"Most states can only project their funding out so many years, so there's always a risk that future funding won't be approved. However, there is a hierarchy of payments, and P3s are typically at the top of the hierarchy," says Andrea Warfield, executive director of O&M at Texas-based Fluor, the engineering manager for the Eagle P3 project. The firm holds a 50% share in the engineering, procurement and construction contract, and a 33% share in operations and maintenance.
Payment security can be complicated, too. Few payment protections exist for projects on public land, as mechanic's lien laws generally do not allow contractors to file liens against federal, state or local governments, says Logan Hollobaugh, claims management and corporate counsel for Chicago Bridge & Iron Co.
"Every state has its own mechanic's lien laws, and they all seem to be slightly different. While liens are not available on public lands, they may be available on public funds or leasehold interests. It all depends on the language and interpretation of the law," Hollobaugh says. He advises contractors to determine whether lien rights exist on the particular project before bidding or starting work on a P3.
On a toll-road project, one California court determined that the contractor could place a lien on the private interest—leasehold and franchise rights—on the public land. In Nevada, the lien statute may allow a contractor to initiate a mechanic's lien, but that right depends entirely on whether the P3 deal is structured as a lease transaction, Hollobaugh adds.
More often than not, the responsibilities for designing, building and financing are bundled together with long-term operations and maintenance contracts in which the private-sector partner assumes responsibility for the asset operation and management for a specified term. In exchange, the O&M contractor, usually a P3 member, is paid either on a fixed-fee basis or an incentive basis. The firm receives premiums for meeting specified service levels or performance targets.
"One of the biggest mistakes a contractor can make is to take on performance standards that are unachievable," Warfield adds. "Most contracts contain steep penalties for not meeting performance standards, and those can add up over time."
To ensure achievable standards, Warfield recommends meeting with the asset's current owners. "They know best what they do and what needs to be done. They are a key resource in determining what drives costs," she says.
Life-cycle planning is also critical to reducing O&M risks, Girard says. "If you're the O&M contractor or the concessionaire and going to be on the hook to take care of an asset for 50 years, then you need to be a part of the process from day one, before even bidding on the job. You need to be an active participant in the design and construction discussion to ensure that you have a quality asset to maintain and operate," he adds.
The goal is not only to maintain the asset for the life of the term but also to satisfy "hand-back" clauses in most contracts, which require the asset to be returned to the owner in a certain condition, with a certain amount of life left in it. Failure to do so can result in penalties, Warfield adds.
"A priority in the bankruptcy of a public infrastructure asset is to ensure that the asset, whether it be a road, bridge or tunnel, remains operational for public use. That means the O&M contractors are typically at the head of the queue to get paid," says John Parkinson, executive director of the Association for the Improvement of American Infrastructure.
He adds, "At the end of the day, even those projects that end up in bankruptcy are not failures. The taxpayers and the public still have an operational asset to use, one that the state could not have delivered without private investment and risk."