3.

Planning and Appraisal of Major Infrastructure

Projects
3.1. Scope
As mentioned in Chap. 1, many projects of a routine nature and which meet obvious needs are scheduled within the normal
budgeting process of a public works agency. Most major engineering projects, however, must undergo a comprehensive series
of studies and approvals before they are authorized and implemented. This occurs, for example, when a project is very large
and/or when it has interstate implications and must, therefore, be individually authorized and funded by acts of the U.S.
Congress. Another example is when a project in a developing country cannot be fully implemented with internal resources, and
technical and financial assistance must be sought from the World Bank or another international aid agency.

This chapter describes typical methodologies to determine the layout, capacity, and costs of a major project, and to carry out
the additional steps that are needed in order to plan and implement it. An important product of these studies may be a
feasibility report, which provides descriptions of the technical and other studies that have been made for a major project,
including estimates of investment and annual costs. A feasibility report may be used, together with other evaluations and
considerations, by the decision makers of a government agency or of a lending institution who must decide whether to support
the implementation of the project.

For the feasibility studies described in this chapter, it is assumed that the investigations of a primarily non-engineering nature
(i.e., the environmental and social impacts, the legal and institutional issues, and the involvement of stakeholders in a public
involvement program) are at sufficient levels of detail to satisfy the sponsoring government agency (and, in addition, an
international banking institution in the case of a developing country). Additional treatment of these subjects, if needed, may be
made in one or more separate reports. Thus, in the United States, a feasibility report could be followed or accompanied by a
separate Environmental Impact Statement, prepared according to strict legal requirements.

At the beginning of the twenty-first century, the planning pattern in the metropolitan New York area has tended increasingly
toward a two-step process, in which the feasibility of a major infrastructure project, individually or in a regional context, is first
studied with various levels of detail and then the full justification of the project is supported in a draft Environmental Impact
Statement. The first step in this process may be called a “major investment study,” or another name that is appropriate for its
scope.

The next eight sections of this chapter describe the main elements of the studies of a major infrastructure project. A section on
the “appraisal” process discusses the procedure that decision makers employ, in order to decide whether to approve a project
for implementation and arrange its financing. Some information is also provided on construction and professional services and
their associated cost. It is important to recognize that the planning approaches and details described in this chapter may have
to be modified for a specific project, sometimes in major respects, to accommodate the construction management and project
financing and implementation arrangements that apply.

3.2. Sequence of Studies for a Single Major Infrastructure

Project
The descriptions in this and the next sections are based in large part on personal experience with major water resources
projects (Goodman, 1984) but they also apply in most respects to many other types of large infrastructure projects. For these

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descriptions, it is assumed that the general location and purpose of a prospective project have already been determined by an
earlier screening process (such as those discussed in Chap. 4) or other means of designation.

A typical complete planning and implementation process involves a five-stage sequence of reports, documents, and actions for
the project, including: (1) a preliminary (or reconnaissance) report, (2) a feasibility report, (3) preparation of contract documents,
(4) activities during construction, and (5) operation.

3.3. First Stage: Preliminary (or Reconnaissance) Report

This stage consists of office studies, field studies, and the preparation of a report. This report should answer the following
questions:

Is a feasible project likely?

What are approximate estimates of capacity and cost?

What additional studies are needed to confirm feasibility?

The investigation begins with office studies, using available information contained in previous reports, maps, and data. Much of
this information may be available from federal, state, and local governmental agencies. Utilities, private firms, newspapers,
libraries, and other sources may also be contacted. Basic materials include maps and photographs (topographic maps, land
surveys, tax maps, transportation maps, aerial photographs); geologic and soils data; climatological data; stream flow and
ground water records; water quality and sediment measurements; information on environmental conditions; and population and
socio-economic data. Data and forecasts are also needed that are pertinent to the specific purpose of the project such as water
supply requirements or electric power demands, office floor areas for government agencies, traffic characteristics, and so on.

Office studies may be adequate to make initial determinations of the general arrangements of the project components, the
capacity of the project or the services it can provide, and its cost. Better estimates can be made by supplementing the office
studies by field reconnaissance and surveys. Field work is needed to confirm the office studies, to suggest changes in the
layouts and estimates, and to obtain detailed information concerning additional matters such as needed relocations,
particularly when the available maps are not recent. Topographic surveys, geological and soils investigations, and other field
measurements may be needed, but these should be kept to a minimum, consistent with the nature of the preliminary report. The
principal personnel involved in this work are normally engineers and geologists. The team may also include architects,
environmentalists, and specialists for the specific types of infrastructure facilities that are studied.

The engineers (or the interdisciplinary team of specialists) who participate inproject formulation define the location and
arrangement of project components, with sufficient details concerning their sizes and functions, so that realistic cost estimates
and other studies determining feasibility can be prepared. Project formulation begins in a rudimentary way in the office studies
and field reconnaissance work required for a preliminary report, is refined and elaborated for a feasibility report, and undergoes
additional changes and definitions of details in the preparation of the plans and specifications for the construction contracts.
This activity is further discussed in Sec. 3.8.

3.4. Second Stage: Feasibility Report

If the project sponsor determines that additional studies are warranted based on the preliminary report and other
considerations, a feasibility report may be authorized. The feasibility report should contain enough information to permit a
decision to be made on whether or not to implement the project. This means that the technical studies must be more detailed
than those required for the preliminary report, and must include financial, economic, and environmental analyses, and a plan for
project implementation. A comprehensive feasibility report should include the following:

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 Descriptions and analyses of the data

Confirmation of construction feasibility based on field and laboratory investigations, studies of project arrangements and
individual project features, and analysis of construction methods (sources of construction materials, access to the project
site, management of traffic patterns, diversion of water during construction, etc.)

Recommendations for arrangement of project works, preliminary plans, and other analyses to determine the principal
quantities of construction, a reliable cost estimate, and discussions of the design criteria

Construction schedule showing the timing and costs of project features

Financial analyses projecting the year-by-year costs, revenues, and subsidies

Economic analyses of the project, if appropriate (e.g., if the sponsor is a federal agency or a regional authority)

Plans for financing construction, and for managing the construction and operation

Institutional and legal requirements

Assessments of the environmental and social impacts of construction and operation, and other impact studies if required

Depending on the extent of the drawings and analyses needed to confirm construction feasibility and to make reliable
estimates of project cost, the work in this phase consists of designs in addition to planning studies. Many books, published
articles, and manuals of federal and other government agencies are available for guidance in the design work.

