Managing cost increases while maintaining forecasted rates

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A rendering of the filtration facility showing layout of the buildings, landscaping, roads, and parking areas.

On Wednesday, June 28, six items related to the Bull Run Treatment Projects were brought before City Council. Council unanimously accepted the Bull Run Treatment Projects annual report, a no-cost planned extension of the program management contract, and two early works packages (one each for the filtration facility and the pipelines) to start construction in September 2023. Two guaranteed maximum price ordinances were given a first reading and will receive a second reading and vote on July 12. 

The annual report describes the significant preconstruction progress already made on Filtration, as well as our continued outreach, cost control, and equitable contracting efforts. It also discusses the cost estimate, which has increased 24 percent since 2022 due primarily to the construction cost inflation affecting projects nationwide. 

The remaining Council items enable Filtration to stay on schedule and start to lock in contractor pricing, both of which will help limit additional cost increases. The Water Bureau is seeking to break ground on construction in fall 2023 to maintain the compliance schedule and avoid further pricing spikes due to regulatory deadline pressures.   

A full list of the Council items with links to further information is below: 

Managing rising construction costs 

The Bull Run Filtration Projects (Filtration) are federally mandated treatment improvements to our drinking water system that, like other infrastructure projects across the country, are experiencing rising costs. The bureau is committed to maintaining the current rate forecast despite these increased project costs.  

Throughout five years of planning and design, the Water Bureau has taken proactive cost management steps including ongoing value engineering to reduce construction costs by $200 million. We have also secured federal financing that will save at least $247 million, and we expect to qualify for $575,000 in grants through the Energy Trust of Oregon. However, despite these best efforts, estimated funding needs for Filtration have increased by $351 million—up 24 percent from 2022 estimates—bringing the total program budget from $1.482 billion to $1.834 billion for the Bull Run Treatment projects.  

As with other infrastructure projects in Oregon and nationwide, the primary drivers of the increase are escalated construction costs and a limited labor and contractor market. Construction projects across the country have experienced cost increases of 40 percent or more, impacted by a host of factors ranging from geopolitical events to ongoing supply chain constraints related to the pandemic.  

Pie chart showing about 60 percent high escalation in construction economy with the remainder of the pie split evenly between design progression, schedule compression, and limited market competition

While we can’t control the escalation in construction costs, we can best manage them by starting construction as early as possible and locking in guaranteed maximum prices. This approach also reduces the potential for additional cost increases due to the project’s compressed regulatory schedule. Because of the bilateral compliance agreement with Oregon Health Authority, the City has a limited window of time in which to complete construction. Any delay to starting construction means higher costs to complete work in less time. Starting construction this fall is the City’s best opportunity both to achieve the regulatory compliance deadline and to control further cost increases. 

Estimated construction costs have also increased due to the limited labor market and bid competition. The Water Bureau’s contractors are actively working to attract the diverse and qualified workforce needed for construction, recognizing the local labor pool is finite and there are numerous large infrastructure projects in the region competing for the same resources. To help meet the City’s equity contracting goals, the bureau has increased outreach to the local contracting community and is using a variety of procurement tools such as limited competition and direct negotiation for certain bid packages.  

Holding the line on rate increases 

Beyond these Council items, the Water Bureau is committed to maintaining current forecasted rates and plans to hold the line on rate increases by applying for additional WIFIA funding, reviewing our Capital Improvement Plan, and evaluating other federal and state funding options.  

In 2021, we secured low-cost, long-term federal financing through the Water Infrastructure Finance and Innovation Act (WIFIA) to help build the Bull Run Treatment Projects, saving ratepayers a projected $247 million. The bureau will now be applying for an additional low-interest WIFIA loan to fund nearly half of the projected cost increase ($172 million). The City doesn’t need to begin paying back these loans until 2032, allowing them to be used as a tool to smooth water bill impacts over time. The extremely low interest rate and flexible terms for WIFIA financing provide financial protection for ratepayers against the risk of rising costs and uncertainty of future conditions.   

The Water Bureau will offset most of the remaining cost increase by deferring capital projects in the ten-year Capital Improvement Plan to year eleven or later. This includes pausing the Willamette River Crossing project and slowing implementation of the seismic plan. Delaying these projects reduces their competition with Filtration for scarce construction material and labor resources, competition that could potentially result in further cost increases.  

The Water Bureau is also committed to seeking state and federal funding opportunities and partnerships. In addition to qualifying for expected incentives of over $500,000 from the Energy Trust of Oregon, the bureau is reviewing opportunities through the Portland Clean Energy Community Benefits Fund (PCEF), State Water Resources Department, Department of Environmental Quality, and Army Corps of Engineering funding programs. We also continue to consult with the City’s Office of Government Relations and collaborate with federal, state, and local governments to secure additional resources and consultations. At the Council meeting, the bureau’s Commissioner-in-Charge, Mingus Mapps, said, “I do want to reassure Council and the people of Portland that I will continue to work with the Water Bureau and especially our federal partners to try to leverage resources to support this mission-critical project.” 

Table showing a 7.9 percent increase in Fiscal year 2024, and 8.1 increase in the following 4 years

The Water Bureau is committed to controlling costs and maintaining current forecasted rates while continuing to invest in necessary and forward-looking improvements to our drinking water system. Our investment in Filtration supports a robust water system that addresses our current needs and anticipates changes in our environment so that the water our community loves is safe and abundant for generations to come. “No one can think of a more important asset than having clean water,” said Commissioner Dan Ryan. “This project needs to keep moving along.”