The Case Against Mega Contracts in Mega Transit Projects
This article is focused on aspects of Eno’s latest report: Saving Time and Making Cents: A Blueprint for Building Transit Better. For more information about project delivery, register today for Eno’s Transit Cost and Delivery Symposium on October 18-21, 2021. At the event, we will share findings from Eno’s transit cost and delivery report, and include panel discussion on best practices in permitting reform and other project delivery themes among transportation professionals, policymakers, and researchers.
All types of transportation mega projects come with price tags that frequently run into the billions of dollars. This is particularly true for large rail transit projects, as we found in our database. $2.3 billion for the 4.3 mile extension of the Green Line in Boston. $1.7 billion for the 15-mile 1 Line in Seattle. $1.5 billion for the 6.6 mile second phase of the Expo line in Los Angeles. But just because a project can cost over $1 billion to build does not mean that it requires a multi-billion dollar mega contract. In fact, evidence from abroad suggests that breaking lines into smaller segments during contracting can bring significant cost savings.
In the United States, project sponsors often attempt to simplify projects by bundling its discrete elements into mega contracts. In theory, procuring an entire line or bundling tasks into one contract can have benefits. The management should be simpler with a single procurement, a single contract, and a single contractor with whom to coordinate activity.
In practice, projects abroad like the low-cost subway buildouts in Madrid or Santiago tend to break transit lines into sections of no more than 2 miles. They also tend to procure subway stations separately from tunneling contracts to acquire contractors with expertise in each specific task. Stakeholders and practitioners in these regions cite this unbundling as a critical means of keeping costs low. Their results back this up: underground transit costs in Madrid and Santiago average only $141 and $112 million per mile, respectively compared to over $500 million per mile in the United States.
Similar unbundling can be found in other countries, too. Rarely do international construction contracts exceed $300 million for transit lines. Our July report found rationale for breaking up a line into smaller sections is threefold.
First, it invites more competition. Few construction firms have the capacity or experience to handle a $1 billion project, so procurements end up with few bidders. On the other hand, many companies can handle a contract of $300 million or less. During the massive buildout of the subway system in Madrid from 1997-2003, using small contracts also helped build a domestic industry of construction firms that now do business all over the globe.
Unbundling also protects projects from disruption. Large mega projects frequently encounter unanticipated problems. A contractor could have underbid and found itself unable to cover its costs. Labor strife or poor work quality can halt construction. Disagreements over contractual terms can create work stoppages. But when transit lines are broken into segments, disputes only stop construction on a portion of the project while other segments proceed.
One of the starkest examples is the single $5.6 billion contract between Maryland and a construction consortium to build and operate the 16-mile Purple Line light rail system. Contract and change order disputes have all but stopped construction activities since 2020, which aren’t anticipated to resume until 2022. The line is now expected to open five years behind schedule and costs continue to balloon.
Breaking projects into smaller segments also provides agencies leverage. When dealing with a single contractor, an agency is beholden to it unless it wants the entire project stopped and have costs escalate. In our work, we found Santiago Metro has a policy where no two contractors are allowed to work on adjacent segments of a subway line, and no contractor can be awarded 2 segments of any given line. When a contractor has underperformed, project managers have simply cancelled the agreements and awarded the work to the other contractors that are working on adjacent segments.
The benefits of unbundling outweigh the potential benefits of a single, large contract. This is reflected in the successful delivery of complex transit lines abroad and has become standard practice in countries outside of the United States. Our report recommends that agencies should break up construction projects into manageable sections and cap contracts at no more than $300 million to $500 million.
However, breaking up construction contracts does not guarantee success on its own. Project sponsors must invest in the public sector staff and oversight needed to execute these smaller contracts strategically and clearly to ensure seamless interfacing and coordination. Doing so might require more management effort in the short run, but all evidence points to long term cost and timeline savings that make such efforts worthwhile.
For more information, register today for Eno’s Transit Cost and Delivery Symposium on October 18-21, 2021.