Performance Contracting Framework
Fostered by Highways for LIFE
Much of America's transportation infrastructure is reaching the end of its design life and needs to be reconstructed. At the same time, traffic levels and the resulting congestion levels continue to increase steadily. These two factors combined pose a significant challenge to State Departments of Transportation (DOTs) and the Federal Highway Administration (FHWA).
In response to this challenge, FWHA is developing, identifying and promoting new methods to reconstruct highways and bridges safer, faster, and better. One promising method is the use of alternative contracting procedures.
FHWA has been working over the past 10 years on evaluating alternative contracting procedures under the SEP 14 program. These procedures, which include performance contracting, incentives/disincentives, and Best Value awards, have resulted in time/cost savings and improved contract management.
Performance contracting is an approach where a private contractor is responsible for achieving a defined set of goals, and where performance goals are specified instead of methods. Using a performance contracting approach will allow State DOTs to define and communicate to contractors specifically what they want to achieve in their construction projects.
The construction contractors should share the risks and rewards as a project partner, and defined performance goals and measurement methodologies will provide a basis for applying incentives and disincentives.
The objective of this effort was to quickly develop a performance contracting framework for a typical reconstruction/rehabilitation project. Performance contracting is becoming more and more prevalent in today's society, and this framework document should help to encourage its successful application in the transportation construction industry. The framework 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 Framework is meant to be a used as a reference guide. 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.
Relation to the Highways for LIFE Program
FHWA has created a new pilot program called Highways for LIFE (HfL). The mission of the program is to improve the driving experience of the American public. HfL will accomplish the program's mission by accelerating the adoption of innovations and technologies thereby improving safety and highway quality while reducing congestion caused by construction.
HfL is looking for new ways to build highways and bridges safer, faster, better, and less costly. The program wants to look beyond the conventional practice of what we build, how we build, what we build with, how we finance, how we contract, and how we do business. One method of achieving the program's mission is by setting a higher bar of performance goals for the HfL demonstration projects. Performance goals provide a way to identify the desired outcome but allow for innovation and creativity. Performance goals provide a uniform basis for evaluating the degree to which HfL projects are successful in achieving desired outcomes and the effectiveness of the technologies and innovations used on the project.
HfL has set high level performance goals in the areas of:
- Improving safety
- Reducing congestion due to construction
- Improving quality, and
- Improving user satisfaction.
Because the HfL program is goal-driven, performance contracting represents a means of defining project-specific goals, reallocating some of the risk for meeting those goals to the contractor, and measuring performance against the defined goals. Performance contracting will be a tool in the HfL toolbox, but HfL projects are not required to use it. However, additional consideration will be given to projects that propose to use performance contracting to achieve the HfL performance goals. HfL believes performance contracting is a significant advancement in facilitating the application of innovation. It allows significant flexibility in selecting the approach best suited to providing the level of performance expected without defining how to obtain it.
For those HfL projects that do use performance contracting, the framework will also help to provide a consistent basis of measurement for use at the program level. A briefing and hands-on technical support on performance contracting will be provided to any DOT/division office upon request (Contact the Highways for LIFE Team at 202-366-4847, or HfLT@fhwa.dot.gov).
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 their input will help to assure buy-in and usability of the end products. The project team worked closely with this stakeholder group during the 30%, 60%, and 90% reviews.
What We Have Learned
- The performance contracting concept should be 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 can not be expected to meet the performance goals.
- Each project will be different. Therefore, the framework 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 Timely.
- Performance goals must be under the influence of the construction contractor.
- Ideally, the performance-based environment will start at the concept or design stages, as that approach will provide the most flexibility.