This Document was prepared for the Office of Technical Assistance and Safety of the Federal Transit Administration (FTA). The study was conducted by the Transportation Consulting Division of Booz-Allen & Hamilton Inc.
Guidance was provided through the FTA's Office of Technical Assistance and Safety. The contents of this report are based on the project staff research and do not necessarily reflect the official views or policies of the U.S. Department of Transportation or the Federal Transit Administration.
This report was authored by Donald C. Schneck and Richard S. Laver of Booz-Allen & Hamilton Inc. Valuable insight and direction was contributed by Mr.Edward Thomas and Mr. Salvatore Caruso of the FTA Office of Technical Assistance and Safety. The authors and FTA would like to express their appreciation to members of the staff of the Metropolitan Transit Authority of Harris County, the UTDC Systems Division of the Bombardier Corporation, and AEG Westinghouse Transportation Systems Inc. who participated in this study. Their interest and support were vital to the successful completion of this entire project.
The Evaluation of Recent Turnkey Procurement Experiences: The Houston Fixed Guideway Project presents the results from an examination of turnkey procurement of major transit capital projects within the context of the Houston experience with its proposed Houston Fixed Guideway Project. Though eventually canceled for local political reasons, the experience gained in the Houston Fixed Guideway Project development process can be of benefit to others interested in conducting a similar process.
The Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991
included Section 3019 that required the Federal Transit Administration
(FTA) to develop a program to demonstrate the application of turnkey
procurement contracting practices in the development of major transit
capital projects. Turnkey procurement involves the consolidation of several
contracts and separate functional efforts into a single design/build or
design/build/operate project. The FTA has implemented the requirements of
ISTEA through the Turnkey Demonstration Program.
• The Turnkey Demonstration Program was initiated with the
selection of
five major transit projects for the evaluation of cost, schedule and
technology improvements.
• The Turnkey Demonstration Program also includes several
ongoing technical
assistance and outreach efforts, one aspect of which is the examination of
recent experiences with the turnkey process for proposed transit projects,
such as the Houston Fixed Guideway Project.
This report presents the results from the examination of turnkey
procurement of major transit capital projects within the context of the
Houston experience with its proposed Houston Fixed Guideway Project. Though
eventually canceled for local political reasons, the Houston Fixed Guideway
Project provides a good example for the five projects in the current
demonstration program. This documentation of "lessons learned" from the
development of a major transit project using the turnkey procurement
approach is intended to benefit the five projects in the demonstration
program plus any other projects to follow.
In August 1992, the Federal Transit Administration (FTA) initiated the
Turnkey Demonstration Program with a formal request for project proposals
and the initiation of technical assistance and outreach efforts. This
program is a multi-year effort designed to evaluate the effectiveness of
the turnkey process in reducing the costs of major capital transit
investments, in decreasing the length of project development schedules and
in encouraging the use of new technologies. Program results may also be
used to describe other achievable benefits of turnkey procurement, document
the many implementation variations and will also be used to modify FTA
project development processes and guidelines to further enhance the
potential effectiveness of the turnkey method. Among the many initiatives
included in the Turnkey Demonstration Program is this evaluation of Houston
METRO's experiences with the turnkey process in attempting to implement the
fixed guideway component of Houston's Phase 2 Mobility Plan, later known as
the Houston Fixed Guideway Project.
The fixed guideway component of the Phase 2 Mobility Plan --
designed to
improve transit connections between Houston's downtown core, the
Uptown-Galleria area and the city's western suburbs -- was first initiated
in 1990. Turnkey was selected as the preferred procurement method for the
project in accordance with a METRO Board resolution requiring private
sector involvement in the development of fixed guideway systems.
Unfortunately, the selected Fixed Guideway Project suffered a loss of local
political support during Houston's 1991 mayoral election and was
subsequently terminated by METRO's Board of Directors in January 1992,
shortly before the turnkey contract for preliminary engineering was to
begin.