The feasibility report provides the basis for an examination bydecision makers in a government agency or in an international
financial institution, to determine whether a project should be implemented and/or financed. The level of engineering detail for
such a report is higher than for a preliminary report but lower than needed for the detailed design and preparation of drawings
and specifications included in the contract documents for construction.

Outlines of tasks are shown in Table 3.1 for planning an urban flood control project and for planning an arterial highway project,
which demonstrate commonalities and differences for the two types of projects. They also provide perspectives of the
complexity of typical projects in the water resources and transportation fields, respectively, and an indication of the different
professional specialties involved in the studies and preparation of a feasibility report. Some of the activities in the table overlap
(e.g., environmental studies will begin before the structures are finally selected). A side-by-side comparison of the tasks for the
two types of projects shows that the organization of feasibility reports is similar for a variety of public works projects.

Table 3.1 Scope of Studies for Feasibility Report-Sheet 1 of 2

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 Flood Control Project Arterial Highway Project

Management and coordination Management and coordination

Analysis of basic data—maps, aerial photos, geological data, Analysis of basic data—maps, aerial photos, geological data,
stream flow, etc. stream flow, etc.

Determination of needs for flood control Determination of needs for arterial highway

– delineation of area affected by floods – delineation of area to be served including existing highway
network and alternative routes for arterial highway
– determination of floodplain characteristics
– determination of service area characteristics
– forecast of future activities in affected area
– forecast of future activities in affected area
– estimates of existing and future flood damages
– origin and destination surveys for existing traffic and
Consideration of alternative ways of meeting needs estimates of traffic growth.

– upstream reservoir Consideration of alternative ways of meeting needs

– local protective works for urban area – western arterial route

– nonstructural measures – eastern arterial route
Studies for reservoir – improvements to existing highway network

– selection of site Studies of western arterial route

– selection of capacity – selection of route

– selection of type of dam and spillway – selection of capacity
– layout of structures – selection of X-section
– analysis of foundations of structures – location and layout of bridges, exits, service areas, etc.
– development of construction plan – analysis of foundations of structures
– cost estimates of structures – development of construction plan
– layout and cost estimates of access roads, bridges, – cost estimates of highway and ancillary works
communication facilities, construction camp, etc.
– layout and cost estimates of miscellaneous facilities for
– identification and estimates of requirements for lands, construction, operation, and maintenance
relocations, easements, etc.
– identification and estimates of requirements for lands,
– consideration of reservoir for multipurpose use with pertinent relocations, easements, etc.
analysis of layouts, capacities, costs, etc.
– consideration of opportunities for shopping malls and other
Studies for local protective works—levees, walls, river shaping and public and private developments
paving, interior pumping stations
Studies of eastern arterial route
Studies of nonstructural measures—land use controls, flood
warning systems, flood proofing, etc. Studies of improvements to existing highway system

Formulation of optimal combination of structural and nonstructural – widenings

components for flood control project
– reduction of excessive curves
Financial analyses
– reduction of excessive slopes
Economic analyses
– other improvements
Assessments of environmental impacts—ecological, archeological,
historical, geological, air and water quality, land sedimentation and – estimates of traffic and cost
erosion, etc.
Formulation of optimal combination of arterial highway and
Sociological impact assessment existing highway improvements

Measures to mitigate adverse environmental and social impacts Financial analyses

Institutional and legal aspects Economic analyses

Public information and participation programs Assessments of environmental impacts—ecological, archeological,

historical, geological, air and water quality, land sedimentation and
Report preparation erosion, etc.

Sociological impact assessment

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 Measures to mitigate adverse environmental and social impacts
Flood Control Project Arterial Highway Project
Institutional and legal aspects

Public information and participation programs

Report preparation

The financial and economic analyses are very important elements of the feasibility report. A project is justified from anational
economic viewpoint if it has positive net economic benefits, provided that the services of such a project are considered of high
enough priority for implementation compared with the use of valuable resources for other purposes. The results of an
economic analysis do not, however, provide sufficient information on financial viability during the course of a project’s actual
construction and operation.

Financial analyses are made to determine the needs for financing the project construction and handling the flow of costs,
revenues, and subsidies after the project goes into operation. The financial analyses may be controlling in the case of a local or
state infrastructure project, while the economic analyses may be critical to the approval by a national government agency.

In modern public works planning, it has become increasingly important to pay proper attention to the environmental and social
impacts of a project, and the institutional and legal structures and constraints. These issues may be critical to a project’s
acceptance for implementation, and must be adequately addressed in the feasibility report. The feasibility report must discuss
how the project will be implemented and operated to meet institutional and legal considerations. There must be an
organization, in place or proposed, that will manage the implementation of the project including financial management,
construction and operation, dealing with beneficiaries, and all of the other functions involved in the management of an
enterprise. This involves not only the organizational structure but additional details concerning personnel, equipment, and other
resources needed.

All legal impediments to construction should have been cleared away. These may be related to land, water, and air rights;
compensation of those who are relocated or otherwise affected adversely by the project; and other matters of law. This may
involve the enactment of new laws as well as the enforcement of existing ones. International agreements may also be involved.

3.5. Third Stage: Final Design and Preparation of Contract

Documents
Contract documents include plans and specifications that are sufficiently detailed to obtain tenders (bids) from qualified
construction and equipment contractors. The plans (drawings) and specifications are based on additional studies of the details
of project works, the logistics of construction, other aspects related to temporary and permanent facilities, and the performance
of contractors. The contract documents also contain additional information on the responsibilities of the project sponsor and
the contractor. Various forms to be completed by the contractor provide information on the contractor’s legal status and
financial capabilities, set forth the quantities and prices for construction and for equipment, and elaborate on the construction
methods proposed by the contractor. The scope of the contract documents depends upon the relative responsibilities and risks
assumed by the sponsor and the contractors, and the assignments of work may differ in substantial ways from those described
in this section.

