The Evaluation of Recent Turnkey Procurement Experiences: Houston's Fixed-Guideway Transit Project

Excerpts from a report prepared for the Federal Transit Administration

(Note: The entire document is available on the Web at the FTA on-line library)

July, 1994


This Document was prepared for the Office of Technical Assistance and Safety of the Federal Transit Administration (FTA). The study was conducted by the Transportation Consulting Division of Booz-Allen & Hamilton Inc.

Guidance was provided through the FTA's Office of Technical Assistance and Safety. The contents of this report are based on the project staff research and do not necessarily reflect the official views or policies of the U.S. Department of Transportation or the Federal Transit Administration.

This report was authored by Donald C. Schneck and Richard S. Laver of Booz-Allen & Hamilton Inc. Valuable insight and direction was contributed by Mr.Edward Thomas and Mr. Salvatore Caruso of the FTA Office of Technical Assistance and Safety. The authors and FTA would like to express their appreciation to members of the staff of the Metropolitan Transit Authority of Harris County, the UTDC Systems Division of the Bombardier Corporation, and AEG Westinghouse Transportation Systems Inc. who participated in this study. Their interest and support were vital to the successful completion of this entire project.

The Evaluation of Recent Turnkey Procurement Experiences: The Houston Fixed Guideway Project presents the results from an examination of turnkey procurement of major transit capital projects within the context of the Houston experience with its proposed Houston Fixed Guideway Project. Though eventually canceled for local political reasons, the experience gained in the Houston Fixed Guideway Project development process can be of benefit to others interested in conducting a similar process.




The Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991

included Section 3019 that required the Federal Transit Administration

(FTA) to develop a program to demonstrate the application of turnkey

procurement contracting practices in the development of major transit

capital projects. Turnkey procurement involves the consolidation of several

contracts and separate functional efforts into a single design/build or

design/build/operate project. The FTA has implemented the requirements of

ISTEA through the Turnkey Demonstration Program.

• The Turnkey Demonstration Program was initiated with the selection of

five major transit projects for the evaluation of cost, schedule and

technology improvements.

• The Turnkey Demonstration Program also includes several ongoing technical

assistance and outreach efforts, one aspect of which is the examination of

recent experiences with the turnkey process for proposed transit projects,

such as the Houston Fixed Guideway Project.

This report presents the results from the examination of turnkey

procurement of major transit capital projects within the context of the

Houston experience with its proposed Houston Fixed Guideway Project. Though

eventually canceled for local political reasons, the Houston Fixed Guideway

Project provides a good example for the five projects in the current

demonstration program. This documentation of "lessons learned" from the

development of a major transit project using the turnkey procurement

approach is intended to benefit the five projects in the demonstration

program plus any other projects to follow.



In August 1992, the Federal Transit Administration (FTA) initiated the

Turnkey Demonstration Program with a formal request for project proposals

and the initiation of technical assistance and outreach efforts. This

program is a multi-year effort designed to evaluate the effectiveness of

the turnkey process in reducing the costs of major capital transit

investments, in decreasing the length of project development schedules and

in encouraging the use of new technologies. Program results may also be

used to describe other achievable benefits of turnkey procurement, document

the many implementation variations and will also be used to modify FTA

project development processes and guidelines to further enhance the

potential effectiveness of the turnkey method. Among the many initiatives

included in the Turnkey Demonstration Program is this evaluation of Houston

METRO's experiences with the turnkey process in attempting to implement the

fixed guideway component of Houston's Phase 2 Mobility Plan, later known as

the Houston Fixed Guideway Project.

The fixed guideway component of the Phase 2 Mobility Plan -- designed to

improve transit connections between Houston's downtown core, the

Uptown-Galleria area and the city's western suburbs -- was first initiated

in 1990. Turnkey was selected as the preferred procurement method for the

project in accordance with a METRO Board resolution requiring private

sector involvement in the development of fixed guideway systems.

