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Performance-based Contracting for Roads in Canada

The Province of British Columbia was a pioneer in outsourcing of road maintenance under performance-based contracts (PBCs) in Canada. The fist round of PBCs was in 1988. Later on, Alberta (in 1995) and Ontario (in 1996) introduced this approach. At present, 100% of provincial highways are maintained under PBCs in British Columbia, 60% in Ontario and 100% in Alberta (under hybrid contracts).

1. Province of British Columbia

Context and Objectives
In 1987, the Government of British Columbia announced the privatization of the maintenance of 100% provincial roads. The principles of privatization were set as follows:

1. Government's role is to manage; it should plan, facilitate and be the catalyst for the economy.
   
   
2. Except in unusual circumstances, the private sector should be responsible for commercial production of goods and services.
   
   
3. The private sector should deliver government programs when it can do so effectively, providing the public interest is protected.
   
   
4. Government would favor arrangements that encourage employee ownership.
   
   
5. Government would favor arrangements that support regional economies.
   
   
6. The government will ensure that employees, communities, firms and the general public are treated fairly.
   
   
7. No contractor can hold an interest in more than three contract areas.

The government employees working in the road maintenance were offered the following options:
Accept employment with the successful contractor in the district.
Stay with the government and fill vacant positions anywhere in the public service.
Take the early retirement package (if they were qualified).
Resign.
Severance pay was not available under any option.

At the end of the privatization for the first round of contracts in 1988, 2,280 employees were transferred to the new Road and Bridge Maintenance contractors, 20 employees stayed with the government, a few resigned, and about 200 took early retirement. In 1995, companies owned by ex-government employees held 16 contracts and controlled 57% of the total value of all 28 contracts.

PBC Format
Highway maintenance contracts that are applied to manage and maintain the provincial highway system in British Columbia are 10-year (since 2003) lump-sum contracts and cover the following services:
all surface maintenance (pavement patching, graveling and grading);
all winter maintenance;
all drainage, landscape, structural, sign and emergency maintenance and repairs;
repairs of damage to government property.

Examples of quantified work include patching (hot in place, and mill and fill), ditching (new ditches and cleaning existing ditches), culverts (installations/replacement), grading, graveling, large signs, brushing, mowing, significant bridge and structural work.

The contracts do not include upgrading/replacing roads or structures, resurfacing, rehabilitation, engineering and geo-technical work, centerline painting, electrical maintenance, corridor management, and avalanche control.

Bidding process
Contracts are awarded through an open competition. Prior to the bidding, all interested contractors are to go through the pre-qualification process carried out by an independent review panel. Maintenance contractors that are in good standing under on-going contracts are automatically approved. New and previously defaulted contractors are to demonstrate their ability to meet the Conditions of the Contract. The independent review panel signs off after the pre-qualification process.

At the first stage of the bidding process, participants are to submit a partial quality plan, which is to include an understanding of the Quality ISO 9001 approach, 6-10 selected activities, and winter maintenance. The technical proposal is assessed against an evaluation checklist and, in case of deficiencies in some areas, proponents are given back their proposals to correct and re-submit within 11 days. The price envelope is not submitted at this stage.

At the second stage, the revised quality plans are reviewed by the MOT against the evaluation checklist and weights for each component of the plan. The ultimate result of the quality plan review is a pass/fail. A score of 80% is required to pass. The bidders also submit price proposals to an independent office. The following bonds are required with the price proposals: Labor and Materials Bond, Performance Bond, and Liability Insurance. Contractors do not bid the entire contract price, but a first year price only. The price envelopes are opened for those who passed the quality evaluation. The final selection is based on the price proposal only, as all bids that have passed the quality review are considered as having the same quality.

Payment Conditions
Contractors are paid 1/12 of the annual contract price every month if performance standards are met. The annual price is adjusted every year and the adjustment is based on labor index, diesel fuel index, general index (supplies, equipment), inventory changes, and service level changes.

