Senior Road Executives Programme 2013

Performance-Based Road Contracting

A New Approach To Road Network Management

Kulwinder S Rao
Senior Highway Engineer, GTIDR
kulwindersrao@worldbank.org
Content

• What is a Performance Based Contract ?

• Why introduce Performance Based Contracts?

• Performance Based Contract Concepts
• Types of Contracts
• Practical Application of PBCs
• Issues to be considered
• Final Word

2
Traditional Road Contracts
Follow
their
 “Ok, tell me what to do and how to do it” Recipe!
– Risk on the owner to design, specify, and control the work
– Price driven approach- Lowest price

 Use Recipe or M&M specifications

– Material to be used (e.g. Polymer modified bitumen)
– Method (required processes)

3
What is an Output and Performance Based Road
Contract (OPRC)?
 “Tell me what you want, but not how to do it”

“the Contract…. to perform the services

to be provided by the contractor and
to execute, complete, and maintain the Works” –WB OPRC document

“an approach to contracting that provides

disincentives, incentives, or both to the contractor
to achieve performance standards or targets
for measurable outcomes and sometimes outputs”
-NCHRP (US)

4
OPRC- A different way of Road Management

Road Agency

Planning Physical Investment Financing

Contract
Design Build Maintenance
Management

Construction Supervision PMMR

Contracts Contracts

Transfer to owner

Source: Y Kamhi 5
Content

• What is a Performance Based Contract ?

• Why introduce Performance Based Contracts?

• Performance Based Contract Concepts
• Types of Contracts
• Practical Application of PBCs
• Issues to be considered
• Final Word

6
Why use Performance Based Contracts?

Issues
 Challenges with quality or performance or both
 Limited resources, shrinking budgets
 Fast deteriorating infrastructure
 Higher User/Public expectations
 Frequent claims and variations
 Lack of expenditure stability
 Most risks with the employer

7
Why use Performance Based Contracts?

Potential Benefits
 Transfer risks to private sector
 Accelerated construction
 Fostering innovation
 Pay as per performance
 Achieve fixed levels of service
 Ability to achieve expenditure stability
– Avoids frequent claims and contract amendments
 Do more with less
– Reduction in contract administration requirements
 Achieve life-cycle cost savings
 Value for money

8
Value for Money

Value of money= Change in Levels of Service

Change in cost

Better Value for Money if

 The LOS remain the same and cost declines
 The LOS improve for the same cost
 The LOS improve and cost declines

9
Reported Cost Savings in OPRC as compared
to traditional contracts

 Norway: 20–40%  Canada

 Sweden: +/- 30% • Alberta +/- 20%
 Finland: 30-35% • British Columbia: +/- 10%
 Holland: 30-40% • Ontario: +/- 10%
 Britain: >10%
 Australia: 10-40%
 New Zealand: 20-30%
 USA: 10-15%

Source: Review of OECD contracts ( 2003)

10
Content

• What is a Performance Based Contract ?

• Why introduce Performance Based Contracts?

• Performance Based Contract Concepts
• Types of Contracts
• Practical Application of PBCs
• Issues to be considered
• Final Word

11
Implementation Methodologies

Design Build Maintain Transfer

Bid Bid Bid

Input Based contracts Maintenance Contracts (PMMR)

DBT- Design & Build Contracts

DB0MT - OPRC format

12
Setting and Measuring Performance

Levels of Service(LOS) relates to all the facets of

performance that a contractor is responsible for
– Key business driver influencing all asset management
decisions.
– Cater to present and future demand
– SMART
– Cover Safety, Serviceability, and Sustainability
– Auditable and easily Monitored

“What gets measured gets done”.

13
Levels of Service

 Usability of the Road.

Four Overall  Road User Comfort.
Criteria Levels
Groups  Durability Measures.
 Other elements.

14
Service Levels- Road Usability

1.Road is trafficable at all times.