The sponsor and its engineers and financial specialists review the tenders made by contractors. A major factor is the prices
offered by a contractor, but other factors considered may include the reputation and previous experience of the contractor, the
specific working methods proposed to carry out the construction or manufacture of equipment and, in the case of the latter, the
operating efficiencies of the permanent equipment to be provided. Unless the comparison of offers and the awards to
contractors are prescribed by legal formalities, the contractors’ tenders are usually ranked after weighing the factors, in order
to determine which tenders are in the sponsor’s best interest, and awards are made accordingly.

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The requirements and arrangements described above for the third stage, and described below for the fourth and fifth stages,
could be quite different when a government agency does not retain complete control of all actions. Various alternative
construction contracts and construction management arrangements, including privatization schemes in which the construction
company shares in the ownership of the project, may be considered.

3.6. Fourth Stage: Construction

For purposes of this section, it is assumed that traditional contracts of public works agencies in the United States are used.
When traditional contracts are employed for the purchase of construction and equipment, additional detailed drawings needed
during construction are prepared by the sponsor’s engineers and by the contractors subject to the sponsor’s approval.
Payments to the contractors are usually made based on measurements of work in progress or completed, in accordance with
the terms of the contract documents. Usually, a percentage of each payment is withheld by the sponsor and released only when
the work is entirely completed and accepted. Supervision of construction by the sponsor’s engineers often includes field layout
of major works, approval of contractors’ choices of working procedures and materials, interpretation of the plans and
specifications, approval of the contractor’s drawings needed to supplement the engineer’s drawings, inspection of construction
activities and of finished work to ensure conformance with plans and specifications, measurement of quantities of
construction, and certifications required as a basis for payments to the contractors.

3.7. Fifth Stage: Operation

The sponsor may employ outside engineers and other consultants to assist in operation for a limited period, train operators,
prepare manuals for operation and maintenance, and monitor the performance of the various facilities. The operating rules may
be changed based on experience during the operation of the project.

3.8. Formulation of a Major Engineering Project

This discussion is based upon typical methodologies employed by experienced engineering planners for large water resources
and transportation developments. In many respects, the procedures are also applicable to many other types of public works
projects, including smaller ones.

During project formulation, the planner starts with an understanding of the needs to be satisfied and/or the problems to be
solved; evaluates the available data and other pertinent information; carries out other investigations; and conceives a plan to
utilize land, water, and other resources to meet the project needs and problems. This work draws on scientific training,
experience with other projects of similar type or with similar components, and imagination as well as judgment, in order to
develop a layout for a project that fits the available topographic, geologic, and soils conditions.

In addition to the information on availability of land, water, and other natural resources, and the nature and magnitude of
products and services that are desired from the project, the planner must be aware of existing or potential constraints. These
may include legal limitations on water or land quantities or uses of these resources; practical limitations on relocations, land
purchase, and easements for buildings, roads, railroads, utilities, and other human-made features; and obvious physical
characteristics of a site that make it inappropriate for certain types of developments (e.g., a particular type of facility may be
unsuitable with certain topographic configurations, foundation conditions, or construction material availability).

In many cases more than one layout is possible. A good planner will eliminate the most unsuitable alternatives while assessing
the remaining alternatives fairly and comprehensively. With some sites and service requirements, the planner may be able to
proceed directly to the optimal solution. In the more usual case, alternative layouts will need to be prepared and examined for
cost, function, construction suitability, and other factors.

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In the case of water resources planning, the planner may approach a solution for a site starting with the perspective of a water
need of a particular type and magnitude (e.g., municipal and industrial water supply) and then consider the possibilities for
modifying the project to make it suitable for multipurpose operations (e.g., recreation, hydroelectric power). Or, the planner may
from the beginning examine a variety of plans that exploit the site for all of the opportunities for multipurpose development.

In the case of transportation planning, alternative highway projects may have different effects on the local and regional
economies. Opportunities for economic development by private interests may be a key issue, perhaps even overriding strictly
engineering and cost factors.

The formulation of a project as discussed above emphasizes structural details, costs, project services, reliability, safety, and
other engineering matters. It is necessary, however, to also consider the impacts of a project that are not primarily of
engineering or cost nature. If the formulation team is dominated by engineers, it will be necessary to consult with or have
formal assessments by other specialists at various stages to ensure that environmental, sociological, institutional, and other
factors are adequately taken into account. Otherwise, projects may be proposed that cannot be implemented. At the early
stages of planning, impact analysis can be limited to identifying the most obvious problems, but studies at later stages need to
be more comprehensive.

As the work of formulation proceeds, the planner gains an improved understanding of site conditions, advantages and
disadvantages of alternative project arrangements, and possible opportunities for using the site to produce more or different
project services. The planner is, therefore, better able to communicate with the sponsor of the project, and reconsideration of
project objectives and purposes, scale, or other aspects may result from such communication.

Many types of planning aids can be used to facilitate the studies. Some of these aids may be employed routinely. Other aids
permit a more comprehensive and interdisciplinary examination of a study area or allow a perspective that may otherwise not
be evident. Finally, some of these techniques (e.g., computer-based) can assist the planning process by reducing the amount of
technical effort required, particularly when repetitive tasks are needed or where the planning process requires a number of
iterations.

Various types of environmental, social, economic, financial, and related analyses may be used to compare alternatives or to
justify projects. The planner must also take account of other effects that often cannot be estimated satisfactorily in economic
or financial terms. These include differences in the uncertainties of construction and operation. With respect to the
uncertainties, the term risk is preferred when the probabilities can be estimated for the events (e.g., floods and droughts) that
produce uncertainty.

There are, however, some uncertainties that must be assessed primarily by engineering judgment based on experience and
observation. Among them are the following:

Alternative solutions that are apparently equivalent may not, in fact, produce the same results. One project may be
inherently better from an engineering point of view, it may have a longer life, or the benefits it achieves may be more certain.

Some solutions may offer greater flexibility than others for potential future modifications of the project purposes to suit
future needs. For example, a large domed sports stadium may be better for possible future multiple-purpose use than an
arena designed for only one sports activity.

