SYNOPSIS FOR MINI THESIS

ON

PERFORMANCE-BASED (INNOVATIVE)
CONTRACTING FOR THE HIGHWAY SECTOR

TRIMESTER-3

By:-
SAGAR SINGH GUPTA ACM 22 (Roll no:- 221060)

SAMBASIVA RAO.P ACM 22 (Roll no:- 221131)

NATIONAL INSTITUTE OF CONSTRUCTION

MANAGEMENT AND RESEARCH

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 PERFORMANCE-BASED (INNOVATIVE)
CONTRACTING FOR THE HIGHWAY SECTOR

Introduction:

The highway sector is perhaps the most conservative segment of the

construction industry. Although highway contractors have implemented many
new construction technologies, owner-contracting methods until recently have
remained the same. NHAI have traditionally awarded highway projects to the
lowest bidders after the design was completed and approved. This design-bid-
build approach while providing a level playing ground for contractors has its
limitations. For example, focusing on low bids sometimes leaves too little
emphasis on product quality and time, factors that affect long-term performance
of the system. The approach is slow and does not favor a life cycle cost
approach to projects.

Rehabilitation, resurfacing, reconstruction, or restoration works have, since the

80’s, characterized a majority of highway construction projects. These types of
projects require a high-quality product and timely completion to minimize the
negative impact to the public, such as safety impacts, traffic delays and
economic loss. The above factors and the limited amount of resources for
highway construction and maintenance accelerated the search for alternatives
to traditional design-bid-build contracting in the highway industry.

In traditional highway construction contracting, cost is generally the one

criterion that determines a winning bid. But in recent years, all the highway
agencies around the globe strive to meet customer needs, factors other
than cost have also emerged as important: quality, delivery time, social
and economic impact, safety, public perceptions, life-cycle costs, and use
of improved technologies. So a new approach in contracting system came
into existing.

In order to accelerate highway construction and minimize the strain on highway

agencies' resources, the Federal Highway Administration (FHWA) created
Special Experimental Project No. 14 (SEP-14) in 1991 to investigate

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innovative contracting methods. In general terms, any contracting method
that deviates from the traditional, prescriptive method can be considered
innovative. Four innovative contracting methods mainly have emerged as the
primary alternatives to the traditional contracting methods (main methods):
warranty, design-build, cost-plus-time bidding (A+B, multi-parameter bidding),
and lane rental.

The main thrust of these approaches is to minimize construction time and cost,
improve quality by either providing specifications for quality control and
inspection or warranties, and most importantly, transfer some risk from the
public agency to the contractor. Contractors have been hesitant to assume this
risk in a traditional contracting setting in which the client gives the contractor
detailed specifications about method and materials. Performance-based
specifications addresses the issues of risk transfer and contractor liability in
highway construction contracts. In such contracts the client specifies the criteria
for performance while providing the contractors with more freedom and
responsibility to meet the criteria.

In India the client generally NHAI defines performance-specification-based

contracting as structuring the contract around the desired results rather than
the method that should be used to accomplish these results. Quantifiable
performance measures, such as having a predetermined surface roughness or
a certain level of strength, are included as performance specifications. This is a
departure from traditional contracting because it specifies characteristics of the
desired product rather than the method by which the end product is achieved,
which is the traditional approach. Performance-based contracting allows the
opportunity for innovation by giving the contractor freedom to choose the
construction method and materials to be used, as long as the end product
meets the performance measure(s) stated in the contract.

Background:

The genesis for the FHWA's SEP-14(began in 1988, with the establishment of
a Transportation Research Board (TRB) task force to evaluate Innovative
Contracting Practices. The task force consisted of 23 representatives from
State highway agencies in U.S.A, all segments of the industry, and others.

Its mission was to:

• Compile and research information on contracting practices used by

agencies in the United States and other countries;

• Assess how current practices affect quality, progress, and cost; and

• Suggest measures for improving contracting practices and promoting

quality in construction.

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The task force investigated four major areas:

• Bidding procedures
• Materials control
• Quality considerations
• Insurance and surety issues.

Recommendations were made by TRB for each of the four major topic areas.
Some of the more significant recommendations included:

• The cost-plus-time bidding concept should be considered for wider

implementation.

• The potential for use of warranties or guarantees and the design-build

contracting concept should be investigated;

• Attention should be given to the use of constructability testing during the

design of projects.

• A nationwide effort should be initiated to transition from method

specifications to performance-related specifications and the
performance-related specifications should include incentive and
disincentive provisions to encourage better quality;

• A national clearinghouse should be established for information on new

materials/processes and the establishment of a national center, or
regional centers, for product evaluation should be investigated.