Despite the Fixed Guideway Project's brief history, it remains a valuable
source of information regarding selection of the turnkey procurement
method, its impact on technology selection, selection of the turnkey
contractor, contract design and other aspects of fixed guideway
procurement. These lessons learned and the context of the overall turnkey
procurement approach are considered the intended purpose and value of this
report. Conclusions to this effort include those in general for turnkey
projects and those more specific to the Houston approach. Based on these
lessons, the following functional aspects of developing a turnkey project
were identified as the key success factors.
• There should be compelling reasons for selecting the
turnkey method that
should include cost, schedule and/or technology improvements, among others,
since the process differs in many ways from the traditional contracting
experience.
• The approach selecting the specifics of the turnkey
process should
consider the strengths and weaknesses of the local lead agency, their prior
major project development experience, the degree of local political and
public support for the project and the expected level of local political
involvement in the project development process.
• Individual components of the turnkey procurement approach
are flexible
and can be defined in ways that mold to the local conditions rather than
the turnkey procurement process leading the definition, particularly
• Selection of the turnkey contractor should not proceed
until the project
has become well established in terms of political support, financial
support and project design definition. In particular:
- Turnkey contractors will be reluctant to develop and submit
expensive
project proposals (or to commit to delivering the project if selected) in
the absence of solid political and funding support
- Postponing contractor selection until after the locally
preferred
alternative has been chosen and preferably until after completion of
preliminary engineering will allow proposers to submit firmer cost
estimates with smaller contingency components
- Given that many cost benefits from use of the turnkey process
relate to a
general shortening of the development cycle, it is crucial that the process
not be held up by financial or political impediments once the project is
underway.
• The existence of uncertainty surrounding public support,
project funding
and project definition can have significant negative impacts on project
outcomes, particularly on turnkey projects.
- Turnkey projects require contractors to make significant up
front
commitments towards proposal development and preliminary contract
negotiations making them reluctant to develop proposals for projects which
lack obvious public and funding support. A lack of such commitment may
limit the number of proposals submitted thus restricting competition in the
bidding process. Furthermore, the general failure to complete a large
turnkey project in the US market (such as the Houston and Honolulu
projects) has only increased this reluctance and may have damaged the long
term viability of this procurement approach.
- The existence of uncertainty relating to project definition can
lead to
increases in the cost of proposal preparation as well as motivating
proposers to add contingency factors to their contract bids to cover
unforeseen development costs.
- The existence of all three types of uncertainty during the
public
scrutiny and decision making phase make fixed guideway projects easier
targets for their critics than projects that are more clearly defined. This
is an essential issue for turnkey projects of new transit systems --
conduct and maintain an extensive outreach program into the local public
and political environments before contracting for a turnkey projects.
• While joint development mechanisms can provide an
effective source of
project funding, project sponsors should keep the following in mind when
considering inclusion of joint development opportunities in a turnkey
contract:
- Joint development opportunities do not directly contribute to
the
effectiveness of the design-build process which is the turnkey method
- Developers typically demand a market-based return on their
investments,
which is higher than that acceptable to government initiated development
investments
- Traditional turnkey consortia are not real estate developers
and
therefore must introduce a very different culture to the turnkey team
- Differing attitudes regarding acceptable risk and return can
impede
formation of contractor consortia including both real estate developers and
traditional turnkey consortia members
- Only the public sector can implement the measures and grant the
concessions needed to capture the value represented by these opportunities.
Based on these findings, it is preferable if joint development
opportunities be excluded from the turnkey contract.
• In general, it is not necessary to require surety bonding
equal to 100
percent of the value of the project. Rather, the project should only be
bonded to meet the expected cost to recover should the turnkey contractor
run into difficulties. This amount will be considerably less than 100
percent of the project value.
This review of the Houston Fixed Guideway Project presents the
issues
behind these success factors in terms of their impact on the turnkey
procurement process and how this experience may be useful to the current
turnkey projects in both the demonstration program and those separately
using the turnkey method.
