Referendum Costs City Millions in Initial Design and Development Fees

By: Sean T. Devenney

According to recent reports from The Philadelphia Inquirer, plans for a $200 Million construction of a badly needed new Family Court building have derailed due to allegations of mismanagement before the first shovel has hit the ground.  The citizens of Philadelphia have already spent more than $10 Million in up-front design and development fees and public officials are scrambling to explain what has happened.  If the Project does not move forward, the more than $10 Million could end up being wasted along with the political careers of a few high level public officials.

In Indiana, recent changes to public project funding laws could have the same kinds of consequences for public officials.  As an example, given that funding for new K-12 public construction will likely have to be approved through the local referendum process, School’s should be cognizant of the fact that there is no certainty that the proposed project will be funded.   However, under traditional delivery methods (i.e., design, bid, build) there are significant “up-front” design costs of approximately 6% to 8% of the cost to construct associated with moving the Project forward that could be wasted if the referendum fails to pass and there is no funding for the Project.

One strategy to minimize the up-front design costs and reduce the risk of wasting substantial design fees incurred as a result of a failed referendum is to utilize the public design-build statute.  In this respect, the School could expend a substantially smaller “up-front” design fee to create the necessary design criteria package to prepare the project for public bidding.  The fee for the design criteria developer is generally only 1%-2% of the costs to construct.  Thus, if the referendum fails, the School will not be risking as much money in the process.