Unfortunately, the selected Fixed Guideway Project suffered a loss of local

political support during Houston's 1991 mayoral election and was

subsequently terminated by METRO's Board of Directors in January 1992,

shortly before the turnkey contract for preliminary engineering was to




Despite the Fixed Guideway Project's brief history, it remains a valuable

source of information regarding selection of the turnkey procurement

method, its impact on technology selection, selection of the turnkey

contractor, contract design and other aspects of fixed guideway

procurement. These lessons learned and the context of the overall turnkey

procurement approach are considered the intended purpose and value of this

report. Conclusions to this effort include those in general for turnkey

projects and those more specific to the Houston approach. Based on these

lessons, the following functional aspects of developing a turnkey project

were identified as the key success factors.

• There should be compelling reasons for selecting the turnkey method that

should include cost, schedule and/or technology improvements, among others,

since the process differs in many ways from the traditional contracting


• The approach selecting the specifics of the turnkey process should

consider the strengths and weaknesses of the local lead agency, their prior

major project development experience, the degree of local political and

public support for the project and the expected level of local political

involvement in the project development process.

• Individual components of the turnkey procurement approach are flexible

and can be defined in ways that mold to the local conditions rather than

the turnkey procurement process leading the definition, particularly

- Contracts

- Project management systems and

- The roles and responsibilities of project participants.

• Selection of the turnkey contractor should not proceed until the project

has become well established in terms of political support, financial

support and project design definition. In particular:

- Turnkey contractors will be reluctant to develop and submit expensive

project proposals (or to commit to delivering the project if selected) in

the absence of solid political and funding support

- Postponing contractor selection until after the locally preferred

alternative has been chosen and preferably until after completion of

preliminary engineering will allow proposers to submit firmer cost

estimates with smaller contingency components

- Given that many cost benefits from use of the turnkey process relate to a

general shortening of the development cycle, it is crucial that the process

not be held up by financial or political impediments once the project is


• The existence of uncertainty surrounding public support, project funding

and project definition can have significant negative impacts on project

outcomes, particularly on turnkey projects.

- Turnkey projects require contractors to make significant up front

commitments towards proposal development and preliminary contract

negotiations making them reluctant to develop proposals for projects which

lack obvious public and funding support. A lack of such commitment may

limit the number of proposals submitted thus restricting competition in the

bidding process. Furthermore, the general failure to complete a large

turnkey project in the US market (such as the Houston and Honolulu

projects) has only increased this reluctance and may have damaged the long

term viability of this procurement approach.

- The existence of uncertainty relating to project definition can lead to

increases in the cost of proposal preparation as well as motivating

proposers to add contingency factors to their contract bids to cover

unforeseen development costs.

- The existence of all three types of uncertainty during the public

scrutiny and decision making phase make fixed guideway projects easier

targets for their critics than projects that are more clearly defined. This

is an essential issue for turnkey projects of new transit systems --

conduct and maintain an extensive outreach program into the local public

and political environments before contracting for a turnkey projects.

• While joint development mechanisms can provide an effective source of

project funding, project sponsors should keep the following in mind when

considering inclusion of joint development opportunities in a turnkey


- Joint development opportunities do not directly contribute to the

effectiveness of the design-build process which is the turnkey method

- Developers typically demand a market-based return on their investments,

which is higher than that acceptable to government initiated development


- Traditional turnkey consortia are not real estate developers and

therefore must introduce a very different culture to the turnkey team

- Differing attitudes regarding acceptable risk and return can impede

formation of contractor consortia including both real estate developers and

traditional turnkey consortia members

- Only the public sector can implement the measures and grant the

concessions needed to capture the value represented by these opportunities.

Based on these findings, it is preferable if joint development

opportunities be excluded from the turnkey contract.

• In general, it is not necessary to require surety bonding equal to 100

percent of the value of the project. Rather, the project should only be

bonded to meet the expected cost to recover should the turnkey contractor

run into difficulties. This amount will be considerably less than 100

percent of the project value.

