As discussed earlier, in D-B-B contracting, the agency (or the agency's agent) is responsible for preparing the 100 percent design documents, including plans and specifications. Following the completion of design, the agency then hires a contractor to perform the construction work through a fixed, low-bid competitive procurement process. The contractor is obligated to build the facility exactly in accordance to the plans and specifications provided by the agency. With the exception of a limited warranty for defects in workmanship and materials quality, the contractor is not liable for defective specifications, errors and omissions in design documents, or the long-term performance on the constructed facility. Neither does the contractor have any say on how design decisions will influence the future performance of the facility nor does it have the privilege to deviate from those decisions. The agency takes responsibility for internal hand-over of as-built information between its construction and maintenance disciplines, and the long-term maintenance and maintenance of the facility. The agency retains the risk of the long-term performance of the constructed facility.
Under D-B and P3, agencies have traditionally articulated the requirements for design and construction, in lieu of plans and specifications. This is accomplished in the Request for Proposals (RFP) and in a draft form of the Technical Provisions 1 appendix to the D-B or P3 agreement. The Technical Provisions of the P3 agreement describe the project scope as well as the technical requirements for the products and services that the designers must accommodate in preparing plans and specifications for construction.
The agency's technical criteria in the P3 Technical Provisions should capture the functional purpose and needs of a project that are required to be fulfilled for successful commissioning and operation of the project. The technical criteria include the "necessary must-haves" of the project and, where strictly necessary, prescriptive language (regarding the design, construction, maintenance and operations technical standards and any manuals) that must be adhered to. The agency sets out the functional requirements (i.e., what service the facility is intended to provide) in the P3 agreement using technical criteria in performance terms. The details on how these are to be provided are left to the P3 private partner. Owing to its policies, public needs and environmental responsibilities, where necessary, the agency can use specific prescriptive terms in the P3 agreement technical provisions to lay out project constraints and limitations, e.g., for safety, right-of-way and environmental constraints. With this, the P3 proposers would still have flexibility to propose alternative solutions within the agency's constraints and suggest changes to prescriptive requirements that they feel would prevent achieving the project goals effectively. That kind of change happens as part of the negotiation process between the agency and the shortlisted P3 proposers and is available to all the Proposers. During the proposal process, P3 proposers can also provide alternative solutions that are better than or equal to the requirements outlined in the P3 agreement technical provisions through an alternative technical concept (ATC) process.
Once the P3 contract is signed and construction commences, the agency can approve on a case-by-case basis any requests made by the P3 private partner to deviate from any identified technical requirements, in the form of design exceptions, waivers or variances. Although it is the agency's prerogative, the language of a P3 agreement's technical provisions can exceed the bounds of the "necessary must-haves" principle. In other words, the agency may over-specify technical criteria through prescriptive requirements and thereby over-determine how the facility should be designed and constructed. Being prescriptive can be appealing as agencies are assured that their desired solutions will be implemented in a way (i.e., means and method) with which they are familiar. However, they can be antithetical to the primary purpose of selecting P3 as the preferred procurement approach.
Since the P3 proposers' technical proposals must conform to those requirements to be responsive, over-specificity in the design requirements (with the exception of safety and security, right-of-way, environmental, and policy related requirements) has potential to leave little room for innovation or value addition and to undermine the transfer of performance risk (Gransberg et al, 2008). Recognizing that the agency's initial design decisions may not always yield the most cost-effective solution, the lack of opportunities for P3 proposers to propose alternative ideas may deprive the project of optimal technical solutions and potential efficiency gains. Furthermore, agencies can end up inadvertently owning the design risks from the downstream consequences of their design decisions on constructability and performance of the facility (Xia et al, 2012). From the legal perspective, the agency assumes full or partial liability for all issues that originate from any prescriptive design requirements. An agency's retention of performance risks can lead to an increase in the agency's total cost of facility ownership over time as well as undermine the incentives to operate and maintain the resulting facility in an efficient manner.
Furthermore, P3 agreements have post-construction performance requirements, in terms of minimum acceptable condition criteria for asset and operational performance. In addition, the P3 agreement will have to specify the associated inspection frequencies and measurement methodologies, and associated timeliness requirements, to monitor those performance requirements during the O&M period. At the end of the P3 agreement term there will also be handback requirements outlining the required condition of the facility and the timeline for bringing it up to that standard. However, what is often lacking is a thorough understanding of how the performance expected during the use phase and handback of the facility is influenced by decisions made during design and construction; in this context, the performance requirements in the design-build phase provides a pivotal continuity between the D-B and operations phases.
