Infrastructure costs keep rising. Consider these approaches to mitigate them.

Infrastructure project delivery is at a crossroads. On one hand, the federal Bipartisan Infrastructure Law (BIL) has catalyzed unprecedented infrastructure investment, while on the other, rising costs for materials, labor and energy are squeezing project budgets and complicating project planning and execution. 

And that’s all against a backdrop of political transition. 

The impact of this dual trend is being felt across the nation and across sectors, from energy to water and far beyond. When it comes to transportation agencies, this trend could hinder efforts to keep America – and the nation’s economy – moving forward. 

For example, the Federal Highway Administration reported that highway construction costs rose yet again in the first quarter of 2024, at an annualized rate of 9.6 percent, which is a 2.4 percent increase over the last quarter of 2023. Continuing cost uncertainty makes accurate budgeting and forecasting a guessing game, which is a particular challenge when it comes to large-scale projects. 

Impact of High-Risk, Large-Scale Projects

The increasing scale of infrastructure projects is one critical factor. Today’s major transit and highway initiatives typically span multiple years and involve complex engineering requirements, which makes planning and delivery even more complex.  

Key challenges include:

• Exposure to Risk and Uncertainty — Contractors bidding on large-scale projects must consider, with some level of certainty, the substantial risks of pricing elements that won’t be needed for several years, such as revenue vehicles. Recent market volatility has made it even harder to predict the cost and availability of resources, from materials to labor to energy. Some companies have backed away from bidding on projects due to concerns about mitigating the risks involved, including attracting and retaining skilled labor. Public owners have become more aware of the importance of risk management and its impact on their programs. 

• Bonding Capacity — Large-scale projects also involve additional surety requirements. The cost of securing necessary bonds has risen significantly, adding another layer of expense to already costly projects. While there is no easy answer, some architecture, engineering and construction (AEC) firms are working more closely with surety companies to understand their expectations and tailor packages and practices to better meet surety standards, which can potentially help manage the cost of bonds. Given that bonds are called on projects relatively rarely, the collective industry should begin a conversation about the level and need for coverage for routine, low risk projects to mitigate overall cost increases.

• Dynamics of Competition — Reduced competition means higher costs for both mega-projects and small, routine ones. As costs rise and transit and highway projects grow larger and more complex, fewer contractors are willing and able to bid on transportation projects. That fosters a vicious cycle of reduced competition and further escalating costs. With fewer contractors willing or able to take on infrastructure projects, the remaining bidders often price in larger risk premiums and higher margins. This reduced competition has led to bid prices significantly above independent cost estimates, forcing agencies to either secure additional funding, scale back project scope or delay projects. These compounding factors are intensifying longstanding challenges in infrastructure development – yet savvy agencies and AEC firms also are finding new opportunities as well.

The BIL Brings Historic Funding Alongside a Greater Need to Manage Costs 

Historic and timely funding made available through the BIL can help to offset some of these increased costs, even as the larger number of projects concurrently in development also threatens to exacerbate shortages of talent and other resources. Yet, every challenge can be an opportunity in disguise. 

This tough operating environment could hasten the adoption of more innovative and effective ways of working. Several key strategies are emerging to maximize the impact of BIL funding while managing cost pressures. Notable examples include:

• Project Sizing and Phasing – To meet these challenges, agencies can more carefully evaluate project scale and adapt by breaking larger projects into smaller, more manageable components. Better aligning project phases with market conditions and contractor capacity can increase competition and reduce risks and bottlenecks to delivery. For instance, the Puget Sound Gateway program split a major project into two phases with different delivery methods, successfully attracting more bidders and better managing risk exposure.

• Risk-Based Cost and Schedule Estimating and Value Engineering – The cost of materials such as concrete and steel have surged, driven by post-pandemic supply chain realignments and global instability. Long lead times for critical electrical equipment and persistent labor shortages are further exacerbating price increases. Against this backdrop, advanced forecasting and simulation tools can optimize project delivery, particularly when deployed as a complement to value engineering. Probabilistic risk-based cost inflation forecasting and cost and schedule risk analysis help agencies better understand and plan for cost escalation. This includes analysis of market-specific conditions, material and labor cost trends, and competitive conditions. The resulting insights can help design and implement comprehensive risk sharing and mitigation strategies. It also can help teams consider alternative approaches to surety requirements.

These approaches that incorporate probabilistic forecasts in financial and overall capital program planning help identify cost-saving opportunities while maintaining project objectives, schedules and quality standards. These services also can help develop strategies for collaborative pricing and opportunities to share risk appropriately between agencies and implementing firms.