• Value engineering concepts should be investigated to identify ways to

promptly approve successful innovative techniques.

The objective of SEP-14 is to evaluate "project specific" innovative contracting

practices, undertaken by State highway agencies that have the potential to
reduce the life cycle cost of projects, while at the same time, maintain product
quality. The intent of SEP-14 is to operate within this administrative flexibility to
evaluate promising non-traditional contracting practices on selected Federal
aided, A.D.B aided, W.B aided and respective nation’s government aided
projects.

Innovative Approaches:

Several "project specific" innovative contracting techniques are currently being

used and evaluated by a number of highway agencies round the world. These
include:

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• Cost-plus-time bidding
• Lane rental
• Design-build contracting
• Warranty clauses.

Other than this there are other methods/techniques in Innovative Contracting

like No Excuse Bonus, Liquidated Savings, Incentives/Disincentives, CPM
Schedules, and Pay for Performance. But the techniques/methods listed
above are having good scope compared to these methods/techniques.

Initially, various concerns on the part of some members of the highway industry
round the world prompted FHWA to proceed cautiously in allowing countries to
experiment with the Design-build concept. However, in recent years, FHWA
has witnessed an increased interest from the countries like Australia, Canada,
Canada, England, Estonia, and USA in the design-build concept. As a result of
this interest, FHWA continues to allow the use of the design-build concept on
an experimental basis. Other innovative contracting techniques have also been
used by a select number of countries like Finland, The Netherlands, New
Zealand, Norway, and Sweden.

Introduction to each innovative contracting techniques:

1) Cost-plus-time bidding:

Description:

Cost-plus-time bidding, more commonly referred to as the A+B factors time

plus cost to determine the low bid. Under the A+B method, each bid submitted
consists of two components:

‘A’ - Traditional Rupee/Pound/Euro/Yen (what ever it maybe) amount for the

contract items

‘B’ - Days bid to complete the work

The number of ‘B’ days is multiplied by the road user cost furnished by the
owner and added to the ‘A’ component to obtain the total bid.

(A) + (B x [Road User Cost / Day]) = Total Bid

This formula only determines the lowest bid for award, not the payment to the
contractor.

Benefits:

1) Improved coordination between prime and sub-contractors

2) Reduced construction time minimizes impacts to users.
3) Contractors are required to put together a well conceived schedule.

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Drawbacks:

1) Contract changes are magnified; too many changes nullify the advantages of
A+B.
2) Acceleration techniques may require more resources for contract
administration.
3) More hours and over-time budget required from contractor.
4) Negotiations for additional work are more intense since time being a bigger
issue.

2) Lane Rental:

Description:

Lane rentals encourage contractors to minimize road-user impacts. Contractors

pay a rental fee for closing lanes and shoulders to do construction work. A
rental fee is included in the contract.

Lane-rental fees are based on the estimated cost of delay or inconvenience to

the road-user during the rental period. The fee is assessed for the time that the
contractor occupies or obstructs part of the roadway, and is deducted from the
monthly progress payments.

Lane Rental should NOT be used to reduce overall contract time but to focus
on the time that roadway users are impacted by construction traffic.

Benefits

Better coordination of prime and sub-contractors

Minimized impact to traveling public
Better public perception due to fewer un-utilized lane closures

Drawbacks

Extra effort by staff to monitor lane rental

Negotiating lane rental adjustments can be difficult with contract changes
Potential added costs to the project

3) Design-Build:

Description:

Design-build differs from traditional methods by overlapping design and

construction, allowing construction to begin after only a portion of the design
has been completed. Typically, design-build contracts are awarded after
Highway Agencies has completed the layout (30% design), the environmental

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process is complete (or nearly complete) and right-of-way is in the process of
being secured.

Design-build also has a different approach to risk management and project

responsibilities.
The contractor often has more responsibility for Quality Control (QC) and
Quality Assurance (QA) of the project; Highway Agencies provides verification.

Benefits

Shortened completion time by overlapping design and construction.

Construction can begin before all design details are final.
Greater innovation in selecting design, materials and construction methods.
Reduced claims due to design errors.
Accelerated response time and dispute resolution through a team effort.
Single contact point for quality, cost and schedule from design through
construction.
Shortened project delivery time which can reduce user costs.
Use of best-value project award selection criteria which evaluates both
technical and financial elements.

Drawbacks

High learning curve because design-build changes stakeholders' roles.

Parties are familiar with traditional methods.
Bidding process more expensive for design-build teams.
Coordination is more challenging due to faster pace.

4) Warranties:

Description:

Warranties require contractors to guarantee all or portions of a construction

project to be free of defects in materials and workmanship for a period of time.
The contractor is required to correct deficiencies that occur during the warranty
period.

