Battelle Study

Performance-Based Contracting For The Highway Construction Industry

An Evaluation of the Use of Innovative Contracting
and Performance Specification in Highway Construction

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This is a 49 page report

Battelle Study as a PDF file

EXECUTIVE SUMMARY OF BATTELLE REPORT ON
PERFORMANCE-BASED CONTRACTING

In February of 2003, Battelle completed a report studying the traditional methods of highway construction and the benefits of using performance-based contracting. The U.S. Department of Transportation defines performance-specification-based contracting as structuring the contract around the desired results rather than the method that should be used to achieve these results.

The highway sector is perhaps the most conservative segment of the construction industry. State Highway Agencies (SHAs) have traditionally managed road design and then awarded construction to the lowest bidder. This type of procurement method, however, tends to stifle innovation, slow project delivery, and increase costs. In their report, Battelle compiled information from the Transportation Research Board and a number of states which found that the design-bid-build method of contracting that is the industry standard for highway construction had the following limitations:

• The system is slow and does not favor a life-cycle cost approach to projects.

• The associated risks in terms of quality and maintenance are not the responsibility of the contractor, since the specifications are usually prescriptive and under the control of the public agency.

• Innovation is often stifled; prescriptive specifications and low-bid pricing result in no reward for the design and construction innovations. Some innovative ideas necessitate changes in laws and regulations and are therefore difficult to implement.

• There is little, if any, opportunity for contractor input into design and construction methods, and quality is often an issue of dispute.

• The traditional system requires SHAs to have large staffs to conduct all its necessary functions of highway design and construction management.

Battelle considered a number of state studies analyzing alternative delivery methods designed to minimize construction time and cost, improve quality, and transfer risk from the SHA to the private sector.

Since the mid-1980s, FHWA began to allow state and local highway departments to try innovative contracting approaches on federally-funded projects including cost-plus-time (A+B) bidding, warranty, design-build, and lane rental through FHWA’s SEP-14 program.

States using these innovative approaches experienced notable improvement in delivery times, project costs, and overall quality. Florida DOT compared traditional low-bid contracts with those awarded using seven different non-traditional methods. In every case, the non-traditional method was less expensive and delivered faster than the average traditional low-bid contract. Wisconsin DOT performed a smaller study on the benefits of warranties and found that warranted pavements are performing better than similar non-warranted pavements.

The report also highlights some of the disadvantages of innovative contracting including the additional resources and expertise needed to correctly utilize new procurement methods and concerns the contracting industry has with shifting risk from the SHAs to the private sector.

Due to the relatively limited use of performance-based contracting in the highway construction industry here in the United States, Battelle also surveyed the experiences other industries have had with this method of procurement.

The Construction Industry Institute studied 350 construction projects to compare three project delivery systems for the construction of several different types of buildings. These systems were design-bid-build (the traditional system), design-build, and construction management at risk (a fixed price contract). Both innovative approaches resulted in lower costs, higher quality, and quicker delivery than the traditional design-bid-build method.

Conclusion

Battelle’s report found that that primary driver for using innovative contracting approaches for SHAs is the reduction in time and resources needed to plan and build a project. Although data comparing the use of innovative contracting against traditional procurement is relatively rare, the case studies reviewed by Battelle found that the use of performance-based contracting can result in as much as 50 percent time reduction in project duration and cost savings ranging from 6 to 40 percent. Limited data exists on how performance-based contracting impacts quality, but evidence from vertical construction indicates that alternative contracting approaches provide better quality compared to the traditional approach.

Recommendations

Recommendations from the report include:

• Encourage states to consider innovative contracting, especially for projects with time, cost, and resource constraints.

• Provide incentives to SHAs that are progressive and have shown benefits due to innovative contracting.

• Nationally, encourage public-private partnerships in financing and managing highway construction and maintenance plans.

• Promote information exchange among SHAs and encourage those states using innovative contracting approaches to track the benefits of those approaches.