Design-Build Cuts Wide Swath in L.A.

Design Build Magazine
By Paul Rosta
Acclaim, rather than Los Angeles’ famous smog, filled the air this April at the dedication of the Alameda Corridor. Some public officials traveled a long way to praise the $2.4-billion, 20-mile-long freight rail project. U.S. Secretary of Transportation Norman Y. Mineta came from Washington to tell over 1,000 guests that the project "embodies the kind of creativity, the kind of cooperation and the kind of resourcefulness that we will need in answering America’s intermodal challenges in the future." California Gov. Gray Davis (D) told the audience that the project is "an engineering marvel that will be studied by governments all over the world." And Los Angeles Mayor James K. Hahn declared that the Alameda Corridor "is the model for the country on how to do public infrastructure."

The tributes were a fitting conclusion to a project that required two decades of planning and five years of construction. Yet one essential element of the project’s success went unmentioned at the ceremony. On 20 of the project’s 21 construction contracts, the Alameda Corridor Transportation Authority, the project’s joint-powers agency, used conventional design-bid-build procurement. But for the program’s biggest, riskiest and highest-profile section–a 10-mile-long, $771-million trench, known as the mid-corridor segment, ACTA selected design-build delivery.

Design and construction of the mid-corridor segment was daunting, requiring over 2,000 utility relocations and construction of a 50-ft-wide, 30-ft-deep trench through the heart of Los Angeles. Potential political, financial and technical pitfalls were rife, but officials say design-build made it possible to deliver the project with the magic words, "on time, on budget."

Successful design-build delivery required cooperation, preparation and astute negotiation. "It didn’t just happen by luck," says Gill V. Hicks, ACTA’s former chief operating officer and general manager and the man Hahn calls "the Godfather of the Alameda Corridor." Hicks envisioned the corridor as a bold solution to a decades-old problem. A major bottleneck had gradually developed between the ports of Los Angeles and Long Beach and links to the transcontinental rail network 20 miles to the north. Even as the ports were growing into the busiest in the U.S., trains carried freight on four low-speed rail lines through surface streets, slowed by more than 200 grade crossings. The Alameda Corridor promises a host of economic and environmental benefits. More than 100 trains daily will move along it, up from 35, and average train speed will increase from about 10 to 20 miles per hour to between 30 and 40 mph. Train, truck and automobile emissions are expected to drop substantially, too.

Unconventional Choice

Although project officials now can hardly imagine the Alameda Corridor without design-build, "there was a time when this project was conceived as several conventional contracts," says John Doherty, deputy program manager, Alameda Corridor Engineering Team, the project’s program management and design consultant. Doherty also is vice president for Los Angeles-based DMJM+Harris, ACET’s team leader. ACET also consists of Long Beach-based Moffatt & Nichol Engineers and two Los Angeles-based firms: Jenkins/Gales & Martinez, Inc. and TELACU Inc. A complex funding formula ultimately cinched the unconventional choice of design-build. "Clearly the financial people drove the decision to go design-build," says Duane Kanegy, ACET program manager and Moffatt & Nichol vice president. On the public side, funding came from a $400-million U.S. Dept. of Transportation loan, $394 million from the ports of Los Angeles and Long Beach and $347 million from the Los Angeles County Metropolitan Transportation Authority. Other state and federal sources, along with interest income, provided $130 million. But the lion’s share of funding was provided by $1.16 billion in revenue bonds to be retired over 30 years with railroad user fees. "We wanted the bids in early since it was a revenue-driven project. We wanted to be earning revenue earlier rather than later," says Hicks.

Thus, the project required confidence from the financial markets. "The private sector is looking for someone to guarantee to them that the project will be built in a certain schedule and the price won’t go over a certain amount," says Nancy C. Smith, an attorney with the Los Angeles firm of Nossaman, Guthner, Knox & Elliott and a legal adviser to ACTA. Before buying bonds, "the financial markets want certainty and lower risk [and design-build] gave us an opportunity to give them what they want," Hicks explains. ACTA’s single-project focus heightened the financial risks. Unlike agencies that build multiple projects, a single-purpose agency like ACTA "can’t spread that risk around all over the place," Smith says. And unlike a public project backed by the full faith and credit of the government, Alameda Corridor would rely solely on its revenue stream to pay its debts, says Smith.

Without design-build, project officials acknowledge the funding situation would have presented them with a Catch-22. In order to meet its goal and start collecting revenue, the project needed to sell bonds. But with conventional procurement for the mid-corridor trench, the project contingency couldn’t be determined until the bids came in. "Had we gone with conventional construction, we would have been selling the bonds before we had a hard-money bid from anyone," says Doherty. Design-build would show a guaranteed project price at the outset, providing the confidence needed to make the bond sale. In the end, the decision to go with design-build "came down to saving time, [providing] more financial certainty and reducing risk,"says Hicks.

Balancing Act

In developing the design-build approach, the project team drew upon several previous large-scale transportation projects. Smith had worked on the $800-million San Joaquin Hills Transportation Corridor and the $687-million Eastern Transportation Corridor, both private toll roads in Orange County, Calif., plus the $1.1 billion Hudson-Bergen Light Rail Transit project in New Jersey and the $1.5-billion reconstruction of Interstate 15 in Utah. Those contracts included significant liquidated damages, which, Smith told ACTA, meant that contractors would have to include large contingencies in their proposals for the Alameda Corridor.