2.No interruptions

Usability of the
Road

15
Service Levels- Road Comfort

 Pavement Surface Defects

Road Comfort • Potholes (max dimension< 150mm), max
no 5/km)

• Cracks (<3mm wide)

• Rutting (max<20mm,<10mm in 5% area)
• Edge failure
 Shoulders (drop< 4cm)
 Road Roughness
ROAD SURFACE PROFILER:
1. Max IRI 4 .0 m
Calibrated equipment 2. Avg IRI 3.0 m (2.0 for single interventions)

16
Service Levels- Road Durability

Durability Threshold Deflection Value

0.7 mm measured with FWD

17
Service Levels- Other Elements
1.Signaling
2.Road Safety

Other Elements 3.Drainage Structures

4.Vegetation
5.Structures
6.Slopes

18
Performance linked Payment Mechanism

Payment Schedule should ensure Value for Money

Key considerations:
• Clearly defined Payment Schedule
• Keep the contractor interested in all contract phases
• Balance income vs expenditure
• Consequences for non-conformance
• Guarantees
• Contractual Deductions
• Delay Damages
• Payment Reductions

19
Examples of Payment Models

Asset Handing over

Cost

Payment schedule
Value of deferred payment
Cost curve
Poor pavement (upfront rehabilitation work)
Time
2 years rehabilitation 6 years maintenance 1 year overlay 1 year
maintenance

Asset Handing over

Payment schedule
Cost

Cost curve

Good pavement maintenance works upfront

Time
3 years 3 years 1 year
maintenance 1 year overlay maintenance 2 years rehabilitation maintenance

Source: Y Kamhi
20
Risk Allocation

 Equitable sharing of risk

 Allocate risk to the party best able to

manage the risk

 Share some part of risk as an incentive to

minimize this risk.

21
Risk Allocation- Example
Contractor Employer/
• Ground conditions Donors
Design & • Construction risk
Construction • Quality risk

• Axle overload
Maintenance • Excess of projected
number of vehicles

• Exchange rates)
Financial • Employer credit rating

• Civil war / riots

Political • Expropriation /
nationalization

• Floods
Force Majeure • Earthquakes
• Epidemic

Source: Y Kamhi
22
Typical Guarantee Structure
Substantial
Completion

Performance Security
during Construction

Pre Transfer Bond

Maintenance
Performance
Tender Bond

Bon during
Phase
phase

+3 months from SC.

Notice to 2-3 Years +1 year from Date
Proceed ~2 months before SC from Transfer of handover

23
Remember the balance…

Cost LOS

Risk

Cost LOS

Risk

24
Content

• What is a Performance Based Contract ?

• Why introduce Performance Based Contracts?

• Performance Based Contract Concepts
• Types of Contracts
• Practical Application of PBCs
• Issues to be considered
• Final Word

25
Types of PBCs…

Many names for PBCs

• Output and Performance Based Road Contract (OPRC- World Bank)

• Performance based Maintenance Management Contract (PMMR-
World Bank)
• Performance Specified Maintenance Contracts (PSMC- NZ, Australia)
• Asset Management Contract (USA)
• Contract for Rehabilitation and Maintenance (CREMA-Argentina)
• Managing Agent Contract (UK)
• Area Maintenance Contract (Finland, Ontario, Canada)
• Engineering, Procurement and Construction Contract (EPC)
• “Turnkey” Contract

26
Types of PBCs…

Depending on scope of activities and asset

addressed

• Single activity (e.g. Lane marking)

• Set of related activities (e.g. Rest Area)
• Single asset (e.g. Bridge)

Depending on coverage of the network

• Corridor
• Area wide

27
Types of PBCs…

Hybrid Contract
• Combination of unit prices and lump sum
• Combination of method and performance specifications

Phase linked
• Maintenance Contract
• Design Build Transfer (DBT) (with or without Warranty)
• Design Build Operate Maintain Transfer (DBOMT)
• Design Build Finance Operate Maintain Transfer (DBFOMT)
• Concession with tolling rights

28
Types of PBCs…

Concession
• Contract
Duration DBOMT/OPRC
• Innovation Hybrid
• Flexibility PMMR
• Contractor’s
Risks
• Cost Savings
Ad measurement
(traditional) contracts

Force Account

Input Output Outcome

Driven Driven Driven

29
Content

• What is a Performance Based Contract ?

