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Publication Number:  FHWA-HRT-14-034    Date:  August 2014
Publication Number: FHWA-HRT-14-034
Date: August 2014

 

Performance-Based Contractor Prequalification As An Alternative to Performance Bonds

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FOREWORD

The Federal Highway Administration (FHWA) is interested in ensuring that State transportation departments select contractors that can complete projects cost-effectively. One potential method to help select qualified contractors is to use a performance-based contractor prequalification process. FHWA commissioned this study to evaluate the wisdom of expanding the use of this process. This report presents the results of this study, which examined relevant literature, evaluated the benefits and costs of performance bonds and performance-based contractor prequalification, and recommended a model performance-based prequalification approach.

Jorge E. Pagán-Ortiz
Director, Office of Infrastructure
Research and Development

 

 

Notice

This document is disseminated under the sponsorship of the U.S. Department of Transportation in the interest of information exchange. The U.S. Government assumes no liability for the use of the information contained in this document.

The U.S. Government does not endorse products or manufacturers. Trademarks or manufacturers’ names appear in this report only because they are considered essential to the objective of the document.

Quality Assurance Statement

The Federal Highway Administration (FHWA) provides high-quality information to serve Government, industry, and the public in a manner that promotes public understanding. Standards and policies are used to ensure and maximize the quality, objectivity, utility, and integrity of its information. FHWA periodically reviews quality issues and adjusts its programs and processes to ensure continuous quality improvement.

 

Technical Report Documentation Page

1. Report No.

FHWA-HRT-14-034

2. Government Accession No. 3 Recipient's Catalog No.
4. Title and Subtitle

 

Performance-Based Contractor Prequalification as an Alternative to Performance Bonds

5. Report Date

August 2014

6. Performing Organization Code
7. Author(s)

Dye Management Group, Inc.

8. Performing Organization Report No.

 

9. Performing Organization Name and Address

Dye Management Group, Inc.
10900 NE 4th Street, Suite 1910
Bellevue, WA 98004-8366

10. Work Unit No. (TRAIS)

11. Contract or Grant No.

DTFH61-11-C-00027

12. Sponsoring Agency Name and Address

 

Federal Highway Administration
Office of Safety Research and Development
6300 Georgetown Pike
McLean, VA 22101

13. Type of Report and Period Covered

Covered
Final Report

14. Sponsoring Agency Code

 

15. Supplementary Notes

The Contracting Officer's Technical Representative (COTR) was Richard B. Duval (HRDI-20).

16. Abstract

State departments of transportation rely on private industry construction contractors to build, rehabilitate, and replace their infrastructure assets. The Federal Highway Administration (FHWA) is interested in providing guidance that State transportation departments can use to select contractors that can complete projects cost-effectively. One potential method to help select qualified contractors is to use a performance-based contractor prequalification process. FHWA commissioned this study to evaluate the wisdom of expanding the use of this process. This report presents the results of this study, which examined relevant literature, evaluated the benefits and costs of performance bonds and performance-based contractor prequalification, and recommended a model performancebased prequalification approach. In the highway industry, one of the main methods to prequalify a contractor is determine whether or not a performance bond can be secured. The current performance bonding system does not differentiate between a high performing and marginally performing contractor, so long as the two companies have the same level of financial assets. This gives both companies the same opportunity to bid on a project, regardless of performance. In a low-bid environment, it creates a situation where a State transportation department subsidizes marginal performance, which, in turn, reduces the incentive for top performers to continue superior performance. This research project analyzes the benefits and costs of performance bonds and performance-based contractor prequalification and creates a performance-based contractor prequalification model. Through a detailed literature review; surveys of contractors, State transportation departments, and sureties; and State transportation department case studies, the research suggests that the default rate for the industry is less than 1 percent, the minimum contract value that requires a performance bond should be raised to between $1 million and $10 million, and the cost of performance-based prequalification is low compared to the cost of performance-bonds. Last, a three-tiered performance-based contractor prequalification model is presented.