Performance Standards
BC MOT Highway Standards are performance-based, considered proactive versus reactive, customer-oriented and do not provide prescriptive methods. Standards set the objective (what and why), general specifications (what and where), and provides detailed specifications (where and when). Methods (“how”) are to be determined by the contractors.

In addition, the contractors must maintain and implement a Quality Management System based on the principles of the International Organization for Standardization’s ISO 9000-2000 standard. While contractors do not have to be certified, they are required to have a system that meets both the letter and the spirit of the ISO standard.

Supervision
The contracts are administered and supervised by the Ministry of Transportation, who designed the Quality Plan. Both monitoring and auditing is involved. The Ministry staff works closely with the maintenance contractors to ensure compliance with the contract terms and conditions. The audits are focused on whether the contractor is meeting the Maintenance Specifications and maintaining a Quality Management System. The Contractor Assessment Program (CAP) was designed to evaluate the performance of contractors by: (a) local MOT staff (audits and monitoring); (b) regional audit team (MOT staff from outside the service area); and (c) through stakeholder feedback (public communication records, elected officials, RCMP, school districts). The contractors who perform well are rewarded with approximately 1% of the contract value, while those who deliver poor or marginal quality of services are penalized.

Results

Overall satisfaction of ex-government employees with privatization. Most of the original “privatized” government employees were satisfied with the outcome of the privatization process. Most of the employee owned companies have been very successful and the ex-government employees (as shareholders) have received generous dividends. There were a few cases where ex-government employees entered into a poor joint venture with a management company and ended up losing their investment (and employment).

Acceptance of the new practice by the public. These performance-based highway maintenance contracts covering 100% of the provincial network were well accepted by the public and were considered successful despite the fact that four contractors defaulted.

Savings. Savings have been reported in the order of 10%.

Directions for Future

Increase in the contract tenure. The pilot contracts let in 1988 covered three-year terms. For contracts let in 1995 the period increased to five years term, with a three-year renewal option. Since 2003, the BC MOT has started awarding contracts for a 10-year period. The purpose of the change was to enable contractors to plan over the longer term and provide sufficient time to amortize the cost of heavy equipment and facilities.

Clustering. Contract clustering is under consideration to achieve more competition and greater savings.

2. Province of Alberta

Context and Objectives
In 1993, the Prime Minister of the province of Alberta initiated a government reinvention process, which aimed to “do a lot more steering and a lot less rowing”. The newly revised mission of road maintenance was preservation of the road infrastructure of the province and contribution to prosperity and economic development. Local consultations to find cost effective solutions to accomplish this mission brought together representatives of not only the government and construction industry, but also insurance and surety companies.

The first round of tenders was arranged in 1995 to let the private sector conduct maintenance work on the primary road network. The province was divided into 30 Contract Maintenance Areas (CMA) and contractors were allowed to have contracts for a maximum of 4 areas per company. With the second round of contracts in 2000, contractors were allowed to win a total of 7 CMAs.

Scope, assets
The CMA contracts are hybrid by nature, with a few lump sum prices to cover routine maintenance and overheads. Overall, they include all maintenance activities on the road and the roadside, including winter maintenance but excluding resurfacing and rehabilitation. The contract tenure is 5 years with a possible extension for 1-3 years.

Bidding process
In the first round of tenders, the price criterion accounted for 60%, while the project work execution plan accounted for the rest. In the second round, the price criterion weight increased up to 77.5%.

Performance Indicators and Non-compliance
The services delivered by the contractor are assessed against the required level of service, which include intervention time and technical criteria. Penalties are applied in case of non-compliance.

Partnership
The Government of Alberta considers partnership as a prerequisite for the successful implementation of the CMA contracts. The work programs are designed in close consultation with the parties concerned. Though the Administration performs the role of a supervisor, it stresses its main objective of developing a state of mind and a good working relationship with the contractors.

Results

Savings. The first round of tenders resulted in savings of around 5%, while the second one – 25%-35%.

Satisfaction of contractors with the return on their investments. The contractors were reported to be satisfied with the return on their large investment (mainly in the equipment and workshops, sometimes purchased from the province).

