Public-private partnerships are a hot topic in the construction industry. A google search will bring up pages upon pages of articles discussing their pros and cons. Much of this discussion focuses on policy arguments for or against these projects – but what do industry members need to know about public-private partnerships? Let’s take a deeper look…
Public Projects and Private Projects Both Have Their Pros and Cons
Construction projects can generally be put into 2 categories: public projects and private projects. Private projects face far less regulation than public ones. The control of these projects is completely within the hands of private owners and construction businesses, which can also create some efficiency gains over slow-moving public jobs. Finally, these private entities are able to use financing opportunities that won’t be available on public jobs.
Public jobs have their upsides, too. Public works projects are often at a very large scale, and present great revenue opportunity for construction businesses. Further, the risk of nonpayment decreases with a public owner, especially for the highest tiered parties.
What are Public-Private Partnerships?
Public-private projects (also known as P3 projects) aim to take on the benefits of both public and private projects. Like private projects, extensive control by a private company helps create efficiency and add expertise. Like public jobs, there’s a steady project owner, decreased payment risks (at least for higher tiered contractors), and a project that will greatly benefit the general public.
Due to these benefits, the p3 format is often used on large and complex public works, public projects that will take an extended amount of time, and in situations where there’s a shortage on public funding.
What Makes Public-Private Partnerships Effective?
With public-private partnerships, construction projects for the benefit of the public enjoy greater participation from the private sector. There’s a lot of literature out there supporting cost savings and increased efficiency for the public entities entering into these projects. On top of that, public partners gain the benefit of experience – private construction companies have a lot more experience with construction projects than the government does, so it makes sense for a public entity to shed some of its risk onto the private sector.
There’s a lot of incentive for those in the construction industry, too. The government (almost) always pays its bills, and it pays them on time. Plus, these projects typically feature pretty favorable financial terms for the private partner, and that private partner will have greater control than on a typical public project. On top of that, P3s often include terms that pay out over an extended period of time. Meaning, construction businesses (and their lenders) may have the opportunity to secure future cash flows beyond the completion of the project.
There’s a lot more to it than that, and we’ll provide some resources at the end of this post with additional information.
P3 Projects Often Incorporate Lean Construction Principles:
Why Does it Matter if a Project is a P3?
Public-private partnerships live in the grey area between public projects and private ones. That sounds obvious, but the setup has ramifications: sometimes, it’s unclear whether the rules for public projects or the rule for private projects will apply. There are a lot of considerations on this front, but two of the most practical (and problematic) ones are payment security and prevailing wage requirements.
Considering P3 projects are on the rise (more on that in a minute), construction businesses should know how they might be affected when working on a public-private partnership project.
Payment Security Tools
When a construction business goes unpaid on a private construction project, that business can often leverage the right to file a mechanics lien into securing or speeding up payment for the work they perform. For public projects, whether it’s federal, state, or local, the project property is not subject to lien claims. Often, payment recovery will come against the prime contractor’s payment bond (and the contractor will have little or no payment security).
But what about when a P3 project is in play? Is the property lienable? Will bonds be present? How can payment be secured?
Often times, P3 projects will have payment bonds present so that subcontractors and suppliers will be able to make a claim on the bond if they go unpaid. Bonds won’t always be required with public-private partnerships though. If the project is set up to where the property itself is owned by a private company or individual, mechanics lien rights may be available. But, if the property is publicly owned and no bonding is present, a claimant could find themselves SoL. Sure, payment might be recovered via litigation or small claims court. But legislatures have decided further protection is needed for construction businesses in the form of lien rights and bond claim rights. When a P3 project is in play, it’s important to understand what payment protections will and won’t be available from the jump.
Levelset CEO Scott Wolfe Jr. Discusses P3’s and Payment Security
Prevailing Wage Requirements
Prevailing wage requirements (created by the Davis-Bacon Act) are common on public projects. Where prevailing wage laws are present, public-private partnership projects will often require that prevailing wages (a sort-of construction minimum wage) be paid on the job. These requirements affect more than just the actual payments going out though – it adds administrative burden to those making payments.
Let’s look at when P3 projects will require prevailing wage payments on federal projects. Then, we’ll discuss some considerations for state-level projects.
P3s and Prevailing Wage on Federal Jobs
A relatively recent case (District of Columbia v. Department of Labor) helped to clarify prevailing wage requirements on public-private partnerships where the public partner is a federal entity.
In that case, the court determined that a P3 project must pass a test to be considered public (for the purposes of prevailing wage laws). The court found that a project (1) must involve public funds; and (2) must be subject to government ownership or operation of the completed facility.
For example, in a situation where the federal involvement is merely leasing the land, prevailing wages won’t be necessary because (1) no public funds were used, and (2) the project will be owned and operated by the private partner.
