U.S. Department of Transportation
Federal Highway Administration
1200 New Jersey Avenue, SE
Washington, DC 20590
202-366-4000
Federal Highway Administration Research and Technology
Coordinating, Developing, and Delivering Highway Transportation Innovations
| REPORT |
| This report is an archived publication and may contain dated technical, contact, and link information |
|
 |
| Publication Number: FHWA-HRT-14-034 Date: August 2014 |
Publication Number: FHWA-HRT-14-034 Date: August 2014 |
Four iterations of the performance bond benefit-cost analysis were conducted because the analysis is sensitive to the assumptions. The benefit-cost ratio analysis for performance bonds started with the baseline assumptions listed in analysis one. Each analysis investigates the impact of a change in the assumptions on the benefit-cost ratio. The title and introduction of each analysis indicates the assumption change for that individual analysis. Also, each analysis includes the following four tables: the performance bond cost results, the assumptions, the performance bond benefits, and the resulting benefit-cost ratio. These analyses show that if the default rate is held constant at 0.69 percent, projects over approximately $10 million have a net benefit from performance bonds; projects between $100,000 and $1 million have a net cost from performance bonds; and projects less than $100,000 and between $1 million and $10 million vary between net cost and net benefit. However, the analysis where the default rate was lowered to 0.46 percent resulted in benefit-cost ratios less than one for all project categories, indicating a net cost for performance bonds on all projects.
This analysis was conducted with a default rate of 0.69 percent and the value of the upper limit of each project size category. Overall, this analysis shows that projects over $10 million have a net benefit from performance bonds, and projects less than $10 million have a net cost from performance bonds.
Table 50. Analysis 1 performance bond cost.
Project Size |
Average Performance Bond (Percent) |
Performance Bond Cost |
< $100,000 |
1.06 |
$1,060 |
$100,000-$1 million |
0.99 |
$9,900 |
$1 million-$10 million |
0.93 |
$93,000 |
$10 million-$50 million |
0.70 |
$350,000 |
$50 million-$100 million |
0.52 |
$520,000 |
> $100 million |
0.52 |
$520,000 |
Table 51. Analysis 1 assumptions.
Project Size |
Default Rate (Percent) |
Number of Days Saved |
Cost per Day Saved |
Cost to Re-bid (Percent of Contract) |
< $100,000 |
0.69 |
30 |
$1,000 |
7 |
$100,000-$1 million |
0.69 |
30 |
$1,000 |
7 |
$1 million-$10 million |
0.69 |
60 |
$5,000 |
7 |
$10 million-$50 million |
0.69 |
60 |
$10,000 |
7 |
$50 million-$100 million |
0.69 |
60 |
$10,000 |
7 |
> $100 million |
0.69 |
60 |
$10,000 |
7 |
Table 52. Analysis 1 performance bond benefit.
Project Size |
Avoided Cost of Default |
Avoided Cost of Re-bid |
Avoided Schedule Delay Cost |
Total Benefit |
< $100,000 |
$690 |
$48 |
$207 |
$945 |
$100,000-$1 million |
$6,900 |
$483 |
$207 |
$7,590 |
$1 million-$10 million |
$69,000 |
$4,830 |
$2,070 |
$75,900 |
$10 million-$50 million |
$345,000 |
$24,150 |
$4,140 |
$373,290 |
$50 million-$100 million |
$690,000 |
$48,300 |
$4,140 |
$742,440 |
> $100 million |
$690,000 |
$48,300 |
$4,140 |
$742,440 |
Table 53. Analysis 1 performance bond benefit-cost ratio.
Project Size |
Performance Bond Cost |
Performance Bond Benefit |
Benefit-Cost Ratio |
< $100,000 |
$1,060 |
$945 |
0.89 |
$100,000-$1 million |
$9,900 |
$7,590 |
0.76 |
$1 million-$10 million |
$93,000 |
$75,900 |
0.82 |
$10 million-$50 million |
$350,000 |
$373,290 |
1.06 |
$50 million-$100 million |
$520,000 |
$742,440 |
1.42 |
> $100 million |
$520,000 |
$742,440 |
1.42 |
This analysis was conducted with a default rate of 0.46 percent and the value of the upper limit of each project size category. Overall, this analysis shows that all projects have a net cost from performance bonds.
