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38 Pros the contractor will fix any problems. Warranties may com- Potential for larger dollar savings bine method specifications with product-performance stan- Reduced maintenance program administration dards or focus on contractor performance, for example, in Further shared risk a contractor-performance-based warranty contract. Gener- Wider use of performance-based contracting ally DOTs apply warranties to construction, reconstruction, Cons and rehabilitation, but they have been used for maintenance. More difficult to adjust contracting program should Warranty jobs are different from traditional contract jobs in funding shortfalls occur two respects: (1) The contractor is responsible for mainte- Less flexibility to adjust resources to immediate nance work that may occur over the warranty period and (2) unplanned problems or issues the contractor is free to use whatever materials and methods Industry may struggle to keep up with a signifi- are deemed appropriate provided the state performance stan- cantly increased program dards are met. Potential reduction in FDOT contract funds for direct contracting with local governments, youth work Aspen, Colorado experience groups, Respect of Florida, and so on. Aspen, Colorado, is a major tourist destination during both Oklahoma the winter and summer. Tourism drives the local economy. During the winter, ineffective and inefficient snow and As a result of direction from the governor, in 2001 the Okla- ice control can impair accessibility. Summer road mainte- homa DOT entered into two 5-year (renewed each year), nance can also interfere with traffic. To avoid the disruption lump-sum performance-based maintenance contracts with required to maintain and improve roads and to avoid defer- a combined value of $36 million to perform routine mainte- ring maintenance, in 1999, the city of Aspen decided to enter nance in five counties in the Tulsa and Oklahoma City areas. into a 15-year contract, with extension options and a product Routine maintenance included such activities as pothole quality warranty. The contract covered both rehabilitation repair, sign repair, litter pickup, and snow and ice control. and maintenance on about 30% of the city's streets. One Legislators expressed concern that the DOT was pressing of the objectives of this contract was to encourage a strong headlong into these contracts without examining the alter- relationship between the contractor and the city. Long-term natives and the lessons learned from other states. About 7 contracts tend to encourage contractors to reduce life-cycle months after the contracts were executed, the contractor ter- costs by performing quality work at the right locations at the minated the contract for convenience. The parties sued each right time. The contract also offered the contractor consider- other, but then they reached a settlement. A careful exami- able flexibility to determine the best methods and materials nation of the circumstances revealed that the breakdown to perform the work. The contractor developed an innova- between the parties was due, at least in part, to flaws in the tive approach to effectively develop, manage, and oversee contract. There is agreement among those who have writ- aggressive work schedules. ten about Oklahoma DOT's experience that a well-written performance-based contract with strong reporting and mon- Thus far, the city of Aspen is reputed to be highly satisfied itoring provisions is essential to success, and by implication, with the contractor and the partnership that has emerged. such a contract could have averted this failure (Ribreau et Cost savings have been realized, work has been completed al. 2004). faster than before, the work has been high quality, and the contractor has limited the adverse impact on tourist travel. A key to success has been the identification and effective SUMMARY OF SELECTED PERFORMANCE-BASED alignment of goals and incentives between the city and the MAINTENAnCE CONTRACTS contractor (Segal et al. 2003). Table 12 presents key characteristics of selected long-term New Mexico performance-based maintenance contracts in the United States, Australia, and New Zealand. New Mexico Highway 44--redesignated US-550 in January 2000--consistently ranked among the most dangerous roads Warranty-Type Contracts in the country. According to the New Mexico Traffic Safety Bureau, from 1992 through 1996, 36 people died and 264 Warranty types of maintenance contracts require the con- were seriously injured in traffic crashes on NM-44. The Four tractor to guarantee the workmanship and materials of the Corners area, which includes the city of Farmington and San service or product for a certain number of years, typically 1 Juan County, had the fourth highest population, while hav- to 3 years after work is completed. The contractor is required ing the ninth highest unemployment rate in New Mexico. to obtain a warranty bond that protects the DOT from fail- Driven by concerns about public safety and the desire to ures or substandard outcomes and ensures the agency that provide economic development opportunities to the area,

