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24 CHAPTER 3 Estimating Incentives and Disincentives I/Ds, Acceleration, bid award and the start time will be of great benefit to the STA and Market Factors because this will increase the available pool of contractors that can fit the project into their schedules as well as allow Accelerating the completion of a highway project through for project materials to be obtained. the use of an I/D provision is a widely used practice by I/D rates for projects with similar RUC impacts should have STAs. While there are many reasons for pursuing an accel- similar I/D rates. Inconsistencies in I/D rates between similar erated project schedule (emergency, special events, economic and/or adjacent projects should be avoided. In some cases, impacts, etc.) the justification for offering an incentive for maintaining consistency when RUC impacts are similar early completion is almost always based on RUCs. RUCs have can be contrary to adjusting RUC for market influences. been accepted as the standard method for establishing I/D rates However, since I/D rates derive their justification from RUC, on projects. Even though construction of a highway project and adjustments to the I/D rate for market influences are may have other impacts that beg the need for accelerated less precise than RUC estimates, consistency should trump completion (environmental, safety, impact on surrounding market influences when a conflict between the two arises. businesses, etc.), these impacts are difficult to quantify and the Capping the total incentive provides a level of risk miti- RUC for a heavily trafficked roadway will more than adequately gation to the STA to protect against grossly overpaying justify the need for an I/D. for acceleration. One method to arrive at an I/D rate is to Using RUC as the starting point for establishing the project start with the maximum incentive amount that is fiscally I/D rate will identify whether a project is actually a viable responsible in the STA's budget. Once this figure is known, candidate for an I/D provision. For example, lower volume the daily I/D rate can be set as long as it does not exceed the roadways may not yield an RUC that is high enough to moti- impact on RUC created by the project. Again, consistency vate acceleration (i.e., acceleration costs exceed RUC). On the with similar projects must also be considered. This may other hand, higher volume roadways will yield an RUC that is require adjusting the number of days for which an incen- a multiple of acceleration costs. In this case, the incentive need tive for early completion will be paid. Offering a longer only be a portion of the estimated RUC. Because there are so time frame where incentive can be earned at a lower rate many factors that impact the effectiveness of an I/D provision, will encourage earlier completion. For example, if the total determining the optimum I/D rate is more art than science. amount of incentive that a STA is willing to pay for early Even though it is impractical to conceive of a theoretical model completion equals $900,000, it would be more advantageous for determining the ideal I/D rate for a given project, a system to allow the contractor to earn $10,000 per day for a max- that considers a few basic factors will improve the state of the imum of 90 days rather than $30,000 per day for 30 days. practice for most STAs. An empirical system for determining effective I/D rates should at a minimum consider the following Highly phased complex projects will have multiple RUC three principles: conditions because traffic patterns change during the project. Often, an I/D may be offered on the same project for a critical Market influences such as the number of qualified bidders milestone. It is imperative that each I/D used on a project is and the availability of other work to contractors should be based on the difference in RUC associated with the estimated factored into the determination of I/D rates. Allowing as traffic conditions that exist during construction of that specific much flexibility as possible for the contractor between the phase and then after completion of the milestone. Also, I/Ds

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25 for multiple milestones should not overlap or be based on the the contract participants to double dipping on RUC impacts. same RUC, in effect exposing the contractor to the potential of Best practice would dictate that I/Ds for critical project phases being charged disincentive twice for the same RUC. Consider should be offered individually based on the RUC impacts of the following hypothetical example as an illustration of these each phase. This type of provision can be applied to I/D projects concepts: where the STA determines the duration of each milestone phase or the contractor can determine the milestone duration An urban interstate reconstruction project involves widening through the use of an A + B1 + B2 + Bn type of contract. Alter- the facility from 4 lanes to 6 lanes. The first phase consists tem- natively, an incentive may