Some solutions include components that are more or less susceptible to unforeseen construction or operation and
maintenance problems and consequent increases in costs. For example, some construction sites may be located in
geologic materials with known serious defects which occur randomly, or various construction sites in a region may have
potential foundation problems which may not be adequately evaluated based on the limited explorations in planning.

3.9. Project Costs

3.9.1. Format of Budget Estimate of Investment Cost [1]

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3.9.1. Format of Budget Estimate of Investment Cost [1]
Estimates of investment cost (often referred to as capital costs) and annual cost of a prospective infrastructure project are
essential ingredients of a plan, and should be carried out for most infrastructure initiatives except for operation and
maintenance of a routine nature. Costs should be based on prevailing market prices for labor, materials, and equipment unless
the project is large or specialized enough to exert an appreciable effect on market prices. The project may cause an increase in
prices if the resources it demands for implementation are in short supply, or it may lower costs if it results in more efficient
production and/or distribution of goods and services. The following sections deal with techniques for pricing investment costs
and annual costs for purposes of financial analysis. Financial analyses of public works that involve constructed facilities start
with estimates of investment cost and annual cost. Adjustments to the components of these financial costs may be needed for
economic analysis.

Table 3.2 shows a recommended form of a budget estimate of the investment cost for a hydroelectric project sponsored by a
municipal public agency. This summary format, which is appropriate for most large projects, is based on the assumption that
the construction would be carried out and the permanent equipment for the project would be obtained through purchase
contracts.

Table 3.2 Publicly-Sponsored Hydroelectric Project Summary of Total Project Investment ($)

Description Amount

Production Plant

Land and land rights 200,000

Power plant structures and improvements 10,800,000

Reservoirs, dams, and waterways 44,700,000

Turbines and generators 27,900,000

Accessory electrical equipment 1,600,000

Miscellaneous power plant equipment 2,200,000

Roads 10,300,000

Subtotal 97,700,000

Transmission Plant

Land and land rights 1,300,000

Clearing land 100,000

Switching station at power plant 7,900,000

Switching stations beyond power plant 19,800,000

Towers and footings 11,000,000

Overhead conductors and devices 14,900,000

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 Description Amount

Roads and trails 600,000

Subtotal 55,600,000

General plant 100,000

Subtotal 100,000

Total Direct Construction Costs, not including contingencies 153,400,000

Contingencies @15% 23,000,000

Total Direct Construction Costs, including contingencies 176,400,000

Engineering, supervision of construction, and sponsor overhead @8% 14,100,000

Subtotal 190,500,000

Net interest during construction @7% annually 1 22,800,000

Total Project Investment 213,300,000

1 12% total based on timing of construction funds.

The costs of the purchase contracts, together with the costs of lands, land rights, and possibly separate water rights, constitute
the total direct construction costs, not including contingencies. Contingencies are then applied, usually as percentages of
direct construction cost components. Contingencies cover extra costs that are paid to contractors during construction due to
differences between estimated quantities of construction and the quantities actually realized at the project site, omissions of
incidental items of work, unforeseen difficulties at the site, changes in plans, and other uncertainties not definable when the
contracts are awarded.

Engineering supervision of construction (by engineer and/or owner, not by the contractor) and owner’s overhead assigned to
the project are then applied as percentages of the subtotal of direct costs, including contingencies. The resulting subtotal
represents the total costs, except for interest on monies borrowed during construction. If investment costs are estimated as of
the date when construction is completed and operation starts, it is necessary to add interest during construction for borrowed
funds or for equivalent expected returns on equity funds used for the construction.

The financing costs may be based on a detailed schedule showing when various payments to contractors and for other costs
are required. An approximate estimate may be based upon applying the full annual interest rate for one-half of the construction
period. For the example shown in Table 3.2, the ratio of investment cost to direct field cost without contingencies, is 1.39. For
projects with longer construction periods and with higher contingencies and higher interest charges for financing construction
and equipment contracts, such a ratio could be 1.6 or greater.

3.9.2. Estimate of Annual Cost

Table 3.3 shows a summary annual cost estimate for the same project for which an investment cost estimate is given inTable
3.2. The operation and maintenance item applies to labor, supplies, and replacement of short-lived equipment and materials.
General administrative expenses are for a portion of the overhead of the central offices of the owner. Renewals and
replacements apply only to major structural or machine elements and are estimated as an annual amount to preserve the equity

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of the investment and keep the project in operative order. Debt service covers interest and amortization based upon repaying
the investment cost of the project within the useful life of the project; in this example, the amount shown was estimated by
applying a “capital recovery factor,” that is, (A|P,i,n) of 0.0735, based on 45 years and 7% interest to the investment cost of
$213,300,000. Finally, federal license fees are included (only federal government agencies are exempt from licensing for
hydroelectric projects and for payment of fees).

Table 3.3 Publicly Sponsored Hydroelectric Project Summary of Annual Charges ($)

Description Amount

Operation and maintenance

 Generation 680,000

 Transformation 240,000

 Transmission line 250,000

General administrative expenses 316,000

Renewals and replacements 1,429,000

Debt service on investment 15,678,000

License fees 150,000

Total Annual Charges 18,743,000

If the owner is not a public entity, the investment cost and particularly the annual cost estimates would include allowances for
taxes. Insurance costs may be shown as a separate item if they are not included in owner’s overhead. If the project is to be
constructed in a developing country, the estimates of investment and annual costs should be shown with separate components
for foreign (“hard”) currencies and local (“soft”) currencies since they may be subject to different financing terms.

When estimates are made for a project sponsored by a central government agency, the period for capital recovery and the
applicable interest rate may be established by government rule for purposes of the estimates, since money is not generally
borrowed for each project separately.

Special studies are needed when the project is constructed in stages to meet a growing demand or in accordance with the
availability of funds. Also, a project may be financed by bonds whose terms are fixed by law, or where the repayment schedule
is arranged to provide for annual amounts that vary from year to year to meet a progressive growth in revenues.

3.9.3. Components of Project Construction and Investment Costs

3.9.3.1. Direct Construction Costs
This and the next several subsections discuss the components of a project investment cost estimate such as that for the
project in Table 3.2. Table 3.4 shows a portion of the details of the estimate of direct construction cost. The quantities of
construction and installed equipment are estimated from formal and sketch-type arrangement and design drawings and from
experience with similar projects.

