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Performance Contracting for Construction

Special Experimental Project No. 14 (SEP-14)

Process

If an Owner Agency determines that an innovative award methodology best meets the needs of their construction project, and it is a non-traditional construction contracting technique which deviates from the competitive bidding provisions in 23 USC 112, then FHWA Headquarters' SEP-14 approval must be received. Any contract which utilizes a method of award other than the lowest responsive bid should be evaluated under SEP-14. These non-traditional contracting techniques may include Enhanced Low Bid, Best Value, life cycle cost bidding, qualifications based bidding and other methods where cost and other factors are considered in the award process.5

MDOT M-115 Pilot Project: The following is the table of contents of the final SEP-14 report for the M115 project:

  1. Introduction and Background
  2. Project Location
  3. Goal Outcomes
  4. Lessons Learned
  5. Successes
  6. MDOT’s Conclusions
  7. Attachments
  8. Appendixes

Final Report URL:
http://www.fhwa.dot.gov/programadmin/contracts/sep14list.cfm

The objective of SEP-14 is to evaluate "project specific" innovative contracting practices, undertaken by State highway agencies that have the potential to reduce the life cycle cost of projects, while at the same time, maintaining product quality. Federal statutes and regulations do set forth specific Federal-aid program requirements; however, some degree of administrative flexibility does exist. The intent of SEP-14 is to operate within this administrative flexibility to evaluate promising non-traditional contracting practices on selected Federal-aid projects.

This experimental program enables States to evaluate nontraditional contracting methods that are not in full compliance with FHWA's contracting policies but provide an open, competitive procurement. Under SEP-14, project owners seeking Federal aid may apply for approval to use nontraditional construction contracting techniques-methods of award other than the lowest responsive bid-to implement value-oriented procurement processes.6

The excerpt below is from the Contract Administration Training manual, and provides a brief outline of possibilities under SEP-14.

"SEP-14 strives to identify, evaluate, and document innovative contracting practices that have the potential to reduce the life cycle cost of projects, while at the same time, maintain product quality. Within the regulatory requirements of the Federal-aid highway program, some degree of flexibility does exist. SEP-14 is an effort to explore this flexibility to its fullest.

The FHWA will not mandate the use of innovative contracting practices. However, through SEP-14, the agency is working to maintain an environment which allows the State Transportation Agencies (STAs) and the construction industry to try innovative contracting practices which may result in an improvement of the industry's traditional contracting methods. FHWA hopes to try all proposed concepts that fall within the flexibility of the Federal-aid program requirements.

The following offers a brief discussion of contracting techniques that are either: 1) under evaluation by a number of States under SEP-14, or 2) under evaluation by some States as non-participating (State funding only):

Best value: A few States have considered awarding construction contracts on the basis of price and "other factors." This method uses a form of price/qualifications-based bidding, and the contract is awarded to the Offeror whose proposal provides the Best Value to the Owner Agency. Different evaluation and scoring methods may be used to select the winning proposal, and some are offered in this package.

Enhanced Low Bid: Traditionally, the majority of construction contracts have been based on low bid price. It has been noted for certain special types of projects that the Enhanced Low Bid process maybe more effective than the traditional low bid process.

Enhancements are focused on embedding additional measures into Owner Agency program plans, using prequalification criteria, and tightening the contract requirements by establishing prequalification standards for the contractor. The States that do not exercise best-value procurement can potentially benefit from an Enhanced Low Bid process.

No excuse incentive (bonuses): Under this concept, the STA gives the contractor a "drop-dead date "(or an incentive date) for completion of a phase or project. If the work is completed in advance of that date, the contractor receives a bonus. The agency will not accept any excuses, including weather delays, for not meeting the incentive date; meaning that the incentive date will not be changed. However, the STA may use its normal procedures to grant weather days or time extensions outside the incentive date. The contract will identify both a bonus date and a completion date for normal construction. If the contractor does not meet the bonus date, normal contract administration processes are followed.

Lump sum bidding: This method requires the contractor to develop the quantities from the contract package prepared by the STA. The contractor then submits a Lump Sum bid for the project. The method is designed to reduce quantity overruns due to errors in quantity calculations or changed field conditions. An added benefit is the reduction in paperwork related to quantity measurement and verification, allowing STA field personnel to spend more time on inspection of the work. Any costs associated with changed or unforeseen conditions as well as added or deleted work will be negotiated using standard practices. States typically use this method for simple projects such as resurfacing, bike paths, box culvert extensions and minor bridge widening.

NOTE: a normal lump sum project for which the STA prepares a complete PS&E package (including a list of quantities) is NOT experimental. Lump sum bidding, where the contractor develops quantities, is experimental because the contractor has responsibility for the estimated quantities as part of preparing the bid estimate.

