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Special Experimental Projects No. 14 - Alternative Contracting
(formerly Innovative Contracting)

Since 1990, the FHWA has allowed the State DOTs to evaluate non-traditional contracting techniques under a program titled "Special Experimental Project No. 14 - Innovative Contracting." Originally, the contracting practices approved for evaluation were: cost-plus-time bidding, lane rental, design-build contracting, and warranty clauses. After a period of evaluation, the FHWA decided that all four practices were suitable for use as operational practices (non-experimental).

Today, SEP-14 remains as a functional experimental program that may be used to evaluate promising non-traditional contracting techniques. In fact, the term "alternative contracting" may be a better descriptor than "innovative contacting" as some of these techniques are widely used and are no longer considered to be innovative by some contracting agencies. Thus in 2002, the title of SEP-14 was changed from "Innovative Contracting" to "Alternative Contracting."

General Information About SEP-14 -- Alternative Contracting

Other Alternative Contracting Web Pages and References

Operational Techniques (no longer experimental)

Experimental Techniques

SEP-14 Briefing

SEP-14 Background

The genesis for the FHWA's SEP-14 began in 1988, with the establishment of a Transportation Research Board (TRB) task force to evaluate Innovative Contracting Practices. The task force consisted of 23 representatives from State highway agencies, all segments of the industry, and others. It's mission was to:

  • Compile and research information on contracting practices used by agencies in the United States and other countries;
  • Assess how current practices affect quality, progress, and cost; and
  • Suggest measures for improving contracting practices and promoting quality in construction.

The task force investigated four major areas:

  • Bidding procedures,
  • Materials control,
  • Quality considerations, and
  • Insurance and surety issues.

Recommendations were made by the task force for each of the four major topic areas. Some of the more significant recommendations included:

  • The cost-plus-time bidding concept should be considered for wider implementation;
  • The potential for use of warranties or guarantees and the design-build contracting concept should be investigated;
  • Attention should be given to the use of constructability testing during the design of projects;
  • A nationwide effort should be initiated to transition from method specifications to performance-related specifications and the performance-related specifications should include incentive and disincentive provisions to encourage better quality.
  • A national clearinghouse should be established for information on new materials/processes and the establishment of a national center, or regional centers, for product evaluation should be investigated; and
  • Value engineering concepts should be investigated to identify ways to promptly approve successful innovative techniques.

The task force's findings are documented in Transportation Research Circular Number 386, entitled, "Innovative Contracting Practices," dated December 1991. The task force chairman, Dwight Bower, subsequently requested that FHWA establish a project to provide a means to evaluate some of the task force's more project specific recommendations and SEP-14 was initiated.


The objective of SEP-14 is to evaluate "project specific" innovative contracting practices, undertaken by State highway agencies, that have the potential to reduce the life cycle cost of projects, while at the same time, maintain product quality. Federal statutes and regulations do set forth specific Federal-aid program requirements; however, some degree of administrative flexibility does exist. The intent of SEP-14 is to operate within this administrative flexibility to evaluate promising non-traditional contracting practices on selected Federal-aid projects.

When is FHWA SEP-14 Approval Necessary?

FHWA Headquarters' SEP-14 approval is necessary for any non-traditional construction contracting technique which deviates from the competitive bidding provisions in 23 USC 112. Any contract which utilizes a method of award other than the lowest responsive bid (or force account as defined in 23 CFR 635B) should be evaluated under SEP-14. These non-traditional contracting techniques may include best value, life cycle cost bidding, qualifications based bidding and other methods where cost and other factors are considered in the award process.

How do I request FHWA's approval under SEP-14?

State DOTs or local public agencies may submit a SEP-14 workplan through the local FHWA Division Office. The Division Office reviews the request and if appropriate, forwards it to FHWA Headquarters (HIPA-30) for review and approval. Electronic copies of workplans and SEP-14 requests for approval are encouraged.

