A Critical Assessment of Material Price Adjustment Clauses for Transportation Design–Build Projects

Abstract

The transportation construction industry is experiencing a substantial risk of material price volatility impacting owners and contractors in successful delivery of projects on budget and on time. The risk is significant for design-build (DB) transportation projects as the entire risks for design and construction services are transferred to design-build teams. Unlike traditional design-bid-build (DBB) projects, the detailed quantities are not specified in DB transportation contracts that are typically fixed-priced contracts. Also, DB transportation projects are often large and multi-year, exacerbating the risk of material price uncertainty over the long project duration. Price adjustment clauses (PACs) have been introduced as a risk allocation mechanism to stabilize the bidding environment for transportation projects. While PACs have been employed in DBB projects for some time, the use of PACs for DB transportation projects is still at an early stage. Therefore, there is a need to better understand how various transportation agencies have incorporated the PAC into their DB transportation projects. The major objective of this research is to examine the current utilization of the PAC among state DOTs in their DB transportation projects. This study employs a combination of survey questionnaires and semistructured interviews involving subject matter experts from state departments of transportation (state DOTs) engaged in alternative project delivery to highlight the widespread adoption of PACs for four primary material line items: fuel, steel, asphalt, and portland cement. The main findings of this study show that while the PACs are adopted at varying levels across different states, they are not seen as critical deal-breakers, as their absence does not significantly deter industry participation in transportation DB projects. Rather, they are generally viewed as more beneficial in multiyear and large DB transportation projects, where price fluctuations and cost escalation are more likely. This study contributes to the body of knowledge on transportation DB projects by providing valuable insights into the thresholds and mechanisms used for price adjustments within PACs, showcasing how they enhance risk allocation. Additionally, this study recognizes the implications of recent events, such as increases in inflation and interest rates, on the consideration of PAC implementation and expansion. Finally, from a practical standpoint, these findings offer state DOTs invaluable guidance to enhance procurement strategies and contract provisions, and increase competition in the infrastructure market, ensuring successful project execution and financial feasibility in transportation DB projects.