Alternative pavement type bidding: Under an SEP-14 proposal, MoDOT evaluated alternative pavement bidding on five projects. FHWA has traditionally discouraged alternate pavement bids primarily due to the difficulties in developing truly equivalent pavement designs. However, Missouri actively involved the paving industry in the process of developing alternate pavement type specifications. They have also developed bid adjustment factors intended to allow a fair comparison of bids for different pavement types. The contract is then awarded to the lowest responsive/responsible bidder after the bids are multiplied by the bid adjustment factors.

Indefinite delivery/indefinite quantity (ID/IQ): This is a concept that several STAs currently use for design, maintenance or traffic control activities, and for other recurring tasks where the contractor bids per unit of specific work (for example, the work unit might be signalizing an intersection, or constructing an off-system bridge) with a guaranteed minimum amount of work units over the life of the contract.

Design-build. The design/build concept allows the contractor maximum flexibility for innovation in the selection of design, materials, and construction methods. Under the design/build concept, the contracting agency identifies the parameters for the desired end result and establishes the minimum design criteria. The prospective bidders then develop design proposals which optimize their construction abilities. The submitted proposals are rated by the contracting agency on the basis of design quality, timeliness, management capability, and cost."7

Lessons Learned from Real-World Performance Contracts

Lessons learned from real-world SEP-14 applications for performance contracts include:

  • Leave time for the application to be reviewed and approved
  • There is sometimes a review and revision cycle needed to get the application in suitable format
  • Work closely with your FHWA rep in the development and submittal of the application.
  • Do not get fancy with the application package.

Sample Materials

A sample Best Value SEP-14 application which includes language on performance contracting is provided below:

Agency Department of Transportation Construction Project

A. Introduction

The Owner Agency submits this work plan for review as a Best Value Award project under the provisions of Special Experimental Project No. 14 (SEP 14) for the use of innovative contracting practices. The Owner Agency has traditionally used a Low Bid method for their construction projects.

The Owner Agency has used this process before on the following projects achieving the following results. (If used previously, list the projects and the results here). By using this contracting technique we will ensure prospective general contractors have the necessary knowledge and experience to successfully complete this construction project and will provide them with flexibility on how they perform the construction, and manage traffic.

The SEP-14 process is an innovative means of procuring projects that may be uncharacteristic to the traditional projects normally encountered by highway departments. SEP-14 provides an opportunity to use and evaluate the contractual arrangements when an alternate process is more beneficial than the traditional process. In this case, selection of the construction contractor will be based on criteria other than cost.

B. Purpose

Under this effort, the Owner Agency intends to enter into a performance contract to obtain construction of (XX asset at XXX location). Through this contract, a private company will assume the responsibility for partnering with the Owner Agency and performing the XX asset construction.

For this effort, the Owner Agency feels that the low bid process will not provide adequate information on the Offerors' qualifications or provide a measure of the Offerors' competence to perform the unique work required for a performance construction contract. The low bid process would also not provide the flexibility needed by the Contractor in coming up with an approach to reach a defined set of performance goals.

The Owner Agency will manage this project and award process, including the Request for Proposals (RFP), advertising, awarding, and performing performance measurement and project monitoring. The successful Contractor will act as the construction contractor under the Owner Agency's oversight and supervision.

Since this project will encourage a private Contractor towards innovation and accelerated construction timeframes, it is essential that the Owner Agency selects a Contractor based on the Best Value available to them, not solely the lowest price. The safety of the residents depends on assets that are properly constructed and built to be durable and long lasting, so the Owner Agency will need to be comfortable with the Offeror's technical approach, management plan, staffing plan, QC/QA plan, past performance and facilities, as well as their price. Thus, the Owner Agency proposes to use a Best Value award for the XXX project.

C. Scope

Through this performance contract, a private company shall assume the responsibility for constructing the XX assets specified in this RFP. The activities required under this contract include:

  1. (List the major elements of the construction project)
  2. Constructing the XX asset to meet the defined contractual requirements.
  3. Meeting the performance goals as set forth in this contract; and
  4. Ensuring that the Owner Agency is notified immediately of all major construction needs for which the Contractor is not responsible under this contract. The Owner Agency and the Contractor shall jointly validate, agree upon, and resolve those items for which there is a question of Contractor responsibility.

The Contractor's personnel shall work with the Owner Agency and shall be held accountable to industry standards of behavior (as a minimum), confidentiality, and workmanship. All work performed by Contractor personnel must be in accordance with all specifications, codes, rules, guidelines and standards that are applicable for Federal aid work.

The successful Contractor must supply all of the labor, tools, materials, equipment, and incidentals necessary to perform all tasks and must satisfy as a minimum, the performance goal "Good/4" level of performance, as set forth in the RFP package. The performance goals establish the acceptable level of performance for each of the performance measures, and are defined as the "Good/4" level of performance. Labor, materials and equipment supplied must meet the standards of the Titles listed under in the RFP.

