A public-private partnership, also known as PPP, is a legal contract between a government body and a private entity. Its goal is to provide either an asset or a service as a public benefit. In the past, there have been consequences from deferred maintenance and underinvestment in the construction industry.
For public-private partnership construction groups, their approach is goal-oriented to meet the needs for new infrastructure projects. The contracts provide profitable opportunities for contractors, so keep reading to learn about the benefits and faults of public-private partnerships in construction.
A key component for PPP contracts is that the private party takes on a significant amount of risk because – how much the private party receives depends on their participation, which ultimately depends on the performance of the contractor.
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Defining a Public-Private Partnership in Construction
In a public-private partnership, there is the public entity, which is either federal, state, or local, and they engage with a private partner. The private partner hires, pays, and supervises the contractor, as well as participating in designing, financing, operating, and maintaining the project in the construction process. Every project is different; ultimately, the role of the private partner varies from project to project. The common projects that a private partner participates include highways, roads, toll bridges, water and sewer systems, and parking facilities. Sometimes, the public-private partnership is created to develop a new construction project and is necessary for repairs, upgrades, and maintenance work. This process is prevalent in many European countries, but they are growing in popularity in the US because of their use in large-scale projects. The collaboration between government and private partners can result in millions of dollars in cost savings.
Public-private partnerships change the style of public works construction. With the formation of a public-private partnership, a contractor will work for a private entity or firm instead of working for a government agency. The owner of the private entity has more control and flexibility compared to a government agency. With this, the owner can select a project design and systematic approach that fits the project’s needs and request the construction contractor to go beyond their traditional role on a construction project. The private entity owner assumes the risk of time and cost overruns, and create strong incentives to prevent these risks to deliver projects on-time and on-budget.
Public-Private Partnership Construction Bonds
PPPs are evolving nation-wide; more states are implementing this process to allow such partnerships while assuring investors, public owners, and taxpayers that the public entity is capable of completing a project on-time, and all parties get compensated for the job. Commonly used construction bonds are bid bonds, payment bonds, and performance bonds; these bonds ensure that parties will follow the specific contractual obligations.
Benefits of PPPs
Public-private partnerships provide better infrastructure solutions rather than solely a public initiative and private exclusively; they each do what they do best. The public entity is better at targeting and completing the necessary projects, whereas private partners work more efficiently and effectively because their specified compensation is dependent on their performance.
Faster project completion is a result of public-private partnerships in the construction field. There is a reduction in delays in project completion. Project building cycles are more rapid when PPPs use time-to-completion as a measure of performance, which measures profit. The private entity owner assumes the risk of time and cost overruns, and create strong incentives to prevent these risks to deliver projects on-time and on-budget. By evaluating maintenance, the p3s enforce penalties for the delay of maintenance.
Public-private partnerships allow the costs of investment to expand over the project’s lifetime. Instead of the traditional pay-as-you-go financing, it will enable infrastructure project costs to come forward in years to pay. PPPs reduce both construction costs and costs for the overall life-cycle. By reducing costs, it can potentially lead to lower taxes.
In terms of collaboration, when both parties work together, they create innovative design and financing systems to benefit the project’s needs. Therefore, the PPP’s return on investment (ROI) might be more significant than projects that are just public or solely private.
Depending on the project scope, PPPs may incorporate early completion bonuses, and this can further improve efficiency as an incentive and sometimes even reduce change order request costs. Because PPPs increase the efficiency of government investment, government funds can be redirected into other areas of the government.
Faults of PPPs
Every project is different; the size, complexity, and experience needed differs from each scope. There is a limited number of private entities that are capable of completing certain projects. Competition comes into play, and if there is less competition from a small number of bidders on a project proposal, there will be less cost-effective partnering. Therefore, profits can range depending on the risk and scope of the project.
The government is at an inherent disadvantage because the PPP is weighed heavily on the private entity side. In this circumstance, it is difficult for the public partner to assess the proposed costs of completing the project accurately. PPPs produce a higher cost for surveillance for the governments. Though it costs more for the price of more reliable quality of service for higher performance, monitoring to ensure efficiency and quality are being delivered. Compared to more traditionally delivered projects, surveillance is not common, so it’s not a cost of the project.
Collaboration is essential in the work-place; a public party and private party coming together to accomplish the same goal will result in efficiency and success. If you’re looking to complete a construction project on-time and on budget, it is a good idea to embrace a public-private partnership.