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Performance-based Contracting for Roads in Finland

In 1998, Finland piloted its first five three-year area maintenance contracts that had some components of performance-based contracts. These contracts were followed by another five contracts in 1999. The experiment demonstrated that the price level was 20% cheaper than in the traditional contracts, negotiated with the Finnish Road Enterprise (FRE). The move towards this procurement innovation reflected the main concerns of the Finnish Road Administration (Finnra): achieving “good value for money spent (more for less), productivity and innovation, optimizing risk allocation between the client and the contractor, contractor flexibility, and better customer service” (Pakkala, 2005a).

With the success of the pilots in mind, Finnra started outsourcing maintenance services through competitive bidding under so-called area maintenance contracts in 2001. In 2003 it moved towards tendering contracts of different tenure: 3-year, 5-year and 7-year. As of May 2005, all the area maintenance contracts in competition (mainly for routine maintenance) are five-year contracts with a two-year renewal option.

After organizational reforms in the public road sector in 2000, Finnra is now responsible for the management of road programs and procurement of works, while the FRE has to compete for contracts along with the private sector.

Assets and services
In Finland area (routine) maintenance contracts are of the hybrid type. Lump-sum payments, typically representing 75-80% of the contract amount, apply to such services as winter maintenance, summer maintenance (shoulders, potholes, etc.), gravel road routine maintenance, routine maintenance of pathways, minor bridge maintenance, certain types of road signs, pothole patching, cleaning and sweeping, vegetation control, and drainage and culvert maintenance. The remaining 20-25% is paid on a unit-price basis for road sign renewal, guardrail replacement, larger road surface repairs, drainage repair, renewal of gravel road surface, and repair of gravel road frost thawing sections. Resurfacing, rehabilitation, lighting, road marking, traffic signs and signals are tendered under separate contracts.

Bidding process
The bidder selection is based on price and non-price criteria, with price accounting for 75%. The non-price criteria include references, personnel, and competence; equipment, depots, and salt storage; quality plan and subcontractors; methodology and traffic safety; a customer service provision; environmental assurance; and a special winter index feature. Bids must also include a 10% annual bonding requirement.

As 78% of the contracts were won by the FRE, Finnra has tried to create incentives for the private sector to continue participating in the bidding process. For this purpose, it issues stipends to non-winners of the bidding, to cover in part the costs of bid preparation. This is expected to encourage the contractors to mature and take part in the next bidding.

Performance Specifications
Finnra’s performance specifications apply to pavements, winter maintenance, guardrail work, trash removal, drainage, and other services. For example, in case of winter maintenance active plowing is required within 2 hours after the snowfall. Additional requirements are set for roads of different classes: e.g., snow should not be higher than 1 cm on the first-class road after it stopped snowing (and certain number of hours) and skid resistance should be less than 0.3 on the same first-class road. Some of performance requirements (e.g., guardrails, trash removal, drainage) are accompanied by illustrations for contractors.

Results of PBC Program

Cost savings. The Finnra has reported 7-10% savings due to performance-based contracting. The present price level is only about 50-60 % of the price level when maintenance works were executed by Finnra using its own labor and equipment.
More beneficial longer-term contracts. Seven-year contracts have been recognized more beneficial than three-year contracts, with savings of over 13%.

Directions for Future
Finland has been increasing the utilization of PBCs, especially long-term contracts. The target is to move entirely towards outcome-based criteria and lump-sum payment contracts covering from the entire road right-of-way. The Finnra is confident that outcome-based criteria are able to encourage the application of innovations and increase productivity of the entire Finnish road sector.

The long-run goal of the Administration is to (a) include more services in the contracts, e.g., road marking, lighting, repair of frost-heave damages, others; (b) extend the contract tenure up to 7 years, as a 7-year period is sufficient to amortize capital equipment investments and creates a competition in the regions; and (c) increase the contract size from 500-1,500 km to 1,000-2,000 km on highways and 500-1,000 km in urban areas with busy traffic volumes. In remote areas, the contracts will remain covering up to 500 km in order to increase and sustain a competitive environment.

Contracts for lighting maintenance services will continue to be outsourced under separate contracts, while collecting road and structural support survey data is mostly likely to be incorporated in maintenance contracts.

Although savings have been reported, the Finnra continues to assess the variations in the value gained from performance-based contracting. The approach is being continuously refined. Bidder selection criteria are being developed, based on innovations and best practices, past performance and competence. The Administration also recognizes the need better to identify outcome-based criteria and performance specifications in collaboration with the private sector.

Finnish municipalities are responsible for their own streets. Some maintenance works are executed by the force account and others are contracted out under the traditional, unit-rate-based approach. However, the trend towards performance-based contracting, the direction the Finnra has selected, is closely being watched by municipalities.

Sources:

1. Correspondence with Jukka Isotalo, Finnra. April 2005.
   
   
2. Finnra (The Finnish Road Administration). 2003. “Procurement Strategy of the Finnish Road Administration.” Helsinki.
   Abailable at: http://alk.tiehallinto.fi/hankintastrategia/finnra_procurement_strategy050603.pdf
   
   
3. Pakkala, P. 2005a. “Performance-based Contracts in Finland”. Retrieved from FHWA “Highway Maintenance Contracting 2004. World State Practice.” Report on the National Highway Maintenance Contract Seminar, April 2004, Orlando, Florida.
   
   
4. Pakkala, P. 2005b. "Performance-based Contracts – International Experience." The Finnish Road Administration (Finnra). Presentation at the TRB Workshop "Performance-based Contracting", April 27, 2005. Washington, D.C. Courtesy of Pekka Pakkala, Finnra.

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