Partnering to modernize real estate and infrastructure 1

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1 Output Specifications, Cognitive Biases, and You Rob Pattison BA, JD Senior Vice President, Light Rail Transit 2 nd Telfer School of Management Seminar Advances in Complex Project Leadership: Setting Conditions for Project Success in a Complex Environment Ottawa, Ontario, Canada May 8, 2018 Partnering to modernize real estate and infrastructure 1

Infrastructure Ontario (IO) Agency of the Ontario government responsible for building, managing, financing, and enhancing the value of Ontario public assets Provides a range of services that support

2 Infrastructure Ontario (IO) Agency of the Ontario government responsible for building, managing, financing, and enhancing the value of Ontario public assets Provides a range of services that support the Ontario government s initiatives to modernize and maximize the value of public infrastructure and realty Upholds Ontario s commitment to renew public services, in partnership with the private sector Partnering to modernize real estate and infrastructure 2

5 billion Under construction 21 $15.8 billion In procurement 20 $10.6 billion Planning or pre-tender 15 $ 7.

3 AFP project status Since 2005, Infrastructure Ontario has been assigned 116 Alternative Financing and Procurement (AFP) projects worth more than $53 billion AFP projects Number Capital cost Completed 60 $19.5 billion Under construction 21 $15.8 billion In procurement 20 $10.6 billion Planning or pre-tender 15 $ 7.8 billion Total 116 $53.7 billion (as of September 30, 2017) Partnering to modernize real estate and infrastructure 3

4 Transparency A collection of industry and academic reports on infrastructure, AFP, and public policy is available on IO s website Partnering to modernize real estate and infrastructure 4

Traditional approach to capital projects Using the

enters into individual contracts at each stage of the

Construction Contract Warranties OPERATOR Operating

Design Contract PROJECT MANAGER PUBLIC SECTOR BORROWING

5 Traditional approach to capital projects Using the traditional project delivery model, the project sponsor enters into individual contracts at each stage of the project and retains much of the project risk CONTRACTOR Construction Contract Warranties OPERATOR Operating Agreement Annual Capital Maintenance Program DESIGNER Design Contract PROJECT MANAGER PUBLIC SECTOR BORROWING Borrowing Reserves SPONSOR Partnering to modernize real estate and infrastructure 5

DBF(O)M approach to capital projects Using the AFP model, the project sponsor enters

and manages the project risk in accordance with the sponsor s specifications

CO. OPERATOR Operating Agreement Annual Capital Maintenance Program INFRASTRUCTURE

6 DBF(O)M approach to capital projects Using the AFP model, the project sponsor enters into one contract with a project consortium (ProjectCo), which delivers the project and manages the project risk in accordance with the sponsor s specifications CONTRACTOR Construction Contract Warranties SPONSOR DESIGNER Design Contract PROJECT CO. OPERATOR Operating Agreement Annual Capital Maintenance Program INFRASTRUCTURE ONTARIO FINANCIER Borrowing Reserves Partnering to modernize real estate and infrastructure 6

7 The role of financing in DBF(O)M A risk transfer tool, not a funding source! Partnering to modernize real estate and infrastructure 7

8 Substantial Completion Sub. Comp. Payment DBFM payment structure Monthly Service Payments (MSPs) Sculpted life cycle payments O&M Fixed debt and equity payments Construction Phase (~3-5 years) Design/construction by ProjectCo Construction financing Concession Term (30 years) Maintenance/Services by Project Co Payments to Project Co covering debt service; equity distributions; maintenance/service*; life cycle payments* * Components of the MSP that would be inflation indexed Partnering to modernize real estate and infrastructure 8

Value for money IO conducts a value-for-money (VFM) analysis to determine which project delivery method provides the greatest cost savings to the public

AFP model Risk Retained Risk Premium Ancillary Cost Financing Cost VFM is achieved if the costs of the AFP procurement model are more than offset by the

9 Value for money IO conducts a value-for-money (VFM) analysis to determine which project delivery method provides the greatest cost savings to the public sector VFM analysis compares the estimated costs of delivering a project using: traditional delivery (known as the Public Sector Comparator); and the AFP model Risk Retained Risk Premium Ancillary Cost Financing Cost VFM is achieved if the costs of the AFP procurement model are more than offset by the transfer of project risk to the private sector Public Sector Comparator AFP Procurement Base Cost Partnering to modernize real estate and infrastructure 9

