: Projects are not competitively bid. Market participants may be hesitant to enter a risk-sharing arrangement before cost of project is defined
- Upfront Time and Resources: Can be very time consuming for parties to agree the final IPD/Alliance contract
- Lifecycle Considerations: Less opportunity to incorporate long-term operations and maintenance work under the agreement
- Market Experience: Less project experience and lessons learned to draw from
- Capability: The Owner’s team may not be sufficiently capable (e.g. skills, experience, behaviors) to deal with the complexity of the project and Alliance delivery method
Construction Management at Risk (CM@R)
Under this model, the CM@R contractor is engaged by the Owner to provide consultancy services during the pre-construction stage (constructability and value engineering reviews, tender administration, etc.). They are later contracted to deliver the construction of the project under a cost-plus-fee arrangement that includes a Guaranteed Maximum Price (GMP). The CM@R contractor typically advises the design team, procures the construction and manages the delivery.
The contractor in a Construction Management at Risk model is responsible for any construction cost overruns above the maximum price. The GMP is negotiated before the design phase is complete and likely to include a risk premium in exchange for the contractor taking on the risks of cost overruns above that maximum price.
IO has begun using this model in circumstances such as its accelerated build program for long-term care facilities and some justice facilities.
Delivery model features and considerations
- Timely Completion: The CM@R contractor can assist in understanding the complexities in construction and schedule development, encouraging a more efficient construction period and timely completion. GMP encourages timely construction completion
- Transparency: The Owner retains responsibility for the design and construction phases of the project and therefore retains understanding/transparency to the costs
- Constructability: Design is reviewed from a constructability perspective
- Change Orders: Can reduce the number and turnaround time of design change orders
- Risk Sharing: Construction cost overruns resulting from delays due to construction (such as poor coordination of site activities) are shared between the Owner and the CM@R contractor, with the Owner’s risk capped at the GMP
- Remediation of Deficiencies: CM@R contractor will be financially responsible for the remediation of any deficiencies that are within its control
- Schedule Risk Transfer: Risk of schedule delays and construction cost overruns are retained by the Owner
- Owner Control: The Owner’s control is reduced during the construction phase as the CM@R contractor has signing authority
- Lifecycle Considerations: No optimization of lifecycle costs and long-term quality/performance by integrating construction and maintenance
- Performance Guarantee: No “guarantee” of asset performance and quality during operations
- Innovation: Less opportunity for private sector innovation
- Construction Quality: CM@R contractor is not financially-motivated to ensure construction quality
- Price Competition: Construction is essentially sole-sourced to the CM@R contractor without the competitive tension of a tender process influencing the proposed GMP
Design – Build – Finance (DBF)
Similar to a Design-Build model, a DBF approach awards the design and construction under a single contract. Consortiums, joint ventures or subcontract agreements may be established between two or more companies to pool the resources and expertise necessary to deliver a DBF project.
The consortium (Project Co) must obtain short-term construction financing from third-party lenders or use its own equity resources. A lump-sum payment at substantial completion is intended to pay off the consortium’s design, construction and construction financing costs. Because the Owner (government or other public-sector owner such as a hospital or transit agency) withholds all or a significant portion of payment until project completion, this approach provides financial motivation for the consortium to complete the project on time – any incremental interest costs and financial penalties associated with schedule delays are borne by the private-sector consortium.
IO commonly uses this model when appropriate for hospitals, justice facilities such as courthouses and transportation projects.
Delivery model features and considerations
- Efficiencies and Cost Savings Potential: Integration of design and construction creates efficiencies and cost savings
- Constructability: Enhanced constructability of design plans
- Project Delivery Schedule: Can accelerate project delivery schedule
- Risk Transfer: Reduced design and construction risk for the Owner. Financial risks borne by Project Co (construction period only)
- Cost and Schedule Certainty: Greater cost and schedule certainty - no payment to Project Co until substantial completion is achieved (assumes no progress payments)
- Performance Quality: Substantial completion payment is performance based – partner must construct the project in compliance with specifications
- Lifecycle Considerations: No optimization of lifecycle costs and long-term quality/performance by integrating construction and maintenance
- Performance Guarantee: No “guarantee” of asset performance and quality during operations
- Opportunity for Innovation: Less opportunity for private sector innovation than the Alliance, DBFM, DBFOM and concession models
- Financing Costs: Higher financing costs given requirement for short-term private financing
Design – Build – Finance – Maintain (DBFM)
The DBFM model involves the private sector consortium (Project Co) accepting responsibility for the design, construction, financing, regular maintenance and rehabilitation of the asset over the contract term to meet pre-defined performance specifications. The typical contract term for the maintenance work is 20 to 30 years. The public sector retains ownership of the assets.