Operational Techniques (no longer experimental)

Cost-Plus-Time Bidding

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

  • The "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 "B" component is a "bid" of the total number of calendar days required to complete the project, as estimated by the bidder (Calendar days are used to avoid any potential for controversy which may arise if work days were used).

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 should be included to reward the contractor if the work is completed earlier than the time bid.

For critical projects that have high road user delay impacts, the A+B METHOD can be an effective technique to significantly reduce these impacts.

A significant number of States have chosen to use and evaluate this innovative method of contracting. Under SEP-14, 27 States and D.C. [AR, CA, CO, DE, GA, IA IN, ID, KY, MD, ME, MI, MN, MO, MS, NC, ND, NE, NV, NY, OK, PA, SC, TX, UT, VA, and WI] have used the A+B METHOD. After a five-year evaluation period, A+B bidding was declared operational on May 4, 1995 and is no longer considered to be experimental.

States that have used A+B have generally reported good results. Contract times have been reduced, costs have been acceptable and quality has been maintained. California used the A+B Method extensively diuring reconstruction efforts following the Northridge earthquake in 1994.

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 rental fee assessment is included in the contract. The lane rental fee is based on estimated cost of delay or inconvenience 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 rental fee rates are dependent on the number and type of lanes closed and can vary for different hours of the day. For example: the rush hour periods of say 6:30 to 9:00 am and 3:00 to 6:00 pm could have an hourly rental fee of $2000 for closing one lane while a lane could be closed at any other time at a rental fee of $500 per hour.

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. The lane rental concept has merit for use on projects that significantly impact the traveling public; major urban area projects are prime candidates for this approach.

Under SEP-14, five States (CO, IN, ME, OK, OR) evaluated the lane rental technique. After a five-year evaluation period, the lane rental technique was declared operational on May 4, 1995 and is no longer considered to be experimental.


The design-build concept allows the contractor maximum flexibility for innovation in the selection of design, materials and construction methods. With design-build procurement, the contracting agency identifies the end result parameters and establishes the design criteria. The prospective bidders then develop design proposals that optimize their construction abilities. The submitted proposals may be rated by the contracting agency on factors such as design quality, timeliness, management capability and cost and these factors may be used to adjust the bids for the purpose of awarding the contract.

By allowing the contractor to optimize its 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. For example: pile driving could begin while bridge lighting is still being designed. Because both design and construction are performed under the same contract, claims for design errors or construction delays due to design errors are not allowed and the potential for other types of claims is greatly reduced.

See the FHWA's Design-Build Web Page for more information on FHWA design-build policy and other related information.


Warranties have been successfully used, in other countries and by some States on non-Federal projects, to protect investments from early failure. Prior to 1991, the FHWA had a longstanding policy that restricts the use of warranties on Federal-aid projects to electrical and mechanical equipment. The rationale for the restriction was that such contract requirements may indirectly result in Federal-aid funds participating in maintenance costs, and the use of Federal-aid funds for routine maintenance is prohibited by law.

The 1991 Highway Act, The Intermodal Surface Transportation Efficiency Act - referred to as ISTEA permitted a State to exempt itself from FHWA oversight for Federal-aid projects located off the National Highway System. For projects under these conditions, warranty clauses may be used in accordance with State procedures.

On August 25, 1995, FHWA published an Interim Final Rule (IFR) for warranties for projects on the National Highway System. The IFR states that warranty provisions shall be for a specific construction product or feature. Routine maintenance items are still not eligible. The IFR also prohibits warranties for items not within the control of contractors. The warranty Final Rule was published in the April 19, 1996 Federal Register. The August 25, 1995 interim final rule making drew twenty written responses from various agencies. FHWA did not believe that the responses were significant enough to amend the interim ruling and therefore the interim final rule remains unchanged.

Prior to the rule makings noted above, eight states participated in the evaluation of warranties under SEP-14. Since the implementation of the warranty regulation in 1995, FHWA no longer requires the evaluation of warranties. See the warranty briefing for additional information.

