Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts (2010)

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

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

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