Guide for Pavement-Type Selection (2011)

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30 7.1 Overview In traditional design-bid-build contracts, the contractor delivers construction services as defined in the standard plans and specifications issued by the highway agency. The contrac- tor assumes no responsibility for the delivered product except with regard to materials and workmanship quality for a limited time period. The agency has the entire responsibility and risk for design, construction, and post-construction performance of the pavement. With the inception of alternative contracting methods, high- way agencies strive for better “value for money” through spe- cific project objectives relating to construction time, quality, innovation, safety, and costs. Examples include lane rental, interim completion dates, performance warranties, and design- build and design-build–finance-operate contracts. These initiatives have shifted the roles and responsibilities of agencies, contractors, and designers from traditional para- digms, which have in turn resulted in the shift of risk allocation from agencies to contractors, thus opening up new challenges in program delivery and facility management. The alternative contracting scenarios involving contractor-based pavement- type selection are defined as follows: • Design-build. Contractor is responsible for only design and construction (involves materials and workmanship war- ranty or other warranty types). • Design-build involving O&M. Contractor is responsible for design, construction, M&R, and operations during the con- cession period (involves performance thresholds established by the agency). • Performance warranty. Contractor is responsible for design, construction, and M&R over the warranty period with no operational responsibilities (involves performance thresh- olds established by the agency). Although these contracting approaches include much more than pavement-type selection, the discussion in this guide focuses on how to deal with the selection process under such scenarios. In alternate contracting, particularly for projects requiring long-term contractor involvement, the contractor (or a concessionaire) bears significantly greater financial risks than in traditional contracts. However, as the long-term owner of the facility, the agency holds the ultimate responsi- bility toward taxpayers and road users for the performance of the pavement. Table 10 shows the agency and contractor relationship for different contracting scenarios in order to provide the neces- sary backdrop for understanding pavement-type selection in such scenarios. These challenges can be managed effectively when risks are understood, their consequences measured, and they are allocated to the party that can best manage them. 7.2 Risk Assessment in Contractor- Based Type Selection In alternate contracting projects, the agency communicates the project goals, requirements, and deliverables to the con- tractor through contract provisions in the RFP. The contractor is obligated to provide the product and services specified in the contract provisions with certain technical, cost, time, and qual- ity requirements. As the selection process proceeds from the preliminary engi- neering phase to the selection of the final pavement type, three distinct milestones are recognized in this process: • Advertising for bids—The agency’s internal assessments and decisions culminate with the development of contract pro- visions. The agency then communicates its requirements to the potential contractor. • Submission of bids—The contractor’s internal assessments and the business decisions culminate in the development of bidding strategies and bid submittal (i.e., the contractor pro- poses a pavement-type alternative for a certain cost value in the submitted bid). C H A P T E R 7 Contractor-Based Pavement-Type Selection

31 Process Design-Bid-Build Alternate Bidding Design- Build 1 Long-Term Performance Warranty1 Design-Build with O&M1 Identification of pavement alternatives Development of potential alternatives at agency level Agency Agency Agency Agency Agency Identification of feasible alternatives at project level Agency Agency Agency & Contractor2 Agency & Contractor Contractor Development of a life-cycle model for pavement alternatives Service life of initial pavement structure (includes pavement design) Agency Agency Agency & Contractor2 Contractor Contractor Service lives of future rehabilitation treatments Agency Agency Agency Contractor Contractor Timing and extent of M&R treatments Agency Agency Agency Contractor Contractor Estimation of life-cycle costs &ycnegAycnegAycnegAnoitcurtsnoclaitinI Contractor2 Contractor Contractor rotcartnoCrotcartnoCycnegAycnegAycnegAR&MerutuF A/NA/NycnegAycnegAycnegAegavlaS Remaining service life at hand back N/A N/A N/A Contractor Contractor &ycnegAycnegAycnegAyratnemelppuS Contractor Agency & Contractor Agency & Contractor &ycnegAycnegAycnegAstsocenozkroW Contractor2 Agency & Contractor Agency & Contractor Traffic operations4 &ycnegAycnegAycnegAycnegAycnegA Contractor Economic analysis of pavement alternatives Develop expenditure-stream diagrams Agency Agency Agency & Contractor2 