• Alternative delivery — Alternative delivery methods, particularly progressive design-build (also referred to phased design-build) and Construction Management at Risk (CMAR), are gaining traction as ways to better manage risk and potentially reduce costs. These approaches allow for more collaborative pricing strategies, greater flexibility in material procurement strategies and timing, shared risk management and cost savings between agencies and contractors. It also can enhance opportunities for innovation. Public private partnerships have proven to be a valuable approach for certain projects by leveraging private sector innovations, appropriately sharing risks and bringing financial capacity to the public’s benefit.

For example, Federal Highway Administration and Washington Department of Transportation have been designing and implementing best practices to help deliver the promised projects in accordance with the target costs and planned schedules. 

Digital Delivery and Modern Methods of Construction

With data rich agencies looking to maximize dollars and radically improve efficiency, we would do well to further incorporate digital delivery into RFPs and project plans. Digital can help:

1. Improve collaboration and productivity: Digital tools like Building Information Modeling and cloud-based platforms enable real-time collaboration among project stakeholders. This reduces errors, rework, and delays, leading to cost savings. Automating routine tasks and workflows also increases efficiency, allowing teams to focus on more complex tasks and promoting innovation.

2. Data-Driven Decision Making: Digital delivery provides access to accurate and up-to-date data, enabling better decision-making. By identifying potential issues early, digital tools can prevent costly delays and changes. Technologies like augmented reality and digital twins help in visualizing projects before construction begins, reducing waste by identifying design flaws and optimizing material usage. 

For example, the digital twin for a bridge-replacement project in Connecticut can link to real-time train schedules, weather data and tidal charts, showing exactly where and when construction cranes should be deployed. A digital twin also is helping improve more than nine miles of Kansas State Highway 96, expanding the corridor from four to six lanes, pavement replacement, the reconfiguration of seven interchanges and adding safe connections for pedestrians and cyclists. 

3. Enhanced Project Management and Quality Control: Digital project management tools help in tracking progress, managing resources and ensuring that projects stay on schedule and within budget. They also bolster quality control through precise measurements and real-time monitoring, reducing the likelihood of defects and rework.

Digital delivery methods become even more powerful when combined with modern methods of construction, which can dramatically decrease the time and cost involved in building essential infrastructure – while also boosting sustainability and worker safety. 

Using modern methods of construction and a kit-of-parts approach, we can standardize complex industrial engineering and construction projects, reducing costs and allowing greater flexibility in production timelines. For the first time, key elements of infrastructure can be built far from where they will stand. This “build anywhere” approach reduces site-based manufacturing by tapping offsite fabrication options. The model allows suppliers to share production, so bottlenecks aren’t an issue.

This is no longer just a theory. The idea has been proven to work in complex environments – such as airports – which can’t afford downtime. In that context, this innovative approach slashed estimated construction time on-site roughly 80 percent from hundreds of days to just tens of days. It also cut the number of component parts from 5,000-plus to just 67. This simplified approach cuts waste, drives economies of scale and speeds on-site construction – while helping to overcome shortages of locally-available skilled labor. 

These approaches can help maximize the impact of BIL funding while managing cost pressures. Yet, particularly when adopting new approaches, collaboration is key. 

A Collaborative Approach

Agencies and the AEC community need to maintain an open dialogue. Project teams need to foster the trust that is essential to successfully adopt new ways of thinking and working collaboratively. To accommodate changes in funding availability and market conditions, flexibility should be integrated into project planning right from the start. 

For example, Louisiana’s Calcasieu Bridge may be one of the most complex projects in state history on the financial, environmental, political and logistical fronts. The project involved replacing the bridge, widening the interstate to six lanes, and adding new approaches, interstate roadways and ramps, service roads and interchanges – all in a site dense with utilities, high-pressure pipelines, rail lines, heavy commercial and residential traffic, and environmental risks. It required an effective public-private partnership and a balanced approach to risk. The approach may give the state roughly 15 percent of annual toll profits after operations and maintenance, with the funds going to further lower toll rates, shorten the 50-year lease, or toward other infrastructure projects. 

Progress required an agile approach to timelines and funding models as well as a keen understanding of the local context. By continuously listening to and incorporating multiple perspectives into their strategies, teams will be better positioned to monitor and adjust to changing market conditions. That’s essential, since there is little sign that things will become easier down the road.

Looking Ahead

The path forward requires careful consideration of project size and risk allocation, coupled with strategic use of BIL funding and financing tools and innovative, flexible delivery methods. 

Agencies that can effectively balance project scale with market capacity, while utilizing sophisticated risk management and progressive procurement strategies, will be best positioned to deliver the successful projects that their communities need to thrive. 

Shawn D. Wilson, PhD, is the former Secretary of Louisiana Department of Transportation and Development. He currently serves as SVP and national highways business leader for WSP, one of the world’s leading engineering, environment and professional services firms.