Infrastructure projects: Managing project delivery risk in the new environment
Infrastructure projects: Managing project delivery risk in the new environment
Managing infrastructure project delivery risks in the ‘new environment’ requires an appreciation of current developments and how these changes affect infrastructure projects moving forward. What are the current risks and/or influencing factors? And, how could these be mitigated in the near and long term?
The full extent of the economic fallout from COVID-19 is still uncertain. One thing that is clear is that the impacts will be felt for at least the next 12 to 18 months. A reduced volume of development in the commercial and residential markets impacts the demand for construction services. The government’s support for the economy and employment by increasing infrastructure investment may partly compensate for the reduction in demand in other construction sectors.
The government will not only need to ensure that infrastructure projects that are close to being ‘shovel ready’ are expedited, it will also need to reconsider the shifting priorities for infrastructure investments. Healthcare infrastructure projects or long-term care facility projects (to the extent public funding would be made available) are clear priorities. Major linear infrastructure capital project investments would also be seen as visible signs of the government’s commitment to the economy and the construction workforce, as well as meeting future mobility demands post-recovery.
The delivery of these infrastructure projects needs to take into account the changing risk landscape and how this is to be addressed in the near and long term. The regional and / or local levels of government are planning for, or are otherwise in, various phases of reopening the economy. Whether it is to address a potential second wave with its lingering effects, or to be better prepared for future similar events, a number of risk mitigants in infrastructure project delivery will need to be considered and are likely here to stay.
Design, construction, and operations considerations
Will technical output specifications for infrastructure projects begin to shift ‘pandemic prevention and control risks’ to designers?
It is not hard to imagine that the built environment may be gradually reshaped to address the risk of spread for future viruses of this kind. Technologies have already been advancing to facilitate more hands-free interaction with the built infrastructure. Hands-free, voice activated, automated, or personal cell phone control technology will become more of the norm when interacting with the built infrastructure on everything from elevators, doors, restrooms, temperature controls, lights, and fare collection equipment. Other design solutions may include larger restrooms, more circulation space in buildings, more screening areas, longer trains to allow more spacing on transit hubs, longer train platforms, or more air movement in spaces that would previously have less recirculation. Owners will also need to play a part in determining how prescriptive these design considerations need to be, or to simply transfer the ‘pandemic prevention and control risks’ to designers.
What are some of the construction-related risks (COVID-19 or similar) to be considered?
The risks and impacts of managing projects on construction sites are asset type dependent. Risks for construction workers are more material in confined spaces, whereas on long linear highway projects, this risk may only be on select types of activities. On major transit infrastructure projects however, if there are tunnels and underground stations, there would be more of an impairment to progress and efficiency. A number of these site related risks may not require costly mitigation measures, that is assuming there is no outbreak on site. These risks can likely be addressed at the local site-level by enhancing best practices, health & safety training, tool box talks, frequent cleaning of heavy equipment and construction tools, placement of hand sanitizers in multiple locations, frequent cleaning of restrooms, and requiring additional Personal Protective Equipment (PPE) where physical distancing activities cannot be achieved.
A more material risk may arise from supply chain disruptions. Risks of local manufacturers slowing production or temporarily shutting down directly impacts schedule, possibly requiring resequencing. As the economy is reopening, updated protocols and measures will be required at these facilities to ensure worker safety and to maintain productivity.
Beyond that, supply chain disruptions will also need to consider geopolitical risks. If steel or other material is sourced from out of region / country, which is not uncommon for competitively priced major infrastructure projects, timely supply of pre-fabricated material may be seriously impacted by the pandemic response (or lack thereof) from that local government. Contractors need to consider what contractual protections they have from suppliers, insurance providers, and other authorities, and document the issues they face in a reasonable level of detail and as early on as possible. On new procurements for suppliers, contractors may consider alternate local sources to mitigate this risk.
What risks would infrastructure owners, or asset maintainers and operators need to consider?