Contractor Contractor Establish LCCA framework Agency Agency Agency & Contractor2 Contractor Contractor Compute life-cycle costs Agency Agency Agency & Contractor2 Contractor Contractor Analyze/interpret results Agency Agency Agency & Contractor2 Contractor Contractor Reevaluate strategies Agency Agency Agency & Contractor2 Contractor Contractor Economic and noneconomic evaluation of pavement alternatives Evaluate pavement alternatives using economic factors Agency Agency Agency & Contractor2 Contractor Contractor Evaluate pavement alternatives using noneconomic factors Agency Agency Agency & Contractor 3 Agency & Contractor 3 Agency & Contractor3 Weigh noneconomic factors against economic analysis Agency Agency Agency Agency & Contractor 3 Agency & Contractor3 Final selection of pavement alternative Agency Contractor Agency & Contractor2 Contractor Contractor 1Agency may perform the pavement-type selection process independently for validating contractor-based analysis and internal purposes. 2Depends on the type of design-build contract. 3Contractor may not consider factors relating to environment, road users, and society. 4It may be difficult to develop consensus on calculating differential costs during normal traffic operations between pavement types. N/A = Not applicable Table 10. Agency and contractor roles in different contracting scenarios.

• Evaluation of contractor proposal—Upon receipt of bids, the agency accepts/rejects the contractor’s proposal based on its conformance to contract provisions of the project. Figure 17 presents a flow chart of the steps involved in the contractor-based type-selection process. 7.2.1 Agency Risks In contractor-based type selection, the agency process begins with the determination of an appropriate contracting method in the preliminary phase of the project. The alternate contract- ing methods involving contractor-based selection typically include design-build, design-build with O&M, and long-term performance warranty methods. The contracting method largely defines the contractor scope in the project and the asso- ciated risks. The agency then conducts a comprehensive risk assessment in the preliminary engineering phase prior to establishing the contract provisions. Typical agency risks include reduced pavement performance, increased unplanned intervention, cost overruns, time delays, and associated indirect effects such as public dissatisfaction and increased work zone accidents. The agency also can perform an independent evaluation of economic and noneconomic factors to address responsibili- ties toward to the taxpayers, road users, and the environment. Table 11 lists factors that should be considered in the agency’s risk assessment. The process includes identification of risks, categorizing the probability of occurrence, determining the likely impact, and properly allocating risks to the parties that can best manage them. To leverage these risks, the agency uses contract provisions as control points to define the contractor’s obligations. For exam- ple, an agency may use performance criteria to leverage risks associated with the “pavement” component of a proposed facil- ity. The agency then specifies performance threshold values and scheduled monitoring to ensure a desired level of service. Whenever the measured performance fails to meet the requirements, the contractor is obligated to undertake repair and rehabilitation work, and failure to maintain the thresh- old performance may result in disincentives (Molenaar et al. 2005). On design-build projects, where the contractor has no responsibility for operation or maintenance, it is appropriate for the agency to reduce its risk by stipulating the pavement alternative(s) suitable for use or by specifying the selection criteria for the contractor to follow. In these cases the agency should clearly indicate the procedure and inputs to be used in the pavement design. In addressing risks, the agency may be inclined to be more stringent in specifying the control points. Such stringent cri- teria may lead to contractor bids with higher prices than the agency’s estimate. In some cases, the contract provisions may 32 not be adequate to cover all the agency risks, which can result in a significant loss to the agency. Therefore, the agency- specified criteria should be robust, realistic, and achievable in order to attract reasonable bid prices from bidders. The agency should establish criteria for evaluating contractor- proposed pavement types and communicate them in the RFP or bid documents. Input from the pavement-type selection committee may be helpful in establishing contract provisions and evaluation criteria pertinent to pavements. The agency also may use risk-sharing mechanisms such as warranty ceiling or price adjustment clauses for inflation management in order to achieve a balance in risk allocation. These strategies may play a significant role in developing rea- sonable contract provisions and attracting balanced bids from contractors. The agency then communicates the project requirements and the evaluation criteria to potential bidders through the RFP or bid documents. The agency should ensure that these require- ments are defined precisely in these documents. 