Financial Planning Pays Off

Jodi Richards
Published in: 

Making a case for the "Big Build" construction of Terminal B Sacramento International Airport (SMF) wasn't a tough sell for airport director G. Hardy Acree - even amid particularly tough economic conditions when crews broke ground in 2008.

"We spent a lot of time and energy with our community," Acree explains. "It wasn't a question that Terminal B needed to be replaced. Even the airlines agreed that the 'do-nothing option' was not an option."

Financial planning for the $1.03 billion project began in May 2000. "It was pretty early on that we discovered we were going to have a rather significant gap between what the forecast was projecting and current inventory of terminal capacity," he notes.

From a design standpoint, the terminal was more than 50 years old. As such, it was sorely undersized for the airport's needs and had become increasingly difficult to maintain, Acree recalls.

In 2003, Corgan and Associates began the programming element embedded in the airport's master plan. A draft form of the plan was adopted by the board of supervisors, which oversees SMF, in February 2004.

Best-Value vs. Low Bid

Input from the community and airport partners combined with lessons learned on a "best-practices tour" of construction and remodel projects at other airports helped SMF develop the objectives for its project. Operational flexibility was important to the airlines, the community wanted an environmentally sustainable facility, and both airport users and community members stressed the importance of fiscal responsibility. There was also a pervasive desire to create a sense of place through the terminal's art and concessions.

Much to Acree's delight, best-value contracting superseded low bid - a first for a Sacramento County project, he notes. The non-traditional selection method allowed the airport to consider factors such as contractors' various carbon footprints and the energy consumption and lifecycle costs of the systems being procured.

"We spent a little bit more money upfront," Acree acknowledges, "but over the life of those systems, the payback is fairly significant by virtue of using less electricity and having a longer life."

An owner-controlled insurance program, another first for the county, saved the airport at least $4 million and has the potential of saving up to an additional $3 million, he reports.

Choosing a design-build model with a guaranteed maximum price has already benefited the airport, adds Acree. Lower traffic turned out to be a "silver lining" of the economic downturn because it provided flexibility in the project's schedule. By strategically accelerating construction and leveraging a very competitive bidding environment, the airport drove costs considerably below the engineer's initial estimate.

Using the design-build model, the project's design was 30% to 40% complete when construction contracts were awarded. This allowed the airport to benefit from value engineering by the contractors, notes Acree. "They shaved a lot of monies out of the program through looking at alternatives," he explains, something that would not have been possible in a design-bid-build project.

Removing Speed Bumps

In an effort to prevent small matters from causing larger delays, the airport put monies in each contractor's budget for contingencies - "fairly robust" amounts, relates Acree. At the end of the project, each contractor keeps 25% of any funds still in its account and returns the remaining 75% back to the airport.

Recognizing that a program of this size could not be managed "downtown," the board of supervisors delegated change order authority to the county engineer and Acree. The two designees then established a change management board and delegated a limited level of authority down to them. This allowed board members to literally make changes in the field. The total amount of change orders under delegated authority could not exceed $70 million (10% of the roughly $700 million aggregate hard construction costs) and no single change order could exceed $1 million.

The combination of programs worked "exceeding well," says Acree. "That gave us a lot of flexibility to be able to manage the project." In mid-September, the project was three months ahead of schedule and $65 million under budget. "I think the approach speaks for itself," he notes. FPFC

Bond Financing

The project was originally budgeted for $1.08 billion, but was dialed back to the final $1.03 billion at the last bond issue in August 2010, when the airport issued $50 million less than planned. Because of the guaranteed maximum price structure, the owner (Sacramento County) is the beneficiary of any final savings.

While the majority of project funds were raised by issuing bonds, SMF also received about $10 million in federal money for its inline baggage screening system via the American Recovery and Reinvestment Act (ARRA) of 2009. It also received an $8.7 million Airport Improvement Program grant in late June, the fourth installment in a seven-year $59 million Letter of Intent (LOI) program with the FAA, comprised mostly of entitlement funds.

Fully $200 million came directly from the airport - $80 million from its capital improvement fund and $120 million in pay-as-you-go Passenger Facility Charge (PFC) revenues.

Airport revenue bonds totaled $564 million; 2041 is the last year the airport will pay on the bonds. The airport issued bonds in 2008 at 5.4%, 2009 at 5.8% and 2010 at 4.8%. The 2009 bond issue consisted of both senior lien bonds and subordinate PFC/LOI revenue bonds, explains Amanda Thomas, deputy director of finance.

The first issue of bonds was in April 2008. The airport originally planned on issuing its second series later the same year, but the financial crisis altered its plan. "There was a point where the markets had essentially shut down from the standpoint of being able to sell airport revenue bonds - particularly those subject to AMT (alternative minimum tax)," Thomas explains.

Lacking the scheduled infusion of funds, airport officials worked with contractors to "smooth" their activities and alter the schedule to sustain the project with cash on hand. The $400 million that should have carried the project through December was stretched an extra six to seven months, Acree recalls. By that time, the markets were beginning to thaw and the ARRA bill allowed the airport to sell bonds without AMT penalty. "That helped us a great deal," he relates.

The bonds issued in 2009 and 2010 that would have previously been subject to AMT totaled $464 million. Thomas estimates the AMT holiday saved roughly $97 million of debt service over the life of the bonds.

"There were a few sleepless nights back in 2009 with regard to financial markets, but we got lucky and I'll take it," Acree notes. "Nobody foresaw that or the severity of the downturn. We've weathered it and positioned ourselves well to take advantage of this new facility."

Vested Collaboration

Acree considers the collaborative nature of the project a "tremendous benefit." Subcontractors with more than 1% of the contract price, for instance, were prequalified so they could be "at the table."

The airport also hired a professional facilitator - an "invaluable" resource, says Acree. Shortly after contracts were awarded in 2008, Rose Agnew of Aviation Innovation began facilitating meetings and team building exercises on and off the airport - some a full day long - to help project participants mesh.

Given the project's size and multiple prime and sub contractors, it was important for everyone to get to know each other, explains Acree.

The sessions paid dividends over the long term, he relates, because project participants evolved into true partners. "We all had something at stake here," he relates. "Everybody wanted to have a successful conclusion."

Acree also credits a "really talented team of internal resources" and a stable core of contractors that stayed intact throughout the multi-year project. "That has helped immensely," he notes.

In retrospect, he regularly comes back to the overall collaboration among the project's participants: "I can't overstate the relationship/partnership that we had with the primes and the subs. They've taken pride and ownership of doing something that's really significant for this region."


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