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39 then Governor Gary Johnson directed that construction and The project encountered significant problems, thus acti- completion of the 118-mile, four-lane road be a high priority vating the warranty provisions. At the same time, the overall during his administration. benefits of the project were determined to be positive. More than 300 locations were identified as not meeting warranty Traditional road design and construction methods used performance criteria, resulting in more than 180 task orders by the New Mexico DOT (NMDOT), formerly known as issued to repair these locations. Total expenditures as of early the New Mexico State Highway and Transportation Depart- 2007 for the pavement and structures warranty reached $8.03 ment, let it to bid projects in roughly 4- to 5-mile increments. million with $161,000 expended on emergency repairs, $1.22 This approach would have taken many years to upgrade the million expended on the structures warranty, and $6.65 mil- entire corridor. To accommodate the governor's directive, a lion expended on the pavement warranty. new approach to road construction was required. The Design Professional Services portion of the contract In July 1998, NMDOT entered into a lump-sum perfor- obligated the contractor to design the project in accordance mance-based contract with a limited liability company with with NMDOT and AASHTO guidelines as the minimum a well-known parent corporation to design, manage con- required design standards. This portion of the contract struction, and warrant NM-44 from San Ysidro to Bloom- required the contractor to perform geotechnical subsurface field. The total cost of the project was $323.83 million, which testing to ensure that the roadbed and structures founda- included $46.82 million for project design and construction tions met acceptable design standards. Although NMDOT management, $215 million for construction, and $62 million reviewed the design provided by the contractor, contract for performance warranties. terms provided that the NMDOT review did not relieve the contractor from full responsibility for the performance of The project involved reconstructing and widening 118 the professional services in accordance with the standards, miles of roadway, rehabilitation or replacement of seven terms, and conditions of the agreement. bridges, and replacement or extension of 393 culverts. The contractor subcontracted with firms to design the project and Additionally, the contractor warranty specified that for 3 to provide construction management and QA. years from substantial completion of the project, if design or construction management failed to meet standards, the con- The project was divided into four bid segments with tractor would perform any necessary corrective design and NMDOT awarding each construction segment in accor- would be liable for the cost of repairs or replacement directly dance with state procurement regulations. The initial con- attributable to the failure. The contract specified that the struction phase of the project was substantially completed in contractor's liability on the professional services warranty November 2001, less than 3.5 years after the initial contract would be limited to $25 million. was executed with the main contractor. Table 12 SELECTED LONG-TERM PERFORMANCE-BASED MAINTENANCE CONTRACTS Washington, Texas DOT, New South New Zealand Virginia DOT D.C., DOT Waco, Tex., Wales, Tasmania, PSMC 001 Western Australia, USA USA USA Australia Australia NZ Australia TNC 01 Begin Date 19951996 June 2000 Sept. 1999 1995 July 1998 Jan. 1999 Nov. 2000 POP 5.5 & 5 Years 5 Years 5+3 Years 10 Years 10 Years 10 Years 10 years US$ 131.6 M US$ 69.6 M US$ 19.8 M AU$ 20M AU$ 8 M NZ$ 75 M AU $95.05M Cost (first term) 2nd (total) (total) per year per year (total) per year term renewed Road Length 402 km 120 km 193 km 100 km 120 km 463 km 2120 km Maintenance Maintenance Maintenance Routine ALL ALL ALL ALL Activity rehabilitation* rehabilitation* maintenance Type of Lump-sum Lump-sum Lump-sum Lump-sum Lump-sum Lump-sum Lump-sum Contract Performance Outcome- Outcome- Outcome- Outcome- Outcome- Outcome-based Outcome-based Criteria based based based based based Source: Pekka Pakkala (2002). *With minor revisions.