Performance requirements provide an alternative way to communicate technical requirements of a project in the P3 agreement. Unlike traditional prescriptive specifications, performance requirements do not prescribe the "methods" for the P3 private partner to design and construct the facility using the agency's base design; rather much emphasis is placed on the requirements of the proposed facility that the P3 private partner must contractually fulfil from user, operational, structural, functional, budgetary, and delivery perspectives.
Essential Functions define how well the highway facility needs to perform and the objectives for a successful delivery of the facility.
Through federally mandated planning processes and agency scoping procedures, each highway project has its own list of "essential functions" without which the highway facility will not perform and the facility will not be successfully delivered as planned. The essential functions are generally traced back to the project purpose and needs, stakeholder expectations, environmental commitments, project constraints and the reasons for selecting a P3 delivery method. The performance requirements identify what is needed to achieve the essential functions of the project, and each performance requirement is defined by one or more performance criteria. The essential functions, performance requirements and performance criteria are typically established during the scoping phase of the project development process.
A well-written set of performance requirements clearly lays out the project scope, agency's expectations and constraints early in the procurement process, while maintaining the quality, cost and schedule needs of the project. This creates a "win-win" situation for both public agencies and P3 proposers in that the proposers are provided with a higher degree of flexibility to devise a broad range of viable alternatives meeting those requirements and the agencies can tap into the technical strengths of the proposers to obtain the best value out of the competition during the procurement process.
Performance requirements define what is need to be done to accomplish the objectives of the project, while Performance criteria are measures that demonstrate a specific owner requirement has been met
Performance specifications are construction specifications designed to focus on the desired quality level or performance of the finished work. Different from performance requirements, performance specifications indicate that a decision has already been made. Performance specifications move away from "method" specifications to provide flexibility to contractors in selecting materials, equipment, techniques, procedures and methods and responsibility to improve the quality or cost, or both, of the end product. Figure 4, which has been adapted from Gransberg et al. (2006), illustrates the hierarchy of performance elements, from essential functions to prescriptive specifications, with an example. Table 1 presents comparative examples of performance and directive requirements for sample project types.
Figure 4. Hierarchy of Performance Elements with an Example
View larger version of Figure 4
| Hierarchy of Performance Elements | Example | Contract Document |
|---|---|---|
| Essential Function | Surface for vehicular traffic | Project Scope |
| Performance Requirement | Safe, smooth, durable & cost-effective pavement | P3 Agreement Technical Provisions |
| Performance Criteria | Maintain an IRI of less than 160 inches/mile | P3 Agreement Evaluation Plan |
| Performance Specification | Construct with an IRI less than 65 inches/mile with 0.1-mile base length | P3 Partner's Plans & Specifications |
| Prescriptive Specification | Use 10 in. of PCC with 550 psi flex. strength | P3 Contractor's Shop Drawings |
Source: Adapted from Gransberg, et al, 2006.
| Directive/Prescriptive | Performance |
|---|---|
| Example 1: Bridge Project | |
|
|
| Example 2: Interchange Project | |
Provide new four level fully directional interchange
|
|
| Source: Texas Department of Transportation | |
The benefits of using performance requirements in the design and construction phases of a P3 project include the following:
Performance requirements are written to be in place for a long period, such as 30, 50, or 75 years, without major changes. While P3 proposers expect certainty and unambiguity in contract requirements for pricing, the agency is likely to have a thorough understanding of potential risks and their consequences to structure a successful P3 project. Transferring too much risk to the private sector could result in poor-value bids with large contingencies for risks the P3 private partner cannot manage. On the other hand, allocating too little risk will stifle innovation and creativity, making the project more expensive. There should be an effective and balanced allocation of risks between the two parties:
As a sovereign entity, most public agencies retain the risks and responsibilities for the safety and security of the highway system against force majeure events, including natural and manmade disasters. To manage the risks effectively, the agency may prescribe a specific level of redundancy in the design of critical structures, such as bridges and tunnels. For instance, the agency may prescribe a specific "redundancy factor" (e.g., load modifiers) for use in the design of superstructure and substructure elements rather than directing the design outcomes, such as material strength or girder size. While the P3 private partner will have the flexibility to control the design outcomes, the risk of maintaining the design redundancy over the entire concession period rests with the P3 private partner.
