Changes add to high-speed rail construction costs in Fresno region. Here’s how much more
Increasing costs for construction of 119 miles of a high-speed rail route through Fresno and the central San Joaquin Valley have pushed allowances for changes to “near exhaustion,” the project’s chief financial officer said Thursday.
The prevalence of change orders to the California High-Speed Rail Authority’s construction contracts, as well as rising inflation over the past two years, have drained what once was a budget contingency of about $4 billion for Valley construction at the start of work in 2013 to less than $275 million as of January, with an expectation for that to shrink further to less than $160 million by April.
The authority’s board of directors, meeting Thursday in Sacramento, voted 7-0 to increase the authorized budget for three Valley construction segments from the December 2021 amount of $17.9 billion to just over $20 billion – an increase of about $2 billion to replenish the contingency.
That’s expected to be enough, authority CEO Brian Kelly said, to complete the current scope of construction contracts in the Valley over the next two to three years.
The contingency represents a cushion in the construction budget to absorb the potential risk of rising costs. For the construction segments now under way in the Valley – three separate contracts that span from north of Madera to Shafter in Kern County – costs have been affected by change orders related to the evolving scope of the project.
Those factors include inflation and rising supply costs, design changes that add new structures or tweak the route, or delays in securing the right-of-way property needed for construction, and added costs for relocating utilities such as gas, electric and communications lines as well as canals and irrigation ditches.
“Our existing contingencies are near exhaustion” for Valley construction, said Brian Annis, the rail authority’s chief financial officer, in the agency board’s meeting. “The high inflation environment has affected projects internationally and in California.”
Payments to contractors to cover change orders have been a constant headache for the rail authority since the first construction contract was awarded in the summer of 2013, prompted by a headlong rush to meet deadlines imposed by the Federal Railroad Administration for about $3 billion in American Recovery and Reinvestment Act economic stimulus act grants.
What’s behind the change orders?
When California accepted its first ARRA grants from the Obama administration in 2011 and 2012, among the key conditions were that the money be spent for construction of the rail route in the central San Joaquin Valley and that the funds be exhausted by September 2017.
“In that period of time, there was no time for delay,” said rail authority board chairman Tom Richards, a Fresno real estate developer.
Rather than forfeit the grants, leaders of the California rail authority acknowledged that they pushed to award construction contracts before most of the pre-construction work typical of major infrastructure projects – including substantial design work, purchasing land for the railroad right of way, and identifying and relocating hundreds of utilities – was not even started before the construction contracts were awarded.
In effect, the project was working in an out-of-sequence manner from the start, Kelly said. Because the agency awarded contracts so early in the process, and then had to adjust its plans as time passes or conditions change, “everything we do requires a change order,” Kelly told the board.
Since 2015, at least 1,161 change orders have been submitted to or processed by the rail authority for its Valley construction contractors amounting to almost $3.9 billion in added costs beyond the original contract amounts. Those change orders include:
Almost $2.1 billion for contractor Tutor Perini/Zachry/Parsons in Construction Package 1, a 32-mile stretch of the route from Avenue 19 in Madera County to American Avenue at the southern edge of Fresno. The original bid submitted by TPZP in 2013 was for about $985 million.
More then $1.5 billion for contractor Dragados/Flatiron Joint Venture in Construction Package 2-3, which spans about 65 miles from American Avenue to the Tulare-Kern county line. The Dragados/Flatiron team’s original 2014 bid for the contract was about $1.23 billion.
About $275.6 million for contractor California Rail Builders in Construction Package 4, which covers about 22 miles from the Tulare-Kern line to Poplar Avenue near Shafter. The original 2015 bid from the construction consortium came in at $347.5 million, but the contract awarded in early 2016 included another $107 million to cover the cost of relocating or protecting utilities owned by Pacific Gas & Electric Co., AT&T and Level 3 Communications.
Learning from past mistakes
Each of the three construction contracts was awarded on what’s called a “design-build” basis, meaning that the contractor is responsible for designing and building their segment of the route. It’s a departure from many other transportation and infrastructure projects that employ a “design-bid-build” process, in which the owner of the infrastructure fully designs the project, which is then put out to bid and a contractor selected to build what is already designed.
“The idea was to transfer some of the liabiity (and risk for cost overruns) from the government to the private sector (contractors),” Richards said Thursday.
The proliferation of change orders, however, has left a bad taste in the mouth of Richards and other board members. With costs for each of the three construction segments soaring well beyond the original bids and contracts, Richards said, “what we’ve proven is that it doesn’t work.”
“I can only speak for myself, but I think we’d be hard-pressed to move forward with design-build in the future,” Richards added.
Over the past two years, Kelly said, project design and construction has progressed to a point where the agency and its contractors have a more thorough confidence in the final scope of the work – and potentially less likelihood of more major change orders.
“Change orders are here, and they will be here until the work is done,” Kelly told board members. “That’s the lesson from the (first) 119 miles, and we will not make those mistakes again.”
Money for construction in the Valley is coming from a combination of sources: the original 2011 and 2012 federal stimulus and railroad grants from the Federal Railroad Administration; cap and trade funds raised for California’s greenhouse gas reduction program through auctions selling pollution credits to companies; and Proposition 1A, a $9.9 billion high-speed rail bond measure approved by California voters in 2008.
The Valley segments and extensions into downtown Merced and downtown Bakersfield are planned to be the backbone of what is ultimately envisioned as a statewide system with electric-powered trains carrying passengers between San Francisco and Los Angeles, by way of the San Joaquin Valley, at speeds of up to 220 mph.