Other SEP-14 Concept Approvals

Indefinite Quantity / Indefinite Delivery - Michigan and some other municipalities are currently using an innovative contracting method described as "indefinite quantity / indefinite delivery". Under this method, contractors bid on unit work items with the location to be determined under future work orders. An estimate of the total work over the life of the contract is provided in each contract. In Michigan's project, the State provides a work order for the installation of traffic signals at each location. Several municipalities utilize this contracting method on a "city-wide, area-wide, continuing, job order, task order, or work order" basis to provide greater flexibility in the construction program.

Alternate Pavement Type Bidding - On March 29, 1996, the Highway Operations Division approved Missouri's request for an alternate pavement bidding procedure under SEP-14. FHWA has traditionally discouraged alternate pavement bids primarily due to the difficulties in developing truly equivalent pavement designs. However, Missouri actively involved the paving industry in the process of developing alternate pavement type specifications and bid adjustment factors. Missouri will evaluate this bidding process on five projects in FY 96 to see if the alternate bidding process is effective and also if their pavement type selection process reflects current market prices. The July 1998 final report summarizes MODOT's experience with this technique. Other States with alternate pavement bidding experience include: Kentucky, Louisiana and Michigan.

No Excuse Bonuses - On September 12, 1996 FHWA approved Florida DOT's request to use the No Excuse Bonus method on Federal-aid projects. FDOT will give the contractor a "drop-dead date" for completion of a phase or project. If the work is completed in advance of this date, the contractor will receive a bonus. There are no excuses for any reason such as weather delays for not making the completion date (an exception is provided for catastrophic events such as hurricanes). On the other hand there are no disincentives (other than normal liquidated damages) for not meeting the completion date. This technique has applicability to projects that must be open to meet a critical date such as a major sporting event.

Lump Sum Bidding - While lump sum bidding is not new, FDOT also received approval to use lump sum bidding concepts on Federal-aid projects. The contractor will be provided with a set of bid documents and will be required to calculate quantities and develop a lump sum bid for all work. Any costs associated with changed or unforseen conditions as well as added or deleted work will be negotiated using standard practices.

Best Value - A few States have considered awarding construction contracts on the basis of price and "other factors." The Oregon DOT has used a form of price/qualifications-based bidding to replace the counterweight trunnion assemblies on the I-5 lift span bridge over the Columbia River. This contract was awarded on the basis of the highest composite score considering both price information and technical criteria. The composite score was determined with a 50 percent weight for cost and 50 percent weight for technical qualifications.

System Integrator Contracts - The Kentucky Transportation Cabinet's (KYTC) is used the system integrator contracting technique on the $5-8 million TRIMARC traffic management and traveler information system in Louisville. TRW and KYTC have signed an agreement which includes the provision for TRW to contract for the equipment installation. TRW performed construction management, project supervision and system integration.

Construction Manager at Risk- A few contracting agencies have begun to evaluate a project delivery system that is relatively common in the vertical building industry - Construction Manager at Risk. The contracting agency selects a construction manager (on the basis of past performance or qualifications) to provide construction expertise, contract management and be contractually responsible for price, schedule and quality during construction. The CM at Risk Firm provides preconstruction advise to the owner concerning constructability, pricing, scheduling, staging, value engineering and other areas related to the construction of the project. At some point in the design, the contracting agency and the CM at Risk firm agree on a "guaranteed maximum price" for construction. At this point, the CM at Risk firm begins to function like a general contractor and is responsible for completing the work on schedule at the guaranteed price.


The Federal Highway Administration intends to encourage the use and evaluation of all promising innovative contracting practices, proposed by State highway agencies and others, which fall within the flexibility of the Federal-aid program requirements.

The success of practices evaluated under SEP 14 requires the cooperation, support and commitment of all those involved. With the support of the entire industry, this initiative to promote innovative contracting practices can foster positive changes to our traditional ways of doing business and result in worthwhile improvements that will benefit the Nation's highway users.

Updated: 05/14/2019
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