Good afternoon and thank you to today's sponsors, AIA New York State, Albany Law School and the New York Bar Association.
Today's symposium on procurement and project delivery for State government agencies is timely. There is growing recognition – beyond this room – that continuing to build infrastructure using only the laws and procedures we have in place is not sustainable. There is also a growing backlog of projects and not enough time or money to fix them all.
As a result, alternative project delivery has become a hot topic among government leaders trying to figure out how to rebuild the State's infrastructure while controlling costs. Bills allowing new ways to deliver projects were introduced in the last legislative session to tackle rising infrastructure costs.
This legislation would be a good start. However, leaders in government, in the building industry, in labor, must admit frankly that how business gets conducted at every stage of infrastructure investment – procurement, design, review, approval, construction and financing – must be scrutinized and improved.
Let me take this opportunity to propose a broad rethinking about how government approaches the construction of public works, and encourage innovation in every phase of procurement. We need a new a new way of conducting the business of building our public infrastructure.
What's more, I would argue that most – if not all – of the proposals I offer today are already being done successfully elsewhere. In many cases, the mission is simply "scaling up" our models.
INFRASTRUCTURE COSTS ARE TOO HIGH
And now is the time for change – given the unstable economy and the high costs of construction across New York.
In 2008, the Building Congress reported on the skyrocketing construction costs for public infrastructure. At the time, the MTA was assuming an annual ten percent increase in labor costs. Anecdotally, contractors reported that they built in a variety of other costs, an "MTA price," to cover delays, late payments and other costs of doing business with that agency. As economic conditions have worsened, cost escalation has declined somewhat, but the long-term trend for construction costs is still up, not down.
Investment in infrastructure is also threatened by weak local, state and national economies. The Comptroller has forecast continued troubles for the State's revenues. The MTA and other transportation agencies have raised fares and tolls simply to maintain the current state of operations. There is no apparent appetite for new revenue sources at any level of government. What's more, federal support for transportation infrastructure seems likely to decrease in the next surface transportation bill.
In the New York City region, no new freeways or bridges have been built since the early 1960s; and no new subway lines have been placed into service since 1940, partially because of the enormous cost of construction.
NEW DELIVERY METHODS
Despite this gloomy picture, government can control and even reduce the cost of public projects and speed delivery.
For example, when Hurricane Irene swept away entire communities in the Catskills in August – a substantial portion of State Route 42 was severely damaged in the storm. It seemed like a devastating setback to a region that relies on two-lane State routes for its economic survival. Governor Cuomo immediately issued an Executive Order to allow design and construction to proceed simultaneously to repair Route 42. At the beginning of October, DOT announced it had awarded the contract to a design-build team, and, the reconstruction of six miles of road and replacement of two bridges is expected to be complete by February.
Similarly, the sudden emergency closure of the Lake Champlain Bridge in October, 2009 forced the State to use procurement methods similar to Design Build. Despite some minor setbacks, this project will be complete this winter. Imagine, a major interstate bridge built, virtually from start to finish in two year's time!
Incremental change has also taken place at the Dormitory Authority, which has enthusiastically used Construction Manager at Risk contracts to speed project completion and control its costs. DASNY has been able to break away from the old model of coordinating multiple contracts and fighting endless litigation. It can now secure a single construction manager who, for a guaranteed price, manages the coordination of contractors (and headaches) that DASNY is normally responsible for.
But its power to use CM at Risk is limited. On most of its large contracts, DASNY must still hew to the traditional procurement model.
A third, broad category of project delivery that's gotten a lot of attention in recent years is Public-Private Partnerships. Public-Private Partnerships have worked in other states and countries by guaranteeing a revenue stream to a private venture to design, build, operate, maintain and finance a facility.
Today, the State doesn't have broad authority to use any of these procurement methods. Special legislation or an emergency is required to employ them, even if they can cut delivery times and produce meaningful cost savings. Government should be able to use these methods where appropriate to assign risk, reduce long-term upkeep costs, or up-front capital costs. Or, as in the case of the Goethals Bridge in Staten Island, build projects it could simply not do without the innovative participation of the private sector.
I'll leave a finer-grained discussion of each method for another time. Instead, I want to emphasize a broader point: government has used essentially the same method to procure large infrastructure work for at least a hundred years. Projects are, by and large, procured using design-bid-build and selecting the lowest available bidder.
Other procurement methods offer opportunities to get projects delivered more quickly, more cheaply, and better than they would be under current law, because they allow different approaches to design, financing, and project management that simply are not allowed today.
I am certain there will be a robust debate about the merits of each procurement method among their champions. But the State must permit flexibility, we must allow government to procure in ways that accelerate projects.
With that said, allowing new procurement methods will not by itself solve the larger problem of repairing our aging infrastructure.
THE STATE NEEDS NEW WAYS TO PAY FOR ITS INFRASTRUCTURE
Even with greater efficiency and economic methods, the State's major transportation agencies simply do not have the resources they need to repair critical facilities approaching the end of their useful lives.