In a P3 project delivery process, the agency undertakes an extensive risk analysis exercise to evaluate the financial and operational implications of high level and major risks, such as toll revenue, inflation and force majeure. Risk assessments at the design and construction level typically focus on the delivery details such as differing site conditions and quality assurance (QA). More often, there is a need to bridge the two major phases, i.e., integrated design-build delivery and the longer-term O&M, through better understanding of how decisions made exclusively for design and construction would impact the overall longer-term performance of the facility.
The use of performance requirements provides agencies with some protection against potential liability from directive, overly specific and defective requirements in a P3 agreement's technical provisions. However, to realize the full benefits of performance requirements, additional risk evaluation may be necessary to understand the consequences of performance requirements themselves on facility performance.
The contract duration is a key determinant in structuring risk allocation between the two parties, which then forms the basis for specifying performance requirements. The shorter the contract term, the more inclined is the agency to have greater control over design details. The agency's concerns are typically related to design details of assets that need life-cycle management, and particularly pertinent to capital intensive assets, including pavements, bridges and tunnels. Not only do these assets have longer service lives that may extend beyond the contract term, but these may also cause significant political, safety and security risks to the agency in the event of failure. There is typically less concern with aspects relating to highway design, construction and work zone management, and operations and routine highway maintenance.
In comparison with long-term P3 concessions, the agency is more likely to rely on design directives to achieve its asset preservation objectives on projects with shorter contract terms. Commensurate with the contract duration, the agency might allow the private sector to assume responsibilities relating to material and structural designs of assets, but would prefer to use design directives to control asset life-cycle management plans for preservation, maintenance and rehabilitation of assets. In short term warranty projects (say 5 to 10 years), the contractor is typically responsible only for materials design, construction quality and workmanship, while the agency retains the responsibility to provide structural design details of assets. For intermediate term contracts, including 15-year Capital Maintenance Agreements and 25-year DBFOM, the contractor may be allowed to perform structural design of assets, but only in accordance with the agency-approved design procedures and life-cycle management plan.
Reducing the whole life cost of the facility is one of the business case justifications of P3 project delivery. Unlike the D-B-B and D-B delivery methods, the private sector has the direct incentive in a P3 concession to think beyond the short-term "first-cost" approach, and adopt the long-term "life cycle cost" view to manage costs, risks and performance over time.
Pavement type selection is a critical factor for optimizing lifecycle costs of pavements. Three broad scenarios exist with regard to pavement type selection in P3 projects:
Performance requirements provide the flexibility to allow P3 proposers to optimize in design, material strategy and construction to achieve lower life cycle costs over time. A classic example is the selection of pavement type in P3 projects. Some agencies allow the P3 proposers to select a pavement type of their choice or from among agency-provided choices while others prescribe what pavement type to use. Among the commonly available pavement types, one pavement type (e.g., asphalt concrete pavement) may be preferable over another pavement type (e.g., Portland cement concrete pavement) or vice versa on the "first-cost" basis, but may require more frequent interventions over the project life for maintenance and rehabilitation to restore pavement condition to acceptable levels.
In a P3 arrangement, the P3 private partner bears significantly greater financial risks as the party responsible for pavement performance over the life of the P3 agreement. However, as the public owner of the facility, the agency has the ultimate political responsibility toward users/taxpayers to ensure the performance of the pavement. In such situations, the P3 private partner should be able to select a pavement type that produces the lowest lifecycle cost among allowable alternatives while meeting the operational performance requirements and bear the financial consequences if it fails to meet those requirements. Furthermore, the P3 private partner should be allowed to optimize the asset lifecycle strategies and associated investment decisions to produce the lowest net present cost. In other words, the P3 private partner should have the flexibility on how and when to allocate its investments (e.g., up-front capital costs vs future renewal costs) as long as the performance requirements are met.
While typical public agencies and proposers undertake a whole life cost analysis at the project level, similar lifecycle cost analyses are required at asset-level during design, at least for high value assets such as pavements and bridges. Through performance requirements, the agency can allow for multiple alternatives while the proposers are incentivized to optimize lifecycle cost to win the bid.
