3 Comments (Leave Comment)
On Monday afternoon, the city council was briefed by John Newby, P.E., CDM, a contracting expert hired by the council to help us better understand the risk involved in the deep-bore tunnel project. I have talked a lot about cost overruns over the past year and was pleased to finally receive some tangible numbers about the probability that cost overruns occur. By WSDOT’s own project estimation analysis, there is a 60% likelihood that the budget for this project will cover all the costs. In other words, there is a 40% chance that there will be cost overruns. Since then, we received more detail how likely different cost scenarios will play out. This Cost Estimate Validation Process graph highlights different probabilities based on different cost overrun scenarios:
- 40% chance of any cost overrun
- 30% chance of a cost overrun greater than $90 million
- 20% chance of a cost overrun greater than $150 million
- 10% chance of a cost overrun greater than $290 million
- 5% chance of a cost overrun greater than $415 million
WSDOT was quick to point out this estimation tool helps set the project budget, and guaranteed us they will actively managed the project, once people are digging, to prevent costs from getting out of hand. But, according to recent briefing from Thomas Neff, PhD, a world-renowned expert on major tunnel projects, and a former vice president at Parsons Brinkerhoff, this is an unprecedented project in both size and soil condition, and the risk assumed by the state and contractor is essentially impossible to calculate.
There are two ways WSDOT can manage the bids come in under the budget amount. Extend the completion date (which they did earlier this year to 2016), and reduce the scope of the project. My colleague, Councilmember Nick Licata, is raising similar concerns in asking WSDOT to form a lockbox for the $290 million currently dedicated to removal of the existing structure and waterfront street improvements, which would help ensure financial promises are kept. Securing this commitment is a good move; however it still leaves the question of who pays that $290 million if it is in excess of the state’s $2.8 billion limit.
Lastly, I’ve raised the issue of risk shifting in a previous blog, and today’s briefing from Dr. Neff reiterated my concerns. In design build projects such as these, it is critical that we understand who is responsible for what risks and that we understand the potential costs associated with those risks. If the state shifts more risk to the contractor, the contractor will increase their bid price to cover the greater likelihood that something goes wrong which they must pay to fix. If the state is trying to lower the bid price, then they have an incentive to shift risk to the public. This has the advantage of reducing risk for the contractor and hence the bid price, but it means that when things go wrong, the public will have to pay to fix them. While it is not clear through what mechanism the public would pay for these overruns, the state intent is very clear – every penny over $2.8 billion will be paid by Seattle area property owners who benefit from this project.
When Council votes on the contract with the State this month, we should ensure that Seattle is protected from this 40% chance of cost overruns.