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 |
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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
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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 |
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6. Performing Organization Code | ||||
7. Author(s)
Dye Management Group, Inc. |
8. Performing Organization Report No.
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9. Performing Organization Name and Address Dye Management Group, Inc. |
10. Work Unit No. (TRAIS) |
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11. Contract or Grant No. DTFH61-11-C-00027 |
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12. Sponsoring Agency Name and Address
Federal Highway Administration |
13. Type of Report and Period Covered
Covered |
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14. Sponsoring Agency Code
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15. Supplementary Notes The Contracting Officer's Technical Representative (COTR) was Richard B. Duval (HRDI-20). |
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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. |
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17. Key Words
Prequalification, Performance-Based, Performance |
18. Distribution Statement
No restrictions. This document is available to the public |
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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 |
Figure 1. Flowchart. KDOH performance-based contractor prequalification process
Figure 2. Line graph. FDOT “ability factor” conversion from contractor’s past performance record
Figure 3. Flowchart. Three-tiered performance-based prequalification process
Figure 4. Flowchart. Three-tiered process with tier three-project-specific details
Figure 7. Equation. Administrative costs of performance bonds
Figure 12. Equation. Total performance bond benefit calculation
Figure 13. Graph. Percent of construction program based on total value in project category
Figure 16. Equation. Final contractor financial capacity calculation
Figure 21. Chart. Tier Two performance-based prequalification
Figure 25. Chart. Tier three project-specific prequalification
Figure 26. Equation. Contractor bidding capacity calculation
Figure 28. Line graph. FDOT contractor ability score/ability factor relationship
Table 2. Impact of the FDOT "ability factor" on maximum capacity rating
Table 3. Example of several MTO qualified contractors under a maximum workload rating adjustment
Table 5. Summary of State transportation department contractor performance evaluation categories
Table 6. Representative costs of performance bonds per $1,000
Table 7. State transportation department construction performance bond rates
Table 10. Respondent State transportation department prequalification rejection rates
Table 11. Impact of performance-based contractor prequalification
Table 12. Respondent State transportation department and contractor performance factor rankings
Table 13. Respondent contractor views on methods of determining project qualification
Table 15. Representative costs of performance bonds per $1,000
Table 17. State transportation departments construction performance bond rates
Table 18. Non-linear premium structure in a typical bridge or highway performance bond
Table 21. State transportation department case study default rates (2007-2011)
Table 23. Assumptions for the performance bond benefit analysis
Table 26. State transportation department respondent descriptive information
Table 27. State transportation department satisfaction with current bond system
Table 28. Respondent contractor views on methods of determining project qualification
Table 32. Linking financial factor to performance alternative
Table 40. Tier one administrative prequalification example scenario
Table 41. Tier two performance-based prequalification example scenario
Table 42. Tier three project-specific prequalification example scenario
AF | Ability Factor |
ALDOT | Alabama Department of Transportation |
APPS | Average Project Performance Score |
AR | Available Rating |
AS | Ability Score |
Caltrans | California Department of Transportation |
CCASS | Construction Contractor Appraisal Support System |
CMGC | Construction Manager/General Contractor |
CMR | Construction Manager-at-Risk |
ConnDOT | Connecticut Department of Transportation |
CPE | Contractor Performance Evaluation |
CPI | Contractor Performance Index |
CPR | Contractor Performance Rating |
CPS | Contractor Performance Score |
CQC | Contractor Quality Control |
DB | Design-Build |
DBB | Design-Bid-Build |
DBE | Disadvantaged Business Enterprise |
EEO | Equal Employment Opportunity |
FDOT | Florida Department of Transportation |
FHWA | Federal Highway Administration |
IOWADOT | Iowa Department of Transportation |
IDOT | Illinois Department of Transportation |
INDOT | Indiana Department of Transportation |
KDOH | Kentucky Department of Highways |
KDOT | Kansas Department of Transportation |
KYTC | Kentucky Transportation Cabinet |
MaineDOT | Maine Department of Transportation |
MassDOT | Massachusetts Department of Transportation |
MCR | Maximum Capacity Rating |
MDOT | Michigan Department of Transportation |
MDSHA | Maryland State Highway Administration |
MoDOT | Missouri Department of Transportation |
MSE | Mechanically Stabilized Earth |
MTO | Ontario Ministry of Transportation |
MWL | Maximum Workload Rating |
MWR | Maximum Workload Rating (Different abbreviations are used for this term based on source cited.) |
NCHRP | National Cooperative Highway Research Program |
NDOR | Nebraska Department of Roads |
NJDOT | New Jersey Department of Transportation |
NSW | New South Wales, Australia |
ODOT-OH* | Ohio Department of Transportation |
ODOT-OK* | Oklahoma Department of Transportation |
ODOT-OR* | Oregon Department of Transportation |
PennDOT | Pennsylvania Department of Transportation |
QA | Quality Assurance |
QC | Quality Control |
SCDOT | South Carolina Department of Transportation |
SFAA | Surety and Fidelity Association of America |
TCRP | Transportation Cooperative Research Program |
UDOT | Utah Department of Transportation |
USDOT | U.S. Department of Transportation |
VTrans | Vermont Department of Transportation |
WSDOT | Washington State Department of Transportation |
WVDOT | West Virginia Department of Transportation |
WYDOT | Wyoming 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. |