But those contingencies would not mix with conventional design-bid-build. If bids came in too high, the construction schedule demanded by the operating start date would force ACTA to award the contract "without the benefit of competition as a lever," Smith noted. She recommended competitive negotiations, which would give ACTA an advantage if the low price went over the "financeable amount." Smith explains: "It is a balancing act and you can’t really tell when you’re drafting the documents how much you’re going to pay for transferring the risk."

Financial consultants also backed design-build. Kay H. Yun, a vice president in the municipal finance department of Goldman, Sachs &. Co.’s San Francisco office, told ACTA that conventional procurement could increase project costs by $25 million and debt service cost by nearly $250 million. Design-build could "shift much of the delay or cost overrun risks to the design-build team" by fixing the price and schedule and incorporating penalties for missing deadlines, Yun wrote.

Thus armed, ACET formally recommended design-build for the mid-corridor segment in an October 1997 report to the ACTA board. Design-build could enable completion up to 18 months earlier than conventional delivery and allow earlier revenue collection, but hurdles remained. The corridor turned out to be the first application of a 1995 Los Angeles city charter amendment that permits the city council to approve sealed bids followed by negotiations with contractors. "There was enough flexibility built into the charter provision that we used that I think it was a reasonable basis to use a design-build contract," Smith says. Ironically, the amendment was intended for relatively small contracts, notes Hicks. "They never thought that the first application of this would be a billion-dollar project," he says.

ACTA prequalified teams led by: Tutor-Saliba Corp., Kiewit Pacific Co., Bechtel Infrastructure Corp., Morrison Knudsen, Fluor Daniel Inc. and Odebrecht Contractors. The request for proposals released in January 1998 provided "bidders with all the engineering work that had been done to date," Hicks says.

A dominant issue throughout the selection was the unusually high share of risk passed on to the contractor. The winning team would be liable for the first $10 million in costs for unforeseen conditions, with ACTA picking up the second $10 million. Moreover, the contract featured stiff liquidated damages. For the first 30 days past the deadline for substantial completion, the contractor would be penalized $125,000 per day. Damages rose in stages to $200,000 per day. Ronald N. Tutor, president of Tutor-Saliba Corp., "hated the contract" at first, recalls Tim Buresh, ACTA’s director of construction and engineering. But after some frank exchanges, ACET’s Doherty eventually persuaded Tutor and other bidders to include the high degree of risk in their bids. But Fluor, Morrison Knudsen and Odebrecht subsequently dropped out of the running.

On July 1, 1998, teams led by Tutor-Saliba, Kiewit Pacific, and Bechtel Infrastructure submitted their bids. Tutor-Saliba was low at $731 million, Bechtel Infrastructure was second at $760 million and Kiewit Pacific bid $783 million. ACTA "stressed clarity and cleanliness" in the process, keeping bidders’ information secure. Hicks notes the board did not meddle with the process and no one registered a protest.

In August, ACTA began several months of negotiations with the Tutor-Saliba team, which also includes O&G Industries Inc., HNTB Design-Build Inc. and Parsons Transportation Group. During negotiations, Tutor "was definitely the person in charge of the project and very impressive in his grasp of all the details," says Hicks. During contract negotiations, "he would argue his case and, ultimately, he would compromise or we would compromise," he adds. Overall, the negotiation period was "a good start," says Hicks. "We developed a good working relationship with him that was quite productive." Among other things, Tutor proposed widening the trench by a foot to allow easier installation of the cast-in-drilled-hole piles that would form the base for the trench walls. The negotiations reduced the base price from $731 million to $712 million.

Tutor, an energetic contractor with a hands-on management style, also entered the project with a reputation for combativeness. Even as the Alameda Corridor was reaching a successful end, Tutor and the Los Angeles MTA were locked in a bitter, lengthy court battle over several disputed subway station contracts. But the ACTA team found that despite Tutor’s reputation "for being a tough, tough guy, he was very flexible," Hicks says. "Ron hasn’t changed," Buresh says. "He’s still the same guy the MTA dealt with. We got what we wanted, what we needed, and what we bought." Notes Tutor: "This job put more of the responsibility for executing the project [on the team] than any other design-build project the company has done."

During four years of construction, both Tutor and ACTA emphasized accessibility and quick decisions. ACTA made it a point to act rapidly on claims. "With a day’s delay worth half a million bucks, we’re immediately much more sensitive to that than the average client," Buresh says. Over time the contract value increased from $712 million to $771 million. Another key to responsiveness was having sufficient contingency. "If we’d had a really, really tight budget, I’d be looking over my shoulder all the time," Buresh says.

The success of the corridor prompted Reno, Nev., and communities in Orange County, Calif., to explore design-build for similar, if smaller-scale, below-grade freight rail corridors. ACTA gets a lot of requests for the mid-corridor contract. Buresh reports: "I don’t know how faithfully they’re following it, but people are sure reading it a lot."
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