The Washington PostDemocracy Dies in Darkness

Maryland likely to be on the hook for millions if it wants to save the Purple Line project, analysts say

Purple Line construction continues on the overpass at the Paul S. Sarbanes Transit Center in downtown Silver Spring on Thursday. (Toni L. Sandys/The Washington Post)

When the contracting team building the Purple Line announced plans to quit mid-construction this summer, some project watchers viewed it as posturing in a three-year fight with the state of Maryland over hundreds of millions in cost overruns.

But industry analysts say financial pressures faced by the lead construction company, Texas-based Fluor, underscore the seriousness of the joint venture’s notice that it will walk off the $2 billion light-rail project rather than continue racking up additional costs.

The company’s problems include cost overruns on multiple megaprojects and a Securities and Exchange Commission investigation into whether it properly accounted for $714 million in overruns and other expenses in 2019. It’s unclear whether the SEC investigation includes the Purple Line project.

With its stock price plummeting in recent years, the global construction giant recently announced that because of “economic disruption” from the coronavirus pandemic and other problems, it would have to suspend paying shareholders a dividend.

“The fuse is probably a little shorter [for Fluor] to pull the plug” on the Purple Line, said Andrew Wittmann, a senior research analyst for Robert W. Baird & Co. “By walking away, they cut their losses before it potentially gets worse and they have a bigger financial hit to the company.”

Firms building Purple Line announce plan to quit over cost disputes

Meanwhile, after Fluor and its partner companies announced plans last month to quit the Purple Line, two rating agencies downgraded the project’s bonds to junk status because of increasing risk that it will be left uncompleted.

Fluor’s financial problems underlie intense negotiations over the past six weeks as Maryland transportation officials try to save a legacy project for Gov. Larry Hogan (R) from ending up as a 16-mile swath of abandoned construction sites through the Washington suburbs.

The three sides — the state, the construction contractor, and an umbrella group of companies overseeing a 36-year public-private partnership on the project — have until June 20 to agree on who will pay for additional costs. Unless a settlement is reached, the construction team has said it will leave in 60 to 90 days.

That would leave the umbrella group scrambling to find new companies to complete the Purple Line — a rare occurrence that industry experts say would add up to a year, cost millions more, and possibly end up in a legal battle with the original firms over any unpaid costs.

To reach a settlement, industry experts say, all sides, including the state, probably would have to pay more to cover the additional expenses.

“Ultimately, I think the parties are going to come to a resolution,” said Jonathan Gifford, a professor at George Mason University and director of the Center For Transportation Public-Private Partnership Policy. “But it’s very likely all are going to have to share in the sacrifice needed for the project to go forward.”

Md. transportation chief says he’s trying to keep Purple Line firms on the job

Years behind and over budget

While cost overruns and delays aren’t unusual for megaprojects, experts say the extent of the Purple Line divide is remarkable.

In its latest report, the construction team said the project was 976 days — more than 2½ years — behind schedule and $755 million, or 37 percent, over budget because of problems beyond its control. Those cost overruns, which the contractor attributes to the state, have soared from the “at least” $519 million cited in its May 1 termination notice.

Some of the cost increases have been preliminary estimates because construction designs are still awaiting approval, according to a recent project report.

Industry experts say the costs of delays also can compound over time and as construction gets more technical.

“Sometimes, once these projects turn south, there’s a bit of an accelerating slope,” said Elizabeth Vermillion, an equity analyst for CFRA Research, an investment research firm. “The costs can pile up faster and faster with more delays.”

Publicly, at least, the Maryland Transit Administration has granted the contractor an additional five months of construction time to make up for initial delays. But the state has refused to pay more, saying any overruns are the contractor’s responsibility.

Scott Zuchorski, head of the North America Infrastructure group for Fitch Ratings, said the Purple Line delays and cost overruns “are definitely on the higher end of what we’ve seen.”