7.2.2 Contractor Risks The contractor’s risks generally are associated with the con- tract provisions of a project and the primary organizational objectives. To put it practically, as a private enterprise, the con- tractor’s primary organizational objectives are to increase the probability of winning the bid, meet the contractual require- ments, minimize losses, and maximize profits. The contrac- tor’s risks depend on the following factors: • Construction details (constructability and specifications). • Location and site conditions (traffic, subgrade, working conditions, etc.). • Performance and financial elements (initial costs, future needs, anticipated cost inflows, etc.). • Performance criteria. • Chances of a successful bid. • Incentive/disincentive structure. • Agency’s receptiveness to proposed strategies. • Contractor’s experience. • Contractor’s ability to control operations and subcontrac- tors. The project-specific contractor risks begin with the con- tract provisions of a project. The contractor’s perceived risks increase as the “unknowns” in the proposed project increase. Contractors tend to manage these perceived risks by building financial contingencies into their bid price. Similarly, if the project criteria are unrealistic (e.g., unreasonable quality lim- its), the contractor perceives higher risk, resulting in a higher proposed price. If the final bid price is too high, it is likely that the contractor will lose the contract.

33 Figure 17. Overview of the contractor-based type-selection process. Agency decides on contractor- based pavement-type selection Agency determines the contracting type Contractor reviews contract provisions and agency practices Contractor performs risk assessment and develops risk management strategies Agency performs an impact assessment of pavement- related risks Agency develops strategies for risk management, allocation and sharing Agency develops contract provisions and specifications Contractor follows the selection process of a given contracting type Contractor develops inputs for the type selection process NO YES Does contractor- selected alternative meet contract provisions? Contractor selects an alternative for the proposal Agency evaluates contractor’s proposal Agency rejects or proposes modifications to contractor- selected alternative Agency accepts contractor- selected alternative Advertising for Bids Submission of Bids Acceptance of Contractor’s Proposal Agency Process Agency Process Contractor Process Contractor Process

The contractor’s risk assessment process includes careful reviewing of the project criteria specified in the RFP or bid doc- uments, identifying potential risks, categorizing the probabil- ity of occurrence, determining how significant the impact would be if the risk occurred, and developing strategies to mit- igate the risks. 7.3 Developing Inputs for Contractor-Based Selection Process While the overall framework of the agency-based pavement- type selection process is applicable to contractor-based pavement-type selection, contractor-based pavement-type selection also needs to incorporate the impact of increased risks in determining the inputs for the process. These factors can be incorporated in the proposed framework of contractor-based selection under the evaluation of feasible alternatives using economic and noneconomic factors. When identifying inputs for the selection process, the con- tractor may find it advantageous to begin by reviewing the agency’s pavement-type selection practices, pavement design methodology, and pavement management data. The agency- based pavement-type selection process can provide a solid starting point. The agency-based selection process reflects local practices on inputs such as M&R and future impacts to traffic, and the agency is likely to evaluate contractors’ techni- cal proposals based on how well they address local condi- tions. In some alternate contracting projects, the agency may provide specific guidance in the RFP on pavement-type selection criteria, such as pavement life-cycle strategies and design methodology. Just as for agency risk assessment, contractors may ana- lyze the factors listed in Table 11 to assess their own risk. The contractor should take a holistic view of the contract provisions, results of risk assessment, and the available risk- sharing mechanisms into consideration in customizing the inputs. The contractor risk assessment can be utilized in establish- ing statistical distribution of risk factors to characterize their variability or uncertainty. For example, the inflationary risks of commodity prices may help to set the standard deviation of future costs, while the assessment of incentives/disincentives for measured pavement performance may prompt the con- tractor to focus more on maintenance strategies and less on rehabilitation. Statistical characterization of risk factors may be unfeasible if sufficient data are unavailable. In such cases, the contractor can make adjustments based on the results of sensitivity analy- sis and Monte Carlo simulation. Contractors should make use of probabilistic risk assessment for determining inputs, which is similar to the probabilistic LCCA process. 