P3s and Prevailing Wage for State Jobs
Obviously, every state has different laws. Plus, not every state has prevailing wage laws (aka “Little Davis-Bacon” acts) on the books. However, when determining whether prevailing wage requirements will apply to state-level public-private partnerships, a similar test to the federal one may apply. That means it will be important to determine (1) who will own and/or operate the finished product, and (2) whether public funds were utilized. As a general rule of thumb, the greater the involvement from the public partner, the better the chance is that prevailing wage rules will apply.
For those of you performing work on California P3 projects – this exact test was used in a recent case (Cinema West v. Christine Baker).
For More on Prevailing Wage Laws:
- How do Prevailing Wage Laws Work in Construction?
- Would Removing Prevailing Wage Laws Lower the Cost of Public Projects?
- Certified Payroll Requirements
Public-Private Partnerships are Only Going to Get More Popular
American infrastructure is in shambles, our airports are falling behind, and housing continues to be a problem for a number of states. On top of that, governments at the federal, state, and local level can’t always afford to make the necessary improvements. As a result, politicians and lawmakers have turned an eye toward P3 projects. States seem to pass more legislation allowing for public-private partnerships all the time, and everyone from Donald Trump to Hillary Clinton sees value in P3 projects, to some degree. So, at least for the immediate future, it’s a good idea to get familiar with P3s – especially for those who regularly work on infrastructure or public works projects.
Procurement Methods for P3 Projects
In large part, P3 procurement methods reflect those for other large public projects. However, there’s often more emphasis placed on ensuring a fair, extensive bidding process and for snuffing out any potential for fraud or collusion. Because of the increased private interest on these projects, along with the extended construction, maintenance, and/or operation timeframes that may apply, it’s incredibly important to be certain that there’s no funny business going on with the private partner.
Often, public-private partnerships will begin just like other large construction projects: with a request for qualifications (RFQ) or a request for proposals (RFP). From there, many projects resemble a design-build project or a variation of it where the private partner is also charged with the operation and/or maintenance of the finished product.
For More on Public Procurement:
Common Uses for the P3 Project Type
Public-private partnerships are most often used on large, complex construction projects. On these projects, the government will really benefit from greater participation from their private partners. Keep in mind though – blending the benefits of public and private works might be valuable on any given project.
Public-private partnerships are regularly used for infrastructure projects. Highways, toll roads, bridges – you name it! The state of America’s infrastructure is not great, to say the least, and the cost of fixing these problems is upwards of $3 trillion. With roadways crumbling, fixes are needed fast. P3 projects offer flexibility (both in financing and project coordination) to get the job done. When done right, P3’s will create cost savings, too.
Denver International, La Guardia, and Kansas City International have all either entered into P3 projects or at least eyed them in recent years – and more are doing the same. For more on the use of public-private partnerships in conjunction with airports, here’s a valuable resource: Evaluating Airport P3 Projects.
Public affordable housing projects often involve partners from the private sector. Typically, this comes in the form of private land with government funding, so property developers may want to familiarize themselves with opportunities in this area. Still, any combination of public and private resources might take place, and it’s not uncommon for contractors to find themselves working on these projects for HUD. P3 projects are so common with affordable housing that the Department of Housing and Urban Development has a page on their HUD USER site discussing them: The Evolution of HUD’s Public-Private Partnerships.
Large-scale green construction projects are also frequently public-private partnerships. When a massive solar energy farm or wind farm is being constructed, often, it’s done on vacant land that’s publicly owned. Even if that isn’t the case, and the property is owned by a private person or company, public funding and control might pull a project into the realm of public-private partnerships. We’ve discussed this topic at length before: P3 Projects: Green Building, Alternative Energy, and Mechanics Lien and Bond Claim Rights
Bundling Smaller Projects Into one P3
Due to the extensive front-end work required for P3 projects, it may not make much sense to utilize the method on small, straightforward jobs. However, when a bunch of smaller, simpler jobs are packaged together, utilizing a public-private partnership makes a lot of sense.
Such is the case with the Pennsylvania P3 Rapid Bridge Replacement Program. As we discuss in this article, Pennsylvania signed up for an unconventional P3 arrangement when it entered into an agreement where their private partner is obligated to repair or rebuild 550 small bridges in a span of 3 years. By lumping all of these projects together and getting creative with the procurement process, these bridges will be fixed or replaced efficiently and in what may be the most cost-effective manner possible. For more information on this cutting edge program, this resource dives in: Pennsylvania P3 Rapid Bridge Replacement Program.
Other Resources on P3 Projects
Here are some expert resources on public-private partnerships:
- P3 Considerations for Contractors by the AGC
- Public-Private Partnership Projects – What, Why & How is Risk Allocated?
- Financing Public-Private Partnerships in the U.S. Private Placement Market