Myron Olstein, Paul Eisenhardt, Robert Geist, Richard King, and Jason Jennings

OBJECTIVES:

The objectives of this study were to conduct case studies and other research to identify best capital practices in and out of the water industry that are available to water utilities to efficiently manage capital projects and programs. These would include but not be limited to capital program management techniques, business case analysis components and methods, and cost effective and innovative techniques for planning and implementing capital projects and programs.

BACKGROUND:

Beginning shortly after the turn of the century and extending to 2040, the water utility sector will see a rapid increase in capital needs due to replacement of aging infrastructure, regulatory requirements, and growth needs. This growth in capital needs is being exacerbated by a number of forces that are not expected to abate anytime soon, which is increasing capital costs at a rate above the growth in capital needs.

HIGHLIGHTS:

1. The water and wastewater sectors are extremely capital intensive.

2. Capital needs will continue to increase until 2040 resulting in rate increases of more than 3 percent above the rate of inflation.

3. In addition to the growth in needs, a number of factors (rising raw material costs, supply demand issues, and personnel shortages) are increasing construction costs.

4. Other sectors have improved their capital efficiency and developed capital program best practices.

5. Water utilities could improve their capital program practices and some utilities that have done so have shown significant improvements

APPROACH:

The multifaceted research approach consisted of (1) a literature search; (2) a utility survey of capital program metrics and practices; (3) focus groups examining specific issues; (4) interviews with utilities, A/E firms, and contractors to discuss targeted issues; (5) development of tools identified through the literature search; and (6) pilot tests of tools at utilities.

RESULTS/FINDINGS:

1. The water and wastewater sectors are among the most capital intensive sectors.

2. After 8 flat years, 20 year capital needs increased 67 percent and are expected to continue to increase through 2040.

3. A majority of the needs are to replace aging infrastructure.

4. Construction costs are increasing due to the rising cost of construction materials, supply-demand issues, personnel shortages, energy cost increases, and other factors.

5. Water utility sector practices are the cause of some of the high construction costs.

6. Other sectors have become more capital efficient and have identified capital program best practices.

7. A water utility survey indicated that water utility capital program practices could be improved.

8. The water utility sector appears to use fewer benchmarks and metrics and tools than more capital efficient sectors.

9. Half of the utilities surveyed reported being short handed in the capital program and experiencing difficulty finding new hires.

10. The largest problems identified by surveyed utilities were rising raw material costs and overall affordability, followed by project timing and project selection.

11. One utility panel and a number of case studies indicated that one of the biggest cost drivers is the risk averse nature of municipal utility contracts.

IMPACT:

This research highlights the enormous impact that rising construction costs and capital needs will have on water utilities causing annual rate increases at multiples of the inflation rate. The project demonstrates that water utilities need to become more capital efficient, and identifies ways in which other sectors and some water utilities have significantly improved their capital efficient. The report and CD-ROM provide tools that will facilitate capital efficiency improvements by utilities.

MULTIMEDIA:

The report includes a CD-ROM that contains a number of capital program best practices including capital cost estimating tools, capital decision making tools, and a Project Readiness Index tool.

PARTICIPANTS:

Participants included more than 30 North American water utilities, three pilot test utilities, and the Construction Industry Institute.