High-speed rail agency says construction costs under scrutiny, control

The threat of massive cost overruns has been a key to arguments by critics who question whether the California High-Speed Rail Authority can deliver a system that connects Los Angeles and San Francisco for “only” $68 billion.

Big infrastructure projects, after all, have a history of costing a lot more than expected. Replacing the Bay Bridge between Oakland and San Francisco ran a reported $5 billion over budget. The “Big Dig,” a Boston highway tunnel, ran about $12 billion over budget. And cost estimates for California’s proposed bullet-train system were a roller-coaster ride of their own even before construction began last year: from about $43 billion in 2010, to an eye-popping recalibration of nearly $100 billion in late 2011, followed in 2012 by the now-current estimate of about $68 billion.

For the first chunk of construction on California’s ambitious high-speed train program, a 29-mile section between the south end of Fresno and the northeastern edge of Madera, the authority established a contingency allowance of about $160 million for unforeseen costs over the awarded contract of about $1 billion to design and build the segment.

Through late January, about $14.1 million in change orders submitted by the contractor have been approved by the agency – and that includes some $5.3 million already included in the budget for dealing with asbestos and other hazardous materials along the route.

Leaders with the rail authority assert that they’re doing everything they can to keep a lid on costs, and that they’re confident in their ability to minimize the effect of change orders on the project’s budget and schedule. They point out that almost $11 billion is embedded in the statewide project budget as a contingency allowance.

“On any project, and certainly one of this size, we’re going to have hundreds, if not thousands, of change orders over the course of the project,” Jeff Morales, the rail authority’s CEO, said in an interview with The Bee. “That’s anticipated, and it’s part of the process.”

“Some change orders will have a cost attached to them,” Morales added. “But some will be cost-neutral, and others will have a cost savings.”

A change order is any modification to the project’s original contract, including design or engineering changes that potentially reduce the overall price of the work. “If it’s not spelled out in the contract, we have to do a change order,” he said.

As crews pick up the pace of building a new bridge over the Fresno River and Highway 145 in Madera, demolishing the Tuolumne Street bridge in downtown Fresno, and preparing to dig a trench under Highway 180 and build an elevated viaduct over Highway 99, the prospect for more change orders grows. The authority’s contingency allowance for CP-1 is higher than for most of the state’s public works projects.

Morales – a former director of the California Department of Transportation – said the $160 million contingency allowance for the Madera-Fresno contract is about 16 percent, compared to most Caltrans projects that have a 5 percent contingency built into the budget. The higher allowance was set after the agency undertook what it believes is an unprecedented look at all of the potential project risks, and assigned probabilities and costs to those factors.

“If we look at the approved change-order log, I would say all of those change orders were really things contemplated in the original risk assessment,” said John Tapping, the authority’s risk-management director.

To date, none of the approved change orders submitted by Tutor Perini/Zachry/Parsons, the prime contractor for the Madera-Fresno construction, have any anticipated effect on the project’s schedule for completion sometime in 2018, said Scott Jarvis, the authority’s chief engineer.

Others, however, have been rejected by the authority. “For instance, on a viaduct, we wanted the contractor to design them to accommodate the future installation of (sound-buffering) walls,” Morales said. “The contractor said that wasn’t specified in the contract and submitted it as a change order.” The dispute went to a three-member arbitration panel – a provision of the contract – which ultimately ruled in the state’s favor.

The second of three contracts for construction in the Valley, from south of Fresno to the Tulare-Kern county line, had a low bid of about $1.25 billion. The state has set its contingency budget for that segment at $261.2 million.

No contingency allowance has been set yet for the third contract, awarded last month to the low bid of about $347 million for 22 miles from the Tulare-Kern line to Shafter.

Constant cost threat

The prospect of problems blowing up the high-speed rail program’s budget is not one that legislators in Sacramento are taking lightly – especially for an agency that still has only a fraction of the money it needs to develop an operational portion of the system.

At an Assembly budget subcommittee hearing last month, Assembly Member Jim Patterson, R-Fresno, homed in on recent reports in the Los Angeles Times in which engineers questioned the state’s ability to bore tunnels through the San Gabriel Mountains between Palmdale and the San Fernando Valley without enormous cost increases and schedule delays.

“This is going to blow up your time sequence and blow up the budget; that’s where I think the huge concern with respect to time and to budget are being made,” Patterson told rail authority board chairman Dan Richard. “Do you still maintain that it can come in on time and at $68 billion overall?”

“There are a range of uncertainties here, so I can’t look you in the eye and say it will be $68 billion,” Richard replied. “When you see our new business plan, the number is going to be less than $68 billion – today, right now, a snapshot of what we think it’s going to be.”

The new business plan, required of the authority every two years, is expected to be released for public comments later this month before it is submitted to the Legislature by May 1.

“I’m more confident about the dollars than I am about the time,” he added. “It may take us a little longer to do this than we said.” The 2014 version of the business plan anticipated that a 300-mile “initial operating segment” carrying passengers between Merced and the San Fernando Valley would be up and running by 2022, with a full system spanning the 520 miles between Los Angeles and San Francisco in 2028.

Part of Richard’s confidence over cost comes from the agency’s experience with bids for construction contracts in the San Joaquin Valley. The winning bids for the first three contracts, covering about 116 miles from Madera to northwest of Bakersfield, collectively added up to about $2.6 billion, compared to engineers’ estimates that ranged from $3.1 billion to $4.3 billion.

The rail agency has about $3 billion in federal stimulus and transportation funds, which are to be matched by about $3 billion in money from Proposition 1A, a high-speed rail bond measure that was approved by California voters in 2008.

The agency also is receiving about $500 million a year from the state’s greenhouse gas-reduction program through at least 2020. That still leaves the agency significantly short of what it needs to build an operational segment from the San Joaquin Valley to either the San Fernando Valley or San Jose.

That’s a big reason the authority says it’s constantly monitoring cost risks. “There are going to be times when we wake up and say, ‘Oh, my gosh, this cost looks like it’s increasing over here,’ ” Richard said. “At those moments we are not going to go off in a corner and roll up in a ball. Our job is to roll up our sleeves and see how we can find offsetting cost reductions.”

Money is a chief concern for the rail agency, but so is the schedule. The rail authority executed the contract for the Madera-Fresno construction in mid-2013, but while some building demolition and utility relocation work began in 2014, major construction didn’t begin until last summer. And, authority leaders told legislators, time is money.

Within the $68 billion budget, “almost $13 million of that is time, it’s inflation,” Morales said at the subcommittee hearing. “Like any big program, the faster we get this built, the less it will cost. The longer it takes, the more it will cost.”

This story was originally published February 6, 2016 at 10:05 AM with the headline "High-speed rail agency says construction costs under scrutiny, control."