10 Eglinton Crosstown LRT Partnering to modernize real estate and infrastructure 10

11 Eglinton Crosstown LRT: Project scope Length: 19 kilometres (10 kilometre tunnel section, 15 underground stations and 10 surface stops) Route: Eglinton Ave. from Mount Dennis (Weston Road) to Kennedy Station; TTC Subway Connections: Cedarvale (Eglinton West), Yonge/Eglinton and Kennedy Stations. GO Train Connections: Mount Dennis (to Kitchener), Caledonia (to Barrie) and Kennedy (to Stouffville). DBFM project scope includes the design and construction of : Track work Stations, stops and plazas Systems Maintenance and storage facility at Black Creek DBFM Scope excludes: Operations: LRV operation, security & revenue control, vehicle dispatch and customer service by TTC under contract to Metrolinx Enabling Works: Tunnels, headwalls, and emergency exits Bombardier Light Rail Vehicle supply Some early utility relocations Maintenance (including vehicles and tunnels supplied by others): Project Co. Partnering to modernize real estate and infrastructure 11

12 Eglinton Crosstown LRT: Project characteristics and risks Third party Land City Round-trip travel time TTC Community Interfaces Cost estimate Permits and approvals Vehicles Tunnels Utilities Enviro Geotech/hydr0 Partnering to modernize real estate and infrastructure 12

Reference concept design (RCD) Also referred to as Indicative Design or Exemplar Design A Reference Concept Design is typically provided as background information (not contractually binding) A

13 Reference concept design (RCD) Also referred to as Indicative Design or Exemplar Design A Reference Concept Design is typically provided as background information (not contractually binding) A Reference Concept Design is used to: Acts as proof of concept for OS compared to existing constraints Provide one example of a compliant building layout that complies with OS Proponents not limited to the Reference Concept Design, provided that their design meets OS objectives Provides a benchmark scheme for setting project budget 13 Partnering to modernize real estate and infrastructure 13

14 Output specification perscriptiveness: Discussion The maximum vehicle weight shall be X kg Question: Why is the maximum vehicle weight required? Traditional Model: Specify maximum weight to ensure good performance, reduce energy requirements, and reduce maintenance on wheels and rail Not required under DBFM model since: The selected criteria (vehicle weight) may constrain other more relevant criteria (axle weight, live loads, etc.) Performance requirements are specified ProjectCo is responsible for supporting structures ProjectCo is maintaining the wheels and rail, and will determine during in-market period what solution delivers the lowest whole-life costs Partnering to modernize real estate and infrastructure 14

15 Output specification: What drives prescriptiveness? Third-party requirements which cannot be negotiated out (e.g., utility standards and physical and operational limits on utility relocation) Binding legal requirements (e.g., statutes, regulations, by-laws) Inter-operability requirements (e.g., compatibility with Bombardier LRVs) Geometrical constraints (e.g., location of tunnel, limitations on available real estate) Temporal constraints (e.g., after-acquired property, after-acquired permits, licenses, and approvals) Fear and Insecurity 15 Partnering to modernize real estate and infrastructure 15

16 Output specification: Do s Define performance requirements: Rider throughput ambient temperature, light, humidity noise, dust, vibration Constraints: Physical (LRVs, track, and systems must fit within tunnel); Temporal (no contemporaneous lane closures for construction at adjacent stations) Manage stakeholder expectations: The final design may vary from what they have been shown Partnering to modernize real estate and infrastructure 16

17 Output specification: Don ts Don t use phrases such as should Don t specify cheaper equipment or materials to save money: within overall price, each Bidder will spend $ on X to save $ on Y Don t include measurement or payment clauses Don t repeat applicable code and standard requirements Don t prescribe, types, makes, models, software, or hardware unless they are essential to project objectives, interfaces, or commitments to outside agencies Don t specify means, methods or materials Don t specify a requirement in order to meet an intent: make the intent the requirement! Partnering to modernize real estate and infrastructure 17

18 Room data sheets Room data sheets are a an excellent way to specify minimum requirements However, care must be made to not accidentally make the Output Specification more prescriptive by using standard Room Data Sheets Partnering to modernize real estate and infrastructure 18

19 I am Wrong 55 to 60% of the Time Partnering to modernize real estate and infrastructure 19

20 Information theory: Signal vs. noise Information Source Transmitter Receiver Destination Message Signal Received Signal Message Noise Source Gleick, James The Information: a History, a Theory, a Flood. New York: Vintage Books, Print. Partnering to modernize real estate and infrastructure 20

21 Actions and Information: Information theory perspective Hartley Information H = log S n = n log S, Shannon Entropy Partnering to modernize real estate and infrastructure 21

22 Noise: Cognitive biases, ego and expertise Anchoring Ambiguity effect Availability heuristic Confirmation bias Fundamental attribution error Hindsight bias Illusion of control In-Group bias Negativity bias Not-invented-here syndrome Optimism bias Outcome bias Planning fallacy Self-serving bias Social proof System justification Unconscious Gender Bias Etc. Partnering to modernize real estate and infrastructure 22

