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PERFORMANCE-BASED CONTRACTING FOR MAINTENANCE SUMMARY Performance-Based Maintenance Contracting (PBMC) was first implemented on a wide scale in British Columbia and since then has become a mainstay of maintenance contract- ing in Australia, New Zealand, England, and Finland, and to an increasing degree in other countries, including the United States. State leaders in this area include Virginia, Texas, and Florida. Not every state and every country is able to or desires to pursue PBMC. The reasons include adequate capacity of the in-house staff to perform most maintenance, lack of statu- tory authority, and disappointing experience with the approach in the past. Some trans- portation agencies in North America, however, have adopted PBMC to complement their traditional approach to maintenance contracting. State and provincial transportation agencies are faced with growing needs and limited resources to maintain the highway network. The resulting challenges have motivated these agencies to expand the amount of contracting they do. Moreover, transportation agencies both in North America and around the world have developed a variety of methods for undertaking PBMC, known by other names such as Total Asset Management and Perfor- mance-Specified Maintenance Contracts. The report discusses the following fundamental issues: Reasons for doing or not doing PBMC; Whether PBMC results in value for money; The challenges in determining changes in levels of service and costs; Allocation of risks; The basic steps for undertaking a performance-based maintenance contract; Types of contracts; Performance measures and considerations in setting performance standards, incen- tives, and disincentives; Contractor selection criteria; Options for monitoring contractors; Working effectively with unions; Partnering; and Training. A literature search on PBMC was one of the two primary sources of material for this synthesis. The literature is examined from four viewpoints: international experience, domestic experience, warranty contracts, and performance-based contracting in the fed- eral government. Surveys were the other primary source of input to the synthesis. One survey was admin- istered to all state departments of transportation (DOTs), the District of Columbia, and Canadian provincial transportation agencies. Seventy-five percent of the states and the District of Columbia responded. The combined response rate of the states, the District of

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2 Columbia, and the provincial transportation agencies was 69%. This survey yielded a wealth of information. Another survey was sent to private firms engaged in PBMC. These firms were asked to complete the survey with the understanding that their answers would remain confidential and could not be identified with a firm. Four private firms that perform PBMC made a number of valuable remarks that could be useful for transportation agencies crafting or modifying performance-based maintenance contracts. Among the most important conclusions of the study are the following: The use of PBMC is accelerating worldwide. By 2005, 35 countries had performance- based maintenance contracts. By early 2006, approximately 15 more were exploring or adopting this approach to maintenance. In the United States and Canada there are already many examples of PBMC. States, provinces, and other entities that have been leaders include Virginia, Texas, Florida, the District of Columbia, British Columbia, Alberta, and Ontario. PBMC reflects a long-term trend in changing the focus of upper management and maintenance managers to outcomes, especially those that are customer oriented. There is evidence that PBMC results in better outcomes at lower cost with less risk and more financial predictability for highway agencies. The evidence on whether PBMC results in improved levels of service is not consistent. In some cases, particularly those in which asset condition or the quality of service are low or have been allowed to deteriorate a great deal, PBMC has resulted in a sharp increase in levels of service. Also, there are other reported improvements in levels of service resulting from PBMC. However, one state and two Canadian provinces, where a large amount of PBMC occurs, do not separate the outcomes achieved by in-house staff and private contractors and the levels of service of contractors cannot be verified. Sometimes levels of service may decline at first. Texas DOT observed this pattern on two interstate performance-based maintenance contracts. A number of agencies are skeptical regarding the claims of cost savings, even though studies provide evidence that cost savings exist. These agencies question--as have a number of internal and external audits regarding specific contracts or programs-- whether a valid basis exists for cost comparisons between force account work and PBMC by private firms. Issues about making cost comparisons are complex. For exam- ple, it is not easy to develop accurate comparisons that place both direct and indirect costs of public agencies and private firms on an equal footing. PBMC, despite the success touted by its advocates, is controversial. There is a risk that a large part of the maintenance organization of a transportation agency will be priva- tized. As a result, a large number of public employees might have to seek employment with contractors if they wish to continue doing similar work. In-house maintenance staff becomes unsettled with the potential loss of worker protection and the possibility of reduced pay or benefits. The most frequent approach to payment in PBMC is a lump-sum with deductions for failing to meet performance standards. The literature and responses to the surveys suggest that a more balanced approach, including both incentives and disincentives, is a better approach and enhances partnering. Successful partnering appears to be critical to the success of PBMC. PBMC is more likely to succeed when the contracting agency and the contractor both share risks and rewards. Many performance-based maintenance contracts are hybrids and include performance and method specifications, payments based on both lump-sum and unit prices, main- tenance and rehabilitation work, and different phases of a facility life-cycle, such as design, build, operate, and maintain. Training has an essential role to play on the part of the contracting agency, the contrac- tor, and any independent third party responsible for evaluating the performance of the contractor.

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3 The following suggestions for future research are offered: Research could be conducted to explore performance measures and measurement protocols concerning levels of service for different types of maintenance assets and operations. Research is needed on defensible methodologies for evaluating cost savings of perfor- mance-based contracting. This research could include an analysis of administrative savings. Further investigation regarding the impacts of PBMC on agency staff and how to mit- igate adverse effects is desirable. The impacts will vary depending on the percent of maintenance work contracted out under PBMC, whether maintenance is completely privatized, whether there is publicprivate competition, the size and nature of the contracting community, and the management and organizational structure used. More research is required on how to implement an effective benchmarking process that can be used to compare agency and contractor performance (outcomes and out- puts relative to costs with adjustments for uncontrollable factors), identify best per- formers, and determine the corresponding best practices. This would be a follow-up study to the 2005 NCHRP Report 511: Guide for Customer-Driven Benchmarking of Maintenance Activities. The maintenance community in the United States and Canada would benefit from a set of model procurement documents and contracts. PBMC is continually evolving and thus these model documents would need to be updated from time to time. Training programs would be useful for PBMC. A variety of audiences and formats could be addressed, including maintenance organizations of transportation agencies, contractors, subcontractors, in-house staff and contractors working together, and contractor/subcontractor interaction.