This review of the Houston Fixed Guideway Project presents the issues

behind these success factors in terms of their impact on the turnkey

procurement process and how this experience may be useful to the current

turnkey projects in both the demonstration program and those separately

using the turnkey method.

The major conclusions specific to the Houston Fixed Guideway Project and

emanating from this review are highlighted below. Findings and background

in support of these conclusions are presented in the detail of the report.

• The Houston Fixed Guideway Project was not a complete turnkey procurement

project. This statement is based on the following findings.

- Texas statute prevented METRO from awarding fixed facilities construction

contracts (for such project components as guideway, stations and

maintenance facilities) using any contracting method other than a low bid.

Furthermore, selection of the turnkey contractor was conducted too early in

the project development process to reach a firm low bid for the fixed

facilities. Hence, these major civil project components were separated from

the turnkey procurement process through a secondary contracting mechanism.

- METRO was to exert a greater degree of project control and oversight than

is generally the case with the turnkey approach. In so doing, the agency

risked re-acquiring many of the project risks which the turnkey method

would otherwise shift to the turnkey contractor.

- The use of a design consultant, separate from the turnkey team, to

conduct the final design of fixed facilities from 30 percent to 100 percent

is very unusual for a turnkey procurement approach.

These characteristics help to define the Houston Fixed Guideway Project as

a modified turnkey procurement process that leaned very closely toward a

more conventional contracting approach.

• The modified turnkey method was selected in accordance with a METRO Board

Resolution encouraging private sector involvement in the development of

fixed guideway projects. METRO also hoped that use of the turnkey approach

would help fast-track the project development process. In particular, METRO

attempted to accelerate project development by conducting contractor

selection in parallel with the project's alternatives analysis. While this

latter process of evaluating turnkey proposals for fixed guideway

development prior to selection of the locally preferred alternative (LPA)

was supported by the FTA, it did create problems with development of the

environmental impact statement and forced contractors to develop proposals

using less clear project definition than would have been the case if

contractor selection had been postponed.

• Selection of the turnkey process was not motivated by an effort to

attract project development expertise. Given METRO's considerable

experience with project development and its access to strong technical

resources, the agency's decision to utilize the turnkey process was not

motivated by a need to obtain access to project management and technical

ability not available "in-house". Similarly, the possible selection of a

proprietary (i.e. fully automated guideway) technology for the project was

only a secondary consideration in selecting the turnkey process -- use of

the turnkey method is not a prerequisite to projects using proprietary

technologies. Finally, the turnkey approach was selected before the

selection of the proprietary technology.

• The Full Funding Grant Agreement (FFGA) for Houston's Turnkey Project was

to be awarded prior to the start of final design and shortly after issue of

the Record of Decision (ROD). This sequence of events represents a

significant departure from the traditional FTA project approval process

where the ROD is usually issued prior to final design and the FFGA is

issued towards the completion of final design. The modified sequence for

the Houston procurement facilitated use of a combined

final-design/construction phase (i.e., Phase II) where the final design and

construction activities would overlap in time leading to a potentially

significant reduction in the length of the project development cycle.

Furthermore, turnkey contractors may have been reticent to enter a combined

final-design/construction phase if they had not seen evidence of committed

funding to cover the construction portion of that work. Hence, it was

important to issue the FFGA before the start of a combined

final-design/construction phase.



• In general, the sponsoring agency should do all in its power to eliminate

as much political, financial, and design uncertainty as possible from the

development process prior to selecting the turnkey contractor. Hence

agencies should consider the following:

- Postpone initiation of the contractor selection process until after the

locally preferred alternative has been selected, and preferably until after

the completion of preliminary engineering and the final environmental

impact statement (FEIS).

- If the turnkey contractor is to be selected prior to completion of

preliminary engineering, the agency should complete those aspects of

preliminary engineering and FEIS that are not included in the turnkey

contract prior to or parallel with the selection of the turnkey contractor

(e.g., establish alignment location, initiate right-of-way acquisition,

begin aspects of the environmental review, and initiate utility


- Ensure that full political and public support has been obtained for the

selected technology prior to initiation of the turnkey contractor selection


- Ensure that local funding support has been obtained for the selected

technology prior to initiation of the turnkey contractor selection process.

