SR99 tunnel budget stretched to the limit 16 Apr 2015

An independent review of the financial position of the Alaskan Way Viaduct Replacement Project in Seattle concludes that the overall program can still be completed within the US$3.1 billion budget set at the start of the project. This is in spite of construction delays and additional costs associated with the TBM breakdown which, under a current “worst case scenario”, would result in the owner (WSDOT) being liable for $317.5 million of change orders and extra administration costs.

$200 million of expected toll income yet to be approved by Legislature

However, even if this worst case scenario were to play out, the independent three-person Expert Review Panel (ERP) which reports annually to the Governor and the Washington State Legislature on project progress, “remains confident” that no more State or local funds will be required, as things currently stand, to complete the project. These calculations, however, include $200 million of anticipated toll revenue raised by the completed project although the level at which this will be charged is yet to be agreed by the State Legislature.

Speaking to TunnelTalk from Seattle, ERP chairperson Patricia Galloway said the Cost Estimation Validation Process (CEVP) that WSDOT employed when it was preparing the design-build tunneling contract was proof of the owner’s “foresight” in managing project risks. Galloway explained that as part of the CEVP process WSDOT hired an advisory team of international tunneling experts to make cost projections and estimates based on risks associated with operating a “one of its kind TBM.” These recommendations formed the basis of an incentive versus risk contingency contract payment structure with the tunnel contractor, STP (the joint venture of Dragados and Tutor Perini), that was subsequently incorporated into the design-build contract by WSDOT’s California-based expert legal firm.

“The potential funding sources [to cover the extra costs that have been incurred by STP] are currently higher than the worst case scenario costs to date,” explained Galloway, “and that is because of what we believe was the foresight of WSDOT to prepare a contract and a program budget – for which the design-build tunnel contract is only one part – to make all [the project elements] work together for completion of the entire program.”

However the ERP, in its latest April 2015 report, recognizes that there are “important challenges” presented by the current and ongoing problems associated with the $1.1 billion tunnel construction contract “that may affect budget and schedule.”

Fig 1. Contingencies and under-spends cover increased tunnel cost

The SR99 tunnel program represents 35% of the overall SR99 Viaduct Replacement Project that also includes the demolition of the viaduct and restoration of the Seattle waterfront; construction and reconfiguration of the highways to service the north and south portals; and the decommissioning of the city’s Battery Street road tunnel.

To counterbalance the potential liability associated with increased tunnel construction costs, schedule overruns beyond the contract delivery date of January 16, 2016, and costs associated with repairs to the 17.5m diameter Hitachi Zosen EPBM, the ERP notes that there are currently up to $329.6 million of funds that could be realised to cover the potential deficit as it stands at present (Fig 1). These relate to:

• under-spends and unused contingencies in other parts of the overall project to an amount of some $59.2 million;
• utilization of the £65 million of incentive-based contingency funds built into the design-build tunnel contract with STP;
• $50 million of liquidated damages that relate to penalties of up to $50,000/day that will be levied against STP for late completion beyond the substantial contract completion date of 17 January 2016 (rising to $100,00/day after November 9, 2016), and;
• the assumption of a successful maximum claim of $85 million being made against the TBM insurance policy.

The ERP’s latest financial projections are based on data made available by all the project’s stakeholders and assume that no more problems emerge once the TBM is restarted in August (2015). All potential Differing Site Conditions (DSC) contingencies and non-tunnel under-spends are accounted for in its calculations, and there now remains only $20 million of contingency in the Deformation Fund to cover possible extra costs associated with settlements and damage caused by TBM excavation operations under Downtown Seattle after the machine has passed beyond its final Safe Haven 3 at 1,500ft (457m) into the TBM tunnel drive.

TBM Bertha will head under Downtown after leaving Safe Haven 3

“Barring no other major problems with the TBM and its operation, and knowing that the hardest part of the tunnelling will have been completed by the time STP hits Safe Haven 3 [at 1,500ft], and that there is the availability to the program of the £20 million Deformation Fund that has not been included in our calculations, once the drive goes under the city, and barring something completely unforeseeable, then there should be sufficient funds available to complete the program to the $3.1 billion budget” said Galloway.