The major conclusions specific to the Houston Fixed Guideway
Project and
emanating from this review are highlighted below. Findings and background
in support of these conclusions are presented in the detail of the report.
• The Houston Fixed Guideway Project was not a complete
turnkey procurement
project. This statement is based on the following findings.
- Texas statute prevented METRO from awarding fixed facilities
construction
contracts (for such project components as guideway, stations and
maintenance facilities) using any contracting method other than a low bid.
Furthermore, selection of the turnkey contractor was conducted too early in
the project development process to reach a firm low bid for the fixed
facilities. Hence, these major civil project components were separated from
the turnkey procurement process through a secondary contracting mechanism.
- METRO was to exert a greater degree of project control and
oversight than
is generally the case with the turnkey approach. In so doing, the agency
risked re-acquiring many of the project risks which the turnkey method
would otherwise shift to the turnkey contractor.
- The use of a design consultant, separate from the turnkey team,
to
conduct the final design of fixed facilities from 30 percent to 100 percent
is very unusual for a turnkey procurement approach.
These characteristics help to define the Houston Fixed Guideway
Project as
a modified turnkey procurement process that leaned very closely toward a
more conventional contracting approach.
• The modified turnkey method was selected in accordance
with a METRO Board
Resolution encouraging private sector involvement in the development of
fixed guideway projects. METRO also hoped that use of the turnkey approach
would help fast-track the project development process. In particular, METRO
attempted to accelerate project development by conducting contractor
selection in parallel with the project's alternatives analysis. While this
latter process of evaluating turnkey proposals for fixed guideway
development prior to selection of the locally preferred alternative (LPA)
was supported by the FTA, it did create problems with development of the
environmental impact statement and forced contractors to develop proposals
using less clear project definition than would have been the case if
contractor selection had been postponed.
• Selection of the turnkey process was not motivated by an
effort to
attract project development expertise. Given METRO's considerable
experience with project development and its access to strong technical
resources, the agency's decision to utilize the turnkey process was not
motivated by a need to obtain access to project management and technical
ability not available "in-house". Similarly, the possible selection of a
proprietary (i.e. fully automated guideway) technology for the project was
only a secondary consideration in selecting the turnkey process -- use of
the turnkey method is not a prerequisite to projects using proprietary
technologies. Finally, the turnkey approach was selected before the
selection of the proprietary technology.
• The Full Funding Grant Agreement (FFGA) for Houston's
Turnkey Project was
to be awarded prior to the start of final design and shortly after issue of
the Record of Decision (ROD). This sequence of events represents a
significant departure from the traditional FTA project approval process
where the ROD is usually issued prior to final design and the FFGA is
issued towards the completion of final design. The modified sequence for
the Houston procurement facilitated use of a combined
final-design/construction phase (i.e., Phase II) where the final design and
construction activities would overlap in time leading to a potentially
significant reduction in the length of the project development cycle.
Furthermore, turnkey contractors may have been reticent to enter a combined
final-design/construction phase if they had not seen evidence of committed
funding to cover the construction portion of that work. Hence, it was
important to issue the FFGA before the start of a combined
final-design/construction phase.
• In general, the sponsoring agency should do all in its power to eliminate
as much political, financial, and design uncertainty as possible from the
development process prior to selecting the turnkey contractor. Hence
agencies should consider the following:
- Postpone initiation of the contractor selection process until
after the
locally preferred alternative has been selected, and preferably until after
the completion of preliminary engineering and the final environmental
impact statement (FEIS).
- If the turnkey contractor is to be selected prior to completion
of
preliminary engineering, the agency should complete those aspects of
preliminary engineering and FEIS that are not included in the turnkey
contract prior to or parallel with the selection of the turnkey contractor
(e.g., establish alignment location, initiate right-of-way acquisition,
begin aspects of the environmental review, and initiate utility
relocation).
- Ensure that full political and public support has been obtained
for the
selected technology prior to initiation of the turnkey contractor selection
process.