• Why introduce Performance Based Contracts?

• Performance Based Contract Concepts
• Types of Contracts
• Practical Application of PBCs
• Issues to be considered
• Final Word

30
Major Civil Works in Liberia adopting
Performance Based Contracting

• Red Light to Gbanga Road US$ 166 Million

• Gbanga to Ganta Road US$ 70 Million
• Cotton Tree Buchanan Road US$ 50 Million
• Monrovia City Streets US$ 19.6 Million
• Vai Town Bridge US$ 18.1 Million
• Caldwell Bridge US$ 8.3 Million
• Fuel Unloading Facility US$ 11.3 Million

Plus Monrovia Port Concession (Private Investment

US$ 120 million)
US$ 450 million+ in a
Post Conflict Fragile State

31
Liberia OPRC- Key features
Long Term Contracts (DBOMT methodology)
Length Rehabilitation Maintenance Periodic
(KM) Period period (after maintenan
Project name (including 6 Rehabilitation ce
months period)
mobilization)
Monrovia At the 8th
to Gbarnga 36 7
180 year of the
months years
Lot 1 project

At the 8th
Gbarnga to 69
18 8.5
year of the
Ganta Lot 2 months years
project

Duration 10 years with handing over under agreed conditions

32
Liberia OPRC- Key features
Single Intervention Contracts (DBT methodology)

Project name Length Rehabilitation Status

(KM) Period (including
mobilization)
Bokay
Town To 25 Completed on
57
Buchanan months schedule

Monrovia 37
City Streets 25 Completed.
months

Defect Liability Period of one year. Taking over under agreed conditions

33
Liberia OPRC- Key features
Single Intervention Contracts (DBT methodology)
Length Construction Remarks
Project name Time
including
mobilization

Vai Town 240 m 36

Completed
Bridge months

Caldwell 18
120 m On schedule.
Bridge months

Defect Liability Period of one year. Taking over under agreed conditions

34
Results……
 Before  After

Monrovia City Streets

Cotton Tree To Buchanan Road

35
Results……
 Before  After

Vai Town Bridge In Monrovia

Red Light Ganta Guinean Border Road

36
And costs……

DBOMT DBT INPUT

37
Content

• What is a Performance Based Contract ?

• Why introduce Performance Based Contracts?

• Performance Based Contract Concepts
• Types of Contracts
• Practical Application of PBCs
• Issues to be considered
• Final Word

38
Issues to be considered

• Length of Contract term

• Shorter vs Longer
• Establishment of LOS
• Costing
• Overall linkage to Network LOS
• Incentives and Disincentive
• Usually focus is only on disincentives
• Contractor Selection Criteria
• Low Bid vs Best Value

39
Issues to be considered

• Internal Agency Support

• Inertia because of long history of Input contracting
• Threat to jobs, wages or benefits
• Training
• Change in culture
• Agency staff and contractor
• Multi Year Funding Commitment
• Safeguards
• Clearing the ROW before signing of contract

40
Content

• What is a Performance Based Contract ?

• Why introduce Performance Based Contracts?

• Performance Based Contract Concepts
• Types of Contracts
• Practical Application of PBCs
• Issues to be considered
• Final Word

41
Final word

• PBCs represent a new paradigm

• Based on increasing experience around the

world, PBCs have much to recommend it

• This approach is not panacea

• But a valuable instrument in a road agency’s

contracting toolkit

Partnership and Trust are key to success!

42
Senior Road Executives Programme 2013

Thank you for your attention

Kulwinder S Rao
Senior Highway Engineer, email: kulwindersrao@worldbank.org
The World Bank

43