“You can just have this gap that grows and keeps getting bigger over the years,” Zuchorski said. “Typically there’s a negotiation where these issues get resolved before the contractor is quitting.”

On the Purple Line, Zuchorski said, “My sense is each side is probably responsible for different parts. But when you’re talking about big numbers and delays over 900 days, those are some big checks to write.”

Determining if the Purple Line contract is a good deal isn’t easy

Negotiators on the almost-daily conference calls have remained tight-lipped about how close they are, or aren’t, to an agreement. Media representatives for all three sides denied requests for interviews with project officials. They also declined to answer specific questions in writing.

However, the umbrella group, Purple Line Transit Partners (PLTP), signaled that it is not pursuing other companies to complete the work. Technically, the construction team has said it will terminate its $2 billion design-build contract with the umbrella group, which holds the $5.6 billion partnership with the state to build the light-rail line and then operate it for 30 years.

In a statement, PLTP chief executive Peter van der Waart said the “substantive content and constructive tone” of the recent negotiations “are giving me increased confidence that a fair deal will be reached that enables us to keep advancing the Purple Line toward completion without further delay. . . . We’re not considering alternative courses at this time.”

How the Purple Line got behind schedule as costs mounted

The construction team, known as Purple Line Transit Constructors, is composed of Fluor, Lane Construction Corp. and Traylor Bros. A spokeswoman for the joint venture referred questions to the state.

A Fluor spokesman said the company “is not participating in the story,” citing the SEC investigation.

The company declined to say whether its accounting of the Purple Line costs is part of the SEC inquiry. However, Fluor leaders recorded expenses on the Purple Line during the time period now under investigation, according to a transcript of a 2019 company earnings call with analysts.

An SEC spokeswoman declined to comment.

Fluor also said in May that the Justice Department had subpoenaed documents for projects it had recorded expenses on in 2019, though the company didn’t reveal which ones.

Maryland Transportation Secretary Gregory I. Slater said in a statement that the discussions have been “productive.” He blamed an early lawsuit against the Purple Line for delaying the start of construction by a year and creating “uncertainty in the project, leading to further delays.”

“It is critical that the details of the settlement are well-developed and thoughtfully considered by both parties, which can take time to develop and evaluate,” Slater said. “These discussions are focused on a fair and reasonable settlement to allow the Purple Line to continue its successful development and the best path to deliver this important transit project for the National Capital region.”

Said Hogan spokesman Michael Ricci: “The Purple Line is an important infrastructure project for the state and the region, and Secretary Slater has kept the governor updated on the progress of the ongoing discussions.”

As states turn to public-private partnerships to build infrastructure, details of the deals are key

The stakes are high. Industry experts say having a contractor abandon a megaproject midstream would be extraordinary.

“It’s very rare to see on a large job like this,” said Wittmann, the Baird analyst. “It does happen, but it happens very infrequently.”

It’s also in all the parties’ interest to keep the construction team on the job, experts say.

Preventing the Purple Line from stalling amid spiraling costs is critical for Hogan. As head of the National Governors Association, he has made infrastructure investments, including via public-private partnerships like the Purple Line’s, his signature initiative. His administration also recently began to solicit companies to add toll lanes to Interstate 270 and the state’s part of the Capital Beltway, in what Hogan has said will be one of the largest public-private partnerships ever in the United States.

Finding a way to finish

The Purple Line would be the first direct suburb-to-suburb rail line in the Washington region and connect Maryland’s spokes of the Metro system. Leaders in Montgomery and Prince George’s counties also are counting on its 21 stations to spur economic development and focus growth in older, auto-centric suburbs.

Purple Line project gets new CEO amid cost, schedule disputes

Kevin DeGood, director of infrastructure policy for the Center for American Progress, a liberal think tank, said contractors have the upper hand in such negotiations. Unlike Hogan, he said, they don’t have to answer to the public awaiting the line’s completion.