23 Mental models Apples are: a) Red b) Sweet c) Round d) Fruit Partnering to modernize real estate and infrastructure 23

24 What s a chicken? Frigaliment Importing Co. v. B.N.S. International Sales Corp., 190 F.Supp. 116 (S.D.N.Y. 1960) Partnering to modernize real estate and infrastructure 24

25 Request for Information (RFI) Partnering to modernize real estate and infrastructure 25

26 Output spec tensions Project Specific Output Specifications (OS) Program Requirements and Desires Geotechnical and Subsurface Constraints Utility Protection and Relocation Property Identification and Acquisition Inter-Operability Issues Transportation Issues Public (Residential and Business) Concerns Regulatory Compliance Partnering to modernize real estate and infrastructure 26

27 Misalignment of Owner s objectives and output specs Owner s Objectives Output Spec Partnering to modernize real estate and infrastructure 27

28 Game theory perspective on output specs PAPI: Players Actions and Information available to each player Payoffs for each outcome Eric Rasmusen (2007). Games and Information, 4th ed., cited by Wikipedia contributors. "Game theory." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 8 Apr Web. 13 Apr Components of DBFM Proponents Project Game Players Owner Bidder 1 Bidder 2 Bidder 3 Payoffs P B1, B2 or B3 P Bidder 1 P Bidder 2 P Bidder 3 Actions A B1, B2 or B3 A Bidder 1 A Bidder 2 A Bidder 3 Information I B1, B2 or B3 I Bidder 1 I Bidder 2 I Bidder 3 Partnering to modernize real estate and infrastructure 28

29 Payoffs: NPV gearing Total NPV Score Proponent A = 450 [(NPV Proponent A / NPV Lowest 1) * 30 *100] Total Points Available: 500 Technical 500 Financial 1000 Total Partnering to modernize real estate and infrastructure 29

30 Payoffs: You get what you pay for Partnering to modernize real estate and infrastructure 30

31 Payoffs: Best PO requires innovation DBFM Innovation) > Traditional Delivery) Partnering to modernize real estate and infrastructure 32

32 Proponent gaming opportunity Owner s Objectives OS Requirement Conforming Proposal Partnering to modernize real estate and infrastructure 33

33 Godel s Incompleteness Theorem GF Partnering to modernize real estate and infrastructure 34

34 Cognitive Biases and Professional Responsibility Partnering to modernize real estate and infrastructure 35

35 Professional Engineers of Ontario code of ethics 1. It is the duty of a practitioner to the public, to the practitioner s employer, to the practitioner s clients, to other members of the practitioner s profession, and to the practitioner to act at all times with, i. ii. iii. iv. fidelity to public needs, devotion to high ideals of personal honour and professional integrity, knowledge of developments in the area of professional engineering relevant to any services that are undertaken, and v. competence in the performance of any professional engineering services that are undertaken. 3. A practitioner shall act in professional engineering matters for the practitioner s employer as a faithful agent A practitioner must co-operate in working with other professionals engaged on a project. 7. A practitioner shall, i. act towards other practitioners with courtesy and good faith, Partnering to modernize real estate and infrastructure 36

36 Suggested readings Influence and Persuasion - Robert Cialdini The Organized Mind - Daniel J. Levitan Moneyball and The Big Short Michael Lewis Thinking, Fast and Slow Daniel Kahneman The Information: A History, a Theory, a Flood James Gleick The Smartest Guys in the Room Bethany McLean and Peter Elkind The Happiness Advantage Shawn Achor Getting to Yes Roger Fisher, William Ury, Bruce Patton Getting Past NO William Ury Difficult Conversations Douglas Stone, Bruce Patton, Sheila Heen Partnering to modernize real estate and infrastructure 37

37 Online Resources crosslinxtransit.ca acrosstown mobile app (Apple, Android, Blackberry) infrastructureontario.ca metrolinx.com thecrosstown.ca Partnering to modernize real estate and infrastructure 38

38 Contact information Robert Pattison Senior Vice President, Light Rail Transit Partnering to modernize real estate and infrastructure 39

39 Follow us Partnering to modernize real estate and infrastructure 40

P3 for Procurement Practitioners. Alfiya Mirzagalyamova and Scott Baker AECOM

P3 for Procurement Practitioners Alfiya Mirzagalyamova and Scott Baker AECOM The Motivation Demystify P3 procurement Draw from experiences of transit P3s in North America Compare DBB and DBFOM - Availability