Construction Law Alert: “P3” is Way More than a New Buzzword - North Carolina's Approval of Public-Private Partnerships and Design-Build Procurement

by Nexsen Pruet, PLLC

August 23rd marks the one-year anniversary of House Bill 857 (“HB 857”) becoming law in North Carolina. Through the enactment of HB 857, the Tar Heel state opened its doors to what is commonly referred to across the country as “P3,” which is shorthand for public-private partnerships. Twelve months is not enough time to determine the long-term impacts of this new legislation, but it does offer an opportunity to explore what the growing P3 buzz is all about.

HB 857, which is entitled “An Act Authorizing Public Contracts to Utilize the Design-Build Method or Public-Private Partnership Construction Contracts,” drastically expanded the available project delivery methods and financing options for public entities in North Carolina. This should lead to higher-quality construction projects and cost savings for public entities. As its name suggests, HB 857 permits the state, counties, municipalities and other public bodies within the State of North Carolina to award construction contracts for public projects using design-build and design-build bridging project delivery methods and public-private partnership financing.

Prior to HB 857, public bodies in North Carolina were limited to design-bid-build project delivery systems using single-prime bidding, multi-prime bidding, dual bidding and construction management at risk contracts. Design-build procurement was considered an alternative contract method that required approval from the North Carolina legislature or the State Building Commission. This resulted in time-consuming local legislative bills by various counties and municipalities for specific construction projects within their jurisdictions. With the passage of HB 857, public entities no longer need to seek specific legislative or administrative approval to procure public construction projects through these alternative delivery systems, but they must meet certain additional requirements established by HB 857.

Public-Private Partnerships

A public-private partnership is a financing mechanism that allows public entities to deliver capital improvements that they could not otherwise afford without private involvement. HB 857 allows governmental entities to partner with private entities for acquiring, constructing, owning, leasing and operating capital improvement projects. However, the private developer is required to provide at least fifty percent (50%) of the financing for the total cost necessary to deliver the capital improvement.

Before entering into a public-private partnership, a governmental entity must determine in writing that it has a critical need for the capital improvement, determine its programming requirements for the project and solicit private developers to submit qualifications. The governmental entity and the private developer must enter into a development contract that specifically identifies the property interests, development responsibilities and financing responsibilities of each participant, along with their responsibilities to put forth a good-faith effort to recruit and select minority-owned, women-owned and small business entities for the project.

Design-Build Contracts

Under traditional pre-HB 857 project delivery methods, the governmental entity was required to hire an architect or engineer to design the project, then provide public notice for contractors to bid the project based on that design, and then select the lowest responsive, responsible bidder from those bids to construct the project. Design-build allows the governmental entities to integrate those steps into one contract, such that one entity is responsible for both the design and construction of the project. This furthers collaboration among the design professional, contractor and owner during the entire process to ensure delivery of quality and cost-efficient building.

HB 857 allows the governmental entity to select the design-builder “on the basis of demonstrated competence and qualifications for the type of professional services required without regard to fee other than unit price information,” essentially the same selection criteria as is used for the selection of design professionals. The governmental entity must thereafter “negotiate a contract for those services at a fair and reasonable fee with the best qualified firm.” If the contract cannot be negotiated with the best qualified firm, the governmental entity may negotiate with the next best qualified firm. In order to facilitate this, the governmental entity must first establish the requirements for the project, including the project budget, schedule and criteria to be considered for selection, and issue a public notice of the request for qualifications from potential design-builders. After receiving design-build proposals, the governmental entity will evaluate the qualifications of the design-builders and rank the three (3) most qualified design-builders before negotiating a contract with them as discussed above.

Design-Build Bridging

Design-build bridging is a hybrid between design-bid-build and design-build project delivery systems. Given the extensive costs of preparing and submitting design-build proposals, the design-build bridging concept effectively allows smaller local design-builders to compete with larger national firms on construction projects where smaller design-builders otherwise would not have sufficient resources to prepare and submit proposals under the traditional design-build procurement method.

Under the design-build bridging scheme authorized by HB 857, a governmental entity first contracts with a design professional to create sufficient drawings and specifications for the project to allow design-builders to make responsive bid proposals. Specifically, the design profession will create thirty-five percent (35%) of the completed design documentation for the entire construction project. After the design professional completes the preliminary design documents, the governmental entity will issue public notice of the request for proposals from design-builders. The governmental entity will then evaluate the qualifications of each design-build proposal received in response to the notice and will group the top three proposals without ordinal ranking. Out of the top three qualified design-builders, the governmental entity will select the lowest responsive, responsible design-builder by taking into consideration the cumulative amount of fees, quality, performance and the time specified for performance of the contract. In essence, the design-build bridging concept includes elements of both traditional design-bid-build and design-build procurement.

Expect to See More of P3

As elected officials, private developers and capital resources learn more about North Carolina’s openness to public-private partnerships, you can expect to read and hear a lot more about P3 deals. The new law opened the door a year ago. Now, let’s see who walks through.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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