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Posted By ACEC Texas, Thursday, April 9, 2015

The Texas Public Policy Foundation recently released a report on transportation funding titled The Road Forward:  Improving Efficiency in Texas Transportation Spending.   The conclusion is that Proposition 1, ending diversions, and contracting “reforms” will provide plenty of money for transportation through 2017.

Of course, the legislative debate on transportation funding is not about getting through 2017, it is about long-term needs.  Leaving this aside, one does not have to get far into the report conclude that it appears to be a conclusion in search of evidence, and that the evidence is contorted to get to the conclusion.

First, the initial statement in the report is that Proposition 1, adopted by voters in 2014, provides at least $1.5 billion annually for transportation.  A glance at the Comptroller’s Biennial Revenue estimate or the state budget tells you that that “fact” is wrong.  The BRE and both appropriations bills estimate the funding from Prop 1 at approximately $1.2 billion per year.  Furthermore, since Prop 1 revenues are tied to oil and gas severance taxes (and in turn to oil and gas prices and production), most budget analysts expect that part of the revenue estimate to be revised downward.   A more realistic estimate of State Highway Fund transfers is probably $1 billion annually in the next biennium.   One billion dollars over the biennium is apparently a rounding error if you are trying to make a point.

Second, the chart on page five of the report regarding inflation in the highway construction area is borderline manipulative.   The table states that the Highway Cost Index (a measure of relative inflationary or deflationary changes in the cost of materials) was 1.27 in 2006 and 1.03 in 2014, projected to be 1.06 in 2016.  In other words, the conclusion is that cost of highway construction has declined.

Again, these “facts” are either wrong or misrepresented.  The graph attached is from the Federal Highway Administration’s website and depicts the National Highway Construction Cost Index (HCI).   The HCI was in fact 1.27 in March of 2006, but in September of 2014 it was 1.13, not 1.03.  (There is no forward projection of the HCI that we are aware of.)   More to the point, using the trend from 2006 – 2014 is duplicitous.  This period suggests a downward trend line in the HCI, whereas looking at a longer period (2003-2014) demonstrates exactly the opposite. Further, TxDOT’s HCI, which is Texas-specific and therefore more pertinent) demonstrates an even greater increase in costs.  This index shows a 12-month moving average in April 2004 of 121.2 increasing by March of 242.4.  The TPPF report clearly understates the significance of the increase in commodity costs of construction materials.

Finally, the report considerably exaggerates the savings that might accrue from increased use of design-build procurement procedures.  TxDOT has the ability to use design-build processes and its ability will increase after September 2015 when an annual limit of three projects for year sunsets.   (The TPPF report states that engineering interests are attempting to maintain this limitation but that statement is flatly wrong.)   

The report suggests that money could be saved by removing a requirement of existing law that DB requests for proposals include approximately 30% schematic design.   No evidence is offered for this and it would be difficult to find many in the engineering/construction industry that would agree.  Some design is required to gain environmental clearance for a project and to put potential proposers on a level playing field in submitting proposals.  In fact, removing this requirement would more likely escalate the cost of bids and proposals as responders include a higher level of risk-pricing.

As to the idea that, expanded use of DB could generate 30% cost savings, again, most in the industry would scoff at that number, including both proponents and opponents of design-build.   The Federal Highway Administration’s study of design-build effectiveness in 2006 concluded that:

. . . design-build project delivery, in comparison to design-bid-build, had a mixed impact on project cost depending on the project type, complexity, and size. The surveyed design-build project managers indicated that project delivery approach (i.e., design-build versus design-bid-build) can be a contributing factor in controlling and potentially reducing project costs. However, project delivery approach was perceived to be less of a factor in affecting project cost than other characteristics of the project or its participants.

When project cost information was used from the project surveys, the design-build projects experienced no appreciable change in total cost due to off-setting cost increases and cost decreases among the project sample surveyed, which both vary widely. When cost information was used from a subset of similar design-build and design-bid-build projects, the design-bid-build projects demonstrated more favorable cost results.

Project costs experienced most growth from contract award to project completion. Respondents to the design-build project survey indicated that the leading cause of project cost changes was change orders: owner required additions or subtractions and design-builder or contractor suggested additions or subtractions. This was true for both project delivery approaches, with design-build projects being significantly more sensitive to delays, additions, or subtractions caused by third parties than design-bid-build projects.

Change orders represented 5 percent of the total costs for the surveyed projects. Claims represented less than one-tenth of one-percent of total project costs. The subset of design-build projects had fewer change orders than the comparable design-bid-build projects, but the average cost per change order was greater for the design-build projects. This can be attributed to the greater size of design-build projects. This was confirmed by the fact that change orders represented about the same share of total project costs for both design-build and design-bid-build projects. In contrast, the dollar value of claims per project was significantly lower for design-build projects than for comparable design-bid-build projects, with the subset of design-build projects having no reported cost of claims.

This is a less-than-ringing endorsement of the idea of 30% savings.  And in fact, the executive summary of the study includes a chart on the estimated impacts of using design-build on cost, duration, and quality which shows the median impact on cost as 0.0%.  

There are valid reasons for using design-build project delivery, but any expectation of achieving 30% cost savings is not one of them.


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