Offerors are encouraged, however, to propose innovative techniques and materials, including techniques and materials not currently used by the Owner Agency. By encouraging the use of innovation, the Owner Agency hopes to enhance safety, value, and condition of the assets under this contract, while minimizing construction costs and other capital costs. The Contractor will assume full responsibility for constructing the assets described in the RFP.

The COTR will monitor the Contractor's work to ensure compliance with the contract and to ensure that all work conforms to the performance goals contained in the contract. Subject to COTR oversight, the Contractor is free to choose the most effective and efficient techniques for meeting those performance goals. Materials must meet Federal/State standards.

D. Schedule

(Outline the schedule that makes sense for the project and the type of asset being constructed). The project will run for up to X years.

The Best Value selection process will have the following stages:

  • The Owner Agency will advertise the RFP;
  • The Owner Agency will hold a pre-bid meeting (this could be a mandatory on site pre-bid meeting);
  • The Selection Committee will review the proposals and identify technically acceptable Offerors based on the criteria listed in the RFP Section M (see sample Section M, Evaluation Criteria).
  • For technically acceptable Offerors, the CO will compute the scores for price based on the criterion listed in Section M (see sample Section M, Evaluation Criteria) and will compute a total score.
  • The Owner Agency may negotiate (if allowed) with technically acceptable offerors in the competitive range (Based on the ratings of each proposal against all evaluation criteria, all of the most highly rated proposals that have a reasonable chance of being accepted for award) and request a Best and Final Offer.
  • The Owner Agency will execute a contract with the Best Value Offeror (highest total score of technically acceptable Offerors) and issue a notice-to-proceed. However, if the parties are unable to execute a contract, the Owner Agency may offer the contract to the Offeror with the second highest total score.
  • After project completion the Owner Agency will submit an SEP-14 report within 4 months.
E. Proposal Evaluation

The Owner Agency will use the Best Value selection procedure laid out in the RFP (see sample Section M). The Owner Agency provides instruction to the offerors on what to submit elsewhere in the RFP.

F. Reporting

The Owner Agency will prepare and submit initial, interim, and final reports on this project. The initial report will be prepared at the approximate time of award of the contract. The initial report will include industry reaction to the Best Value award process, any identifiable effects on the proposals received, and a summary of the Offeror's scores.

Based on the outcome of the project, discussion of other success factors of this approach may also include objectives such as:

  • Did the project deliver the high level of quality expected of a contactor team especially experience in the work items and overall supervision of such a complex project?
  • Did the project meet schedule and budget with a minimum of modification, in particular planning and scheduling-based issues?
  • Did the contractor community generally accept use of Best Value contracting on this project and are they open to its future use on unusual projects highly dependant on the Contractor's skill and expertise?

The Owner Agency will submit an interim report mid-way through the project.

The Owner Agency will submit a final report upon completion of the contract and final acceptance. The final report will contain an overall evaluation of the project along with any suggestions and recommendations for improving the process.

A sample Enhanced Low Bid SEP-14 application which includes language on performance contracting is provided below:

Agency Department of Transportation Construction Project

A. Introduction

The Owner Agency submits this work plan for review as an Enhanced Low Bid Award project under the provisions of Special Experimental Project No. 14 (SEP 14) for the use of innovative contracting practices. The Owner Agency has traditionally used a Low Bid method for their construction projects.

The Owner Agency has used this process before on the following projects achieving the following results. (If used previously, list the projects and the results here). By using this contracting technique we will ensure prospective general contractors have the necessary knowledge and experience to successfully complete this construction project and will provide them with flexibility on how they perform the construction, and manage traffic.

The SEP-14 process is an innovative means of procuring projects that may be uncharacteristic to the traditional projects normally encountered by highway departments. SEP-14 provides an opportunity to use and evaluate the contractual arrangements when an alternate process is more beneficial than the traditional process. In this case, selection of the construction contractor will be based on criteria other than cost.

B. Purpose

Under this effort, the Owner Agency intends to enter into a performance contract to obtain construction of (XX asset at XXX location). Through this contract, a private company will assume the responsibility for partnering with the Owner Agency and performing the XX asset construction.

For this effort, the Owner Agency feels that the low bid process will not provide adequate information on the Offerors' qualifications or provide a measure of the Offerors' competence to perform the unique work required for a performance construction contract. The low bid process would also not provide the flexibility needed by the Contractor in coming up with an approach to reach a defined set of performance goals.

The Owner Agency will manage this project and award process, including the Invitation for Bids (IFB), advertising, awarding, and performing performance measurement and project monitoring. The successful Contractor will act as the construction contractor under the Owner Agency's oversight and supervision.

