City eyes sharing inflation risks in sewage contracts

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This article was published 22/02/2023 (1005 days ago), so information in it may no longer be current.

The City of Winnipeg could try to prevent the cost of a sewage mega project from soaring higher by sharing some of the financial risk to build it.

Amid skyrocketing inflation and construction costs, city council will be asked to let public service staff negotiate “escalation clauses” within contracts for the biosolids facilities project, the second of three phases of north end sewage treatment plant upgrades.

The proposal comes after city staff warned the biosolids work is at risk of an up-to-$360-million price hike, which officials previously promised to mitigate as much as possible.

That effort included consultations with potential bidders in October, when the city heard companies were concerned about the financial risk of committing to a traditional fixed fee for the project, according to a new report.

“If they bid at all, they are currently adding significant price contingencies (up to 40 to 50 per cent of the project cost) to fixed-fee projects to protect themselves from the recent market volatility,” Cynthia Wiebe, Winnipeg water and waste manager of engineering services, writes in the report.

To avoid that surge in costs, the report asks council to give city staff the option to negotiate “escalation clauses.” These would require the municipal government to cover a set portion of actual cost increases on the project, based on a pre-selected price index.

That greater certainty should help attract multiple competitive bids and get the city a better price overall, said Tim Shanks, water and waste director.

“On these large projects, some contractors might not even bid if there’s too much risk in it… We want lots of competition on these bids, so we’re trying to make our procurement approach as leading edge as possible,” said Shanks.

The biosolids project is part of the three-phase, $1.854-billion north end sewage treatment plant upgrade. Last June, a city report noted the previously approved $552-million price for Phase 2 could soar to $912 million, which has not been factored in to the overall price of the upgrade.

The $360-million potential price hike was blamed mostly on $190 million of expected inflation/project delay costs, as well as $130 million to speed up work to reduce the amount of algae-promoting phosphorous in the plant’s effluent.

Shanks said allowing more flexibility to deal with unexpected costs could reduce risk for builders and prevent them adding large contingency funds into their price estimates, which would help the city secure cheaper options. City staff are also asking special council and committee meetings be available to expedite the process of awarding the contract.

“These two steps are a direct result of us trying to prevent that $900-million price tag… this is us trying to manage the risk,” said Shanks.

It can take about six months to evaluate bids and get a contract approved by council, which scheduling special meetings could speed up by a couple of months, said Shanks, making it easier for bidders to commit to a specific price.

Of course, tying some portion of new construction costs to a price index could add some costs to the approved capital budget for Phase 2, which is still officially set at $552 million. However, Shanks said the strategy should still save money overall.

The report notes the consumer price index and construction cost index are among those that could be utilized to determine cost increases that would be paid out, if a contractor’s costs rise. Exact details of how an index would be used and how much of an “escalation allowance” the city would need have yet to be determined.

The chairman of council’s water and waste committee supports the proposal, noting it’s important the city push forward on the sewage upgrades, which will reduce pollution and increase sewage capacity.

“That’s our No. 1 capital priority, so we’ve got to get moving on that,” said Coun. Brian Mayes, referring to the north end upgrade.

The councillor said past budget hikes for sewage projects underline the need to seek out methods to control the costs, such as the one being proposed.

“I do think something had to be done to avoid having just a massive contingency,” said Mayes.

Council is expected to cast the final vote on the matter in March. The city expects to begin construction on the biosolids facilities in 2025.

joyanne.pursaga@freepress.mb.ca

Twitter: @joyanne_pursaga