be offered for the completion of the porarily widening the eastbound lanes so that 4 lanes of traffic entire project, where RUC impact is estimated as the differ- can be maintained during construction of the westbound lanes. After westbound traffic is detoured to the widened eastbound ence between conditions during construction and post con- lanes, the second phase of construction commences. This phase struction conditions. In any case, development of a consistent consists of constructing the westbound lanes, which will prohibit method for estimating RUC impacts and I/D rates should be westbound traffic from exiting and entering the roadway at an a priority for STAs. interchange within the limits of the project. The STA would like to accelerate the first phase, limiting eastbound traffic to one lane while the temporary widening is Estimating RUC constructed. Thus, an I/D is offered for completion of the first phase based on the estimated increase in RUC for single lane There are many methods available for STAs to estimate traffic in the eastbound lane. For this case, it is necessary to es- RUC impacts associated with a highway construction project. timate RUC first for the condition during construction of the It is not the intent of this report to either endorse a method or eastbound widening (one lane eastbound traffic) and second for product, or to provide detailed guidance for calculating RUC. the condition after completion of the first phase (two-way traffic on the eastbound lanes). The difference between these two RUC The following discussion of estimating RUC is provided as a estimates is the STA's starting point for establishing an I/D rate means for the reader to understand why and how the estima- for the completion of the first phase. Based on these two RUC tion of RUC impact is important to the effective use of I/D estimates, the STA sets an I/D rate of $25,000 per day for a max- provisions for highway construction. For those interested, the imum duration of 21 days. Completion in less than 21 days will following references provide a more in-depth review of RUC earn an incentive of $25,000 per day, while completion in methods and tools: more than 21 days will incur a disincentive of $25,000 per day. Overall completion of the project is also an objective of the STA. As such, the STA establishes an I/D for early completion; the Improved Models for User Costs Analysis, Salem and Ashraf, contractor is offered $10,000 per day for completion of the entire 2007 (24) project in less than 240 calendar days (not to exceed $600,000 Road User Cost Manual, State of New Jersey Department of total incentive) and is also subject to a disincentive of $10,000 per Transportation, 2001 (25) day for each day used in excess of 240 calendar days. Now, assume Estimating Road User Costs as a Basis for Incentive/Disincentive that the contractor finishes the first phase in 31 days, incurring a $250,000 disincentive. Also assume that final completion of the Amounts in Highway Construction Contracts, Gillespie, project takes 245 calendar days resulting in an additional $50,000 1998 (26) disincentive. Effectiveness of Accelerating Highway Rehabilitation in Urban Under this scenario, the contractor is being penalized twice for Areas, Olguin, Allison, and McCullough, 1995 (27) the same RUC that occurred during the first phase. There could be a number of arguments about the schedule impact of the first phase and subsequent work. The contractor could argue that An array of computer applications is available for use in he/she is actually due an incentive payment of $100,000 for the estimating road user delay cost. These include RealCost (25), work occurring after the first phase. Regardless of the various Quickzone, QUEWZ, Alternat (28), HCS, MicroBENCOST outcomes that may arise from a schedule impact analysis, it is (26), FREWAY, QUADRO2, CARHOP, CORQ-CORCON, highly likely that the contractor has been doubly penalized for INTRAS, FREQ, and FRECON2 (27). Please refer to the afore- the same RUCs from the first phase of work. First, the contractor mentioned references for detailed information on the use of was charged a disincentive of $25,000 per day for project days 22 through 31 and was again charged an additional disincentive these tools and their applicability to estimating RUC impacts. of $10,000 per day for project days 27 through 31. Conversely, According to FHWA, the only legal precedent that has the same "double dipping" of RUCs is possible in an incentive invalidated an I/D specification was Milton v. Alabama (28). scenario as well. In this decision, the court ruled that Alabama's use of an I/D provision was a penalty and therefore unenforceable. The When I/Ds are offered for critical milestones within a project, primary evidence that influenced the court's decision was an I/D should not be offered for the overall completion of that (1) the I/D amount was not based on RUCs, (2) the disincentive project. Similarly, coupling lane rental provisions with I/Ds was capped and (3) there was no language in the specification for milestones or overall project completion may also expose that described the disincentive as a means to recover road user

