Integrating an OCIP with a P3 to Maximize Risk Financing
It is common knowledge that there is an infrastructure funding crisis in the U.S. The increasing number of deteriorating roads and bridges, and gridlocked freeways throughout the U.S. are at a tipping point. The lack of sufficient funding at the federal, state, and local levels, exacerbated by fierce competition by public entities for this limited funding, has compelled transportation authorities and transit agencies, to seriously contemplate using public-private partnerships (P3) as an alternative project delivery method in lieu of using the traditional construction project delivery approach for their large capital development programs.
In addition to the proliferation of P3s for project delivery and procurement on large infrastructure projects, the use of an owner controlled insurance program (OCIP) is a very effective risk financing and risk management approach, which can be strategically integrated with a P3 to produce advantageous risk financing benefits. The integration of an OCIP with a P3 is a revolutionary and innovative program structure approach that can produce project and operational efficiencies, as well as cost savings benefits, for project owners on large capital construction and infrastructure projects.
Project owners involved with transportation infrastructure projects have challenging risks to manage. The following is an overview of OCIPs and P3s, and how they offer a compelling option for these projects.
An owner controlled insurance program (OCIP) or “Wrap-Up” is a highly efficient risk financing and control mechanism and an increasingly popular alternative to the insurance management techniques used on most large capital construction projects. With an OCIP, the interests of the owner, designer, construction manager, contractors, and consultants are covered by one insurance arrangement, or “wrapped up.” An OCIP also provides a single point of focus for safety and claims management. This offers a coordinated approach specifically tailored to the project, and will eliminate disputes among contractors and their insurers, reduce disruption at the work site, and can minimize delays attributed to accident investigation of claims. An OCIP can facilitate inclusion of small and minority contractors and businesses by eliminating coverage and high-limit insurance barriers.
In a traditional insurance program, contractors, subcontractors, construction managers, consultants, and the project owner all provide their own separate insurance. By having the project owner control the insurance purchasing through an OCIP, broader and more uniform coverage with high liability limits can be provided for all contractors and subcontractors participating in an OCIP under a master insurance and risk management program. The total premium to cover the project owner and contractors under an OCIP tends to be significantly less than the total premium charged if each contractor purchases its own insurance and includes that cost, plus any mark-up, in its bid to the project owner.
OCIP Cost Savings
By implementing an OCIP, the potential cost savings on large projects can range between 1% to 3% of a project’s total construction cost. This metric is dependent on several factors, which include; the lines of coverage included in the OCIP, the ability to limit losses and claims that could erode potential cost savings, the type of bid credit reimbursement method used, and the effectiveness of the OCIP administration process. The core insurance coverages that are included on most OCIPs are Workers Compensation, General Liability, Builders Risk, and Contractors Pollution Liability. The cost drivers are Workers Compensation and General Liability, with Builders Risk being a pass-through cost to a project owner. Additional cost savings can be realized with the implementation of a “deductible charge-back process”, which is highly recommended as a risk management best practice to ensure that contractors who are enrolled in the OCIP have some skin in the game.
A public-private partnership (P3) is a contractual arrangement between a public entity (governmental agency or authority), and a private entity (individual company or consortium of investors) for the key purpose of developing, operating, and maintaining public infrastructure which is in the domain of a governmental public entity. P3s are comprised of a single private entity or group of private entities, e.g. joint-ventures, LLCs, that have an equitable interest in the project with development responsibility and financial liability for performing certain project management and operational functions associated with a large-scale infrastructure project. Responsibilities can extend to ongoing operation and maintenance.
A P3 is an alternative approach to project delivery and procurement used on large public infrastructure projects. Basically, a P3 is a project delivery arrangement that is formed between a public entity and private entity that is used mostly on large infrastructure projects, which differs from a traditional public entity procurement. The main difference is with a P3, the private entity assumes greater financial, construction, and other risks associated with the public infrastructure project in exchange for a greater potential return on its investment in the construction project, and potentially in the project’s ongoing operation after completion and it has been put to its intended use.
Under the traditional construction project delivery approach of “design-bid-build” for a public project, the public entity designs the project, prepares/advertises a RFP, and awards/contracts with the lowest responsible bidder to build the project. The public entity operates and maintains the facility or other type of infrastructure after construction completion and the project has been put to its intended use or into revenue service for public transit systems or for public toll roads or toll bridges. The public entity usually finances the entire capital cost, as well as a large portion of the operating and maintenance budget for the completed project strictly with public funding, i.e. taxpayer money.
With a P3, the private entity will typically be responsible for project cost, schedule, and quality risks, and the public entity will typically stipulate it maintains responsibility for all regulatory approvals, environmental reviews, and for right-of-way acquisitions in the case of transportation infrastructure projects. In return for accepting direct responsibility and the risk for these various project management functions, the private entity will usually receive an equitable interest in the project and the opportunity to earn a financial return on their investment commensurate with the private entity’s assumption of risk and liability for the project.
When a P3 agreement is structured properly, it leverages contractual risk-transfer language that includes contractual penalties and rewards to increase the probability that the private entity will complete the project within the stipulated timeframe and on budget. If the P3 agreement is structured to include long-term operational requirements, it can stipulate stringent operations and maintenance standards. These contract requirements would obligate the public entity and private entity to comply with their contractual obligations, even in the event of any adverse economic or political conditions that could potentially arise and cause deferred maintenance or disrepair to the completed infrastructure.
P3 Cost Savings
Depending on the type of project delivery structure implemented on the project, the potential benefits to a public entity project owner include; the capital cost and schedule savings, making better use of private sector technologies and innovations, and most importantly, accessing more capacity to finance all or a portion of the life-cycle costs for total cost of ownership of the project with a capital infusion of private financing. The goal of a P3 is risk transfer and risk allocation with a focus on allocating various project risks to the entity who is most capable to effectively manage the risk.
Public entities who use traditional project delivery and procurement methods typically assume all the responsibility and risks for financing, designing, constructing, maintaining and operating infrastructure projects after they transition into operations, or with transit projects into revenue service. Conversely, with a P3, the responsibilities and risk are either transferred to, or shared with, the private entity. This is the compelling reason public entities use P3 project delivery to achieve significant time and cost savings, while benefiting from technology innovations, higher quality projects, and reducing their total cost of risk.
Hope you enjoyed this post. I will look forward to your comments. I will share more Insights in future posts.
Please read, “Integrating an OCIP with P3 Infrastructure Projects” It provides a compelling argument for integrating an OCIP as a risk financing approach, with a P3 as an infrastructure funding approach, as a viable option for large public capital construction, transportation, and infrastructure projects.
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Until next time…
David Grenier is the Managing Director and Principal Consultant at C-RISK, LLC.
C-Risk is a risk management consulting company that provides strategies and insights on wrap-up insurance programs to project owners in the public and private sector who are involved with large capital construction projects.
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