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Performance Contracting - A New Approach for a New Era

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Since 1970, traffic has grown at more than 25 times the rate of increased capacity. This is complicated by the fact that, according to the American Society of Civil Engineers, one-third of the Nation's major roads are in mediocre condition at best. These two factors combined guarantee that roadway construction and maintenance will be a vital and continuing concern over the next 20 years. Yet current approaches to building and maintaining roads are often characterized by limitations that prevent innovation, such as agency-mandated materials or processes, which sometimes result in decreased efficiency and increased costs.

A New Approach for a New Era

Performance contracting is a relatively new approach to road construction and maintenance where an agency specifies performance goals rather than methods and materials and a private contractor is responsible for meeting a defined set of goals. In other words, the owner agency specifies what to achieve rather than how to achieve it. This allows the contractor the flexibility of determining how to achieve the outcomes rather than using a specified method or material. This flexibility should enable them to perform profitably and competitively without compromising quality. Instead of prescriptive methods, the owner agency uses a set of predetermined and mutually agreed upon performance goals to determine a successful outcome.

How is Performance Contracting Different from Design-Build, Best-Value, and Warranties?

Design-Build: In some respects, PCfC is similar to the design-build method, which allows the contractor 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.

Potential Benefits

  • State and local DOTs benefit from the opportunity to clearly describe the desired outcomes the contractor must deliver.
  • Contractors benefit from the flexibility to determine how best to accomplish the desired outcome in an innovative and competitive manner. Contractors also benefit from sharing the rewards from a project well done.
  • Everyone benefits from innovations introduced by the contractor that may lead to improved safety and mobility, reduced costs, and faster project completion at equal or better quality.

Potential Challenges

  • Implementing a new approach requires a culture shift within owner agencies and among contractors that may initially be met with resistance.
  • Agencies will need to recognize that they are sacrificing some control by placing responsibility for how a job is done onto the contractor.
  • Performance contracting is not a panacea, and may not be appropriate for all projects.

The performance contracting approach, however, is focused on allowing the contractor to create efficiencies during the construction phase. Construction contractors do not take on the design liability nor do they become the designer of record. Under performance contracting, specific performance goals are assessed and measurement methodologies applied during the construction phase. The results of these specific, measurable, and realistic assessments provide a basis for applying incentives and disincentives.

Best-Value: Under a best-value selection process, the criteria for contractor selection include quality issues as well as cost issues. The low-bid concept is still a part of the selection process, but it is weighted with other elements to determine a best value that minimizes impacts and enhances the long-term performance and value of construction. PCfC typically uses a best-value approach rather than straight low-bid so that the owner agency can evaluate and score the contractor's proposed approach to meeting the performance goals.

Warranties: Warranties may apply to materials and workmanship, or performance. Under a materials and workmanship warranty, the contractor is responsible for correcting defects in work elements within contractor control during the warranty period. The contractor assumes no responsibility for defects due to design decisions on the part of the owner agency. Under a performance warranty, the contractor assumes full responsibility for performance during the warranty period. In effect, the contractor guarantees that the product will perform at a desired quality level.

Warranties can be used as part of a performance contract to ensure that performance goals are met for the period specified in the warranty. An example of this is the M115 project recently done by Michigan DOT. A warranty was used as part of this performance contract to ensure ride quality for at least 5 years after construction. A further innovation with this contract was that Michigan DOT allowed the proposing contractors to specify a warranty period longer than 5 years to obtain additional points towards the best value award.

Is Performance Contracting Right for All Construction Projects?

FHWA is sponsoring a series of 2.5-day workshops to introduce participants to the concept of Performance Contracting for Construction and to help them begin applying the concepts and framework procedures to a specific construction project.

The workshop has two primary parts. Day 1 (part 1) focuses on providing an introduction to performance contracting and to FHWA's Performance Contracting Framework (available at /framework) to both the public and private sectors. Owner agencies and contractors will have the opportunity to discuss with each other the opportunities and challenges of performance contracting, and to ask each other questions.

Days 2 and 3 (part 2) are for the public sector (owner agency) and focus on understanding and applying the processes provided in the Framework. These sessions combine presentations on the processes with starting to apply the processes to a specific project through group exercises.

The primary target audiences for this workshop are state and local transportation agencies and their FHWA Division Office Counterparts. The target audience for the first day of the workshop also includes private sector contractors. The workshop will be of interest to engineers, planners, designers, materials personnel, administrators, and contracts personnel.

For more information on the Performance Contracting for Construction Implementation Framework or to learn how to become a pilot state, contact:

Mary Huie
Federal Highway Administration,
U.S. Department of Transportation

Chris Schneider
Office of Asset Management,
U.S. Department of Transportation


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Mary Huie
Center for Accelerating Innovation

Updated: 04/04/2011

United States Department of Transportation - Federal Highway Administration