The environmental review process remains a challenge for design-build contractual arrangements, including the P3 concessions. The outcome of the environmental review process is a Record of Decision that indicates the formal approval by the Federal Agency such as the FHWA or the Army Corps of Engineers. A ROD identifies the selected alternative, lists other alternatives considered, states the basis for the decision, and outlines mitigation strategies to be adopted with the selected alternative. A procuring agency cannot proceed with contract award until a ROD is signed. Recognizing the deviation from the standard course of project development stages for accelerated delivery, some agencies choose a sequential approach to obtain permit approvals before the initiation of the procurement process to minimize approval risks, while other agencies overlap both processes to save time.
With the use of performance requirements or alternative technical concepts, the construction design details may be different from the preliminary design details prepared for the environmental impact statement and identified in the ROD. The general rule is that if the environmental footprint of the proposed alternative is less than the commitments made in the environmental review process, and upon verification, an environmental re-evaluation will not be required. If the footprint of the proposed alternative exceeds those commitments, the agency has to either reject the concept considering the cost and schedule risks with the re-evaluation process, or may provide conditional approval but transfer their approval-related risks to the P3 proposer along with any additional cost/time to be borne by the proposer.
Acknowledging these challenges, some agencies have recognized the need to obtain an environmental decision that is reasonably broad enough to allow a spectrum of design alternatives. Quoting from the Missouri DOT ATC Frequently Asked Questions, the following statement provides valuable assistance for handling permitting concerns with performance requirements as well (MoDOT, undated):
"When using the ATC process on a project, the NEPA document has to first of all recognize that the project allows the opportunity for the ATC process, and secondly leave the evaluation broad enough to identify all the environmental impacts for a maximum footprint of various design alternatives, rather than narrowing the design to only one solution. Historically in past projects, the NEPA documents were overly prescriptive identifying that the preferred alternative is the only solution. The NEPA document should identify the impacts globally and not be too specific about the type of solution to be implemented. Ultimately, if an ATC does require NEPA re-evaluation, then we offer a conditional approval within the ATC process and follow-up with a re-evaluation after award. MoDOT's environmental staff is involved on the ATC Review Team throughout the project development to continually evaluate the environmental needs. If a contractor proposes a design that is different from the preferred alternative selected in the NEPA document, we can award the contract and complete NEPA afterward if the proposed design impacts were analyzed in the original NEPA document (i.e., it was an alternative carried through for analysis but was not the preferred alternative). We work very closely with our FHWA partners in Missouri. There are certain things we have to do to meet our federal requirements, and we communicate that to the bidders throughout the ATC review process."
Performance requirements are generally developed for those items where the performance can be verified using measurable criteria. The agency should ensure that the proposed performance criteria, triggers for further actions, and monitoring frequency and measurement methods, at a minimum align with its levels of service goals and asset management objectives. Performance requirements are often used:
Highway agencies enforce a system of non-compliance points (i.e., hold points) and disincentives to ensure that the contractual requirements are satisfied. Typically, depending on the type of non-compliance, the agencies may incorporate a timeliness requirement to allow for remedial actions, and upon unsatisfactory outcome, noncompliance points will be accrued, and disincentives come into effect. Some agencies adopt a risk-based approach where the frequency and extent of monitoring, and accordingly the liquidated damages or disincentives, might increase with the level of non-compliance detected by the agency.
In the aftermath of the Supreme Court of Alabama's verdict in State Highway Department vs Milton Construction Company (1991), the disincentive clause can be deemed as an unreasonable and unenforceable penalty, if the disincentive clause is not scientifically designed to recover the actual damages caused by the contractor's failure to meet a requirement. For example, a performance deduction of a disproportionately high sum, such as $1 million, for failure to maintain grass at the required height would trigger a legal challenge based on the damages from tall grass. However, the disincentive clause may be enforceable if the agency scientifically demonstrates the relationship between the disincentive amount and vegetation growth, say with the use of an appropriate crash modification factor showing increased crash risks with vegetation growth affecting sight lines/ distances of drivers.
