Alternative Project Delivery - Texas Water Development Board

Section 2
The Owner may have very limited experience with long term DBO contracting and
thus have difficulty adequately defining the contractual relationship with the DBO
vendor team. A contract that includes, at a minimum, the provisions for project
development, design, permitting, start-up, acceptance testing, operations, regulatory
compliance, monitoring and reporting and future plant modifications, is undoubtedly
complex. A multiphase project contract can be difficult to prepare, understand and
administer. This is the reason that Owner Agent, Procurement Advisor, Owner
Representatives and specialized outside legal counsel are typically used on DBO
projects.
The requirements for significant financial strength of the Project Guarantor and the
high cost of developing a DBO proposal are frequently cited as deterrents to smaller,
less sophisticated contractors participating in the DBO process. These two features
tend to necessitate that at least one of the project participants is a major corporation
with significant financial assets. This is often interpreted as meaning that DBO
project delivery approach limits competition to major companies in the water and
wastewater field. However, the procurement process can be structured to require a
portion of the work to be performed by local, minority or disadvantaged Contractors.
A significant DBO contract issue is the Owner’s administrative oversight during the
operations period and the applicable standards of care for maintenance during the
operating period of the contract. In a long-term, fixed price contract for the O & M of
a facility, the Owner must be able to hold the DBO Contractor to enforceable
standards for equipment maintenance. Otherwise, the DBO Contractor has an
incentive to increase their profits by shortchanging equipment maintenance. DBO
contracts should have clearly defined and measurable standards for acceptable
equipment maintenance, periodic inspections and an Owner’s remedy for inadequate
maintenance by the DBO Contractor’s Operations.
Build-Own-Operate-Transfer (“BOOT”)
Description
BOOT projects have had very little commercial application in the United States.
BOOT projects can be characterized as an “absolute” performance-based contract in
that they are structured as buying a commodity of given quality at a fixed price. The
characteristics of a BOOT project include the vendor providing the design, permitting,
financing, construction, commissioning and long-term operation of the constructed
utility asset. Consequently, the vendor uses commercial private financing and owns
the asset. The security for the BOOT Contractor to secure financing is a purchase
contract for the asset from the Owner. BOOT Contractors are generally prequalified,
but the final Contractor selection is based fundamentally on providing a
commodity at a given price or tariff. An example of a tariff for a water contract would
be a contract based on providing a minimum quantity of quality water for a fixed
dollar value. This type of project delivery is common throughout many developing
nations of the world where cost of service is critical and design and operational
expertise of the Owners in these areas can be very limited.
2-16 Texas Water Development Board B1381-Sect2