Benefits

Quality and durability of selected work items guaranteed for a specific time.
Longer timeframe for acceptance means agency can ensure contractor is
performing high-quality work.
Decreased inspection level on warranty projects allows states to allocate
resources elsewhere.

Drawbacks

Owner must ensure that warranty guidelines are reasonable and enforceable.

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Warranty may not be collectable if guidelines are too restrictive or place undue
burden on contractor.
Requires additional staffing to monitor the warranty after construction.

Suitability:

Projects suitable for any innovative contracting technique are:

1) Projects in which right-of-way, utility, environmental, and other socio-

political issues have been resolved.

2) Projects where the potential exists for increasing quality, decreasing

costs, decreasing time, reducing administration costs, and reducing the
possibility for legal claims and change orders.

Factors to be considered in Innovative Contracting:

1) The primary goal of Innovative Contracting is to provide timely delivery of a

quality project or facility with limited User & Social Impacts.
2) User & Social Impacts- Costs incurred by the road user or public that are not
directly accounted for in Traditional Contracts.

Any way the main factors to be considered are listed below

Third Party Conflicts - Utilities, Environmental, Political Legal. (Innovative

Contracting should not be used in any case where a
third party conflict exists)

Project Complexity - Routine, Complex Design, Complex Construction,

Technical Integration

Availability of Funds - Emergency Project, Timing of Funds, Local, State,

National, Bonding, Toll Fees

Time Constraints - Event, Emergency, Public Perception, Limited

Resources

Road User Impacts - High Accident Rates/Safety in Work Zones, Impact to

Businesses, Traffic Control, High Road User Costs
(Delays, Inconvenience), Air Pollution

Product Quality - Smoothness, Extended Service Life, Maintenance

Objectives, Improved, Serviceability

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Methodology and Nature of study:

This Thesis presents an overview of performance-based-outcome contracting

and describes case studies of performance-based contracting projects in the
construction industry particularly highway sector around the world.

The use of performance specifications is relatively new in the highway

construction area and has been limited to warranty-type clauses applied
independently or in conjunction with Design-build contracts. Highway
Authorities around the world are just now beginning to explore the potential of
developing and using performance-outcome-based contracting in which the
contractor is responsible for the condition of the roadway over the long term.
Some of the contracting approaches used with these long-term performance
specifications include Design-Build-Warranty, Design-Build-Operate and
Design-Build-Operate-Transfer. Very few highway construction projects have
been built using such performance-based outcomes in other countries.

From this thesis work we are going to show how innovative contracting will
affect the quality, delivery time, social and economic impact, safety, public
perceptions, and life-cycle costs of the highway projects which are executing in
India.

References:

1) International overview of Innovative contracting Practices for roads by

Pekka a. Pakkala - Finnish road administration
Dr. W. Martin de jong - Delft University of technology
Juha äijö - ramboll Finland oy

2) Selection and evaluation of Alternative contracting methods to Accelerate

project completion -A synthesis of highway practice by
Consultants-Stuart d. Anderson & Ivan damnjanovic (Texas a&m university
College station, Texas)

3) Contracting methods for highway construction by

Donn e. Hancher, university of Kentucky

4) Innovative contracts Case studies-by

Lancashire county council

5) Innovative Contracting journal- national audit office, 1991. Management of

road maintenance.

6) Articles- innovative contracts in road infrastructure in Finland and the

Netherlands- by

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 Mónica altamirano, Delft University of technology, faculty of technology,
policy and management

7) Role of innovative contracting in the delivery and operation of major

transportation infrastructure projects by
Federal transit administration - U.s. Department of transportation

8) Research paper on performance effectiveness of contracting techniques by

Kelly strong-Assoc. Prof., civil, construction &Environmental engineering
Iowa state university

E-References:

www.ic.usu.edu
www.fhwa.dot.gov
www.sha.state.md.us
www.dot.state.mn.us

Acronym List:
NHAI – National Highway Authority of India
AASHTO – American Association of State Highway Transportation Officials
DBOM – design-build-operate-maintain
DOT – Department of Transportation
FHWA – Federal Highway Administration
I/D – Incentive/Disincentive
ITS – Intelligent Transportation Systems
LCC – life-cycle costs
NCHRP – National Cooperative Highway Research Program
QA/QC – quality assurance/quality control
RFP – request for proposal
ROI – return on investment
RUC – road-user cost
SHA – state highway agency
SOO – statement of objectives
SOW – statement of work
TRB – Transportation Research Board
SEP – Special Experiment Project
A.D.B – Asian Development Bank
W.B – World Bank
C.P.M – Critical Path Method

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