Disincentive payments should be devised so as to recover potential losses incurred by the agency and users caused by contractual "non-compliance", but not as a penalty. Note that any arbitrary selection of disincentive amounts may risk being legally disputable and unenforceable. With performance requirements, it is particularly advisable to follow scientifically sound approaches, supported by robust analysis of operational and asset life-cycle performance, to determine "damages." The agency should also take cognizance of any pre-existing latent defects that may have been carried through after the contract was awarded.
The agency should incorporate all clauses relating to system-wide changes, including those related to specifications and performance thresholds, within the non-compliance criteria of a contract. These clauses allow the agency to improve the performance thresholds over the contractual period, when such improvements to specifications and practices happen at the programmatic level due to various reasons relating to legislative or technological changes.
Most agencies incorporate specific clauses in the P3 contract to ensure that the assets are "handed back" in good condition at the end of the contract period. In addition to the minimum service quality standards and asset condition criteria required during the use phase, the agency will have to include technical criteria, as a part of performance requirements, specifying the required condition of the assets that the P3 private partner should handback at the end of the concession term.
More than 30 State DOTs have implemented performance-based practical design (PBPD) to provide design solutions that meet the purpose but not exceed the needs of a project. PBPD is an approach to decision-making that encourages engineered solutions rather than reliance on maximum values or limits found in design specifications (FHWA, 2015).
Consistent with the philosophy of incorporating flexibility in highway design, PBPD adopts data-driven decision-making with the support of performance analysis tools. Several tools, including the IHSDM, RSA, HCM, HCM, and a plethora
of traffic simulation tools enable a wide variety of operational and safety performance analyses for PBPD.
PBPD relies on reducing the design redundancy between the agency-approved standards and project needs. This new design approach ensures substantive operational and safety performance without compromising on long-term safety or user needs to save money. The design exceptions are recognized and managed in the same way as the conventional highway design process. PBPD will provide a scientifically sound basis to evaluate various highway design alternatives proposed
as ATCs or using performance requirements.
The handback criteria should be asset-specific and must be demonstrated at the elemental level. The handback criteria can be specified in terms of condition indicators, remaining useful life, percent assets in good condition, or the ability to meet certain performance tests. Consistent with the agency's asset management plans, the handback criteria must take into account both functional and structural adequacy of assets. To ensure a minimum remaining useful life on handback, the major asset types, say pavements and bridges, must demonstrate certain residual structural adequacy, irrespective of their functional condition. Further, to address any performance deficiencies at contract expiration, the agency should specify contractually whether the P3 private partner is contractually obligated to restore or replace to the required standards or whether it will be assessed with potential financial retentions based on the fair market value of the asset type.
As in the case of most asset types, the agency will have to rely on asset performance modeling to forecast future conditions and estimate remaining useful life. To facilitate such efforts, the contract should clearly specify the rules of asset performance evaluation, including those for tracking of asset conditions over time, compilation of maintenance, preservation and rehabilitation histories, traffic and cost modeling, and the evaluation schedule. The P3 private partner is expected to retain records related to all the above asset decisions during the concession period to provide critical information for analysis, as needed by the agency.
The concept of performance requirements is not new to highway agencies and the highway construction industry at large. Performance requirements that adopt an outcome-based approach have been in use in the U.S. via various procurement models, including design-build, schedule-focused alternate contracting clauses, short-term and long-term warranties, and performance-based maintenance contracting. In general, agencies tend to be more flexible or performance-oriented when specifying design requirements for some technical areas, while they realize the need to be more directive for other technical areas.
From an historic perspective, highway agencies have evolved over time to be flexible with established standards, practices, or solutions for highway design, as every project is unique in terms of user needs, community values, setting and character of the project area, cultural and ecological resources, and the natural environment. The highway design process is required to be context sensitive and balance the design needs with those of the surrounding natural and human environments. Recognizing the need for flexibility, the FHWA issued a publication that demonstrated flexibility in design approaches to integrate highway functions with those of the community, following which the AASHTO published a Guide for Achieving Flexibility in Highway Design in 2004 (FHWA, 1997; AASHTO, 2004). In describing the philosophy of highway geometric design, the AASHTO calls it "both a science and an art" and further encourages "designers to be creative and sensitive in addressing the many facets of design to fit a particular situation".
