World Map
Country Matrix
Case Studies

Performance-based Contracting for Roads in USA

A performance-based contract (PBC) is referred to as an asset management contract in the USA. It is a fixed-price, lump-sum agreement requiring the contractor to maintain the contracted assets at specified standards throughout the contract term.

1. Virginia State

Virginia State is the pioneer in introducing a performance-based approach to manage and maintain roads in USA. In 1995, the Virginia legislature enacted the Public and Private Transportation Act (PPTA), which mandates the Virginia Department of Transportation (VDOT) to evaluate unsolicited proposals from private entities to acquire, construct, improve, maintain and/or operate qualifying transportation facilities under its jurisdiction. The major goals of the PPTA were to improve efficiency and save on road expenditures.

In the following 1996 year, VDOT entered into a five-and-half year asset management contract with a private company (VMS, Inc.) to manage and maintain 251 miles of interstate highways.

Definition of Asset Management Contract
The contract let to VMS, Inc. included repair and rehabilitation of roadways and bridges, major tunnel rehabilitation, roadway and roadside cleaning, and drainage and vegetation management. The contract also includes unlimited quantities for snow/ice removal, incident response, and repairs and servicing of assets such as lighting, traffic control, fencing and guardrails.

Risk transfer
No change orders are permitted in the contract. The contractor assumed risks related to such factors as inflation in labor and materials, and unexpected events such as accidents and storms, snow and ice control. Collecting third-party damages rests with VDOT, but this may change.

Results

Renewal for 5 years. This asset management contract has recently been extended with the same contractor, as an evidence of the satisfaction with the contractor’s performance level.
17% cost savings by the VDOT. Cost comparisons between VDOT and VMS, Inc., carried out by the latter, have demonstrated VMS as the better value, with VDOT maintenance costing USD29,500 per mile annually and VMS, Inc. costing USD22,400 per mile.
Development of small contractors with diverse specializations and creation of competition. VMS, Inc. outsourced 90% of the works to small contractors, and provided training programs and technical assistance to small and minority-owned companies in subjects like cost estimation, and bid preparation. This promoted the development of a diverse and vibrant contracting industry. Now the newly trained small and minority-owned businesses can secure state contracts, which was impossible before 1996.
Effective allocation of VDOT personnel to more needed projects. Despite fears of many public employees after the inception of the asset management procurement model that they would lose their jobs, VDOT continues to retain around 1,000 staff. In fact, the reduced administration burden of the asset management approach allowed transferring employees to other productive projects.

2. Washington, D.C.

In 1998 the District of Columbia Department of Public Works (DC DPW/DDOT) and the Federal Highway Administration (FHWA) started developing a performance-based procurement model, which would allow improving the condition of major streets and interstate highways in the Capital. In 2000, the tender was won by the same company that pioneered a PBC approach in Virginia. The 5-year USD60 million contract was awarded on a best-value selection.

The project (The DC Street Initiative) is the largest transportation investment in DDOT's history. It is also the first time that the FHWA has joined with a DOT in a program to preserve transportation assets.

Scope, assets, services included
This contract includes rehabilitation and maintenance of 75 miles of major streets and interstate highways and covers 344 lane-miles, 2,950 catch basins, 7 miles of drainage ditches, 450,000 feet of curb and gutter, 109 bridge structures, 4 major tunnels, and traffic and weather control, including snow and ice control.

Performance Indicators
The contract spells out performance specifications related to: pavement structure, roadway cleaning, drainage, roadside cleaning, roadside vegetation, bridge maintenance, tunnel maintenance, snow and ice control, traffic control and safety maintenance.

Compliance with performance indicators
Surveillance and monitoring of the DC Street Project are outsourced to a consulting company. Monitoring is arranged through public surveys and monthly field inspections. Ratings of good, fair, and poor are given in relation to performance criteria including ride quality, cracking, skid, public satisfaction, and other factors. If the performance measures are exceeded in any given year, the contractor is eligible for a performance award in that year.

Performance and payment bonding
The DDOT requires a bond of a one-year contract value, instead of a bond for the entire contract value. The Department realized that the bond of the entire contract value would pose a threat to the financial capacity of some potential bidders and thus may discourage them from participating in the bidding process. One-year-value bond was deemed to provide enough time to find another contractor, in case the incumbent defaulted.

Payment schedule
The payment schedule is designed to create an incentive for the contractor to deliver high level services. The contract provides for rewarding the contractor for high or exceptional performance, or penalize him for non-compliance with performance criteria.

Results

Significant improvement of road conditions and satisfaction of the client with the conditions of the contracted assets. In the first year of the contract execution, the road conditions were improved from the high 20s before outsourcing up to the low 80s (out of 100). The DC government team is specifically satisfied with the performance regarding snow removal, emergency responses, and the progress on tunnels, which had been dilapidated prior to the contract. Overall, DDOT, FHWA, the DC public, and VMS consider the project successful, as the assets are generally found in better condition than they were before the project outset.

Development of small-scale contractors. The success of this contract is partly attributable to the specialization through subcontracting to smaller companies or companies that VMS creates for an area of maintenance. VMS has positively affected various neighborhoods with new job hiring, community service participation, and subcontracting.

3. State of Florida

As of April 2005, some 19 PBCs were implemented in Florida to manage and maintain roads and road structures.