Project Co would not be fully paid for construction work following substantial completion, but would be paid in instalments over the length of the maintenance term. Because the Project Co is responsible for the maintenance and performance of the facility for 20 to 30 years, there is additional incentive to use high-quality and durable materials that will ultimately benefit the Owner and public.
IO commonly uses this model when appropriate for hospitals, justice facilities such as courthouses and transportation projects.
Delivery model features and considerations
- Efficiencies and Cost Savings Potential: Integration of design and construction creates efficiencies and cost savings
- Constructability: Enhanced constructability of design plans
- Delivery Schedule: Can accelerate project delivery schedule
- Risk Transfer: Significant risk transfer to Project Co over the life of the agreement. Reduced design and construction risk for the Owner. Financial risks borne by Project Co
- Cost and Schedule Certainty: Greater cost and schedule certainty - no payment to Project Co until substantial completion is achieved (assumes no progress payments)
- Innovation Potential: Greater potential for design and construction efficiencies and innovation than the DBB model
- Performance Quality: Substantial completion payment is performance based – partner must construct the project in compliance with specifications
- Owner Control: Less direct control in project delivery and less flexible where major changes are required over contract term
- Financing Costs: Higher financing costs given requirement for short and long-term private financing
- Upfront Time and Resources: Increased due diligence, planning and transaction costs leads to longer planning and procurement period
- Maintenance Costs: Long term maintenance costs are potentially higher than if a flexible approach was taken
- Lifecycle Considerations: Long terms maintenance costs set up front and funding plan put in place. Greater consideration for long-term quality and lifecycle costs
- Performance Guarantee: Performance-based service payments encourages higher maintenance quality and that asset is in good condition at handback
Design – Build – Finance – Operate – Maintain (DBFOM)
The DBFOM model builds on the DBFM model. In addition to Project Co accepting responsibility for the design, construction, financing, regular maintenance and rehabilitation of the asset over the contract term, it also takes responsibility for operations under the same contract.
This model is suited for projects where both the maintenance and operations have the potential to be transferred to the private sector. For instance, a light rail transit (LRT) system has the potential to be delivered under a DBFOM model, where Project Co may assume responsibility for maintaining and rehabilitating system infrastructure as well as day-to-day operations.
IO and Metrolinx have used this model for some transit projects.
Delivery model features and considerations
- Efficiencies and Cost Savings Potential: Integration of design and construction creates efficiencies and cost savings. Greater potential for design and construction efficiencies and innovation than the DBB model
- Constructability: Enhanced constructability of design plans
- Delivery Schedule: Can accelerate project delivery schedule
- Risk Transfer: Significant risk transfer to Project Co over the life of the agreement. Reduced design and construction risk for the Owner. Financial risks borne by Project Co
- Cost and Schedule Certainty: Greater cost and schedule certainty - no payment to Project Co until substantial completion is achieved (assumes no progress payments)
- Performance Quality: Substantial completion payment is performance based – partner must construct the project in compliance with specifications
- Performance Guarantee: Lender discipline to ensure performance is met throughout the agreement and at handback. Performance-based service payments encourages higher maintenance quality
- Lifecycle Considerations: Optimizes long-term quality/performance and lifecycle costs (trade-offs between upfront costs, lifecycle costs and operating performance). Long-term maintenance costs set up front and funding plan put in place
- Control: Less direct control in project delivery and less flexible where major changes are required over contract term
- Financing Costs: Higher financing costs given requirement for short and long-term private financing
- Upfront Time and Resources: Increased due diligence, planning and transaction costs leading to a longer planning and procurement period
- Maintenance Costs: Long-term maintenance costs are potentially higher than if a flexible approach was taken
Revenue Risk Concession
Revenue risk concession models involve the private partner designing, building and financing an asset, providing regular maintenance and rehabilitation services, and operating, managing and investing in the business of the asset, under a long-term agreement. The private-sector partner is compensated by revenue from user charges which in turn are used to finance its investment in the asset. The role of the public authority is primarily focused on regulatory compliance, monitoring, and customer protection through enforcing government regulations and the project agreement, as well as through policy decisions. Build-Lease-Transfer (BLT), Build-Operate-Transfer (BOT), Build-Own-Operate-Transfer (BOOT) and Build-Own-Operate (BOO) models are characterized as concession models.