“I don’t think there’s any way for the state to leave a project like this unfinished,” DeGood said. “That would be such a black eye. You couldn’t have it.”

However, the prospect of the state having to pay more comes at a particularly bad time because government budgets have been hit hard by tax revenue losses due to the pandemic.

State Del. Kumar P. Barve (D-Montgomery), chairman of the House Environment and Transportation Committee, said the state must complete the project, but he doesn’t see how it could contribute more.

“Our budget is going to be in a structural deficit for a very long time,” Barve said. “We’re going to be cutting spending all over the place. . . . If more money is needed from the state, it’s hard to know where it’s going to come from.”

Project officials say the construction of the line is about 40 percent completed. If the contractor quits, workers would leave behind partly built bridges, an unfinished tunnel and miles of torn up roads.

The line was initially scheduled to open in March 2022. State officials have since said it will open in two phases, in late 2022 and mid-2023. However, that schedule does not appear to take into account the 976 days of delays cited by the contractor.

Federal appeals court ruling allows Purple Line construction to continue

The delays started with the ultimately unsuccessful 2014 lawsuit by Purple Line opponents, but additional problems followed. The contractor said further delays stemmed from CSX changing design requirements for a crash wall along its tracks and the state changing rules for the project’s embankments and culverts, in addition to it lagging in providing right of way.

“This is a complicated project,” said Robert Puentes, president of the Eno Center For Transportation, a nonpartisan think tank. “It’s had these unique things happen to it.”

Even so, industry experts say, they doubt the construction team would have threatened to quit unless the cost overruns had become untenable. Walking off a job would be so potentially damaging to the three companies’ reputations that it wouldn’t make sense to publicly announce a plan to do so unless they were serious about needing to cut their losses.

That’s probably why the contractor said in its termination notice that it had offered to complete the Purple Line at cost — meaning without making a profit, experts said.

Hogan administration cuts costs from Purple Line project

“The private partners want to maintain their reputation,” Puentes said, “so I’m sure they didn’t make this decision lightly.”

Fluor is best known for building oil and gas facilities. However, its global business includes multimillion and multibillion dollar contracts on mines, power plants, airports, bridges and highways, such as building the Capital Beltway toll lanes in Northern Virginia.

Construction companies typically have single-digit profit margins on large projects, so $755 million in Purple Line cost overruns would wipe out any profit and then some, experts said.

Companies often are willing to absorb additional costs, even if they eat into profits, to preserve their reputations, analysts said. But that becomes more difficult for a firm that has suffered significant recent losses.

Those losses have led to at least two lawsuits by Fluor shareholders, including one filed this month alleging that company executives had intentionally underbid to win contracts on power plants and other projects that later incurred additional costs. The Purple Line was not listed as a problematic project in either lawsuit.

Fluor officials told analysts in 2019 that they had recently adopted a “more disciplined approach” to bidding, assessing the company’s risks, and monitoring its projects, according to the earnings call transcript.

Work on region’s big projects continues, and accelerates, amid coronavirus

Vermillion, the CFRA Research analyst, said Fluor has a particularly large number of fixed-price contracts, such as on the Purple Line, that leave it exposed to unanticipated costs.

She said she was struck by the tone of certainty in Fluor’s notice that it would be reducing its future revenue by terminating the Purple Line contract. Companies typically try to convey optimism whenever possible, she said.

“They do sound pretty certain this project won’t continue for them,” Vermillion said of the May notice. “The tone of the press release makes it sound like they think it’s going to dissolve.”

While the contractor’s departure would leave the umbrella group scrambling to find a replacement, experts say, the end result could be even worse for the state.

Dhaval Shah, a director in the infrastructure ratings group for S&P Global Ratings, said it would be so costly for the umbrella group to secure a new construction contractor that he thinks it would instead try to terminate the entire public-private partnership.

“Without [the Maryland Department of Transportation] giving any relief or absent new significant funding,” Shah said, “I think it’s highly unlikely they’ll find a replacement.”