This depends on the infrastructure asset class, and the whether the asset is already designed with features to address COVID-like disease. From a smaller scale, maintenance of vertical infrastructure, including major transit hubs, will likely require more frequent cleaning of restrooms, elevators, doors, and payment / information kiosks. Hand sanitizer stations will likely be ubiquitous moving forward, and these stations will need to be serviced.
A bigger question is whether a society being more receptive to the work-from-home model (or a society with lingering concerns with a second wave or future viruses) will see ripple impacts to travel patterns in the medium to longer term. And, how would such changes impact the operations and maintenance of the transportation infrastructure?
Would longer trains or more trains at a higher frequency be run to avoid overcrowding, thereby leading to higher maintenance and operations costs? Would people flock back to personal single occupancy vehicles as a way to avoid crowded transit hubs, and add a greater burden on aging roadway infrastructure? Authorities and operators, particularly those with fixed priced maintenance contracts, will have to monitor the travel data closely during recovery to document and address such risks.
Pricing and scheduling considerations
Pricing and scheduling considerations to address such risks are crucial to both infrastructure projects that are already being delivered in this current environment, and new projects yet to be procured.
For infrastructure projects where construction is underway, there needs to be clear, transparent and frequent documentation of cost and scheduling impacts. This would then support a partnering approach with the authorities to jointly address these impacts.
For infrastructure projects that are in the process of, or are yet to be procured, government authorities are encouraged to consider how these risks can be mitigated.
The following upward pressure on infrastructure market costs and tender prices may result if there is no clarity on contractual protection or relief to these new risks:
- Labour productivity loss – Work distancing practices, new health and safety protocols, or potential self-quarantine of workers may lead to reduced efficiency and productivity.
- Supply chain disruptions – Risk of production and logistical disruptions from local and foreign fabricators and manufacturers will need to be considered.
- General conditions cost increase – If schedules are longer and more cleaning and other construction measures (more restrooms) are required, this will lead to an increase of the general condition costs.
- Schedule impacts – Whether there are labour restrictions on construction work in confined spaces, reduced efficiencies for remote working office staff/designers, or if the above-cited risks materialize, the resulting schedule impact will compound the upward pricing pressure.
In the current environment, the following downward pressures may feed through to a larger reduction in tender prices in the near or medium-term:
- Softer construction demand – It is clear that construction prices have been rising faster than general inflation and construction input costs, in the last few years. This suggests that margins have also increased in the last few years. A large reduction in demand will lead to compressed margins, reduced general conditions and potentially reduced labour costs. This was seen in the past, where a significant reduction in work volume led to double-digit reductions in tender prices.
- Labour rates – Softer construction demand would lead to downward pressure on labour rates.
- Commodity prices – The reduced demand would lead to increased competition and therefore provide downward pressure on commodity prices.
Notwithstanding the current downward price pressures, it would be prudent for infrastructure asset owners to move quickly to address these risks on fixed-priced, date-certain contracts, particularly those under procurement. These may be addressed in a variety of ways including but not limited to relief events, force majeure, insurance requirements, and/or more prescriptive construction protocol or reporting requirements.
Infrastructure developers would find it challenging to commit to fixed construction prices and schedules in large long-term construction projects when the subsequent ripple effects of COVID-19, including potential subsequent waves, are not yet certain.
The private and public sector both have a role to play in managing infrastructure delivery risks in this new business environment:
The private sector can help to identify, quantify, document, and communicate these risks based on their experiences to date. Projects under active procurement would see bidders seeking clear contractual protections that would limit this risk exposure, to the extent they can manage it.
The public sector is encouraged to consult with the industry (i.e. developers, contractors, manufacturers, insurers, operators, and designers) on the risks and potential mitigants for current and future infrastructure project delivery. This is with a view to act promptly on commercial and technical (including design, construction, and asset management) provisions in the contract, particularly for projects that are under procurement.
For more information on infrastructure project risks – read Infrastructure projects: Managing project feasibility / planning & procurement risk in the new environment