Building Better Contracts: Benefits and Drawbacks of DBOM Contracting

When one thinks of big infrastructure projects, one typically thinks of grand buildings, lengthy highways, or soaring bridges. Some might think of the impressive engineering behind them. The more cynical might imagine cost overruns, construction delays, or poor workmanship. However, very few consider the contracts behind the projects. But the way these contracts are designed can make a large difference in the completion and quality of infrastructure projects.

Traditionally, government agencies awarded infrastructure contracts through the design-bid-build system (DBB), where the relevant government agency designs a project, and companies then bid for contracts to complete different parts of the project: to finish the design work, construction of different segments, maintenance, operations, and so forth.

In 1991 Congress passed the Intermodal Surface Transportation Efficiency Act. This law enabled Design-Build-Operate-Maintain (DBOM) contracts where the government contracts with a single company to design, construct, and for a length of time maintain and operate an infrastructure project. Variants of this method might also make the contractor responsible for financing, or only design and construction, or transfer ownership to a contractor. While these new types of contracts vary in the functions and extent of control contracted out, in all of them the relevant government agency contracts with a single company that is given a much larger role in the project than under the design-bid-build system.

Similar methods have roots deep in American history. The country’s first turnpike, the Philadelphia and Lancaster turnpike, opened in 1794 using only private funds. Similarly, many early railroads were built by private companies using land-grants provided by the federal government. However, the government increasingly took greater control of infrastructure projects throughout much of the nineteenth and twentieth centuries. This trend reversed itself with the rise of public-private partnerships in the 1990s, such as the DBOM model.

The first project to officially use this model was the Hudson-Bergen light rail in New Jersey, which completed its first leg in 2002 and third in 2011. The Federal Highway Administration estimates that using the DBOM model saved the project eight years in construction time compared to the traditional design-bid-build model. Since then, several trains, highways, and even parks have been built using a similar model. 

These types of contracts can streamline project development. Since the design and construction are handled by the same entity, construction can begin before the design work is finished. They also integrate projects under one roof, standardizing procurement and thus reducing delays and change orders. Additionally, these types of contracts can reduce transaction costs, since government agencies can deal with only one company instead of several. These cost savings apply particularly to large, complex projects. The more parts a project has, the more an agency can save by not contracting out each individual part. 

These contracts also relieve government agencies of the commitment to fund the maintenance of projects far into the future. This means projects can depend on a reliable maintenance budget instead of the politics of state and local governments. This also eliminates much of the government’s risk from a project. If there are delays or cost overruns, those are borne by the contractor and not the government. This may result in higher upfront costs, but those can be offset over the lifetime of the project.

The government agency responsible typically issues a concession granting the contractor the rights to the project built for a set period of time. This allows the contractor to gain revenue from the project, such as tolls, fares, or leases. For example, the Las Vegas monorail was built under a build-operate-transfer contract, a DBOM variant that transfers ownership of the project to a private entity and financed by private but tax-free bonds. A not-for-profit entity operates the monorail without public subsidies while serving 5.4 million riders a year. In 2010, the monorail declared bankruptcy but successfully reorganized by 2012. 

These contracts have some drawbacks, though. They require government agencies to significantly give up control of their projects. The goals and motives of private contractors may not align with the public interests, and they may make decisions government agencies would not, such as higher tolls or fares. Additionally, such contracts also typically last for decades, which can bind governments to clauses they might regret. For example, non-competition clauses may prevent a government from developing alternative roads next to turnpikes developed under a DBOM contract if that road threatens the turnpike’s revenue. Private contractors are also not subject to laws designed to protect transparency and the public interest, like the Freedom of Information Act or the Administrative Procedures Act. However, agencies can write contracts to require similar procedures from contractors. This underlines the care and specificity these contracts require to produce the intended result. 

DBOM contracts have the potential to speed up and save money on projects. They also can relieve government agencies of burdensome maintenance and operations expenses. However, they must be used carefully. Since governments must give up significant control of their projects, they should be careful to specify project details and understand what rights they are giving away. Implemented properly, however, DBOM and similar innovative contracts can improve the quality and speed with which America builds infrastructure. 

Written by Patrick Conrad, Public Policy Intern