Construction Management

A Guide to Design-Build-Operate (DBO) Contract

Design–Build–Operate (DBO)

Design-Build-Operate (DBO) contracts are long-term, contractual, performance-based agreements between an Employer and a Contractor in which the Contractor is responsible for designing, building, operating, and maintaining a facility, meeting performance standards, replacing assets over its life cycle, or the majority of it, and hand back the facility to the Employer at the end of the contract.

DBO arrangements are frequently confused with other types of public-private partnership (PPP) projects, such as build–operate–transfer (BOT) or concessions; however, unlike the latter, DBO projects do not require the Contractor to finance or bear the commercial risk for the project. Because financing is provided by the employer, contractual arrangements are shorter and simpler than with BOT or concessions.

Design-Build-Operate Contract Vs Other Contracts

In contrast to more traditional contracting methods, such as build-only or design-build, a DBO contract eliminates the typical interfaces encountered in the construction industry between the D, B, and O phases of a facility: the DBO Contractor acts as a single point of responsibility for all or part of the facility’s life cycle.

As a result, where an Employer, many years after a design-build contract has ended, generally has no other easily available recourse than to assume the financial consequences of an asset becoming obsolete earlier than the design life span announced by the design-build Contractor, or of Operating Expenditure (OPEX) becoming significantly higher than defined at the design stage, a DBO arrangement makes the Contract.

Any actual OPEX that is higher than committed, or that occurs earlier than planned asset replacement, represents the full risk.

As a result, the Employer gains greater and earlier certainty about a facility’s total life cycle costs and performance—the DBO Contractor is contractually bound to meet performance standards and is sanctioned by the payment of performance damages if those standards are not met.

DBO arrangements are also praised for allowing faster delivery schedules due to the absence of D, B, and O interfaces, a higher long-term operational viability, and thus better value for money and lower life cycle costs than traditional sequential contracting over a facility’s life span.

Indeed, recent economic research studies tend to show that DBO is more efficient and sustainable in terms of economic value potential than design-build or BOT arrangements.

How Design-Build-Operate Contracts Work?

Due to a lack of public sector expertise in delivering complex facilities (such as water treatment plants and energy plants) and a lack of public sector expertise in delivering complex facilities (such as water treatment plants and energy plants), the private sector is increasingly involved in the procurement and operation of public infrastructure.

For involving public sector risk and expertise in the procurement of public infrastructure, there are a variety of options. Design-Build Operate is one of these arrangements (DBO). It’s especially common in water treatment plants.

DBO involves a government (often in the form of a government body or local authority) engaging a single contractor to:

  1. design and build the infrastructure facility
  2. operate the facility for a period (typically between 10–30 years)

The government usually pays the contractor for developing and operating the infrastructure project, either through tax income, grants (e.g. from international development organizations), or debt financing. Throughout the process, the government usually owns the infrastructural facility.

The government may either:

  1. let the public use the facility or its services for free (if the facility’s function falls within the remit of public services, such as a prison or some roads), or
  2. charge end-users a fee for use of the facility

Key strengths of a DBO Contract

  • Early certainty as to the lifecycle costs of a facility – fees are set from the outset of the facility life D + B + O + M
  • Better value for money – life-cycle costs optimized, with Contractor naturally driven to optimize design, construction (plant, materials, and workmanship), and operation practices
  • Higher guarantee on operational performance – easier financial actions against the Contractor if Key Performance Indicators are not met
  • A single point of responsibility- for design, build, and operation phases – no interfaces D / B / O – Faster delivery schedule
  • Allow introducing innovative design options – vs. local skills & resources => on-the-job training of Employer’s personnel over several years

See Also
Design-Build Contracts

Build-Operate-Transfer Contracts