Transport Forum 2005 by Cesar Queiroz, Lead Highway Engineer, ECSIE Washington, DC, March 7-11, 2005 Options for Implementing Performance-based Contracts

Presentation Outline Importance of Road Infrastructure & Maintenance Evolution of Civil Works Execution Advantages and Disadvantages of PBCs Bidding & Bid Evaluation Supervision & Quality Control Payment & Liquidated Damages Dispute Settlements Lessons Learned and WB Study on PBC

Economic Development and Road Infrastructure GNI ($/pop) Source: Queiroz and Gautam 1992 logGNI = 1.39 logPRD R squared: countries

Ruins of a bridge over the Danube River in Novi Sad, Yugoslavia, targeted in a NATO strike in 1999

Importance of Timely Maintenance Timely maintenance of $12 billion could have saved $45 billion needed for road reconstruction in Africa A well maintained paved road should last for 10 to 15 years before resurfacing, but lack of maintenance can lead to severe deterioration in 5 years

Evolution in the Execution of Civil Works 1.Force account (or direct labor) 2.A public sector monopoly (public contractor) 3.Corporatized public sector contractors 4.Private sector contractors

Separating Planning & Management from Implementation of Road Maintenance Avoid conflicting responsibilities Control costs and maintain quality Introduce competition and reduce costs, frequently 20% to 30%

Forms of Price based Contracts Lump sum - payment based on a single price for the total work Admeasure - payment based on quantity of completed work and tendered rates (bill of quantities) Performance - payment based on performance (or results) achieved

Risk Allocation Between Client & Contractor Lump sum, admeasure and performance contracts: contractor bears much of the risk Cost-reimbursable contracts: client bears the main risk Currently most agencies favor admeasure contracts

PBC Has Several Names Performance Specified Maintenance Contract (PSMC) Performance Based Management and Maintenance of Roads (PMMR) Output Based Service Contract Performance Based Road Asset Management and Maintenance Contract

PBC in Different Countries Long-term PSMC in AU, NZ, Canada (3-10 yrs) CREMA (Contrato de REcuperation y MAntenimiento) in Argentina, etc. Warranty contracts in USA Asset Mgnt & Maint Contracts in VA, USA DBFO (up to 30 yr) in UK, Finland, Portugal Some are hybrid type contracts (i.e., quantity-based and performance-based)

Why PBC? Reduced administration: less effort to measure works Avoid frequent claims and contract amendments to increase quantities of activities Client focus: pay on the basis of user- related performance indicators More responsibility to contractors stimulates initiative and innovation Development of a new industry and creation of additional job opportunities

Disadvantages of PBC Longer tendering period Perceived loss of control and flexibility by road agencies Uncertainty of long term relationship Lack of some (or unclearly specified) performance standards and level of service Possible unfair competition for smaller contractors

Allocation of Risks Force Account 100 RISK TO PUBLIC SECTOR 0 RISK TO PRIVATE SECTOR 100 Maintenance Contracts PBC Concessions Decreasing Public Risks, Increasing Private Risks BOO

For PBC: Contractors are Free to Decide What to do When to do How to do Where to do To do physical works themselves, or subcontract to others (some restrictions may exist)

Prior to Bidding Definition of road sections or network to be contracted out Inventory of the road assets and their conditions Selection and definition of Key Performance Indicators (KPI) Methods of KPI measurement Definition of likely maintenance & possible rehabilitation Preliminary cost estimates

Bidding Prequalification highly recommended Hold pre-bid technical seminars with potential bidders (detailed review of concept and specifications) Adjustment of bidding documents with the help of consultants WB Sample Bidding Document: oads/c&m_docs/pmmr_final.doc

Evaluation Criteria of Bids Once technical expertise, experience, staffing, quality control/quality assurance, management have been checked, then… Bid price

Bid Evaluation / Contract Amount ActivityBid Evaluation basis Management & Maintenance: Network km x Lumpsum per km- month x No. of months Emergency Works:Assumed quantities x unit prices Rehabilitation Works: Lumpsum or quantities x unit prices TOTAL BID PRICE:SUM OF THE ABOVE

Supervision Arrangements Consultants (individual or firm) Road Agency staff (e.g., Argentina, Estonia)

Quality Control/Assurance Contractor’s self-control arrangements Formal monthly inspections Supervisors (formal/informal inspections) Project Manager (formal/informal inspections) Road users

Payments under PBC: ActivityPayment basis Management & Maintenance Lumpsum per km- month (Output-based) Emergency Works Based on unit prices, for works agreed case by case Rehabilitation Works Lumpsum or quantities x unit prices

Liquidated Damages Reduced payment Suspended payment Fines (different for each KPI and response time: e.g., $440 per day per pothole) Demerit Points System (Sweden, Serbia): Failure to fulfill administrative duties Failure to perform routine maintenance Failure to perform winter maintenance

Dispute Settlements Mutual consultation/direct negotiation (site inspection, progress meetings and collaborative discussions of each party’s position) Arbitration (e.g., Dispute Review Board) Adjudication (e.g., Dispute Review Expert) Appeal to the Court

Advantages of Rehabilitation Included in PBC An incentive for the contractors to perform well to avoid increased maintenance costs in future in order to comply with performance indicators defined in the contract Feasibility of PBC on roads in fair to poor condition

Lessons Learned: Planning of PBC Define clear and simple performance standards and measures before advertising bids Include only “maintainable” roads (unless rehabilitation is included) Have consistent documents and requirements Do not try to impose too many risks on the contractor

Lessons Learned: Contracting Ensure solid and credible financing of contract during the entire contract period Use of small local contractors: Only after adequate preparation and training, and for contracts with very simple requirements (or as subcontractors) Build in a Dispute Resolution Mechanism

Lessons Learned: Management of PBC Supervision consultants need to fully understand their role (… control service level and assure overall technical quality - - but no micro-control and micro-management) Road Agency staff need to understand their changed role (e.g., from performing quality control to focusing on quality assurance) Arrange regular formal and informal communication links with contractors, including regular review sessions

Thank you!