Transport Forum 2005

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Transport Forum 2005
Options for Implementing Performance-based
Contracts

• by
• Cesar Queiroz,
• Lead Highway Engineer, ECSIE
• Washington, DC, March 7-11, 2005

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Presentation Outline

• Importance of Road Infrastructure Maintenance
• Evolution of Civil Works Execution
• Advantages and Disadvantages of PBCs
• Bidding Bid Evaluation
• Supervision Quality Control
• Payment Liquidated Damages
• Dispute Settlements
• Lessons Learned and WB Study on PBC

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Economic Development and Road Infrastructure
GNI (/pop)
logGNI 1.39 logPRD R squared 0.76 98 countries
Source Queiroz and Gautam 1992
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Ruins of a bridge over the Danube River in Novi
Sad, Yugoslavia, targeted in a NATO strike in
1999
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Importance of Timely Maintenance

• Timely maintenance of 12 billion could have
  saved 45 billion needed for road reconstruction
  in Africa
• A well maintained paved road should last for 10
  to 15 years before resurfacing, but lack of
  maintenance can lead to severe deterioration in 5
  years

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Evolution in the Executionof Civil Works

• Force account (or direct labor)
• A public sector monopoly (public contractor)
• Corporatized public sector contractors
• Private sector contractors

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Separating Planning Management from
Implementation of Road Maintenance

• Avoid conflicting responsibilities
• Control costs and maintain quality
• Introduce competition and reduce costs,
  frequently 20 to 30

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Forms of Price based Contracts

• Lump sum - payment based on a single price for
  the total work
• Admeasure - payment based on quantity of
  completed work and tendered rates (bill of
  quantities)
• Performance - payment based on performance (or
  results) achieved

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Risk Allocation Between Client Contractor

• Lump sum, admeasure and performance contracts
  contractor bears much of the risk
• Cost-reimbursable contracts client bears the
  main risk
• Currently most agencies favor admeasure contracts

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PBC Has Several Names

• Performance Specified Maintenance Contract
  (PSMC)
• Performance Based Management and Maintenance of
  Roads (PMMR)
• Output Based Service Contract
• Performance Based Road Asset Management and
  Maintenance Contract

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PBC in Different Countries

• Long-term PSMC in AU, NZ, Canada (3-10 yrs)
• CREMA (Contrato de REcuperation y MAntenimiento)
  in Argentina, etc.
• Warranty contracts in USA
• Asset Mgnt Maint Contracts in VA, USA
• DBFO (up to 30 yr) in UK, Finland, Portugal
• Some are hybrid type contracts (i.e.,
  quantity-based and performance-based)

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Why PBC?

• Reduced administration less effort to measure
  works
• Avoid frequent claims and contract amendments to
  increase quantities of activities
• Client focus pay on the basis of user-related
  performance indicators
• More responsibility to contractors stimulates
  initiative and innovation
• Development of a new industry and creation of
  additional job opportunities

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Disadvantages of PBC

• Longer tendering period
• Perceived loss of control and flexibility by road
  agencies
• Uncertainty of long term relationship
• Lack of some (or unclearly specified) performance
  standards and level of service
• Possible unfair competition for smaller
  contractors

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Allocation of Risks
100
Force Account
Maintenance Contracts
PBC
RISK TO PUBLIC SECTOR
Concessions
BOO
Decreasing Public Risks, Increasing Private Risks
0
100
RISK TO PRIVATE SECTOR
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For PBC Contractors are Free to Decide

• What to do
• When to do
• How to do
• Where to do
• To do physical works themselves, or subcontract
  to others (some restrictions may exist)

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Prior to Bidding

• Definition of road sections or network to be
  contracted out
• Inventory of the road assets and their conditions
• Selection and definition of Key Performance
  Indicators (KPI)
• Methods of KPI measurement
• Definition of likely maintenance possible
  rehabilitation
• Preliminary cost estimates

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Bidding

• Prequalification highly recommended
• Hold pre-bid technical seminars with potential
  bidders (detailed review of concept and
  specifications)
• Adjustment of bidding documents with the help of
  consultants
• WB Sample Bidding Document http//www.worldbank.o
  rg/transport/roads/cm_docs/pmmr_final.doc

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Evaluation Criteria of Bids

• Once technical expertise, experience, staffing,
  quality control/quality assurance, management
  have been checked, then
• Bid price

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Bid Evaluation / Contract Amount
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Supervision Arrangements

• Consultants (individual or firm)
• Road Agency staff (e.g., Argentina, Estonia)

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Quality Control/Assurance

• Contractors self-control arrangements
• Formal monthly inspections
• Supervisors (formal/informal inspections)
• Project Manager (formal/informal inspections)
• Road users

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Payments under PBC
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Liquidated Damages

• Reduced payment
• Suspended payment
• Fines (different for each KPI and response time
  e.g., 440 per day per pothole)
• Demerit Points System (Sweden, Serbia)
• Failure to fulfill administrative duties
• Failure to perform routine maintenance
• Failure to perform winter maintenance

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Dispute Settlements

• Mutual consultation/direct negotiation (site
  inspection, progress meetings and collaborative
  discussions of each partys position)
• Arbitration (e.g., Dispute Review Board)
• Adjudication (e.g., Dispute Review Expert)
• Appeal to the Court

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Advantages of Rehabilitation Included in PBC

• An incentive for the contractors to perform well
  to avoid increased maintenance costs in future in
  order to comply with performance indicators
  defined in the contract
• Feasibility of PBC on roads in fair to poor
  condition

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Lessons LearnedPlanning of PBC

• Define clear and simple performance standards and
  measures before advertising bids
• Include only maintainable roads (unless
  rehabilitation is included)
• Have consistent documents and requirements
• Do not try to impose too many risks on the
  contractor

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Lessons LearnedContracting

• Ensure solid and credible financing of contract
  during the entire contract period
• Use of small local contractors Only after
  adequate preparation and training, and for
  contracts with very simple requirements (or as
  subcontractors)
• Build in a Dispute Resolution Mechanism

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Lessons LearnedManagement of PBC

• Supervision consultants need to fully understand
  their role ( control service level and assure
  overall technical quality - - but no
  micro-control and micro-management)
• Road Agency staff need to understand their
  changed role (e.g., from performing quality
  control to focusing on quality assurance)
• Arrange regular formal and informal communication
  links with contractors, including regular review
  sessions

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Thank you!