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February 10, 2006

Area Term Contracts

Plan will save 25%: Ministry

New Zealand consultant sells Ontario road plan

Moving to an Area Term Contract with road contractors assuming and managing most of the risk could save taxpayers up to 25 per cent, the Ontario Road Builders Association convention at the Royal York Hotel heard.

Tony Porter, a partner in road builder consultant Opus was brought in from New Zealand to evangelize the long term benefits of moving to ATCs from the current Area Maintenance Contracts (AMC) and told about 300 delegates that a Finnish study of world-wide jurisdictions where the system has been implemented showed up to a 25 per cent saving.

Tony Porter

“It’s all about the people,” Porter said.

“If you have the right people you can have fun, do business and make money. In Australia, the UK and New Zealand where we’ve done this no one has gone out of business.”

ORBA members were polite and subdued during the hour-long presentation by MTO assistant deputy minister Mike Goodale as to what the government is thinking in bringing the concept to the table next year.

Mike Goodale

Ministry officials have yet to present the plan to cabinet for approval, he said, but the plan is to have prototype RFPs posted this summer. Following time for feedback, the first live bids would start in the fall with assumption of work in spring, 2007.

Goodale said contracts will be let for about 800 to 1,000 centreline kilometers of road and the service provider will be expected to maintain, rehabilitate and manage the pavement to set standards.

Each contract will be worth about $25 to $35 million a year for the term, expected to be in the 20-year range.

“We have a responsibility to the taxpayers of Ontario to find cost efficiencies and provide the highest quality roads possible,” Goodale said.

“We have an obligation to explore this.”

He stressed nothing has been decided and that more discussion with ORBA members was planned to work out some of the hurdles, including key issues such as performance bonds and third party liability.

While he recognized the change is seen by some contractors as detrimental to smaller operations and larger players fear the industry could be hijacked by large multinationals who would siphon profits offshore, he said part of the change is driven by a desire to give Ontario contractors the experience and the capitalization to compete head-to-head with those foreign conglomerates worldwide.

Goodale said many things still need to be worked out, including how to account for sudden and unusual increases in costs such as fuel or labour during the contract.

Porter said the concerns raised by ORBA are not dissimilar from concerns raised by their counterparts around the world where the concept has been introduced.

However, he said, sorting out the levels of risks to be assumed by the service provider and how issues will be worked out through a management board comprising contractor and government representatives should smooth out the bumps.

“The other thing it does is allow innovation,” said Porter. “Right now it takes a lifetime to get a spec changed. If you’re responsible for the road you can go ahead and try a patch of material and monitor it and see if it works”

Doug Woods of Cope Construction said the new direction “doesn’t scare me as a small contractor. I see opportunity here for the bigger guys to bid on the work and to subcontract it.”

Steve Cruickshank of Cruickshank Construction in Kingston said his firm already has AMC worth about the same as the ATCs are being set at and is interested finding out more.

Even some of the grumbling in the room about performance bonds didn’t deter him.

“A bond company hasn’t paid out on an performance bond for an Ontario road builder in 30 years,” he said. “It’s money in the bank for them so they should be interested. But it’s a big change and we’re all resistant to change.”

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