Monitoring compliance with performance indicators
The FDOT has designed a systematic approach to evaluate the quality of road maintenance operations that is driven by customer-based levels of service. It is called the Maintenance Rating Process (MRP). It applies a numeric rating system with the scale having 170 separate measures. Each measure is evaluated on a 1 to 5 scale, where 5 is excellent and 1 is very poor. The passing score is 4.

The MRP system determines standards for four facility types: rural limited-access roads, urban limited-access roads, rural arterial roads, and urban arterial roads. Each facility is broken down into five elements: roadway, roadside, traffic services, drainage, and vegetation and aesthetics.

Each of the elements is further broken down by their specific characteristics.

Results

Significant cost savings. According to “Asset Management Program Summary,” a report published by the Florida Department of Transportation in November 2003, the state has saved $83.7 million, or 15.3% throughout the life of the contracts.
Increase in number of PBC contracts. By July 2008, Florida expects to have 28 active asset management contracts.

4. State of Texas

In 2003, the Texas Department of Transportation (TxDOT) launched a program to improve rest areas. To upgrade and maintain these facilities, TxDOT has applied a performance-based procurement approach. The goal was to improve the overall quality of rest areas, increase the level of service to “acceptable” or “better” and use the private sector’s skills and experience to maintain and operate these facilities.

In all, four two-year contracts were awarded. The contracts cover enhancement of facilities, janitorial services, and on-going maintenance of buildings, grounds, landscaping, parking areas, signs, utilities and others.

Contract tenure
Although the TxDOT has only let two-year PBCs, it believes that contracts for at least a four-year term would result in more competition. Longer contract periods would enable contractors to amortize equipment, develop small-scale contractors, apply innovations in works and sub-contract work with warranties.

Performance standards
The new specification standards are accompanied by pictures illustrating “acceptable” and “unacceptable conditions” for each component of the rest areas, from curbs and signs to restroom stalls and barbeque pits.

Contractor’s risks
The contractor is required to develop and submit for the client’s approval an Enhancement Plan, which covers repair or replacement needed to bring all contracted assets up to an acceptable level. The contractor bears responsibility for licensing permits and operation requirements. This includes testing and maintenance in compliance with the most recent Federal, State, and local codes and statutes, and for coordinating relevant requirements with the State Commission on Environmental Quality.

Quality Assurance
To ensure that contractors would meet the specified performance standards and to encourage the contractor delivering high level services, the TxDOT has designed incentive and disincentive payment mechanisms. Evaluations are arranged through formal and informal inspections by TxDOT’s Maintenance Division. The incentive and disincentive payments are based on the overall score of the facility maintained. If the contractor scores 92% or higher, it receives a 15% incentive payment per day until the next evaluation. If the score ranges between 80-84.49%, 100% of daily pay is deducted from the contractor’s payment, if the score is 75-79.49%, 150% of daily pay is deducted, and if less than 75%, 200% is deducted. The deduction continues for a minimum of 7 days and if, in 7 days, the score improves up to 85%, the disincentive is removed, if the score still remains below, deductions continue. If the score is below 85% during the two consecutive evaluations, the contractor is given a notice and a deadline to rectify the defects and ensure compliance. If the deadline passes and non-compliance is still confirmed, the fine of $5,000 per day as well as applicable disincentives are imposed on the contractor.

Performance and payment bonding
In Texas, statutes required bonding of 100% of the contract value. With multi-year contracts, the contractor’s bonding capacity would be tied up for years. To encourage more bidders, Texas passed the authority to reduce the requirement to a two-year bond renewable annually. This ensures that there will be at least one-year’s worth of work bonded.

Directions for future

Change in the incentive mechanism. In the first year of PBCs, TxDOT paid incentives of $246,468 and assessed disincentives and special deductions of $246,065. As a result, the TxDOT considers limiting the incentive payment period to 30 days at the next contract renewals.

Results

Improved conditions of contracted assets. After the first year facilities maintained under PBCs were rated at an average of 91%, an 18-point increase over their pre-contract condition.

Sources:

1. VDOT (Virginia Department of Transportation). “Public and Private Transportation Act (PPTA) 1995.” Courtesy of VDOT.
   Also available at: http://www.virginiadot.org/business/ppta-default.asp
   
   
2. FHWA (US Federal Highway Administration). 2003. "DC Streets' is a Capital Success",
   Focus, March 2002.
   Available at: http://www.fhwa.dot.gov/pavement/preservation/ppc0306.cfm
   
   
3. Florida Department of Transportation. Asset Management web site: http://www.dot.state.fl.us/statemaintenanceoffice/asset.htm
   
   
4. Defense Technical Information Center. “Winter Storm Travel Guide. The Penguin Guide.”
   Available at: http://www.dtic.mil/ref/html/penguinguide/html/travel.htm
   
   
5. Holmes, S. 2005. "Florida Asset Management." Presentation at the TRB Workshop on “Performance-based Contracting”. Office of Maintenance, Florida Department of Transportation.
   Presentation at the TRB Workshop “Performance-based Contracting”, April 27, Washington, D.C.
   
   
6. Moore A. 2004. “Private Transportation and Competition.” Testimony on to U.S. House Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs Committee on Government Reform.
   Available at: http://www.reason.org/commentaries/moore_20040518.shtml
   
   
7. Joint Legislative Audit and Review Commission of the Virginia General Assembly. 2001.
   “Review of VDOT’s Administration of the Interstate Asset Management Contract.”
   Courtesy of Joint Legislative Audit and Review Commission of the Virginia General Assembly.
   Also available at: http://jlarc.state.va.us/reports/rpt259.pdf
   

Back to Case Studies