Both unit cost and lump sum items are based on estimates of amounts of work. Preliminary estimates may be based on

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experience with overall costs of finished work (e.g., dollars per square foot of finished office space or dollars per kilowatt of
installed power generating station). The best construction and installation cost estimates are based on “contractor-type”
estimates of:

Cost of purchased materials

Equipment rental or ownership costs

Wages or salaries paid to construction and/or installation personnel

Cost of management and supervision

Other overhead costs and profit

Table 3.4 Publicly Sponsored Hydroelectric Project Details of Portion of Direct Construction Cost ($)

Description Unit Quantity Unit Cost Amount

Production Plant

Land and land rights Job L.S.1 — 200,000

Subtotal Land and Land Rights 200,000

Powerhouse

 Foundation exploration Job L.S. — 150,000

 Excavation, common Cu Yd 15,000 3.00 45,000

 Excavation, rock Cu Yd 40,000 10.00 400,000

 Foundation treatment Job L.S. — 250,000

Substructure

 Concrete Cu Yd 22,100 150.00 3,315,000

 Reinforcing steel Lb 875,000 0.60 525,000

Superstructure

 Structural steel Ton 270 2000.00 540,000

 Concrete CuYd 2,600 300.00 780,000

 Reinforcing steel Lb 370,000 0.60 222,000

 Architectural treatment Job L.S. — 1,200,000

 Plumbing Job L.S. — 73,000

 Lighting Job L.S. — 220,000

 Miscellaneous metal Job L.S. — 110,000

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 Description Unit Quantity Unit Cost Amount

Permanent townsite

 Permanent residences Job L.S. — 1,320,000

 Streets and utilities Job L.S. — 570,000

 Community building Job L.S. — 140,000

 Water supply and water and sewage treatment Job L.S. — 800,000

Electrical service Job L.S. — 140,000

Subtotal Power Plant Structures and Improvements 10,800,000

1Estimates for Lump Sum items are based upon layouts, costs on other similar projects, and other methods

When the cost estimates are prepared primarily for the budgeting process, or to provide guidance to those who examine bids
made by contractors and equipment suppliers, the large effort and cost to prepare contractor-type estimates may not be
warranted for all project components. Estimates may then be based on unit prices experienced on other jobs, adjusted for
actual job conditions, and inflation. Cost indexes such as those shown and discussed later in this chapter may be useful for
such adjustments. Such indexes should be applied only to the construction and equipment supply portions (the “field costs”) of
the investment cost estimate.

The costs of lands and relocations as well as interest during construction and the other additions made to field costs to reach
the “bottom line” of the investment cost estimate in Table 3.2 may be subject to market effects which are different from those
that inflate construction and equipment costs. For either contractor-type or budget-type estimates, the field costs should be
recognized as being dependent on such variables as the geographical location of the work; seasonal weather conditions;
problems of care of water during construction; unusual or special geotechnical conditions (foundations, construction
materials); accessibility of the work; accommodations for housing and transportation; materials handling and storage facilities;
sources of construction power, availability of labor and material required; wage rates; construction plant and equipment; terms
of financing available; and taxes, insurance, and risks.

3.9.3.2. Contingencies
According to AACE International (RP 10S-90), contingency is defined as “An amount added to an estimate to allow for items,
conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in
aggregate, in additional costs” (AACEI 2012).

The appropriate contingency percentage depends on the type of project or component and its location, and the quality of data
available. Some planners increase the quantities of construction or the unit prices to allow for all or a portion of the
contingencies. This is not, however, considered a candid professional practice. The allowance for contingencies is not a cover-
up for errors or inadequate engineering and is actually expected to be spent for the project.

Lang and Merino (1993) have suggested the use of various contingency factors that depend on the type of construction
(buildings or civil works) and the level of detail employed for the estimates. Their factors are shown in Table 3.5 for buildings
and for civil works. When suitable data are available, it is appropriate to apply contingency factors that vary with the level of
planning detail and the type of construction, but with more specificity than in Table 3.5.

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Table 3.5 Typical Contingency Factors for Buildings and Civil Works

Buildings Basis Factor

(%)

Order-of-magnitude Overall cost per unit of capacity, derived from existing facilities 20

Square or cubic Historical data on overall cost per unit area or volume 15
dimensions

System estimate Separate costs for sitework, masonry, etc., with a factor expressed as ratio or percentage then applied to 10
(factor) arrive at total cost

Unit price estimate Substantially all components clearly defined and estimated in detail 5

Definitive estimate 5

Civil Works Factor

(%)1

Order-of-magnitude 30-40

Budget (factor) type 15-25

Definitive 5-10

1Factor depends on function, size, location, type of construction, and other variables.

(Source: Lang and Merino, 1993, with permission from John Wiley and Sons.)

The planning and engineering work affects not only the accuracy of the initial investment cost but, in its designs related to
annual operating maintenance and replacement costs, exert an additional effect on other costs throughout the life of the
project. Thus, it has been estimated (Thuesen and Fabrycky, 1989) that almost 80% of life cycle cost is committed by the
completion of the detailed designs.

Bent and Humphreys (1996) have focused on the “design-build” method of design and construction. They indicate that for the
construction of a processing plant, such as in the chemical engineering industry, an estimate within ±10% of total cost is
reasonable at the following points of completion: engineering 85%, procurement 90%, and construction 20%.

3.9.3.3. Land and Land Rights

These should include all costs for land, water, air, and mineral rights connected with project features. Among these costs are
the purchase price or easement costs minus salvage value of improvements, the cost of surveys incident to a sale, legal fees
and transfer costs, and severance payments. Allowances should also be included for buffer areas, relocation, access, and other
needs. Special estimates may be required for agricultural land and other land whose producing capability may be lost or
modified by the project.

3.9.3.4. Engineering, Supervision of Construction, and Sponsor

Overhead
Among the costs to be included for a financial analysis are the costs incurred in the development of final design, specifications,
and construction drawings; the cost of inspection for construction, installation, and/or maintenance activities; the cost of

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administering contracts; and other sponsor overhead costs. For an economic analysis, this cost item should include the
additional costs attributable to the project but not a financial responsibility of the project sponsor, such as cost of relocation
assistance advisory services, educational costs, and other costs of governmental entities.

