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57 APPENDIX C Example of Pavement-Type Selection in Design-Build Operations & Maintenance Projects This appendix illustrates an example of the contractor-based mine if any of these alternatives should not be considered selection in design-build O&M projects using the process pro- for this project. The agency considers all alternatives to be posed in Chapter 7. adequate and finds none of them to be restricted in this project. The agency also makes a decision to allow consid- eration of other pavement alternatives that are neither rou- Needs Statement tinely used nor restricted in the RFP, if proposed by the Assume that an agency is procuring a design-build O&M bidders. The agency prepares a statement reflecting this contract for reconstructing a 15-mile segment of a six-lane provision such as: urban interstate highway. The facility serves as the primary The agency considers the following alternatives adequate route of the growing urban traffic, and the agency would like for this project: to reduce traffic disruptions as much as possible. The agency Alternative 1 (conventional) has identified funding mechanisms for the project and has Alternative 2 (conventional) decided to procure contractor services for design, construc- Alternative 3 (long-life) tion, operations, and maintenance phases of the project for a Alternative 4 (long-life) period of 40 years. The agency is in the process of developing Alternative 5 (composite) contract provisions addressing pavement-related needs for If proposed by the bidder, the agency will also consider inclusion in the RFP. another pavement type and determine its suitability and accept- ability to the agency's pavement-type selection committee. LCCA program--The agency requires bidders to conduct Agency's Internal Assessment an LCCA of the feasible alternatives used in the selection As noted, the agency has identified the contracting type process. The bidders are required to submit documenta- and the overall scope of contractor involvement in this proj- tion of the process identifying the inputs and assumptions ect. While the agency retains the financing responsibilities of used. The agency recommends that bidders use FHWA's the project, the agency plans to procure contractor services in RealCost software. design, construction, and facility management with a single Pavement design procedures--The agency allows bidders contract. to use any nationally recognized procedure in developing The agency performs an impact assessment to identify pavement structural designs, but detailed documentation pavement-related risks in accomplishing project goals and of the design calculations must be provided for approval successful execution of the contract. Based on the evalua- and/or acceptance. The documentation should include tion, the agency identifies strategies to manage them. The all design inputs that are used to arrive at the pavement agency's evaluation culminates with contract provisions in selections, including a narrative on how the inputs are the RFP that specify requirements for the project and the determined. bid proposal. The key aspects of the process are summarized Service-life estimates of initial pavement and structural as follows: rehabilitation--The agency recommends that bidders follow agency guidelines in developing expected service Pavement-type alternatives--The agency evaluates the lives of various pavement types and rehabilitation activi- pavement types currently used in its jurisdictions to deter- ties, as these estimates were developed using the agency's

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58 pavement management data. The agency will allow bid- The agency will evaluate the strategy proposed in each ders to make appropriate adjustments to these estimates submittal against the baseline scenario and score them but must be provided documentation supporting any accordingly. deviations from the agency guidelines. The agency will The agency will specify a lane rental fee for this project. then evaluate the reasonableness of these deviations. The rental fee will be determined based on the daily road Type and timing of maintenance and functional rehabilita- user costs for the selected work zone strategy. tion--The agency recommends using the agency's guide- The agency prefers a pavement type with minimal future lines in determining the type and timing of maintenance interventions. and functional rehabilitation activities. Should the bidders Noneconomic factors--The agency did not find any risks deviate from the standard agency practices, documentation with noneconomic factors when the pavement types in the supporting the deviations is necessary. The agency will then agency's list are used. evaluate the reasonableness of these deviations. Projected traffic volume--The agency forecasts the traffic Initial costs--The agency has established standard protocols volume to grow between 2 and 6 percent annually. The for bid analysis to determine if the bids are reasonable and agency requires the contractor to use a 4 percent growth rate responsive or if re-advertisement is necessary. If needed, the for developing structural designs and user costs. Should the agency may compare the bid prices against historic cost traffic growth exceed this value, the agency will make finan- models. cial adjustments to the contract. Commodity prices, inflation, and macroeconomic risks-- Performance criteria--The agency requires the contractor The agency typically uses Consumer Price Index (CPI) based to maintain the pavement at a threshold performance level. inflation forecast models to predict short-term inflationary The contractor is required to maintain the facility at all times effect on materials, labor, and equipment. Considering the meeting the following criteria: ineffectiveness of these models in predicting long-term IRI 140 inches/mile. trends, the agency recognizes the need for risk sharing with Average rut depth in wheel paths 0.25 inches. the potential contractor. Since the contract is executed for a Faulting 0.25 inches. 40-year period, the sharing of macroeconomic risks is nec- The agency requires the contractor to submit the essary to get reasonably priced bids. The agency develops the results of pavement condition surveys conducted following strategies for managing monetary risks associated annually. with pavements: Hand-back criteria--On hand back, the agency requires The agency will pay the contractor a supplement if the the contractor to demonstrate that the pavement has at future rehabilitation costs exceed 10 percent of the bid least 5 years of remaining useful life. The agency also spec- amount. ifies the method to be adopted in calculating the remain- The agency will revise payments annually for scheduled ing useful life. maintenance, consistent with inflationary trends. The agency establishes evaluation criteria for contractor- The agency prefers a pavement type with lower future proposed pavement types (see Table C1). The agency uses costs and overall lower life cycle costs. Supplementary costs--The agency finds no risks in supple- an adjusted bid method (life-cycle cost of an alternative/ mentary costs. technical score) for approving the contractor-proposed Futurecostsformaintenanceand rehabilitation--The agency pavement type. will make adjustments to payments to reflect increases in commodity prices, prevailing labor rates, and equipment The agency then develops the RFP that includes identified only. The agency will not pay for any unscheduled mainte- strategies and requirements and advertises for bidding. nance or rehabilitation not presented in the proposal. Work zone costs--Since the facility is expected to carry heavy traffic, the user cost component is expected to be sig- Table C1. Agency's evaluation criteria. nificant. The agency develops the following strategies for managing work zone related risks: Evaluation Factor Criteria Weights Overall technical feasibility Pass/Fail Not required The agency identifies 10-hour road closure as the stan- