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Evaluation of International Performance Contracting Methods for US Highway Projects

Description:

State departments of transportation (DOTs) continue to experience pressure to deliver highway projects faster, better, and at less cost. Furthermore, they are attempting to do so while morphing their project delivery and procurement systems into forms that were never contemplated by their enabling legislation. The trend is to reduce inherently adversarial contracting policies and procedures and put more responsibility on the construction contractor for delivering a satisfactory product meets or exceeds specified minimums. Various methods have been tried from simple incentives to complex attempts to craft design-build contracts with mechanisms that encourage the contractor to exceed expectations. National Cooperative Highway Research Program (NCHRP) Synthesis 390, Performance Based Contractor Prequalification found that the contracting community was in favor of performance based prequalification and did not see any barriers to implementation. NCHRP Synthesis 376, Quality Assurance in Design-Build Projects, found that DOTs were attempting to shift the responsibility for quality and performance of the constructed project to the design-builder but were constrained by outdated regulations that were written for design-bid-build projects. A Federal Highway Administration (FHWA) scan tour of Europe and Canada (Report No.FHWA-PL-05-010, “Construction Management Practices in Canada and Europe”) clearly observed the difference between the US project delivery culture and that of overseas agencies. One recommendation from that report was that the US consider adopting the more promising philosophies found overseas. Thus, the need for a fresh and unconstrained look at transportation project delivery methods is in order based on the result of those three studies.

Many European transport agencies as well as those in Australia, New Zealand, and South Africa have adopted some form of performance contracting where the owner has stepped back from prescriptive specification and design and make a transition to the idea that the design and builder should hold responsibility not just for meeting minimum specifications but for long-term performance. These initiatives have been highly successful in a number of cases and have changed the way projects are delivered in those countries as well as enhanced the quality of the resulting infrastructure. In New Zealand, for instance, the classical line between maintenance and construction has been blurred to the point where the only projects that are not delivered on multi-year long term performance based contracts are major bridges and Greenfield highways. Multi-million dollar pavement and bridge rehabilitation projects that would qualify for federal construction funding in the US are delivered under long-term performance based “maintenance” contracts where an entirely different payment system is in effect. Depending on the project, the contractor’s payment is based on a formula that extends from 1 to 5 years. If the project exceeds monthly performance criteria, the contractor receives monthly payments that are greater that 100% of the contract amount. If they dip below minimums, the payment schedule is reduced commensurately. The contractor is supervised by a third party consultant with whom they share design responsibilities in a system similar to CM-at-risk. The most obvious impact of this change in New Zealand is reflected by the number of licensed professional engineers that on the contractor’s staff. There is also a “shadow QA” group in each company that conducts performance measurements before the consultant to that corrective action can be taken in time to avoid penalties and hopefully maximize bonus payments. The result is a project delivery environment where owner, designer, and builder are all calibrated to exceed stipulated performance criteria rather than just meet it. A less dramatic example is the Ministry of Transportation in Ontario which has substituted a rigorous performance based prequalification system for performance bonding. The system controls whether or not a given contractor can bid on work and how much work they are allowed to compete for based on the firm’s past performance record. Synthesis 390 found that Ontario is saving approximately $70 million in bonding costs at the investment of standing up a 3 person prequalification office that monitors and administers the performance based program. Thus, there is a visible record of success in changing public transportation agency project delivery to a performance based system.

The proposed research will start where the above-cited reports left off and assembled a body of information on international agency experience with performance contracting. It will detail the various methods in practice and develop a spectrum like the one described in the previous paragraph which extended from merely using contractor performance for prequalification in Canada to semi-privatizing project delivery on a performance/service basis like in New Zealand. It will then evaluate each of the foreign methods against US legal, policy, and cultural constraints, identifying barriers to implementation and recommending means to surmount them. It will assemble quantitative performance data from the international public agencies and demonstrate the impact of making the shift in terms of cost, time, and quality. The proposed research should address the following questions:

· What are the best practices for implementing performance contract projects?

· What are the options for performance metrics and how well are they able to be applied?

· What are the roles of the designer (in-house or consultant) in performance contracting project delivery?

· What are the advantages and disadvantages of performance contracting versus design-bid-build (DBB), construction manager-at-risk (CMR) and design-build (DB)?

· What types of projects are good candidates for performance contracting project delivery?

Objective:

The main research objective is to capture the performance contracting experience available from overseas and potentially in US DOTs, city and county engineering, and streets departments. The study will not allow itself to be constrained by actual or inherent biases about what can and cannot be done in the US public transportation sector. One of the major outcomes of this study is the discovery surmountable barriers to implementation in much the same way that design-build was implemented. The study will then assemble a set of best practices and conduct a comparative analysis that can be utilized by agencies wishing to implement performance contracting in their highway construction programs. The primary deliverable will be a monograph that details the salient research findings and recommendation along with quantitative measures of effectiveness.

Tasks:

Specific Tasks of the research to accomplish the main objective include:

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Task 1 – Define the state-of-the-practice in performance contracting through a comprehensive literature, the collection and analysis of relevant procurement documents, performance contracting design and construction contracts, review of enabling legislation and barriers to performance contracting implementation;

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Task 2 – Select a representative set of case study projects from public transportation agencies with performance contracting experience that can be studied in depth to identify both best practices and lessons learned;

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Task 3 - Prepare a research work plan that describes the details of the research methodology and methods for identifying best practices and developing conclusions;* *

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Task 4 - Execute the research work plan and prepare an interim research report that articulates the data collection and analysis as well as emerging conclusions, best practices, lessons learned and a proposed outline for the guidebook;

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Task 5 - Prepare the draft report evaluating performance contracting project delivery. Incorporate review comments as required and validate the report’s efficacy on a range of simulated US performance contracting projects.

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Task 6 - Publish a monograph (20-30 pages) on performance contracting and a final research report that details the full results of the research.

Implementation:

The anticipated budget and schedule are based on assumptions for required resources to support limited on-site collection of performance contract case study project data, the assembly of the contents of the monograph and validation of the findings in the simulation with the case study DOT. .

Relevance:

The intent of this project is to identify the next generation of project delivery methods. This form of alternative project delivery is needed immediately to compliment current project delivery tools that DOTs need to be able to deliver their infrastructure improvement programs. The result will likely be the initiation of efforts to eliminate barriers and articulate potential benefits to upper management and legislative authorities.

The payoff of this research is likely to be significant in that it comes at a time when a large influence can be applied to the programs all 50 states. By starting now, uniformity in programs can be fostered that will pay dividends in being able to benchmark performance contracting project delivery and compare project performance metrics between states. It also creates another benefit in it provides a spectrum of possible implementation that can be progressively implemented. The first step would be the implementation of an Ontario-like performance based prequalification system. Florida already has the many of the same features in its program and has achieved good results in the switch to performance based prequalification. Finally, the Ontario Ministry’s documented a savings of 2-5% in its construction costs by eliminating bonds represents an a potentially huge payoff if the same holds true in the US.
Sponsoring Committee:AKC20, Project Delivery Methods
Research Priority:High
RNS Developer:Douglas D. Gransberg, PE, Professor, Construction Science Division, University of Oklahoma, Norman, OK, 73019, 405-325-6092, dgransberg@ou.edu,
Date Posted:12/09/2015
Date Modified:12/18/2015
Index Terms:Contracting, Road construction, State departments of transportation, Design build, Project delivery, Performance measurement, New Zealand, Ontario, International, Best practices, Metrics (Quantitative assessment), Design bid build, Construction manager at risk,
Cosponsoring Committees: 
Subjects    
Highways
Administration and Management
Construction

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