Contract Value = Upper Limit of Project Size Category
Table 54. Analysis 2 performance bond cost.
Project Size |
Average Performance Bond (Percent) |
Performance Bond Cost |
< $100,000 |
1.06 |
$1,060 |
$100,000-$1 million |
0.99 |
$9,900 |
$1 million-$10 million |
0.93 |
$93,000 |
$10 million-$50 million |
0.70 |
$350,000 |
$50 million-$100 million |
0.52 |
$520,000 |
> $100 million |
0.52 |
$520,000 |
Table 55. Analysis 2 assumptions.
Project Size |
Default Rate (Percent) |
Number of Days Saved |
Cost per Day Saved |
Cost to Re-bid (Percent of Contract) |
< $100,000 |
0.46 |
30 |
$1,000 |
7 |
$100,000-$1 million |
0.46 |
30 |
$1,000 |
7 |
$1 million-$10 million |
0.46 |
60 |
$5,000 |
7 |
$10 million-$50 million |
0.46 |
60 |
$10,000 |
7 |
$50 million-$100 million |
0.46 |
60 |
$10,000 |
7 |
> $100 million |
0.46 |
60 |
$10,000 |
7 |
Table 56. Analysis 2 performance bond benefits.
Project Size |
Avoided Cost of Default |
Avoided Cost of Re-bid |
Avoided Schedule Delay Cost |
Total Benefit |
< $100,000 |
$460 |
$32 |
$138 |
$630 |
$100,000-$1 million |
$4,600 |
$322 |
$138 |
$5,060 |
$1 million-$10 million |
$46,000 |
$3,220 |
$1380 |
$50,600 |
$10 million-$50 million |
$230,000 |
$16,100 |
$2760 |
$248,860 |
$50 million-$100 million |
$460,000 |
$32,200 |
$2760 |
$494,960 |
> $100 million |
$460,000 |
$32,200 |
$2760 |
$494,960 |
Table 57. Analysis 2 performance bond benefit-cost ratio.
Project Size |
Performance Bond Cost |
Performance Bond Benefit |
Benefit-Cost Ratio |
< $100,000 |
$1,060 |
$945 |
0.89 |
$100,000-$1 million |
$9,900 |
$7,590 |
0.76 |
$1 million-$10 million |
$93,000 |
$75,900 |
0.82 |
$10 million-$50 million |
$350,000 |
$373,290 |
1.06 |
$50 million-$100 million |
$520,000 |
$742,440 |
1.42 |
> $100 million |
$520,000 |
$742,440 |
1.42 |
This analysis was conducted with a default rate of 0.69Â percent and the value of the upper limit of each project size category. Also, the number of days delayed in the benefits was doubled for each project category. Overall, this analysis shows that projects over $10 million and below $100,000, have a net benefit from performance bonds, and projects between $100,000 and $10 m illion have a net cost from performance bonds.
Contract Value = Upper limit of Project Size Category
Table 58. Analysis 3 performance bond cost.
Project Size |
Average Performance Bond (Percent) |
Performance Bond Cost |
< $100,000 |
1.06 |
$1,060 |
$100,000-$1 million |
0.99 |
$9,900 |
$1 million-$10 million |
0.93 |
$93,000 |
$10 million-$50 million |
0.70 |
$350,000 |
$50 million-$100 million |
0.52 |
$520,000 |
> $100 million |
0.52 |
$520,000 |
Table 59. Analysis 3 assumptions.
Project Size |
Default Rate (Percent) |
Number of Days Saved |
Cost per Day Saved |
Cost to Re-bid (Percent of Contract) |
< $100,000 |
0.69 |
60 |
$1,000 |
7 |
$100,000-$1 million |
0.69 |
60 |
$1,000 |
7 |
$1 million-$10 million |
0.69 |
120 |
$5,000 |
7 |
$10 million-$50 million |
0.69 |
120 |
$10,000 |
7 |
$50 million-$100 million |
0.69 |
120 |
$10,000 |
7 |
> $100 million |
0.69 |
120 |
$10,000 |
7 |
Table 60. Analysis 3 performance bond costs.