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40 NMDOT paid $60 million for the 20-year pavement NMDOT elected to use a variation of a price agreement, warranty and $2 million for the 10-year structures (bridge, the Job Order Contracting (JOC) method, in which the price drainage, and erosion) warranty. The duration of the war- agreement presents a comprehensive scope of work, with ranty agreement is limited to a specified time, number of all anticipated bid items. Individual task orders or JOCs are equivalent single-axle loads (ESALs), or total expenditures, issued to the contractor for a specific maintenance or repair whichever occurs first. The pavement warranty is limited to task to be paid at the unit bid price amount for each appli- 20 years of service life, 4 million ESALs, or $110 million cable bid item. The JOC method differs from a conventional of total contractor expenditures. Therefore, beyond the $60 price agreement, which is typically confined to a specific million payments from the state, the contractor is at risk of service, such as striping or crack sealing, by providing for a an additional $50 million in pavement expenditures, if neces- wider array of construction and maintenance activities. sary, to meet the terms of the warranty. The structures war- ranty is limited to 10 years of service life, 2 million ESALs, Although the project required significant corrective or $4 million of total contractor expenditures. The contrac- actions--180 task orders to conduct repairs at more than tor is at risk for an additional $2 million in structure expen- 300 locations not meeting warranty performance criteria-- ditures, if necessary, to meet the terms of the warranty. The studies conducted on safety and economic impact found the pavement and structures warranties are therefore treated as project to be beneficial to road users. The motoring public two separate and distinct contracts and are secured by a $114 has experienced shortened travel times, smoother riding sur- million surety bond. face, with a decrease in crash severity and average cost per collision. The economic expansion predicted in 1999 has not The warranties are divided into four segments (same as materialized. the construction segments), each of which is subject to expi- ration depending on the ESALs count for that segment. The Task order work has minimally affected the motoring contractor submits an Annual ESAL Calculation Report to public. Many of the task orders are erosion related, for which summarize the cumulative amount of ESALs calculated from work is performed off the roadway. The majority of pave- data obtained from three weigh-in-motion stations located ment task orders have required short-term lane closures at the beginning, middle, and end of the project. NMDOT involving mill and overlay or grinding operations. Lon- is responsible for the weigh-in-motion station maintenance ger-term lane closures necessary for full-depth pavement and data, and the contractor is responsible for calculating the reconstruction involved less than 20 task orders. Long-term number of ESALs. lane closures normally last no more than a week. All lane closures minimally affect the motoring public, causing no The pavement and structures warranty portions of the congestion delay. contract state that the contractor will repair or replace any portions of the project that fail to meet specific objective per- Little warranty work has been performed by NMDOT formance measurement criteria. The pavement performance maintenance personnel. Emergency work was performed by criteria establishes minimum acceptable criteria for various maintenance personnel in 2004 involving an embankment road conditions, including smoothness, rutting, cracking, failure, culvert sedimentation, slope erosion, and pavement bleeding, raveling, delamination, potholes, and depressions. patching. This work was performed by the NMDOT before The structures performance criterion establishes minimum having the price agreements in place. The contractor reim- acceptable criteria for various bridge, drainage, and erosion bursed NMDOT for costs associated with this work. conditions. The contractor has been responsive in addressing the Pavement and structures are inspected annually by con- pavement and structures portions of the project that failed tractor subconsultants to locate and identify areas that do to meet the minimum acceptable performance criteria. In not meet the performance criteria. An annual maintenance addition, the contractor has been reimbursing NMDOT for plan is prepared by the contractor summarizing the find- funds paid to the contractor under the price agreements for ings of the inspections and outlining a plan for maintenance warranty work (Lowry 2007). and repairs for the next construction season. Deficiencies identified during the annual inspections are then repaired, State Experience with Warranties bringing the problem areas back into compliance with the performance criteria. A comprehensive review of state DOT experience of all types of warranty contracting resulted in the findings NMDOT is responsible for nonpavement maintenance listed here. Some of the warranty contracts are clearly along the roadway, such as mowing, metal barrier repairs, performance-based; for example, a Wisconsin DOT proj- snow removal, striping, and signage. ect included warranty provisions based on a performance distress index and the International Roughness Index (Bay- raktar et al. 2004).