In this context, most agencies have been more receptive to performance requirements in highway design. Performance requirements facilitate innovative design solutions to meet the functional and operational needs of the project in a given context within the current agency standards, criteria, policies. The experience with alternative technical concepts indicates that agencies, by and large, are more likely to use discretion with design variances (i.e., design elements not meeting the AASHTO Green Book's non-controlling criteria) under select scenarios, while they are less likely to use discretion with design exceptions (i.e. design elements not meeting the AASHTO Green Book's 13 controlling criteria). Note that agencies are required to undergo a design exception approval process with the FHWA. However, when substantive long-term safety performance is demonstrated in the design, design exceptions are likely to be approved with or without mitigation strategies.
Performance modeling, which is foundational for allowing performance requirements, provide further opportunities to extend the use of performance requirements in highway designs. Analytical tools, including Interactive Highway Safety Design Model (IHSDM), Road Safety Audits (RSA), Highway Capacity Manual (HCM), and Highway Safety Manual (HSM), facilitate quantitative evaluation of safety and operational effects of geometric design decisions in the highway design process. The use of such tools will provide a more scientific basis to evaluate the P3 private partner's design products.
Highway agencies are more likely to allow performance requirements in work zone management during construction. Most agencies have experience with schedule-focused contracting provisions, such as cost plus time bidding, lane rental, locked incentives and interim schedule milestones, on complex highway projects in urban areas. The schedule-focused contracting clauses are typically devised with an incentive-disincentive (I-D) based payment mechanisms to share a monetary savings with the contractor for improving work zone performance (e.g., for early opening to traffic or minimizing delay time or queue length of work zone traffic) beyond the minimum acceptable threshold, or to compensate losses for performance deficiencies. Work zone road user costs form the economic basis for devising I-D mechanisms.
There is a plethora of tools, ranging from simple spreadsheet based sketch planning tools to sophisticated microscopic simulation tools, to understand and assess the mobility impacts of work zone strategies prior to deployment and monitor performance during construction. Furthermore, construction analysis tools, such as Construction Analysis for Pavement Rehabilitation Strategies (CA4PRS), which facilitates scenario analysis and optimization of construction production rates, lane closure strategies, work zone traffic analysis, and schedule analysis, are useful for work zone planning. In a nutshell, the experience with these contracting clauses, supported by the availability of work zone performance analytical tools, should make it easier for the implementation of performance requirements in work zone management.
To evaluate user-based performance goals on construction projects, the FHWA's Highways for LIFE (HfL) program developed contractually non-binding performance criteria that are related to safety, congestion, user satisfaction and quality aspects of a construction project (see Table 2). The HfL program successfully demonstrated the application of use-based performance criteria on many construction demonstration projects across the country that received grant funding for innovation implementation. The goals can serve as a template for performance requirements to manage the project delivery process from the users' perspective.
| Performance Criteria Title | Performance Criteria |
|---|---|
| Safety |
|
| Construction Congestion |
|
| Quality |
|
| User Satisfaction |
|
Performance requirements are more mature in highway operations and maintenance of P3 projects. Many agencies routinely use performance requirements to specify the corridor management and maintenance needs in the RFP, while the P3 private partner's O&M contractor selects the means and methods to meet those requirements. Some agencies, including those in Texas, District of Columbia and Virginia, have implemented performance requirements on non-P3 projects using performance-based maintenance contracting.
Experience has shown that the highway agencies are inclined to be more directive with design requirements for major asset types: pavements, tunnels and bridges. To facilitate the implementation of performance requirements, it is necessary to understand the rationale behind the agency's use of directive requirements:
Furthermore, the agency gains a significant amount of heuristic knowledge or "local" experience over many years on how these assets perform based on asset performance data indicating the influence of climate, characteristics and variability of local materials and soil profiles, and traffic patterns and loadings. This knowledge could have a decisive influence on why agencies tend to go with directive requirements. When performance requirements are allowed, the agency is likely to have less control over the design details of the P3 private partner, and if there are any deviations from the standard agency practices, the agency may lack enough evidence or performance data to characterize the risks more accurately. The agency can utilize a combination of performance prediction analytical models, performance testing and performance related specifications to understand interactions and dependencies among the influencing factors. Such tools would help agencies manage potential risks associated with the use of performance requirements for major assets.
1 DOTs/ Highway agencies may use a different terminology, such as the Scope of Work or Technical Requirements.