Project Size |
Avoided Cost of Default |
Avoided Cost of Re-bid |
Avoided Schedule Delay Cost |
Total Benefit |
|
< $100,000 |
$690 |
$48 |
$414 |
$1,152 |
|
$100,000-$1 million |
$6,900 |
$483 |
$414 |
$7,797 |
|
$1 million-$10 million |
$69,000 |
$4,830 |
$4,140 |
$77,970 |
|
$10 million-$50 million |
$345,000 |
$24,150 |
$8,280 |
$377,430 |
|
$50 million-$100 million |
$690,000 |
$48,300 |
$8.280 |
$746,580 |
|
> $100 million |
$690,000 |
$48,300 |
$8,280 |
$746,580 |
|
Table 61. Analysis 3 performance bond benefit-cost ratio.
Project Size |
Performance Bond Cost |
Performance Bond Benefit |
Benefit-Cost Ratio |
< $100,000 |
$1,060 |
$1,152 |
1.08 |
$100,000-$1 million |
$9,900 |
$7,797 |
0.79 |
$1 million-$10 million |
$93,000 |
$77,970 |
0.84 |
$10 million-$50 million |
$350,000 |
$377,430 |
1.07 |
$50 million-$100 million |
$520,000 |
$746,580 |
1.43 |
> $100 million |
$520,000 |
$746,580 |
1.43 |
This analysis was conducted with a default rate of 0.69 percent and the value of the lower limit of each project size category. Also, the days of delay are the same as they are in the original analysis (analysis one). Overall, this analysis shows that projects over $1 million provide a net benefit from performance bonds, and projects less than $1 million have a net cost from performance bonds.
Contract Value = Lower Limit of Project Size Category
Table 62. Analysis 4 performance bond cost.
Project Size |
Average Performance Bond (Percent) |
Performance Bond Cost |
< $100,000 |
1.06 |
$106 |
$100,000-$1 million |
0.99 |
$990 |
$1 million-$10 million |
0.93 |
$9,300 |
$10 million-$50 million |
0.70 |
$70,000 |
$50 million-$100 million |
0.52 |
$260,000 |
> $100 million |
0.52 |
$260,000 |
Table 63. Analysis 4 assumptions.
Project Size |
Default Rate (Percent) |
Number of Days Saved |
Cost per Day Saved |
Cost to Re-bid (Percent of Contract) |
< $100,000 |
0.69 |
60 |
$1,000 |
7 |
$100,000-$1 million |
0.69 |
60 |
$1,000 |
7 |
$1 million-$10 million |
0.69 |
120 |
$5,000 |
7 |
$10 million-$50 million |
0.69 |
120 |
$10,000 |
7 |
$50 million-$100 million |
0.69 |
120 |
$10,000 |
7 |
> $100 million |
0.69 |
120 |
$10,000 |
7 |
Table 64. Analysis 4 performance bond benefits.
Project Size |
Avoided Cost of Default |
Avoided Cost of Re-bid |
Avoided Schedule Delay Cost |
Total Benefit |
< $100,000 |
$69 |
$5 |
$207 |
$281 |
$100,000-$1 million |
$690 |
$48 |
$207 |
$945 |
$1 million-$10 million |
$6,900 |
$483 |
$2,070 |
$9,453 |
$10 million-$50 million |
$69,000 |
$4,830 |
$4,140 |
$77,970 |
$50 million-$100 million |
$345,000 |
$24,150 |
$4,140 |
$373,290 |
> $100 million |
$690,000 |
$48,300 |
$4,140 |
$742,440 |
Table 65. Analysis 4 performance bond benefit-cost ratio.
Project Size |
Performance Bond Cost |
Performance Bond Benefit |
Benefit-Cost Ratio |
< $100,000 |
$106 |
$281 |
2.65 |
$100,000-$1 million |
$990 |
$945 |
0.95 |
$1 million-$10 million |
$9,300 |
$9,453 |
1.02 |
$10 million-$50 million |
$70,000 |
$77,970 |
1.11 |
$50 million-$100 million |
$260,000 |
$373,290 |
1.44 |
> $100 million |
$260,000 |
$742,440 |
1.43 |