For example, when the Metropolitan Transportation Authority first presented its latest five-year capital plan, it outlined an ambitious $28 billion program. But, as many of you know, the MTA has had to repeatedly revise its plan, shaving off billions of dollars in order to make up huge funding shortages. The latest iteration relies almost entirely on new debt to cover the remainder of the plan.
The good news is, with the new proposal, the MTA will complete the first major new expansions of its rail network since 1940. The bad news is how the MTA will finance its next capital plan is a $30 billion question mark.
Funding for the State Department of Transportation is equally scarce. There has been little public discussion about how the State plans to fill the gaping holes in DOT's capital budget next year.
Ironically, in order to create a stable funding source for DOT's capital program, the Legislature created the Dedicated Highway and Bridge Trust Fund in 1991. The Trust Fund was to pay for ongoing capital improvements on a pay-as-you-go basis.
But, it has not turned out that way. In a 2010 review, the Building Congress found that spending on new capital projects this year would account for $800 million of the $3.7 billion allocated to the Fund. The rest would be used for debt service and state operations at the DMV and other agencies.
To add a final example, the Port Authority of New York and New Jersey also released a $29 billion ten year capital plan in 2007. As the Port's revenues decreased in a down economy, it quickly revised its plan to $24 billion. Nevertheless, as the Port's financial position continued to weaken, it secured a major toll increase that will reach $15 for passenger cars paying cash by 2015. Trucks crossing into Manhattan will pay up to $105 to cross the George Washington Bridge in 2015.
What these stories illustrate is that we are not faced with a problem that can just be fixed with new procurement methods or doing more with less. The fact is that the State's major transportation agencies are structurally underfunded. Dedicated funds for roads and rail have been misapplied. Many of the State's revenue sources burden only those who use narrow portions of a larger network. The vast majority of drivers do not pay a specific user fee.
To address the transportation funding gap, government and advocates must find a way to fund transportation with a protected, reliable revenue stream which distributes the cost of upkeep more fairly.
During the MTA bailout process in 2008, Lieutenant Governor Richard Ravitch proposed an MTA Capital Finance Authority, through which dedicated revenues would flow. More recently, legislation was introduced that would create a State Infrastructure Bank. Either model can allow the creation of a fund where all money dedicated to infrastructure can be collected directly and spent exclusively on transportation.
An excellent model for this is the New York City Water Finance Authority, which has been able to issue debt to pay for a historic capital campaign that will protect New York City's water supply for the next century. Prior to the creation of the WFA in the 1980s, work on the third water tunnel had been abandoned; the City's waterways were polluted because of inadequate sewage treatment infrastructure; and water and sewer mains were antiquated, and, in some parts of the City, non-existent. Prior to creation of the Water Authority, people still paid water bills – those bills just went straight to the City's general fund. Now, thanks to the secure funding and financing Authority model, we have a safe, modern, water supply and sewer system in New York City.
We should replicate this model for transportation.
Where will new revenues for transportation come from? It is challenging to raise the issue of charging New Yorkers more to drive their cars. It is a difficult conversation, but one that must happen.
Some ideas include: creation of a Vehicle Miles Travelled tax; dedicating an enhancement of the State gas tax to transportation; building High Occupancy Toll lanes; or creating a uniform toll policy that distributes the burden more equally among users of bridges, tunnels, roads and parkways rather than on just a few. Moreover, uniform tolls even out traffic flow and reduce environmental "hot spots."
Asking for new revenues is a tough job in any environment, today it is even more so. But support for any increase in fees would be more likely if there was a guarantee that the money would be dedicated to improving the road and rail network. Hence, new fees and tolls would have to go hand in hand with a new financing entity that collects receipts and uses funds only to guarantee and pay for debt issued on behalf of transportation projects.
A truly stable, protected revenue source is a cornerstone for the transportation network.
IMPROVE AGENCY REVIEW AND PROJECT MANAGEMENT
Alternative delivery and new revenue sources for transportation are big-picture initiatives that grab headlines. Implementing these ideas can help reduce the infrastructure backlog and facilitate economic growth. But without looking closely at how government reviews projects and functions as a project owner we will be unable to fully realize their benefits.
At the State level, any number of agencies can impact the progress of a waterfront park, a wastewater treatment plant, a road through a wetland, or an urban renewal project.
Permission to proceed from the State is important. However, we have heard that review and oversight protocols used on one project will change for another. Agencies can require unrelated add-ons or costly mitigations in order to approve a project. Submission guidelines can be unclear, requiring revisions that would be unnecessary if written submission guidelines were available.
There must also be a clock for agency reviews. Agencies appear to have unlimited time to review projects, and where there are statutory timelines, they may be ignored. Also, there are often unlimited bites at the apple for agencies. An applicant will respond to comments, and there will be follow up comments, and follow-ups to follow-ups.
These types of inefficiencies are certainly not unique to the State. However, this is an insidious layer of government review – where an agency has veto power over a project which it is not managing and which keep vital projects from moving forward.