Since this project will encourage a private Contractor towards innovation and accelerated construction timeframes, it is essential that the Owner Agency selects a Contractor based on a pre-qualification process, not solely the lowest price. The safety of the residents depends on assets that are properly constructed and built to be durable and long lasting, so the Owner Agency will need to be comfortable that the Offeror is qualified to perform the construction and meet the performance goals, as well as being comfortable with their price. Thus, the Owner Agency proposes to use an Enhanced Low Bid award for the XXX project.

C. Scope

Through this performance contract, a private company shall assume the responsibility for constructing the XX assets specified in this RFP. The activities required under this contract include:

  1. (List the major elements of the construction project)
  2. Constructing the XX asset to meet the defined contractual requirements.
  3. Meeting the performance goals as set forth in this contract; and
  4. Ensuring that the Owner Agency is notified immediately of all major construction needs for which the Contractor is not responsible under this contract. The Owner Agency and the Contractor shall jointly validate, agree upon, and resolve those items for which there is a question of Contractor responsibility.

The Contractor's personnel shall work with the Owner Agency and shall be held accountable to industry standards of behavior (as a minimum), confidentiality, and workmanship. All work performed by Contractor personnel must be in accordance with all specifications, codes, rules, guidelines and standards that are applicable for Federal aid work.

The successful Contractor must supply all of the labor, tools, materials, equipment, and incidentals necessary to perform all tasks and must satisfy as a minimum, the performance goal "Good/4" level of performance, as set forth in the IFB package. The performance goals establish the acceptable level of performance for each of the performance measures, and are defined as the "Good/4" level of performance. Labor, materials and equipment supplied must meet the standards of the Titles listed under in the IFB.

Offerors are encouraged, however, to propose innovative techniques and materials, including techniques and materials not currently used by the Owner Agency. By encouraging the use of innovation, the Owner Agency hopes to enhance safety, value, and condition of the assets under this contract, while minimizing construction costs and other capital costs. The Contractor will assume full responsibility for constructing the assets described in the IFB.

The COTR will monitor the Contractor's work to ensure compliance with the contract and to ensure that all work conforms to the performance goals contained in the contract. Subject to COTR oversight, the Contractor is free to choose the most effective and efficient techniques for meeting those performance goals. Materials must meet Federal/State standards.

D. Schedule

(Outline the schedule that makes sense for the project and the type of asset being constructed). The project will run for up to X years.

The Enhanced Low Bid selection process will have the following stages:

  • The Owner Agency will advertise the IFB;
  • The Owner Agency will hold a pre-bid meeting (this could be a mandatory on site pre-bid meeting);
  • The contractor shall provide written documentation to demonstrate his/her ability to perform the type of work or similar jobs.
  • The Selection Committee will review the packages and identify a short list of qualified Offerors based on the criteria listed in the IFB section L.
  • The owner Agency will only consider prices from Offerors which the owner Agency has determined are qualified under the evaluation criteria in section M. The owner Agency shall award the Contract to the qualified Offeror with the lowest acceptable price
  • After project completion the Owner Agency will submit an SEP-14 report within 4 months.
E. Proposal Evaluation

The Owner Agency will use the Enhanced Low Bid selection procedure laid out in the IFB (see sample Section M). The Owner Agency provides instruction to the offerors on what to submit elsewhere in the IFB.

F. Reporting

The Owner Agency will prepare and submit initial, interim, and final reports on this project. The initial report will be prepared at the approximate time of award of the contract. The initial report will include industry reaction to the Enhanced Low Bid award process, any identifiable effects on the proposals received, and a summary of the Offeror's scores.

Based on the outcome of the project, discussion of other success factors of this approach may also include objectives such as:

  • Did the project deliver the high level of quality expected of a contactor team especially experience in the work items and overall supervision of such a complex project?
  • Did the project meet schedule and budget with a minimum of modification, in particular planning and scheduling-based issues?
  • Did the contractor community generally accept use of Enhanced Low Bid contracting on this project and are they open to its future use on unusual projects highly dependant on the Contractor's skill and expertise?

The Owner Agency will submit an interim report mid-way through the project.

The Owner Agency will submit a final report upon completion of the contract and final acceptance. The final report will contain an overall evaluation of the project along with any suggestions and recommendations for improving the process.

5BRIEFING – "FHWA Initiatives to Encourage Quality Through Innovative Contracting Practices Special Experimental Projects NO.14 - (SEP-14)," July 9, 2002 (Updated March 11, 2005). http://www.fhwa.dot.gov/programadmin/contracts/sep_a.htm

6Gerald Yakowenko, "Megaproject Procurement: Breaking from Tradition," Public Roads, July/August 2004, Vol. 68, No. 1.

7Contract Administration Core Curriculum Participant's Manual and Reference Guide 2005, "Chapter V. Other Issues" (updated January 9, 2006). http://www.fhwa.dot.gov/programadmin/contracts/cor_V.htm.

More Information

Contact

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

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