The Alberta model of PBC application is founded on a strong, sustained political will and pragmatism. Established partnership between the parties concerned helped them comprehensively understand their new roles and risks.

Directions for future

Revision and re-definition of performance indicators. The Government of Province has found its contract specifications rather recipe-based than performance-based and recognized the need to improve their definitions.

3. Province of Ontario

Area Maintenance Contracts (AMC), which are deployed to maintain 60% of the provincial road network in Ontario, are designed to include both management and execution of maintenance works. The vast majority are lump-sum contracts. The contract periods range from 7 to 9 years.

Assets, Services
Services included in AMC in Ontario are:
routine maintenance (pothole repair, shoulder grading, repair guide rail and fences, sweeping and debris removal, traffic signal and illumination-scheduled maintenance and repair, tunnel maintenance, bridge cleaning, scheduled maintenance (lift bridges) and minor repair; sign replacement, grass cutting and weed control, line painting);
winter maintenance (plowing, liquids, sanding, salting);
patrolling (visual inspection, at least daily in winter);
emergency assistance (response to collisions and spills).

Resurfacing and rehabilitation are not included in AMCs.

Performance specifications and compliance monitoring
The Maintenance Quality Standards (MQS) set out maintenance requirements. Many are time-based such as number of days to fix a give-size pothole or to repair collision damage to guide rails. Mandatory patrolling frequencies are key to detecting defects. At a minimum, maintenance contract requirements meet the MQS.

The contracts are administered by the central administration, not the regional offices. The frontline field staff include superintendents who have several coordinators, about one per 300 two-lane km. The monitoring manual sets out key requirements for each contract parameter. Contractors also propose quality control procedures that are marked as part of proposal scoring.

Failures to comply may result into penalties up to the contract termination.

Evolution of the approach
During the second round of bids in 2001-2004 some changes were incorporated into the AMC contracts:

Increase in the contract tenure. The duration of contracts were revised and increased from 3-5 years (3 years minimum with a 2–year renewal possibility) to 5-9 years (5 years minimum with a renewal possibility for up to 4 years).
Inclusion of additional services. Services such as pavement marking and electrical work were added to the contract.

Directions for Future
Ontario’s government plans to introduce a comprehensive long-term road management contracts to manage and maintain its provincial roads. In addition to expanding the list of items covered by the contract, innovations include such things as conditions-based end result specifications, and a separate treatment of operating and capital (investment) activities.

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Sources:

1. British Columbia Ministry of Transportation Highway Maintenance Contracts web site: http://www.th.gov.bc.ca/bchighways/contracts/maintenance/hwy_maintenance_contracts.htm
   
   
2. Lund, E.A. 1996. “Privatization of Road and Bridge Maintenance in British Columbia. Transfer of Public Employees to the Private Sector, British Columbia Experience.” Paper presented for the World Bank Road Management Training Seminar, December 18, 1996.
   Washington, D.C.: World Bank.
   Available at: http://siteresources.worldbank.org/INTROADSHIGHWAYS/Resources/338993-1122496826968/cn_ntk5a.pdf
   
   
3. Newhouse, J. 2004. “2003/2004 Maintenance Contracts. Request for Proposals.” Presentation. British Columbia Ministry of Transportation. Courtesy of British Columbia Ministry of Transportation.
   Also available at: http://www.th.gov.bc.ca/BCHighways/contracts/maintenance/Nov_15_Meeting_Full_Presentation.pdf
   
   
4. PIARC – Canada. 2004. “Maintenance Delivery in Ontario.” Prepared for PIARC, December 2004. Kananaskis. Canada.
   Available at: http://www.cnc-piarc-aipcr.ca/documents/OntarioMaintenanceContractingPPP.pdf
   
   
5. ISTED. 2002. “Contracting Road Maintenance: Example of the Province of Alberta in Canada.” No 26, October 2002. Courtesy of ISTED.
   Also available at: http://www.isted.com/periodiques/lettre/lettre_pdf/lettra26.pdf
   
   
6. Please see British Columbia's Bidding Documents

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