17. Key Words

Prequalification, Performance-Based, Performance
Bond, Surety, Ability Factor, Ability Score,
Eligibility, Contractor Evaluation, Project
Qualification, Bidding

18. Distribution Statement

No restrictions. This document is available to the public
through the National Technical Information Service
Alexandria, Virginia 22312

19. Security Classification

 

Unclassified

20. Security Classification

 

Unclassified

21. No. of Pages

 

178

22. Price
Form DOT F 1700.7 (8-72) Reproduction of completed page authorized

Metric Conversion Chart

TABLE OF CONTENTS

EXECUTIVE SUMMARY

CHAPTER 1 — INTRODUCTION

CHAPTER 2 — LITERATURE REVIEW

CHAPTER 3 — OVERVIEW OF INDUSTRY OUTREACH EFFORT

CHAPTER 4 — BENEFIT-COST ANALYSIS OF PERFORMANCE BONDS

CHAPTER 5 — PERFORMANCE BOND PARADOX

CHAPTER 6 — BENEFIT-COST ANALYSIS OF PERFORMANCE-BASED

CHAPTER 7 — PROPOSED PERFORMANCE-BASED CONTRACTOR PREQUALIFICATION SYSTEM

CHAPTER 8 — CONCLUSIONS

APPENDIX A: GLOSSARY

APPENDIX B: CASE STUDIES

APPENDIX C: DETAILED PERFORMANCE BOND COST ANALYSES

APPENDIX D: EXISTING PERFORMANCE-BASED PREQUALIFICATION MODEL ALGORITHMS

REFERENCES

 

LIST OF FIGURES

 

LIST OF TABLES

 

LIST OF ABBREVIATIONS AND SYMBOLS

AFAbility Factor
ALDOTAlabama Department of Transportation
APPSAverage Project Performance Score
ARAvailable Rating
ASAbility Score
CaltransCalifornia Department of Transportation
CCASSConstruction Contractor Appraisal Support System
CMGCConstruction Manager/General Contractor
CMRConstruction Manager-at-Risk
ConnDOTConnecticut Department of Transportation
CPEContractor Performance Evaluation
CPIContractor Performance Index
CPRContractor Performance Rating
CPSContractor Performance Score
CQCContractor Quality Control
DBDesign-Build
DBBDesign-Bid-Build
DBEDisadvantaged Business Enterprise
EEOEqual Employment Opportunity
FDOTFlorida Department of Transportation
FHWAFederal Highway Administration
IOWADOTIowa Department of Transportation
IDOTIllinois Department of Transportation
INDOTIndiana Department of Transportation
KDOHKentucky Department of Highways
KDOTKansas Department of Transportation
KYTCKentucky Transportation Cabinet
MaineDOTMaine Department of Transportation
MassDOTMassachusetts Department of Transportation
MCRMaximum Capacity Rating
MDOTMichigan Department of Transportation
MDSHAMaryland State Highway Administration
MoDOTMissouri Department of Transportation
MSEMechanically Stabilized Earth
MTOOntario Ministry of Transportation
MWLMaximum Workload Rating
MWRMaximum Workload Rating (Different abbreviations are used for this term
based on source cited.)
NCHRPNational Cooperative Highway Research Program
NDORNebraska Department of Roads
NJDOTNew Jersey Department of Transportation
NSWNew South Wales, Australia
ODOT-OH*Ohio Department of Transportation
ODOT-OK*Oklahoma Department of Transportation
ODOT-OR*Oregon Department of Transportation
PennDOTPennsylvania Department of Transportation
QAQuality Assurance
QCQuality Control
SCDOTSouth Carolina Department of Transportation
SFAASurety and Fidelity Association of America
TCRPTransportation Cooperative Research Program
UDOTUtah Department of Transportation
USDOTU.S. Department of Transportation
VTransVermont Department of Transportation
WSDOTWashington State Department of Transportation
WVDOTWest Virginia Department of Transportation
WYDOTWyoming Department of Transportation
*The Ohio, Oklahoma, and Oregon State transportation departments all use the formal abbreviation ODOT. These abbreviations were modified for purposes of this report by appending the standard State abbreviation.

 

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