• Sponsoring agencies are faced with a variety of options and variations on

the basic turnkey theme when designing their turnkey contract. Based on the

experiences of Houston and other North American turnkey projects agencies

may wish to consider the following:

- Consider the separation of the project into two separate turnkey

contracts--one for the fixed facilities design and construction and one for

the systems design and procurement. This approach can focus the development

of turnkey consortia into their specialties and thereby limit the forced

teaming of entities with inherently different conceptions about acceptable

project risks and their cost reimbursement requirements.

- While certain state laws (e.g. Texas, California, New York, and Hawaii)

frequently stipulate that construction of fixed facilities must be let on a

low bid basis, Federal legislation stipulates that design contracts be

awarded on technical qualifications leading to natural conflict with

respect to turnkey contracts (where the design and construction

responsibilities are awarded to the same contractor). This problem can be

avoided either by requesting a legislative modification by separating fixed

facilities from the turnkey contract. However, the separation of

construction efforts from the turnkey contract may neutralize many of the

inherent benefits derived from combining design/build activities within a

turnkey contract.

- Consider inclusion of fixed facilities construction management within the

turnkey contract, particularly where construction contracts for fixed

facilities are awarded outside the turnkey contract. This approach may

improve quality control by assigning responsibility to the agent having

greatest incentive to effect an optimal outcome; however, this then

requires a local agency-based quality assurance program to sample-test the

effectiveness of the quality control process.

- Maintain systems integration responsibilities within the overall turnkey

team or directly within the systems turnkey contractor's realm. No other

entity has better incentive or expertise with which to ensure an optimal


• The sponsoring agency should continue to maintain a decreased, but still

involved level of project management oversight. Given the large capital

investment represented by a fixed guideway project and the more unique

requirement to specify the project at an earlier stage than with

traditional procurements, the sponsoring agency has a heightened

responsibility to maintain visibility over continuing progress, respond

quickly to unexpected decision points and thereby, protect the public

interest and their own. However, to avoid lengthy delays in the project

development process (delays which can significantly reduce the time saving

potential of the turnkey process) the sponsoring agency should have a

limited period of time in which to review and respond to periodic project

review documents submitted by the contractor before the contractor has the

right to proceed with the project development plans included in those

documents. This response period should be explicitly stated in the


• The Federal Transit Administration's administrative guideline for a 100%

performance bond on a project's construction component should be modified

to a level which better reflects both the maximum expected cost to recover

from a contractor failure and the surety industry's capacity to bond large

projects. An optional approach could be to require performance bonding

amounts for turnkey contracts that are related to the cost of each phase of

project development. An overall project performance bond amount could be

funded at a lesser proportion of project cost. Individual performance bonds

could then be escrowed against that amount as costs are incurred for each

systems element and individual stages of the civil facilities. As delivery

is accepted by the turnkey consortia or the agency, the escrowed amounts

could then be reapplied to other upcoming elements. This approach would

fulfill the full intentions of the 100% bonding requirements without

incurring the additional financing costs of carrying the full project cost


• The Federal Transit Administration's project development process should

be adapted to provide greater flexibility to the development of turnkey

projects and to facilitate accelerated project development . One key aspect

of the development process that should be considered for modification is

the scheduling of the FTA Record of Decision and the Full funding Grant

Agreement. In particular, the FTA should provide the sponsoring agency with

the Record of Decision and a Letter of No Prejudice for the full funding

grant amount prior to the initiation of final design (as was the case for

the Fixed Guideway Project). Moving these events ahead of final design

demonstrates the kind of strong financial support contractors will wish to

see before developing proposals or committing to contracts. Equally

important, this change facilitates the overlap of the design and

construction processes, a characteristic unique to the turnkey process and

one which offers potentially significant benefits in terms of accelerated

project development.