The ERP notes, however, that the $317.5 million figure of potential extra liabilities relating to STP’s accumulated claims for extra costs that it has so far incurred is a “worst case scenario”, adding that “the ERP’s experience is that awards of contractors’ claims is often substantially less than the sums requested by them.” If STP fails to recover these substantial extra costs from WSDOT – either through mutual agreement or following intervention by the DRB, or via possible future legal challenges in court – it is (so far) looking at a potential cost addition of 26.5% above its contract price of £1.1 billion, not including any successful claim made against the maximum $85 million TBM insurance policy.

To date STP has submitted, or is due to submit, $292.5 million of change order requests, which it is entitled to do under the terms of the design-build contract. This includes the largest single claim to date, known as PCO (Potential Change Order) 250, which relates to excavation of the recovery shaft and damage to the TBM that STP claims was caused by an old and unmapped 8in diameter steel well casing. That claim has been the subject of a mass of correspondence since it was lodged in December 2013, shortly after the TBM was stopped. WSDOT and STP have failed to reach agreement on the issue, and a Dispute Review Panel is now due to convene shortly to hear evidence from both parties. However, under the terms of the contract between STP and WSDOT the panel’s recommendations are not binding upon either party.

Three main elements emerge from the latest ERP report:

• the disputes review process is not working “due to both parties’ reluctance to acknowledge the decisions made in the process” (p21 of the official report attached)
• the contingency and project risk provisions built into the design-build contract are working well to minimize project financial risk and to protect the State’s liability
• there exists “a tendency [for owner and contractor] to blame rather than to work together to solve problems” (p21 of the report)

TBM downtime has enabled work on internal tunnel structures

Galloway told TunnelTalk that a significant amount of work had been carried out by STP towards completing other elements of the tunnel contract that had originally been scheduled to take place following completion of the TBM excavation drive. These include works at the north and south portals, which are now substantially complete, and internal structures inside the tunnel behind the TBM. “The fact that STP has been able to advance a lot of that work and take advantage of the TBM downtime has enabled it to mitigate a significant portion of the delay.” Galloway also pointed out that talk of a two-year delay was “a bit of a misnomer” because while STP’s project completion date assumed completion with no risks being realized by the end of 2015, WSDOT’s less demanding schedule incorporated an extra year’s worth of project risk to November 2016.

“Through the Cost Estimating Validation Process (CEVP), the WSDOT contract contemplated that there might be issues, since this was to be a first of its kind machine, and that there was the potential for issues with the TBM,” explained Galloway. “That is why the insurance was set up in such a way so as to deal with some of the issues that have, since, occurred; a claim has been made and the insurance investigators are out on site doing their investigation work.”

SR99 southern viaduct demolition (2011) and replacement highway connections completed a year ahead of schedule

“The next round of excavation to Safe Haven 3 [about 400ft ahead once the repaired TBM restarts] will be important in terms of seeing how the machine operates after the repairs, but the good news is that STP is meeting its repair schedule.” Once an expert analysis of the advance rate being achieved by the newly reinforced and repaired machine during its short drive into Safe Haven 3 is complete, and following a final inspection of the TBM prior to driving under Downtown, STP is expected to announce a revised substantial completion date. WSDOT’s reduction by £8 million of the maximum $58 million liquidated damages that it can hold STP liable for (to cover schedule overrun penalties) implies a current estimate of an extra 160 days at $50,000/day – some time in June-July 2017.

This analysis, however, presupposes no further problems being encountered since most of the sources for offsetting income and contingency have now been accounted for. In addition, although liability for the extra costs might not fall upon WSDOT (and ultimately the taxpayers of Seattle) if the owner can successfully fend off all, most, or some of the change order claims, the contractor could be facing huge additional costs over and above its £1.1 billion contract price.

Next week TunnelTalk will report on the issues surrounding the major change order PCO250 – which relates to the TBM obstruction – based on a mountain of project correspondence between WSDOT and STP that has been released to us under the USA Freedom of Information legislation.