Performance Contracting for Construction

Executive Summary

State and Local Departments of Transportation (DOTs) need to deliver quality, timely construction projects under constrained budgets and high expectations from the traveling public.

A strength of the private sector is applying new and innovative techniques to solve problems. However, in highway construction, a contractor’s ability to innovate is usually constrained by the project design, detailed standard specifications, and a low bid environment, all of which are in place to protect the agency and to ensure quality.

Performance contracting is an alternative contracting technique, under which DOTs specify performance goals (desired outcomes), and contractors receive the flexibility to propose and apply innovations to meet those goals. It is designed to enhance cooperation and problem solving between the owner agency and contractor as partners, and to ensure that the owner agency achieves its desired outcomes for the project.

Under performance contracting, the agency can clearly communicate to the contractor what they are trying to achieve with the project, and the contractor shares the risks and rewards through incentives and disincentives.

FHWA originally developed this Guide in 2006. This 2012 update includes lessons learned and sample materials from a successful pilot project conducted by the Michigan Department of Transportation.

Objective

The objective of this effort was to develop a performance contracting guide for a typical reconstruction/rehabilitation project. Performance contracting is becoming more and more prevalent in today’s society, and this Guide should help to encourage its successful application in the transportation construction industry. The Guide is provided as a tool for owner agencies wanting to implement performance contracting for their construction projects, and it includes recommended processes and sample materials for:

• Project Selection
• Performance Goals
• Measurement Methodology (and associated incentive/disincentive fee structure)
• Sample Enhanced Low Bid and Best Value Awards
• SEP-14 Applications

The Guide is meant to be a used as a reference. It should help owner agencies to accelerate the solicitation development process and help them to avoid common obstacles and pitfalls.

The effort also produced a bibliography of sources (available separately) related to performance contracting. This bibliography will be valuable for stakeholders who wish to broaden their knowledge on the subject and for agencies wishing to implement performance contracting.

Stakeholder Involvement

The project team received input and guidance from a select group of stakeholders from State DOTs and industry. This group was key to the success of the project, because the discussions focused on making the Guide's materials implementable in the real world for both owner agencies and contractors.

What We Have Learned

• The performance contracting concept is applicable in the construction environment.
• For this concept to work for the construction phase, the construction contractor must have flexibility in how they perform the work. Without this flexibility, the construction contractor cannot be expected to meet the performance goals.
• Each project will be different. Therefore, the Guide provides recommended procedures for contract development as well as sample materials that can be used to accelerate the process. However, the Owner Agency will need to tailor the processes and materials to their individual application.
• Performance goals should be SMART - Specific, Measurable, Achievable, Results-Oriented, and have a Time element.
• Performance goals must be under the influence of the construction contractor.
• The Michigan pilot project was highly successful and resulted in significant innovation and quantified benefits.
• The concepts presented here on developing performance goals and measuring performance against them are highly relevant to Design-Build project goals and other innovative contracting techniques that are centered around the contractor meeting goals.

For Additional Information

Contact Gerald.Yakowenko@dot.gov