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Performance Contracting for Construction

Overall Process

To successfully develop and implement a performance contract for a construction project takes a number of steps. An overview of the steps is shown in the figure below.

Flow chart describing process for performance contract development
Figure 1. Overall Process for Performance Contract Development

Defining and Recruiting the Stakeholders

Developing a performance contract should not be left to one person within an organization. The Owner Agency should identify the appropriate stakeholders, recruit them for the effort, and keep them involved as the solicitation package is developed, refined, and finalized. By involving the various stakeholders throughout the process, the Owner Agency will help to ensure buy-in and approval of the end product.

Stakeholders at a minimum should include:

  • The Project Manager/Project Engineer/Contracting Officer's Technical Representative for the project
  • A representative from each office/department that will be impacted by the project
  • A representative from the contracts/procurement office
  • A representative from the FHWA Division Office
  • A representative from the contracting industry, and
  • A representative from the consulting industry.

A note of caution is that the representatives from the contracting and consulting industries may become ineligible to bid/propose on the project due to their involvement in the solicitation development. However, by working with appropriate industry organizations to receive the inputs and review feedback, the Owner Agency will get the value of the input without precluding individual private organizations from bidding.

Project Selection

It is important to determine whether the contracting environment and the individual project are suitable for performance contracting. Performance contracting will not be appropriate for all agencies and for all projects. This topic is covered in the Project Selection section of this Guide.

Developing and Testing the Performance Goals

The basis of any performance contract is the set of performance goals that defines what the contractor is to achieve under the contract. Developing these goals is an iterative process, and the goals should be tested before being finalized. This topic is covered in the Performance Goals section of this Guide.

Developing the Measurement Methodology

If you set goals, you need to measure performance against those goals to determine to what extent they were met. The measurement methodology will define what gets measured by whom and when, as well as what to do with the results. This topic is covered in the Performance Measurement Methodology Section of this Guide.

Determining the Method of Award and Developing the Solicitation Packages

Traditional low bid is not optimal for Performance Contracting, since it does not typically allow for flexibility and consideration of the offeror’s technical approach. If at all possible, the Owner Agency should utilize a Best Value award process, or an Enhanced Low Bid award process. These processes and sample materials for solicitation development are provided in the Best Value and Enhanced Low Bid Sections of this Guide.

Developing and Submitting an SEP-14 Application

Because performance contracting is an innovative contracting approach that typically includes incentives/disincentives and that is not typically awarded under traditional low-bid, it requires special approval under SEP-14. Obtaining this approval is not a daunting task, and a process and sample materials are provided under the SEP-14 Section of this Guide.

Managing the Contract and Measuring Performance

MDOT M-115 Pilot Project: For the pilot project, safety, construction congestion, quality, and user satisfaction data were collected before, during, and after construction to demonstrate that PCfC can be used to achieve the HfL performance goals in these areas.

Once the Owner Agency and the selected contractor have signed the contract, the Owner Agency must oversee the contract and measure performance according to the procedures defined in the contract. Performance contracting requires many of the same resources as a traditional contract (engineers, managers, inspectors), but it also requires potentially specialized resources to measure performance against the performance goals. The Owner Agency must ensure that it has adequate resources in place to develop and award the contract and to determine if the contractor is meeting the project goals and the conditions of the contract.

Because many of the specialized resources are only required on a periodic basis (for example, pavement testing equipment) the Owner Agency may wish to hire a consultant to provide these resources. The Owner Agency can make an initial determination of the resources needed, and then adjust as needed over the course of the contract.

One key to the success of all performance contracts is effective communication between the project stakeholders. One means of facilitating this communication is formal project partnering.

Formal Project Partnering

Due to the sharing of risk and reward between the Owner Agency and the contractor, performance contracts are a form of public-private partnership. Formal project partnering provides a mechanism for facilitated discussions in a neutral environment. It allows the definition and tracking of important unwritten project goals, and it establishes a method of resolving disputes before the contract terms and conditions come into play.

Used properly, formal partnering can be a key tool in solving problems quickly and fairly. It really is the key to success for asset management contracts, and its use should be seriously considered for any performance contract.

Sample wording for the solicitation package is included below.

Sample Contract Language for Formal Project Partnering

The following wording is a sample of RFP/IFB wording for requiring formal project partnering.

"The Contractor shall actively participate in formal project partnering with the Owner Agency and other parties involved. Under this partnering provision, the Owner Agency and the Contractor shall meet at a neutral location to discuss project goals and issues in a facilitated environment. The Owner Agency and the Contractor shall also establish their project-level dispute resolution hierarchy of personnel at the initial session. This hierarchy shall allow the Owner Agency and the Contractor to try to work out disputes at the project level before considering enacting the disputes clause. An experienced professional partnering facilitator shall facilitate the partnering sessions. These sessions can be very helpful in establishing strategies for meeting the performance goals, and in removing barriers to meeting the performance goals. The Owner Agency and the Contractor shall establish high-level project goals during this process. It is anticipated that an initial full-day session shall be held, followed by regularly scheduled follow-on half-day sessions. These follow-on sessions shall be held approximately every 4-6 months. The Contractor and the Owner Agency shall agree on the facilitator, and shall share partnering costs equally. The Owner Agency's obligations for partnering include actively participating in the formal project partnering meetings, and paying half of the facilitator and facility costs. The cap for the Owner Agency's monetary obligation for this process is $30,000. The Contractor's obligations for partnering include actively participating in the formal project partnering meetings, and paying half of the facilitator and facility costs. In the event that a dispute cannot be solved through the project-level dispute resolution hierarchy, it shall be subject to the disputes clause."

More Information

Contact

Jerry Yakowenko
Office of Program Administration
202-366-1562
E-mail Jerry

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Updated: 08/28/2012
 

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