3.9.3.5. Timing of Project Construction and Investment Costs

The project investment cost includes interest on monies borrowed for construction. This may be based on a detailed
breakdown of the various items of construction and installed equipment in a construction schedule and the application of
interest charges for each item for a period reckoned to the end of construction, or on a simplified method. An example of the
latter approach is to apply the full interest rate to all the construction cost, including contingencies, for one-half of the total
construction period.

3.9.4. Components of Annual Costs

Two methods may be used to estimate annual costs. One approach is to estimate the costs for each separate year of
construction and then for each year of operation after the completion of construction. Another approach is to estimate all costs
as annual costs extending from the date when construction is completed; this requires spreading of all costs, including
construction costs, during the period of operation. Table 3.3 shows the annual costs corresponding to the investment cost in
Table 3.2 on the latter basis. Table 3.6 shows the details of these costs.

Table 3.6 Publicly Sponsored Hydroelectric Project Details of Portion of Annual Charges ($)

Description Amount

Generation O&M

Operation

 Supervision and engineering 40,000

 Station labor 150,000

 Supplies and engineering 60,000

Maintenance

 Supervision and engineering 50,000

 Structures and improvements 80,000

 Generating and electrical equipment 180,000

 Reservoirs, dams, and waterways 120,000

Subtotal 680,000

Transformation and Switching O&M

Operation 110,000

Maintenance 130,000

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 Description Amount

Subtotal 240,000

Transmission Line O&M

Operation and maintenance 250,000

Operation and Maintenance 1,170,000

General Administrative Expenses 316,000

(27% of total operation and maintenance)

Renewals and Replacements

Structures and improvements 13,600

Reservoirs, dams, and waterways 83,800

Turbines and generators 343,700

Accessory electrical equipment 30,100

Miscellaneous power plant equipment 140,600

Switching station equipment at power plant 183,400

Switching station equipment beyond 488,900

Transmission line, towers, and footings 63,900

Trans line overhead conductors and devices 75,900

General plant 5,100

Renewals and Replacements 1,429,000

(sinking fund basis @ 7% interest)

Like the contractor-type estimates for construction, the operation and maintenance cost estimates may be based on detailed
estimates of personnel costs, office supplies, gasoline, oil, depreciation and repair of automobiles and short-lived replacement
parts, and other expendables. Alternatively, the estimates may be based on experience on other projects adjusted for inflation
and different project conditions. Additional allowances are included for general administrative expenses, to spread sponsor
costs that are not identified with specific projects. Estimates for operation and maintenance do not generally include costs for
replacement of major structural or machine elements, which are more properly included in the renewals and replacements (or
interim replacements). Such costs may be estimated by developing a schedule for major replacements, estimating their costs,
and then averaging such costs over the period of analysis of the project, using appropriate discounting or depreciation
techniques. A procedure often used is to depreciate each major item to be replaced by means of a sinking fund; this is
equivalent to placing an equal annual amount at compound interest in order to accumulate the required replacement amount at
the end of the item’s useful life.

For purposes of a financial analysis, the components of the annual cost estimate may be quite different depending on the

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method used for assigning general administration expenses, providing for renewals and replacements (“sinking fund,” straight-
line method, or other accounting method), and financing. With respect to the latter term, the capital recovery factor provides an
estimate of equal annual payments over the project period to pay back the funds borrowed to cover the investment cost. This is
equivalent to paying an amount for interest each year, while accumulating the investment amount by means of a sinking fund
and repaying it in a lump sum at the end of the project period. When the owner uses equity funds for construction, the “debt
service” term does not apply and provision must be made instead for a return on equity each year and for depreciation of the
investment over the project period (or a shorter period using accounting rules permitted by regulatory authorities and the
income tax rules).

In updating annual costs, inflation should be taken into account. For this purpose, the construction cost indexes are not directly
applicable, but may be used for guidance together with equipment price indexes, data on local construction labor costs with
their trends, and other more general indexes such as producer and consumer price indexes which may be formulated by
government agencies.

If all the money to build the project is borrowed, the annual debt service depends on the terms of the loans applying to the
investment cost of each project component. For Tables 3.3 and 3.7, it is assumed that equal annual amounts over a 45-year
period will be used to pay off the loans. Other schedules could have been developed to provide for an increasing payment each
year to reflect the growth of demand for project services. This is not appropriate in this case because all power produced would
find a ready market at the beginning of operation.

3.9.5. Use of Indexes to Adjust Cost Estimates

Table 3.7 shows how an investment cost estimate, prepared for a 4-year construction project when the applicable construction
cost index was 3000 and the interest rate for construction funds was 4%, can be updated for an index of 4000 and an interest
rate of 8%.

Table 3.7 Adjustment of Investment Cost Estimate—Thousand $

(Unadjusted interest rate 4% and cost index 3000)

(Adjusted interest rate 8% and cost index 4000)

Unadjusted Adjusted

Direct construction costs not including contingencies 1,000 1,333

Contingencies (30%) 300 400

Direct construction cost including contingencies 1,300 1,733

Engineering, supervision of construction, and sponsor overhead (10%) 130 173

Subtotal 1,430 1,906

Interest during construction 114 305

INVESTMENT COST 1,544 2,211

In the United States, cost indexes are published for different types of projects and for different locations, by various federal and
state governmental agencies and private organizations. Engineering News Record (ENR) magazine compiles and publishes data
for two indexes, one for buildings and the other for construction projects (usually referred to as “civil works”).

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Other indexes are available including other builders’ construction cost indexes, equipment cost indexes, and federal-aid
highway bid price indexes. The updates of these and other indexes are published by ENR and by government agencies and
other private organizations.

3.10. Costs for Professional Planning and Construction

Services
Large public organizations in the United States such as the General Services Administration (GSA) and the U.S. Army Corps of
Engineers, and the larger state Departments of Transportation (e.g., California DOT) may have full rosters of specialists on their
own staffs that are qualified to provide all of the professional services for a project. Smaller public works agencies, and even
the larger government agencies for some projects, often have need for employing other firms and individuals, however, to
supplement their own capabilities and capacity to perform planning, design, and construction supervision services. Other public
agencies and most utility companies and private entities prefer to maintain small staffs and to engage outside consultants for
most projects.