An exciting example of government acknowledging this problem is the announcement of the acceleration of the Tappan Zee Bridge, where the Federal Highway Administration has been tasked by President Obama to coordinate with other federal agencies and accelerate reviews to allow construction on a new bridge to start as early as next year. FHWA is then required to use this process as a template for approving all large projects in the future.
This model should be replicated throughout New York State.
When acting as a project owner or project manager, government agencies should adopt innovations that improve construction quality, speed delivery and reduce costs. New bywords like LEAN, IPD and BIM have become the catchphrases of the building industry in the past five years.
The core of these new approaches, however, is old: demanding collaboration and cooperation among all participants on a project. Government agencies and contractors must move away from adversarial terms on which many projects are still built. Collaborative, team approaches to building like LEAN and Integrated Project Delivery have helped accelerate delivery times, reduce cost and costly litigation.
Government has had some noticeable successes using these approaches.
First among them was MTA Capital Construction's response after the destruction of nearly half a mile of tunnel on the #1 Subway line on September 11, 2001. The MTA established a command center where the owner, designers, contractors, and subcontractors collaborated continuously, working out constructability issues as they arose. The entire project was completed months ahead of schedule and barely a year after the attacks at a final cost of $140 million, even when initial estimates were placed at $200 million.
David Burney, New York City's Commissioner of the Department of Design and Construction introduced a collaborative approach for construction of the City's new, one billion dollar, state-of-the-art police academy. The entire team – owner, designers, engineers, construction manager and subcontractors – worked together under the same roof throughout the design process. Though it isn't finished yet, construction of the Academy is coming in on time and on budget. Participants on the project say that this "IPD-lite" model is an excellent approach to building and eliminates much of the second guessing and change orders that bedevil large government projects.
These examples deserve to be replicated as much as possible. They should become the standard and not the exception. They should replace the adversarial style of construction that increases costs and slows delivery. But it will take the commitment, not only of government, but of the building industry, which must adopt the necessary technologies and change the way it does business as well.
PROJECT LABOR AGREEMENTS AND NEW VENDOR SELECTION METHODS
Finally, a few miscellaneous but important changes to how government procures large construction projects can further reduce the cost and improve the efficiency of infrastructure investment.
First, the City of New York has signed major Project Labor Agreements with many of the largest labor unions, that have helped the City control costs and manage projects more efficiently.
Typically, owners do not have control over the price of labor or labor practices on their own project sites. Project Labor Agreements have empowered the City and enabled it to establish fair terms for myriad labor issues. Although the City has not released specific cost data on PLA projects, Contracts Director Marla Simpson, who is with us today, has said that the savings are significant.
Second, price should not be the only consideration when selecting a contractor or construction team, especially for challenging projects that require a high level of expertise. Qualifications Based Selection and Best Value selection are still not widely permitted in New York when selecting contractors and vendors for major projects. There are complex issues and strong opinions both for and against these procurement methods. Simply put, there needs to be compromise that enables government to procure the construction team best suited for a job on a basis other than simply the lowest bid.
A final practice that increases costs is the "over-engineering" of projects. In an effort to minimize risk, public owners frequently require, and designers frequently produce drawings, that over-engineer projects. According to one expert, this practice can increase materials costs by two hundred percent in some cases. Public facilities should be safe and built for long term use, but they should also be built for the task they are meant for.
CONCLUSION: WHAT YOU CAN DO
We are at an inflexion point for government: with dwindling revenues and an ongoing financial slump, the public is demanding accountability from government for every dollar spent. At the same time, government must continue to deliver core services and provide the infrastructure necessary to drive our economy and maintain New York's high quality of life.
Innovation in public building is increasing. All of the practices I've outlined are in place in other states or are being used on a limited basis here in New York.
- Elected officials need to pass legislation enabling alternative delivery methods.
- Elected officials must create protected, reliable funding streams for transportation that are less susceptible to fluctuations in the economy. Legislators should consider the creation of a Transportation Finance Authority that would collect revenues and spend them solely to finance our roads and rail network.
- The leadership in executive agencies must streamline the review and approvals process for large projects.
- Agencies should communicate with one another and establish clear guidelines for the project review process. Guidelines should include definitive timelines for completing reviews.
- Large infrastructure agencies should adopt collaborative project management tools like IPD and LEAN. These practices have proven to improve delivery times.
- The building and construction industry must also become more proficient using BIM, IPD, and LEAN practices, as they are becoming the industry standard.
- Everyone associated with building public works should reach an agreement on adding new selection criteria to the low-bid, design-bid-build model which remains the standard in New York State.
New York City and New York State have both successfully used some of these methods. In talking to project managers and agency executives, it is clear they are eager to use these methods more widely.
Government should capitalize on these incremental improvements. Today, the State is led by agency executives, a Governor and legislators who are well aware of the funding crisis and appear more willing to try new approaches.
The old way of procurement will simply not allow us to pay for all of our infrastructure needs, nor will it allow us to innovate in ways that will improve quality and reliability and reduce overall costs.
I hope those in this room and in the State Capitol will continue this dialogue, resolve any differences of opinion, and set to work to make the substantial changes needed to expand and protect the State's invaluable public infrastructure.
Thank you.