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26 Table 7. RUC components. Road User Cost Component Comments Based on a simulated project with 60,000 AADT (40% trucks) and an average 5-minute delay due to construction, the travel time delay accounts for more than 90% of total RUC (estimated using travel time values from HERS model, USDOT 2005). Travel Time Delay Valuation of travel time delay should be based on a weighted average hourly rate by vehicle type that is based on appropriate factors for business travel, personal travel and average vehicle occupancy (23, pp. 18-25). Based on a simulated project with 60,000 AADT (40% trucks) and an average 5-minute delay due to construction, the vehicle operating cost accounts for Vehicle Operatin g approximately 5% of total RUC (estimated using RealCost default values adjusted Cost for current transportation CPI values, 3rd quarter 2008). Hourly operating costs by vehicle type should be used. Accident Cost Not normally used in RUC estimates for justifying the use of an I/D provision. Environmental For the one project example that was found using hydrocarbon, carbon monoxide Cost and nitrous oxide emissions as a component of RUC, the total of these costs were less than one percent of total RUC. delay costs resulting from the construction project. Based on 3. Forecast the volume and composition of traffic for each of the lack of any other legal precedent or an overturning of the capacity estimates that will be compared. the Milton v. Alabama decision, it is likely that most claims 4. Perform a traffic analysis of each of the conditions that will involving I/D projects have been settled to avoid setting any be compared (mean speed, mean delay, etc.). This may further precedents. To be defensible, it is critical that I/D rates require several analyses of each condition (peak rush hour, be based on reasonable estimates of the RUC associated with off peak, and evening) to arrive at representative values for the delay caused by the highway construction project. the average delay encountered over a 24-hour period. RUC consists of the following components: travel time costs 5. Calculate the desired RUC components for each capacity (user), vehicle operating costs, costs associated with accidents, condition that will be used as a basis for the I/D rate; results and environmental costs from exhaust emissions (27). In prac- of step 4 are used in conjunction with the best available tice, most STAs limit the calculation of RUC to travel time and data for each cost component. vehicle operating costs. There are two primary reasons for lim- 6. Calculate the difference between daily RUC of each capacity iting RUC estimates to these two components. First, lim- condition that will be used for establishing an I/D rate ited reliable data exists for accident and environmental costs (RUC impact due to construction). due to construction delays. Second, travel time delay and vehi- In summary, I/D rates derive their value from an estimate cle operating costs are normally high enough to justify the use of the RUC increase that is attributable to the highway con- of an I/D provision. I/D rates use RUC estimates as a basis for struction project. The fact that RUC estimates are commonly justification, but the actual I/D rate used is almost always a very high (greater than $100,000 per day) and the associated fraction of the estimated RUC and should never exceed the I/D rates are considerably lower should not lead a STA to RUC impact due to construction. Table 7 provides additional the conclusion that RUC estimates need only be cursory. information for each of the RUC components: On the contrary, to be enforceable, the RUC estimates that A step-by-step method for calculating road user delay costs lead to the I/D rates must be based on sound engineering follows (26): practice. STAs should have a documented process for calculat- ing RUC impacts due to construction. This process must also 1. Estimate the highway's capacity before, during, and after be consistently applied. Complex projects with multiple I/Ds construction; performing multiple capacity estimates for milestones will require multiple RUC estimates that cap- during construction may be required if capacity changes ture the changes in capacity as milestones are completed. during different phases of the project. Also, RUC factors should be based on proper assumptions re- 2. Determine which capacity estimates will be compared as a garding AADT, percent of traffic by vehicle type, vehicle oper- basis for establishing I/D rates; in the case of an I/D that is ating costs that reflect current CPI adjustments, and hourly tied to opening the finished facility to unrestricted traffic, the RUCs that have been adjusted for personal/business trips and capacity during construction would be compared with the average vehicle occupancy. Failing to correctly estimate RUC capacity after construction. impacts may render an I/D provision unenforceable.