- Ensure that local funding support has been obtained for the
selected
technology prior to initiation of the turnkey contractor selection process.
• Sponsoring agencies are faced with a variety of options
and variations on
the basic turnkey theme when designing their turnkey contract. Based on the
experiences of Houston and other North American turnkey projects agencies
may wish to consider the following:
- Consider the separation of the project into two separate
turnkey
contracts--one for the fixed facilities design and construction and one for
the systems design and procurement. This approach can focus the development
of turnkey consortia into their specialties and thereby limit the forced
teaming of entities with inherently different conceptions about acceptable
project risks and their cost reimbursement requirements.
- While certain state laws (e.g. Texas, California, New York, and
Hawaii)
frequently stipulate that construction of fixed facilities must be let on a
low bid basis, Federal legislation stipulates that design contracts be
awarded on technical qualifications leading to natural conflict with
respect to turnkey contracts (where the design and construction
responsibilities are awarded to the same contractor). This problem can be
avoided either by requesting a legislative modification by separating fixed
facilities from the turnkey contract. However, the separation of
construction efforts from the turnkey contract may neutralize many of the
inherent benefits derived from combining design/build activities within a
turnkey contract.
- Consider inclusion of fixed facilities construction management
within the
turnkey contract, particularly where construction contracts for fixed
facilities are awarded outside the turnkey contract. This approach may
improve quality control by assigning responsibility to the agent having
greatest incentive to effect an optimal outcome; however, this then
requires a local agency-based quality assurance program to sample-test the
effectiveness of the quality control process.
- Maintain systems integration responsibilities within the
overall turnkey
team or directly within the systems turnkey contractor's realm. No other
entity has better incentive or expertise with which to ensure an optimal
outcome.
• The sponsoring agency should continue to maintain a decreased, but still
involved level of project management oversight. Given the large capital
investment represented by a fixed guideway project and the more unique
requirement to specify the project at an earlier stage than with
traditional procurements, the sponsoring agency has a heightened
responsibility to maintain visibility over continuing progress, respond
quickly to unexpected decision points and thereby, protect the public
interest and their own. However, to avoid lengthy delays in the project
development process (delays which can significantly reduce the time saving
potential of the turnkey process) the sponsoring agency should have a
limited period of time in which to review and respond to periodic project
review documents submitted by the contractor before the contractor has the
right to proceed with the project development plans included in those
documents. This response period should be explicitly stated in the
contract.
• The Federal Transit Administration's administrative
guideline for a 100%
performance bond on a project's construction component should be modified
to a level which better reflects both the maximum expected cost to recover
from a contractor failure and the surety industry's capacity to bond large
projects. An optional approach could be to require performance bonding
amounts for turnkey contracts that are related to the cost of each phase of
project development. An overall project performance bond amount could be
funded at a lesser proportion of project cost. Individual performance bonds
could then be escrowed against that amount as costs are incurred for each
systems element and individual stages of the civil facilities. As delivery
is accepted by the turnkey consortia or the agency, the escrowed amounts
could then be reapplied to other upcoming elements. This approach would
fulfill the full intentions of the 100% bonding requirements without
incurring the additional financing costs of carrying the full project cost
amount.
• The Federal Transit Administration's project development
process should
be adapted to provide greater flexibility to the development of turnkey
projects and to facilitate accelerated project development . One key aspect
of the development process that should be considered for modification is
the scheduling of the FTA Record of Decision and the Full funding Grant
Agreement. In particular, the FTA should provide the sponsoring agency with
the Record of Decision and a Letter of No Prejudice for the full funding
grant amount prior to the initiation of final design (as was the case for
the Fixed Guideway Project). Moving these events ahead of final design
demonstrates the kind of strong financial support contractors will wish to
see before developing proposals or committing to contracts. Equally
important, this change facilitates the overlap of the design and
construction processes, a characteristic unique to the turnkey process and
one which offers potentially significant benefits in terms of accelerated
project development.