The selection process for outside consultants may range from simply contacting firms that have previously provided
satisfactory services, to a more elaborate scheme of inviting and evaluating bids. The following six-step procedure is used by
many government agencies for selecting outside consultants:

Advertisement or an informational meeting with invited consultants.

Prequalification through the review of material already on file or based on a formal submission in response to a request for
qualifications (RFQ).

Selection of a limited number (shortlist) of consultants from whom proposals will be requested.

Evaluation of formal proposals, based upon such criteria as intended methods of performance, project organization, or
personnel. Proposals may also be evaluated on price, either in conjunction with the technical proposal, or separately (two
envelope method) in which prices are only one factor to be considered.

Ranking of proposals in order of technical merit, or of a combination of technical merit and price.

Final negotiations with highest-ranked proposer. If unsuccess-ful, negotiations with next-ranked firm.

For certain types of work, such as field explorations defined by detailed specifications, the selection from among prequalified
firms may be based wholly on the evaluation of cost proposals. Some government agencies may be bound by law or by agency
protocol to base its selection of consultants on price considerations, wholly or with a fixed weighting formula.

The following are the principal bases of compensation for consulting services:

A fixed amount per day or per hour for specified services.

A fixed retainer for services, whether called on to perform them or not, or a fixed amount for an expected level of services
beyond which additional compensation is paid.

Salary cost times a multiplier, plus direct non-salary expenses.

The actual cost of services performed, plus a fixed or variable fee.

Fixed sums for defined services.

A percentage of the construction cost.

“Turnkey” arrangement, in which the engineering and other professional services are included as part of the payments to the
construction contractor and may not be separately identified.

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For a typical sequence of reports, documents, and actions for a large infrastructure project, an approximate guide is given
below for the cost of “primarily engineering services” in terms of percentage of estimated construction cost, based on
experience up to the early 1980s (Goodman, 1984). Since that date, there have been increasing costs for “non-engineering”
services for environmental and social impact assessments, public participation programs, and interagency coordination. While
these are not “primarily engineering services,” they do involve engineers and other planners in addition to the specific
specialists for these activities. The costs for these “non-engineering services,” which are unique for each project, should be
estimated separately and added to the following estimates.

Preliminary report based on reconnaissance studies—¼ to ½%

Feasibility report—1 to 2%

Design—4 to 6%

Construction supervision on behalf of sponsor—5 to 10%

Overall for the above—8 to 15%

The American Society of Civil Engineers (ASCE) periodically analyzes fees for engineering services, which are reported in its
Manual 45 Consulting Engineering: A Guide for the Engagement of Engineering Services. These estimates are for tasks defined in
the manual for six “standard” phases: (1) study and report phase; (2) preliminary design phase; (3) final design phase; (4)
bidding or negotiating phase; (5) construction phase; and (6) operation phase. In this context, the services contemplated for
phases (1) and (6) are quite limited. The curves shown in Fig. 3.1 are expressed in terms of percentage of construction cost, for
design fee versus construction cost, and for total fee versus construction cost. The manual cautions that: “[a]ny particular
project is not likely to lie directly on a curve. The curves represent an average of hundreds of projects of varying complexity.
However, these graphs can help in approximating the design fees and total fees for budgeting and comparison purposes.” The
curves also do not include the costs of many types of “special services” such as for field investigations, surveys, materials
testing, studies of treatment processes, and most non-engineering activities. Studies that have a relatively small component of
design-type engineering as compared with planning by engineers and non-engineering specialists, such as regional studies,
would involve costs that can be estimated only after the scope of work, level of analysis, and expected work product are
defined.

Figure 3.1 Costs for Consultants. (Source: American Society of Civil Engineers, 2003 with
permission from ASCE.)

The American Association of State Highway and Transportation Officials (AASHTO) published a guide in 1996 for contracting,
selecting, and managing consultants, focusing on the use of consultants by state agencies that include the types of contracts
and methods of payment, the selection process, and the management of their services.

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3.11. Appraisal Process Before Approval of a Major Project
Project appraisal is the process by which a reviewing authority determines whether a public works project meets appropriate
criteria for authorization and/or funding, or whether a regional plan meets appropriate standards for proceeding with
implementation studies of one or more component projects. The reviewing authority may be a public official, the decision
makers in a government agency or financing organization, or a legislative body. The analyses for projects in the United States
and other economically advanced countries may differ from those for projects in developing countries, particularly when they
are subject to review by international lending agencies.

Project appraisal emphasizes the results of planning rather than the planning process, but of course the latter must be carefully
considered when examining recommended plans and confirming the validity of the analysis of alternatives. Planners in
national, regional, and local organizations should formulate their appraisal procedures while conforming to their institutional
missions and incorporating specific considerations that apply to the conditions in their project and service areas.

Knowledge of the appraisal process is essential to the design of a planning effort, and in defining the results to be expected
from that effort. Appraisal guidelines for the United States and other economically advanced countries and for the developing
countries are similar in many respects. A number of criteria relate to financial and economic analyses and other matters which
are discussed more extensively in other chapters.

3.12. Project Delivery Methods

3.12.1. Introduction
For construction contracts for public works, traditional approaches have been replaced in many instances by methods that
were once restricted to private project sponsors. These include arrangements referred to as owner-builder; design-construct or
design-manage; professional construction management; and program (or project) management. Both the traditional and the
newer approaches, have advantages and disadvantages that should be considered by the owner or the construction contractor.

The organization and details of a traditional “unit-price” construction contract, including the difference between the items of
construction in such contracts and the items in budget estimates, were presented earlier in Chap. 3. The prices quoted by
contractors for these items may be compared with those in an “Engineer’s estimate” prepared prior to the receipt of the
proposals from the contractors.