7.4 Agency’s Evaluation of Contractor-Based Selection The agency evaluates the contractor’s proposed pavement type for its conformance to contract provisions of the project, as illustrated in Figure 18. The agency can validate the assump- tions and analysis criteria used in the contractor’s selection process, as well as whether the contractor’s selection meets the overall project goals. Once the contractor submits the pre- ferred pavement type, the agency should check for compliance with its economic and noneconomic goals. 34 Table 11. Factors suggested for risk analysis. Design-Build Design-Build with O&M Performance Warranty • Initial costs • Supplementary costs • Work zone costs • Noneconomic factors • Agency’s pool of alternatives • Performance criteria • Service life of initial pavement • Service life of structural rehabilitation • Type and timing of maintenance and functional rehabilitation • Initial costs • Commodity price inflation • Supplementary costs • Future maintenance costs • Future costs for rehabilitation • Future operational costs • Work zone costs • Noneconomic factors • Inflation, discount factors, and macroeconomic risks • Projected traffic volume • Projected revenue • Agency’s pool of alternatives • Performance criteria • Service life of initial pavement • Service life of structural rehabilitation • Type and timing of maintenance and functional rehabilitation • Initial costs • Commodity price inflation • Supplementary costs • Future maintenance costs • Future costs for rehabilitation • Future operational costs • Work zone costs • Noneconomic factors • Inflation, discount factors, and macroeconomic risks • Projected traffic volume • Additional costs for warranty requirements (for surety bonds as in additional bid price, $/sq. yd) Note: In design-build scenarios, where the contractor is not responsible for O&M or long-term performance warranties, the contractor would follow the agency-specified process in developing life-cycle strategies.

The agency can use the following criteria in evaluating the contractor-selected pavement type: • Cost feasibility and reasonableness of alternatives. • M&R schedule. • Structural design. • Innovative/new practices proposed. • Quality management. • Construction time and the impact of work zone to traffic. • Constructability. Based on the evaluation, the agency can accept or reject the contractor’s proposed pavement type or initiate negotiations for further modifications. When the pavement portion is a relatively small part of the project, scoring on the pavement design will not be a determining factor in the award of the project. In such cases, and where a low bid award is mandated by law, the agency should consider specifying the acceptable pavement designs in the RFP. 7.5 Pavement-Type Selection in Alternate Contracting Projects 7.5.1 Design-Build Projects In design-build projects, an agency executes a single contract for both design services and construction of a project. The contractor assumes primary responsibility for both design and construction teams and thus contributes to the elimination of the conflicts between them and the acceleration of the con- struction schedule. Design-build projects are awarded based on either lowest price (with or without adjustments for techni- cal value) or best value for a fixed price. An agency may define the contractor’s role in pavement- type selection in one of the following ways: • Agency-specified. The agency specifies the pavement type in the proposal and specifies either the final thickness of each pavement layer or the minimum thickness (or mini- mum compacted depth). The contractor is allowed to make necessary design adjustments for certain conditions (e.g., frost protection). In any event, the contractor must follow the agency-specified pavement type and thickness design. • Agency-preferred. The agency specifies the preferred pavement types as well as any pavement types that are not allowed. The contractor must select a pavement type from the choice the agency provides. The agency may ask the contractor to perform thickness design for the selected pavement type in accordance with the standard procedures. • Agency-permitted. The agency allows the contractor to select the pavement type and perform structural design. The agency requires the contractor to provide detailed docu- mentation of the design inputs, a narrative on how the inputs were determined, the design methodology, and the outputs. Design-build projects usually involve contractor services only in the design and construction phases, typically with a limited warranty period; they usually do not extend to other phases of the pavement life cycle, such as M&R. On proj- ects with a shorter turnover period and limited contractor responsibility, the agency assumes the responsibility for managing future performance risks. Therefore, the agency can stipulate the pavement alternative(s) to be used in a project or specify the criteria, such as the life-cycle strate- gies, design criteria and inputs for LCCA, to be followed in the selection process. These stipulations help to ensure that the contractor builds a pavement that meets the