This is a continuation of my review of the Final Report of the Commission of Inquiry into the Ottawa LRT fiasco. This article picks up from the point where the contract is awarded to the successful P3 bidder, Rideau Transit Group, and reviews the contract and project structure.
See also: The Ottawa LRT Report Part I which contains introductory material and the story up to the contract award. In Part III I will turn to construction problems and testing before revenue service began, and Part IV will cover from that point to the present.
On December 19, 2012, Rideau Transit Group (RTG) achieved the best score on their submission although, as I noted in the previous article, this was primarily on financial factors as the technical scores of the three bids were close to each other. Ottawa still clung to the 2010 budget estimate, and the project was approved at $2.13 billion. However, the P3 arrangement removed much of the City’s control over the project.
The actual structure of the project involved several entities, some of which were actually the same companies acting in different guises. This divided the project into subcontracts although ultimate responsibility rested at the top with RTG.
The Project Agreement accounted for the fact that, as is typical with this type of model, RTG would flow the bulk of its contractual obligations under the agreement down to subcontractors. […] The Project Agreement required RTG to ensure that its subcontractors complete the subcontracted scope of the OLRT1 project in the same manner and to the same extent as RTG is required to under the terms of the
Accordingly, the obligations for the works required by the Project Agreement were set out in RTG’s subcontracts with OLRT-C [the construction arm of the P3] and RTM [the mainenance arm], respectively. Under the subcontract with OLRT-C, OLRT-C took on the obligation to complete the design and construction as required under the Project Agreement as well as the risk and associated payments if the obligations were not met. Similarly, the subcontract with RTM flowed down RTG’s obligations to maintain the OLRT1 project as required under the Project Agreement, and RTM took on the risk and associated payments if the obligations were not met.
This structure allows RTG to be a small entity made up of only a handful of executives and support staff who would administer and oversee its contracts with its subcontractors. Any reporting from the subcontractors up to the City and back went through RTG. [p 148]
In this arrangement, management of the groups responsible for the work flows through the topmost level, RTG. In theory, this provides a single point of contact and responsibility, but it also creates a potential choke point in the City’s ability to manage work done on its behalf.
“Under the Project Agreement, RTG was responsible for the construction and maintenance of the OLRT, and the City would be the operator of the system. The Project Agreement, which was based on Infrastructure Ontario’s P3 template, gave the City limited control over the construction process or the subsequent maintenance of the system. Therefore, the City’s ability to direct the project was generally limited to enforcing specific financial remedies under the Project Agreement. In essence, the City was in a position where it had to rely on RTG to fulfill its contractual obligations and could only attempt to ensure compliance by withholding funds or otherwise enforcing contractual remedies.” [p 9]
Systems integration is an important part of any large technical project. One cannot simply buy components from various sources, plug them all in and expect them to work. With the management of suppliers happening a few levels removed from the City, an assumption is needed that this integration is actually happening. In fact, it was not, or at least not at a level needed to guarantee success.
“RTG’s project plan required the various engineering systems that went into the OLRT1 to be carefully integrated. However, the subcontractors operated in silos. These decentralized arrangements made it essential that the parties integrate their efforts and engage in near-constant communication. They failed to do so, OLRT-C [the construction arm of the P3] did not effectively coordinate their efforts, and the project suffered due to this lack of coordination.” [p 9]
On top of these issues, the vendors argued that the specifications were too “prescriptive” about how things should be achieved, as opposed to describing a system performance requirement and leaving it to the P3 to figure out how that should be met. This affected, in particular, the vehicle design.
An obvious question is why this was not addressed during the pre-award stage of commercially confidential discussions, or if the City and their consultants (who presumably were responsible for the specification) refused to change it.
“Regardless of the details of the project specifications required in the Project Agreement, by signing the Project Agreement, RTG agreed to be “responsible for the complete design, Construction, testing and commissioning and Maintenance of the complete Systems required for the safe and efficient operation of the LRT.” That is, RTG signed the Project Agreement with “eyes wide open.” [p 151]”
The contract contained provisions for various types of default including:
- Failure to Maintain Schedule: The City could issue a notice to RTG which triggered a requirement for a plan to get the project back on time and achieve a Revenue Service Availability (RSA) date no later than mid-May 2019. Failure to deliver a plan would be deemed a default and entitle the City to terminate the contract.
- Delays to Revenue Service Availability: Many preconditions determined whether RSA had been achieved including Substantial Completion of civil works, testing and safety requirements, and training of City staff for system operation. The RSA date was May 24, 2018, and five days after certification, RTG was entitled to a $200 million payment. If this date was not met, the agreement included provisions for rescheduling and a penalty payment (liquidated damages), but in any event if the date went beyond May 2019, this would be considered as a default.
- The contract between RTG and OLRT-C also contained provisions for penalties up to about $145 million for delay damages.
Various types of events were provided for where RTG would be entitled to a schedule change and financial compensation. Typically these were external events including Acts of God, interference by other agencies or governments, labour actions, civil unrest, contamination of work sites, and archeological finds. Even if the event was beyond RTG’s control, they were required to reduce or eliminate its impact to the degree possible.
Despite this fairly exhaustive list, the agreement did not provide for any relief related to geotechnical risk. This was assumed completely by RTG with only the following exemption:
“The only partial exception to this is that the Project Agreement did create a Relief Event “with respect to Tunnel Work only” for “bursting or overflowing of water tanks, apparatus or pipes if such events are not attributable to the actions or omissions of Project Co [RTG] or any Project Co Parties and are not properly inferable, readily apparent or readily discoverable from the Background Information.” [p 159]
RTG, in effect, lost their bet on geotechnical risk thanks to a large sinkhole on Rideau Street. This event is covered later in the report.
Although the contract included a worst-case option that the P3 would be declared in default and the entire project would revert back to the City, this is obviously not a path to be followed except in the most dire circumstances. There is a strong incentive for the P3 to hit the mark on schedules, or at least claim that this will occur, and for the City to use financial threats to ensure projects stay on time. However, this creates an antagonistic relationship if anything goes substantially wrong on the project.
However, with the Mayor’s political credibility hanging on delivering a project “on time, on budget”, the likelihood that the P3 would be forced into default was minuscule. This created a situation where the project would “succeed” no matter what.Continue reading