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Managing Risk vs. Managing Costs

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At a press briefing on Tuesday, I shared some of my current thinking about cost overruns on the Alaskan Way Viaduct replacement project.

The conversation with press was a good chance to step back from the sound bites being thrown around and to talk in plain terms about the risk being assumed – by both the City and the State – for this project. To be clear, this conversation is not about transportation; this conversation is about smart financial management. 

Most know me from my years of transportation advocacy at the Sierra Club, but my professional training and experience is in financial management with ten years as a CFO for a law firm and five years as a finance manager for a construction management.  This is the experience I am bringing to bear on my critique of Seattle’s current obligations to building the deep bored tunnel. Since January, I am also wearing the mantel of councilmember, and with it, the responsibility to ensure the City of Seattle does not assume any more financial liabilities than absolutely necessary in this serious economic downturn.  We are currently trying to balance the budget with a looming $57 million dollar shortfall, and there is no cushion left to absorb costs from the AWV tunnel. I see us trying to keep libraries, parks and community centers open, and I cannot imagine the  kind of trade-offs we would need to make if that number doubled, tripled, etc.

Specifically, I am concerned with two particular ways that the State is exposed to risk on this project, and the limitations in current agreements that would leave Seattle on the hook for these overruns.

1)      The size of the bond that the state is requiring is insufficient.  Until 2009, State law required a performance bond for the full cost of any project – this part of the contract is estimated to be $1.2 billion.  In 2009, the State amended RCW 39.08.030 to allow highway construction contracts administered by the WA Department of Transportation over $250 million to authorize bonds less than the full contract price of the project.  The State assessed the largest available bond, and found it to be $800 million. The state’s current plan, as was presented to the Council on May 17th is to ask contractors to seek a $500 million performance bond on the $1.2 billion contract.   Somehow they have gone from $1.2 billion bond, to $800 million, to $500 million

2)      The state has capped its spending on this project at $2.4 million, per 2009 legislation.  We heard from Pete Holmes earlier this week that this legislation is binding.  While we all hope that the project does not go over $2.4 million, there are no economic incentives for the state to manage risk for this project.  Hope alone will not prevent cost overruns.  The prudent course of action is to resolve as much uncertainty before we commit to contracts and digging.  Who pays amounts over $2.4 billion is a big uncertainty that is best resolved now – not at some point in the future if the project starts to fall apart

My interpretation is the state is focused on managing costs and ignoring the underlying fact that risk is the true driver of potential overruns.   In a tough political environment, the short run goal is to get the lowest possible bid from a contractor (requiring a smaller performance bond will help them to achieve this).  However, today I gave the analogy of managing a home renovation project.  If I am building a new deck, my goal is to achieve the lowest overall cost – not just lowest bid – for the project, because every dollar above or below that bid is coming out of my pocket. 

The State is currently taking steps to manage the cost of the bid, but at the same time is making sacrifices exposing the city and the state to risk. It is incumbent upon us as representatives of Seattle to ensure that they are also managing risk that will drive the long-term costs over the life of the project.   When we manage for risk, we manage for the overall cost of the project, a prudent approach in these economic times.

Asking questions and addressing concerns does not create cost overruns.  In fact, evidence indicates that not asking these questions is actually what leads to cost overruns. 

The Viaduct replacement has become very divisive, and many discussions are framed as “you are either with me or against me.”  I need to do my part to break down this polarization, but others will need to help too, if we are to have an open, forthright discussion as to how we address the risk and costs on this project.  There is still an opportunity to protect Seattle’s interests, address what I see is the glaring exposure for Seattle, and move forward with this project in a timely manner.  If we are to be successful, it will take a concerted effort by all of Seattle’s leaders. For our city’s sake, I hope we get there.


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Comment from Sue F Minahan
Time January 24, 2012 at 9:50 pm

If resulting evidence does indicate a large extra unsupported expense to the city and state for the planned tunnel — do we have the ability to halt, or readjust the plan? Would that require additional voting? Essentially, my question is: what are our potential options (of revision for engineering this route)?

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