agency’s expectations. In the agency-specified scenario, the agency performs the pavement-type selection using its own design methodology, life-cycle strategies, and cost criteria. While specifying the final pavement type, the agency is encouraged to allow for incentives for contractor innovation and competition that would result in long-term cost savings. In the agency-preferred and agency-permitted scenarios, contractors follow the agency’s process in pavement-type selection. The contractor can follow 35 Figure 18. Agency evaluation of contractor pavement type. NO YES Contractor- selected alternative meets contract goals and provisions? Agency validates contractor selection process Agency evaluates contractor- selected alternative for compliance with its economic and noneconomic goals Agency rejects or proposes modifications to contractor- selected alternative Agency accepts contractor- selected alternative Contractor selects an alternative for the proposal

the process presented in Figure 19. The individual steps of the selection process include: Step 1. Identifying feasible alternatives from the RFP when restrictive, or the agency’s pool of alternatives when permissive (see Figure 3). Step 2. Following agency-allowed practices or RFP instruc- tions in developing pavement life-cycle strategies for alternatives (see Figure 4). Step 3. Following agency-allowed practices or RFP instruc- tions in conducting LCCA (see Figure 8) and evalu- ation using economic and noneconomic factors (see Figure 15). Step 4. Selecting the most-preferred alternative (see Fig- ure 18). 7.5.2 Design-Build Projects with O&M These projects involve a greater role for the private sector through public–private partnerships in areas such as project conceptualization, financial planning, project financing, O&M, toll collection, congestion pricing, and design and construction. Design-build projects with O&M typically are larger and more complex than traditional projects. Variants of design-build projects with O&M include: • Design-build–operate–maintain. • Design-build–finance–operate. • Long-term lease. Due to the complexity of these projects, there are several risk factors associated with finance, revenue, macroeconomics, and facility management that may have a direct or indirect bearing on the pavement-related costs. These risks may have a “subjec- tive” influence on the contractor’s decision making. Assump- tions pertaining to the following factors contribute to these risks: • Traffic volume projections. • Revenue from tolls. • Maintenance costs. • Operational costs. • Financing costs. • Commodity prices. • Inflation and discount rates. Given the contractor’s risks and responsibilities in design- build with O&M, agencies generally allow the contractors to select the preferred pavement type. The contractor can fol- low the process presented in Figure 20. The individual steps of the selection process can include: Step 1. Reviewing contract provisions to identify potential risks (see Figure 17 for Steps 1 through 4). Step 2. Performing risk assessment to develop risk manage- ment strategies. Step 3. Reviewing the agency’s pavement-type selection prac- tices, design methodology, and pavement performance data. 36 Figure 19. Pavement-type selection for design-build projects. Scenarios for design-build projects

Step 4. Developing contractor-specific inputs for use in the selection process. Step 5. Selecting feasible alternatives considering project- specific constraints (see Figure 3). The contractors may select alternatives from the agency’s pool or pro- pose their own alternatives. Step 6. Developing pavement life-cycle strategies for selected alternatives using contractor-specific inputs and agency-specified performance criteria (see Figure 4). Step 7. Conducting LCCA using contractor-specific inputs (see Figure 8) and evaluation using economic and noneconomic factors (see Figure 15). Step 8. Selecting the most-preferred alternative (see Fig- ure 18). 7.5.3 Performance Warranty Projects Pavement warranties require significant decision making by both agencies and contractors, as they contribute additional risks and benefits to pavement life-cycle costs. There are three types of warranties practiced in the highway industry: materi- als and workmanship, short-term performance, and long-term performance. Table 12 provides a comparison of the important aspects of the three warranty types. Materials and Workmanship Warranty In projects involving materials and workmanship war- ranty, the contractor is responsible only for material prop- erties and workmanship issues that contribute to poor pavement performance during the warranty period. Since the agency is responsible for pavement-type selection, pave- ment design, and LCCA, the agency-based process can be followed. Short-Term Performance Warranty In short-term performance warranty projects, the agency is responsible for pavement-type selection and structural design requirements. Some agencies, however, may allow the con- tractor to select the pavement type in addition to design and construction aspects, and thereby allow for innovation. The contractor is responsible for material design, any improvements