IO has no projects using this model.
Regulated Asset Delivery
A Regulated Asset Delivery (RAD) model involves a company owning, investing in and operating an infrastructure asset under a legally binding licence from an economic regulator. The regulator grants the company the right to charge a regulated fee for use of the asset to fund a portion of its operations and recoup investment costs. The charge is set by an independent regulator who holds Project Co accountable to ensure any expenditure is in the interest of the ultimate user of the asset.
IO has no projects using this model.
Progressive Delivery Models
A “Progressive” procurement strategy fosters collaboration between the owner and its contracting partner. Before entering a final fixed-price (Progressive P3s) or target price (Progressive Design-Build) contract, both sides work together to define the project requirements, design, pricing and risk through a Development Phase that commences following the selection of the partner via a competitive procurement process.
IO’s work on progressive procurement strategies is well informed by ongoing discussions with industry. A progressive procurement strategy may be paired with a variety of contracting models. It includes cost control measures such as affordability caps to establish a budget for which the development partner would produce a scope of work. Alternate, or separate, prices can be developed to permit decision making on the amount of scope and associated cost that is desired for a project. These additional measures present an opportunity to inform government decision-making earlier than with classical versions of P3 models. It also creates an opportunity for more collaborative project planning and consultation work.
Progressive Design-Build
A Progressive Design-Build applies a similar collaborative approach between the owner and its contracting partner during the early work of projects such as project requirements and design work in the Development Phase. Unlike the Progressive P3s, a Progressive Design-Build model can employ a target-price rather than the fixed price enabled under a P3 model. The structure may also include a gain-share/pain-share mechanism where the pain-share for the contractor is capped at the profit and direct costs are paid to complete the project.
IO and Metrolinx are using this model on select transit projects.
Delivery model features and considerations
- Procurement timelines: The procurement timeline could be reduced with fewer design- and construction-related submittals during the RFP stage
- Collaboration: The owner(s) and Development Partners have an opportunity to work more collaboratively to develop design, reduce risk and finalize pricing before contracting for project implementation
- Efficient Risk Transfer: Working collaboratively during the design phase facilitates efficient risk transfer to the party best placed to manage that risk
- Pricing Regime: Where fixed pricing is not possible without significant premiums, a target price approach with gainshare/painshare mechanism offers a more flexible pricing regime, however, comes with less certainty over final pricing from an overall budget perspective
- Price Competition: Final pricing is developed iteratively over the development phase without the competitive tension of a tender process
- Transparency: The owner has access to costs and pricing on an open-book basis that requires an enhanced ability to determine the value proposition leveraging market benchmarks and other supporting information
Progressive DBF/M (Progressive P3s)
In addition to maintaining the key attributes of the typical P3 models currently employed by IO, the Progressive P3 strategy also incorporates a Development Phase between the procurement and construction phases, where the owner makes monthly payments and works with the Development Partner to a) collaboratively develop designs to advanced levels that allow for more efficient and accurate pricing and b) establish a committed fixed price to deliver the project based on transparent pricing and advanced designs. Upon confirmation of the fixed prices, the Development Partner is responsible for raising private financing (debt and equity, where applicable) during the latter stages of the Development Phase with Commercial and Financial Close expected to coincide with the end of the Development Phase. The P3 contract is executed at Financial Close.
IO and Ministry of Health are using this model on select hospital projects.
Delivery model features and considerations
- Procurement timelines: The procurement timeline could be reduced with fewer design- and construction-related submittals during the RFP stage.
- Collaboration: The owner(s) and Development Partners have an opportunity to work more collaboratively to develop design, reduce risk and finalize pricing before contracting for project implementation.
- Retains benefits of typical P3s: The value of private sector capital continues to be recognized, with opportunities for private sector debt participation and long-term equity (in the case of DBFM) and still available.
- Efficient Risk Transfer: Working collaboratively during the design phase facilitates efficient risk transfer to the party best placed to manage that risk
- Price Competition: Final pricing is developed iteratively over the development phase without the competitive tension of a tender process
- Transparency: The owner has access to costs and pricing on an open-book basis that requires an enhanced ability to determine the value proposition leveraging market benchmarks and other supporting information