Alternative Contractual Models and Their Use Tony Porter April 2003

Outline 1.Contract Models 2.New Zealand Practice 3.International developments 4.Personal Thoughts

Asset Management Pyramid Work Instructions Intervention Levels Link Outcomes Service Levels Network Outcomes Physical work Vertical Intergation

Delivery Models Physical Work Intervention Levels of Service Key Success Factors (Link) Key Success Factors (Network) Work Instructions (What) (When) (Expectation) InputDriven OutputDrivenOutcomeDriven Operational Tactical Strategic

Input Driven Contracts  Typically –“Direct Labour” –“Plant Hire” –“Day Works” –“Maintenance by Administration” (MBA)  Provide detailed methodology and payment is for individual inputs –Labour by hour –Plant by hour –Materials by quantity delivered

ASSET OWNER CONTRACTORCONSULTANT Output Driven Contracts  Payment is by schedule of rates for each completed repair with a warranty period  Some flexibility in methodology  Separation of Service Delivery Components

Consultant may be: - in-house - joint venture partner - or sub-contracted to contractor - lead contractor ASSET OWNER CONSULTANT CONTRACTOR Outcome Driven Contracts  Only desired outcomes specified  Complete flexibility in methodology  Payment by lump sum  Typically one point of contact

Roles OperationalTactical Strategic EfficiencyEffectivenessEfficacy Physical Work Levels of Service Work Instructions Link Outcomes Network Outcomes Intervention Levels

Definitions Definitions  efficiency - measured by a comparison of production with cost (as in energy, time, and money) –Doing things right  effectiveness: ability to produce a decided, decisive, or desired effect –Doing the right thing  efficacy: the power to produce an effect –Setting the right objectives

Roles EfficiencyEffectivenessEfficacy ImplementationManagementGovernance Physical Work Levels of Service Work Instructions Link Outcomes Network Outcomes Intervention Levels InputDriven OutputDrivenOutcomeDriven

Comparison Asset owner specifies State of development Risk sharing Reliance on Asset Database InputLabour materials DecrepitNoneLow OutputSchedule of rates MatureSomeMedium OutcomeRoughness Texture Scrim YoungSignificantHigh

2 New Zealand Models

Contract Models for Road Network Management in New Zealand  Conventional  Performance Specified Contracts (“PSMC” & “PBC”)  “Hybrid”

 Separate Schedule of Rates Contracts for: –Asset/corridor management (Consultancy Roles) –Routine Pavement Maintenance –Corridor Management vegetation control signs –Resurfacing –Pavement Rehabilitation Consultant RCA Contractor 1 Conventional Model

Conventional Model - continued  Increasingly the maintenance contracts in the “Conventional Model” are performance based e.g. –Grass cutting –Pot hole repair response times –White line marking –Spray seals –Pavements

Typical Roles R C A Audit Agree investment needs Manage funding Issues Approve asset management plan Consultant Develop network management strategies Draft asset management plans (Seals, Rehabs etc) Approve Routine Maintenance Program Audit Work Done Approve Claims Contractor Identify Routine Maintenance Work Prioritise & program Routine Maintenance Execute works Ensure work quality and satisfy liability requirements

Issues  Client “control” –Focus can be directed to all elements of the asset e.g. Vegetation control –Adversarial management style?  Information Symmetry

Contracts Can Create “Information Asymmetry” Physical Work Intervention Levels of Service Key Success Factors (Link) Key Success Factors (Network) Work Instructions Physical work Management Governance Conventional

All three parties need “Information Symmetry”  Maintaining open lines of communication across the contract interfaces is essential  Internationally fear of “asymmetry” is limiting the progression of outsourcing

 Single Lump Sum Contract for all activities  Includes all –All Routine maintenance –Pavement Rehabilitation –Surfacing –Minor Safety Improvements –Consultancy roles  PBC also includes some capital improvements –Seal extensions & seal widening Contractor Consultant RCA Auditor 2 PBC & “PSMC” Models

Issues  Maintenance Liability –Controlling the “consumption” of the asset during the term of the contract  Require –A robust inventory of the asset –Clearly defined outcomes –An understanding of the performance of the asset. –Equitable risk sharing –Confidence in the industry!  Place a strong emphasis on trust and long term relationships  They are still in the early stages of development

Special “Risks” for Local Authorities  Risk Profile - 100% of network?  Rate payer interfaces  Impact on Local Contracting Industry  Changing levels of service  Lowly trafficked roads –Levels of service –Cost of compliance

Physical Work Intervention Levels of Service Key Success Factors (Link) Key Success Factors (Network) Work Instructions PBC Contracts Can Also Create “Information Asymmetry” Physical work Management Governance PSMC

Check List for PSMC’s If you know What you have –What is it worth –What do you want it to do –What condition it is in –What you need to do to it –When you need to do it – You can expect to get a robust lump sum price for maintaining your network for an extended period

Client ConsultantContractor Auditor 3 Hybrid Model for Network Management  Two Lump Sum Contracts –Physical works includes resurfacing Area wide treatments all routine maintenance winter maintenance (outside lump sum) –Consultancy Contract includes medium to long-term asset management Corridor management information management Safety auditing separate “auditor” role  Client picks the Contractor /Consultant Team

Most significant differences  From the Conventional model –Self auditing by contractor –Heavy reliance on partnering  From PSMC –Hybrids do not require as robust definition of outcomes. e.g Residual pavement life is not as big an issue as there are underlying quantities of work –demands for data at tender stage are far less  Note: Reprioritisation of the Lump Sum is allowed with agreement

Issues  Less duplication = reduced price?  Client selects the team  More price certainty than conventional model  Allows more client involvement/influence  Note: this may allow a stronger ratepayer focus

Where Do the NZ Models Lie on the Continuum? NZ PSMC North Canterbury Hybrid Conventional NMM InputOutcome Western Bay of Plenty PBC

3 International Trends

Source: Pekka Pakkala (Finnra) 2002 Paradigm Changes in Client Procurement of Maintenance

What Is Happening In:  Australia?  UK?  USA?  Canada? NZ PSMC North Canterbury Hybrid Conventional NMM InputOutcome Western Bay of Plenty PBC

4 Personal Thoughts

I Believe Cost Savings Are Principally About:  The size of the network –Annual expenditure In WA varied from 315km to 4280km but expenditure was about the same  The duration of the contract  The management style –Creating a win/win environment  A competitive market –Note: Conventional maintenance tenders were 20% less than our estimates last year

All 3 NZ models are capable of delivering the similar benefits if the playing field is level.  However the PBC model provides: –an instrument for forcing advanced asset management into a network –a way around our established paradigms But in the end it is the people that really make the difference in each model

Thank You