needed in materials and structural designs, better quality con- trol, and performance issues during the warranty period. Short- term warranties are used in both traditional design-bid-build 37 Figure 20. Pavement- type selection for design-build projects with O&M. Table 12. Comparison of pavement warranty types. Agency decides on design-build project with operations and maintenance Contractor reviews agency practices, contract provisions and performance criteria Contractor performs risk assessment Contractor develops pavement life-cycle strategies for agency-specified performance criteria Contractor performs LCCA and evaluation using economic and noneconomic factors Contractor-based selection of the most-preferred alternative Aspect Materials & Workmanship Short-Term Performance Long-Term Performance Typical period 2–4 years 5–10 years 10–20 years Type of specifications Agency's current standard specifications for specific treatment Agency-specified minimum materials and construction requirements acceptable for project Agency-specified minimum structural design, material design, materials, and construction requirements acceptable for project Agency responsibility Structural design, material design, evaluation Structural design, evaluation Evaluation Contractor responsibility Correct defects in pavement caused by elements within their control Material design, quality control, and pavement performance for warranty period Structural design, material design, quality control, and pavement performance for warranty period Acceptance of project In accordance with agency's normal practices Initial: construction activities Initial: construction activities Final: after specified warranty period is completed Final: after specified warranty period is completed

contracts and alternate contracts including design-build and multiparameter bidding. The agency specifies performance thresholds to monitor pavement performance during the warranty period. In short- term performance warranty projects, the agency-based pavement-type selection process can be followed (see Fig- ure 21). In addition, the contractor may need to perform risk assessment to incorporate risk premiums in the bid price. Long-Term Performance Warranty In long-term performance warranty projects, the contractor is responsible for performance issues and planned/unplanned maintenance activities over an extended period (typically, between 10 and 20 years). This type of warranty is used in both traditional and alternate contracting projects, where some projects may involve substantial financial investment from the contractor. However, the contractor generally is not given facility operations control. In these projects, the contractor is responsible for pavement- type selection, structural design, materials selection and design, quality control, pavement maintenance, rehabilitation strategies, and performance. Contractor-based type selection is considered vital to long-term performance warranty proj- ects, as it allows the contractor to select the most appropriate and cost-effective strategy for meeting performance require- ments. The agency is responsible for establishing realistic per- formance thresholds, monitoring performance and, in some cases, sharing risks. Establishing realistic and achievable per- formance thresholds based on historical data is critical. Agen- cies use performance specifications for acceptance in these projects. The contractor can follow the process presented in Figure 21. The individual steps of the selection process can include: Step 1. Reviewing contract provisions to identify potential risks (see Figure 17 for steps 1 through 4). Step 2. Performing risk assessment to develop risk manage- ment strategies. Step 3. Reviewing the agency’s pavement-type selection prac- tices, design methodology, and pavement perfor- mance data, Step 4. Developing contractor-specific inputs for use in the selection process. Step 5. Selecting feasible alternatives considering project- specific constraints (see Figure 3). The contractor may select alternatives from the agency’s pool or pro- pose their own alternatives. Step 6. Developing pavement life-cycle strategies for selected alternatives using contractor-specific inputs and agency-specified performance criteria (see Fig- ure 4). Step 7. Conducting LCCA using contractor-specific inputs (see Figure 8) and evaluation using economic and noneconomic factors (see Figure 15). Step 8. Selecting the most-preferred alternative (see Fig- ure 18). 38 Long-term performance (10 to 20 years) Materials and workmanship (2 to 4 years ) Short-term performance (5 to 10 years) Agency-based pavement-type selection Contractor reviews agency practices and performance criteria Contractor performs risk assessment Options for performance warranty projects Contractor reviews agency practices and performance criteria Contractor performs risk assessment Contractor develops pavement life cycle strategies for agency -specified performance criteria Contractor performs LCCA and evaluation using economic and non- economic factors Contractor-based selection of most-preferred alternative Figure 21. Pavement-type selection for performance warranty projects.