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Performance Contracting for Construction
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). To address this challenge, FHWA has been working with State DOTs and industry to develop a "toolbox" of potential solutions. One tool in this toolbox is performance contracting.
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 owner agencies to define and communicate to construction contractors specifically what they and FHWA want to achieve in their construction projects.
The construction contractors on performance contracts 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. However, it must be stressed that for a performance contract to be successful, the contractor must be provided with flexibility on how to perform the work and the performance goals must be under the control/influence of the contractor.
Guide Purpose and Contents
FHWA has been working over the past 15 years on evaluating alternative contracting procedures under the Special Experimental Projects No. 14 (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. FHWA anticipates that the use of these procedures will expand greatly in the future as a means of addressing current challenges.
The purpose of this Guide is to provide States with processes and materials that they can use to accelerate the development of a performance contract solicitation package for construction contracts. These materials will be the basis on which the Owner Agency develops their approach.
The Guide includes processes and sample materials for:
It should be noted that the Guide focuses on processes and materials that would be different than those used for traditional low-bid construction contracts.
The Guide is meant to be a used as a reference guide, with a process and sample materials for each major section.
A bibliography of sources related to performance contracting is available as a separate document. In developing the Guide, the project team found these sources to be useful, and they should prove to be valuable for stakeholders who wish to broaden their knowledge on the subject and for agencies wishing to implement performance contracts.
FHWA originally developed this Guide in 2006. This 2012 update includes lessons learned and sample materials from a successful pilot project performed by the Michigan Department of Transportation. We have included this additional information in text boxes to allow easy identification.
Relation to the Highways for LIFE Program
FHWA has implemented a program called Highways for LIFE (HfL). The mission of the program is to improve the driving experience of the American public. HfL is accomplishing 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:
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 Guide 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 Gerald.Yakowenko@dot.gov).
The project team developed the Guide materials working with subject matter experts at FHWA and a select group of stakeholders from State DOTs and industry. The FWHA subject matter experts provided inputs and guidance on material and processes at the development stage. The stakeholder group provided valuable review comments and guidance at the 30%, 60%, and 90% completion stages.
The State and industry stakeholder group included:
The FHWA subject-matter experts included:
The project team extends a sincere thank-you to all those who provided input and guidance. Participation did not involve formal endorsement of the final product.
With respect to the 2012 update, the project team extends a sincere thank you to the Michigan Department of Transportation (MDOT) and its project team, both for their creativity in applying the Guide concepts to their M-115 project, and for providing us with the Request for Proposal materials for use in this update.
Roadmap to the Guide
The Guide begins with a discussion of the overall performance contract development process, and then includes individual sections on:
Each section describes (as applicable) a suggested process to follow, presents lessons learned from real-world contracts, and provides sample materials for the solicitation package.
The reader should start with the overall process and project selection sections. If the reader determines that the project they are considering is a candidate for performance contracting, they should then move to the Performance Goals section, then to the Measurement Methodology section, then to the appropriate Award Process section, and finally to the SEP-14 section. The reader should note that a number of portions of the sample materials are highlighted to represent values that may need to change for the individual project.