Up to the latter part of the 1990s, most major public works projects in the United States were executed through “traditional”
fixed price or unit price purchase contracts for construction and major permanent equipment. Employing the design-bid-build
project delivery method or system, detailed plans and specifications are first prepared and included with the other contract
documents for the project. The prices bid by prospective contractors depend on their estimates of labor, material, equipment,
general conditions costs or job-specific overhead, home office overhead, and profit. Their proposals may also include
descriptions of construction methods, their arrangements for financing and insurance during construction, performance
guarantees, and other details. Contracts are awarded by the sponsor, or “owner” (private or public), after the proposals (tenders
or bids) are received from contractors and evaluated for cost and other considerations.

Two project delivery methods assumed increasing importance by the end of the twentieth century. These are the design-build
and build-operate-transfer methods for constructing projects. These methods allow the owner to shift certain risks to
constructor. On a design-build project, the design-builder is the single point of responsibility for the design and construction of
the project, which includes full responsibility for the coordination of these functions. While the contract documents may include
preliminary plans and specifications, the contract’s requirements are more likely to emphasize quality of construction and the
performance of the finished project. On a project that employs the build-operate-transfer method of project delivery, the owner
is relieved of certain responsibilities relating to the completion of construction and the operation and maintenance of the

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completed work, while obtaining the benefit of the use of the completed facility. Further risk may be shifted similarly with the
design-build-operate-transfer project delivery method. In any of these cases, however, in order to take advantage of the
benefits, the owner must relinquish a certain amount of control to the contractor.

3.12.2. Features of Principal Types of Project Delivery Methods

The “traditional” design-bid-build project delivery method represents what has been employed historically for the majority of
infrastructure projects. In this method the owner separately retains the services of the designer and the contractor. In a fixed
price (or lump sum contract) the design is complete prior to the commencement of the construction work, and the owner is
contractually responsible to each of them for the other’s performance of its services or work. This method has been codified by
laws and the rules and regulations of various public agencies. Generally, the non-traditional arrangements have historically been
employed first for construction projects sponsored by private, rather than, public clients. Variations or combinations of these
types are also used. The following briefly outlines the principal features of these and other “traditional” types of project delivery
arrangements, as well as other “non-traditional” arrangements that are employed for public works projects.

3.12.3. Project Contract Types

3.12.3.1. Cost-Plus-a-Fee Contracts
If the drawings, specifications, and other contract documents necessary to determine the total cost of the work are not available
at the time the owner wishes to award a contract or contracts for construction, the owner may enter into an agreement with a
contractor or construction manager in which the final cost to the owner will be determined at a later time, and perhaps not until
construction is finally completed. These agreements are commonly referred to as cost-plus contracts, in which the
compensation to the contractor or construction manager is based upon the actual cost for the performance of the work plus a
fee. The amount of the fee may be determined in any number of ways, including, but not limited to, a fixed fee, a percentage of
the total cost of construction, or a varying percentage that decreases as the cost of construction increases.

3.12.3.2. Guaranteed Maximum Price Contracts

A variation on the cost-plus-a-fee contract is the guaranteed maximum price (GMP) contract. While the contractor (or
construction manager) is reimbursed for the cost of the work plus a fee, the total compensation to the contractor is limited to
the amount of the GMP.

3.12.4. Traditional Project Delivery Methods

3.12.4.1. Design-Bid-Build
Contracts may be competitively bid or negotiated.

A general contractor or several prime contractors may perform part of the work and subcontract the rest to specialty
subcontractors.

The entire work is defined by the plans, specifications, and other contract documents. Compensation may be based upon a
single fixed price or lump sum amount for the entire work of a prime contract with the owner, unit prices for defined parts of
the work where the quantity of such parts are not finally determined at the time of contract award, or a combination of both.

3.12.4.2. Owner-Builder

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 In certain circumstances, an owner may perform some or all of the design and construction work with its own forces. For
example, many city, county, and state public works departments and public and quasi-public transportation agencies
employ this method for some or all of their projects, particularly those of a routine nature. Such self-performed work is also
often referred to as “force-account” work. In some cases, the owner may perform conceptual or other phases of preliminary
design and hire outside firms for the preparation of the final design and construction documents. Outside contractors may
also be retained to provide supervision or perform construction work.

3.12.5. Alternative Project Delivery Methods

3.12.5.1. Design-Build
Design-build is a project delivery method in which a single entity is responsible to the owner for the design and construction of
the project. In the traditional design-bid-build model, the designer is generally independent of the owner and the contractor. The
designer may have certain contractual obligations to the owner and functional obligations to the owner and the contractor in
the administration of the contract between the owner and the contractor, such as assessing the performance of the contractor
and approving payments to the contractor.

The use of design-build has been more prevalent in design and construction of process plants and other heavy industries than
in residential and commercial buildings. Proponents of design-build, however, continue to seek increased utilization of design-
build in all market sectors, particularly in the area of overturning laws which preclude its use in public procurement.

3.12.5.2. Professional Construction Management

Professional construction management describes the preconstruction and construction phase services provided to the owner
on a project by an independent entity acting as the owner’s agent or representative. Professional construction management is
distinguished from other forms of construction management contracts, such as the cost-plus- a-fee and guaranteed maximum
price contracts, in that the professional construction manager is not at risk, that is, it is not responsible for the design of the
project, nor for the time or cost of the performance of the work by the contractor. The primary focus of the professional
construction manager is to solely represent the interests of the owner on the project.

3.12.5.3. Program Management

Program management is essentially an outgrowth of professional construction management. Whereas construction
management services are generally viewed as project specific, program management addresses the broader perspective of an
owner’s operations and often the management of multiple projects. A common application today of program management
services may be an airport redevelopment project in which the program manager representing the local aviation authority
assists the authority in the planning of the overall program, the selection of designers, construction managers and contractors
for various individual projects, and the coordination of these design and construction activities with the ongoing airport
operations. The program manager brings the same management and organizational skills to manage the quality, cost, schedule,
scope, and risks associated with the program as does the construction manager for the individual project.

3.12.5.4. Build-Operate-Transfer (BOT)

In a build-operate-transfer project delivery method the responsibility to build and operate the facility lies with a single entity that
could be a joint venture, partnership, or a consortium of design firms, contractors, and financial institutions. This consortium
operates the facility over a certain period of time called a “concession period” (usually 20-30 years) to recover their expenses
and profits.

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