U.S. Department of Transportation Federal Highway Administration

MEMORANDUM

By previous memorandums you have been informed of the Federal Highway Administration's (FHWA) initiative to encourage States to use and evaluate promising innovative contracting practices under Special Experimental Project No. 14 (SEP 14). The purpose of this memorandum is to provide you updated information on SEP 14 activities, to advise you of several recent decisions, and to request your support in expanding the experimental use of innovative contracting practices.

Since initiation of SEP 14 in 1990, four innovative contracting techniques have been proposed, used and evaluated by a number of State highway agencies (SHA's). These techniques had previously been identified in Transportation Research Circular No. 386, Innovative Contracting Practices and/or the 1990 European Asphalt Study Tour report as having potential for successful use on Federal-aid highway projects. The techniques are:

• Cost-plus-time bidding,
• Lane rental,
• Design/build contracting, and
• Warranty clauses.

Attachment "A" contains a brief discussion of each technique.

The SEP 14 has been operational for over 5 years and approximately 65 percent of the SHA's have, on at least one occasion, participated. Attachments "B" and "C" list the States that have participated and the technique(s) they have chosen to use and evaluate. The participation of these SHA's in SEP 14, and the reports developed, have provided the information necessary to make a number of decisions for the future. These include:

• The cost-plus-time bidding approach, with its widespread successful use, has demonstrated definite beneficial application to the Federal-aid highway program to reduce construction time for critical projects that have high road user delay impacts. The use of lane rental can similarly be an effective technique to significantly reduce these impacts. Although lane rental has not been as widely used and evaluated as cost-plus-time bidding, it is not difficult to administer and its use does not compromise any existing FHWA policy. For these reasons, we have determined that these techniques (cost-plus-time and lane rental) have proven their suitability for use as nonexperimental, operational practices. The SHA's are encouraged to consider the use of these techniques for future projects with high road user impacts.
• The use of warranty clauses should be a permissible practice on Federal-aid projects. We have begun a rulemaking effort to revise the presently prohibitive warranty regulation (23 CFR 635.413) to permit States to use warranty clauses in Federal-aid highway contracts. However, the regulation will contain general criteria to ensure that contractors will not be required to be responsible for items not under their control.
• Although there is support from some SHA's to use and evaluate the design/build contracting method, a large portion of the industry has expressed strong disapproval. Due to lack of support from the highway community, we have decided that no special emphasis, beyond the SEP 14 initiative, should be made to promote the design/build/warrant concept at this time. We will continue to approve use and evaluation of design/build contracting under SEP 14.

A review of Attachments "B" and "C" reveals that a number of SHA's have participated in multiple SEP 14 projects. The use of SEP 14 to test and report on new promising techniques, that have the potential to improve the quality of highway construction, is highly beneficial to our industry. As concepts are successfully evaluated and made operational (i.e., cost-plus-time bidding and lane rental), others are being proposed for evaluation to take their place (i.e., indefinite delivery contracting and cost-plus-quality bidding). All SHA's should be encouraged to identify and evaluate at least one technique that is new to that State.

If you have any comments or questions regarding SEP-14 or would like to discuss any specifics of a proposed innovative contracting practices concept, please contact Mr. Allan Rockne of the Contract Administration Branch at (202) 366-1562.

/s/ original signed by
William A. Weseman

3 Attachments

Attachment A

INNOVATIVE CONTRACTING TECHNIQUES

Cost-Plus-Time Bidding:

Cost-plus-time bidding, also referred to as the A+B method, involves time with an associated cost, in the low bid determination. Under this method, each bid submitted consists of two components:

• The cost or "A" component is the traditional bid for the contract items and is the dollar amount for all work to be performed under the contract.
• The time or "B" component is a "bid" of the total number of calendar days required to complete the project, as estimated by the bidder.

The bid for award consideration is based on a combination of the bid for the contract items and the associated cost of the time, according to the formula:

(A) + (B x Road User Cost / Day)

This formula is only used to determine the lowest bid for award and is not used to determine payment to the contractor.

A disincentive provision, that assesses road user costs, is incorporated into the contract to discourage the contractor from overrunning the time "bid" for the project. In addition, an incentive provision is usually included to reward the contractor if the work is completed earlier than the time bid. The value of the road user cost is predetermined by the contracting agency and specified in the proposal. It is based on costs such as road user delay time, any detour costs, construction engineering costs, etc.

Lane Rental:

Like cost-plus-time bidding, the goal of the lane rental concept is to encourage contractors to minimize road user impacts during construction. Under the lane rental concept, a provision for a lane rental fee assessment is included in the contract. This fee rate is based on estimated cost of delay to the road user during the rental period. The fee is assessed for the time that the contractor occupies or obstructs part of the roadway and is deducted from the monthly progress payments.

The rental fee rates are stated in the bidding proposal in dollars per lane per time period, which could be daily, hourly or fractions of an hour. Neither the contractor nor the contracting agency give an indication as to the anticipated amount of time for which the assessment will apply and the low bid is determined solely on the lowest amount bid for the contract items.

The intent of lane rental is to encourage contractors to schedule their work to keep traffic restrictions to a minimum, both in terms of duration and number of lane closures. This concept has merit for use on projects that significantly impact the traveling public; major urban area projects are prime candidates for this approach.

Design/Build Contracting:

With the design/build approach, the contracting agency identifies the end result parameters and establishes the design criteria minimums. The prospective bidders then develop design proposals that optimize their construction abilities. The submitted proposals are rated by the contracting agency on factors such as design quality, timeliness, management capability and cost.

By allowing the contractor to optimize his/her work force, equipment and scheduling, the design/build concept opens up a new degree of flexibility for innovation. However, along with the increased flexibility, the contractor must also assume greater responsibility. Extended liability insurance or warranty clauses may be used to ensure that the finished product will perform as required.

From the contracting agency's perspective, the potential time savings is a significant benefit. Since the design and construction are performed through one procurement, construction can begin before all design details are finalized. Also, because both design and construction are performed under the same contract, claims for design errors or construction delays due to redesign are not allowed and the potential for other types of claims is greatly reduced.

The Office of Chief Counsel reviewed the design/build concept for compatibility with current Federal laws and regulations. It is their position that Federal-aid funds may participate in design/build contracts when approved under SEP-14 and awarded using competitive bidding procedures. However, the approach should only be applied to those projects for which the end product or facility can be well defined.

Warranty Clauses:

Warranties have been successfully used in other countries and by some States on non-Federal projects to protect investments from early failure. Currently there is a regulation (23 CFR 635.413) that restricts the use of warranties on Federal-aid projects to electrical and mechanical equipment. The rationale for the restriction is that such contract requirements could indirectly result in participation in maintenance costs, and the use of Federal-aid funds for normal maintenance purposes is prohibited by law.

However, an exception to this restriction was made possible as a result of the 1991 Highway Act, the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). The Act provides certain program flexibilities for Federal-aid projects off the National Highway System (NHS) when a State chooses to request an exemption. Under these conditions, warranty clauses may be used in accordance with State procedures.

Under SEP 14, the FHWA has approved warranty concepts with the objective of encouraging improved quality and contractor accountability without shifting the maintenance burden to the contractor. Ordinary wear and tear; damage caused by others, and routine maintenance remain the responsibility of the State.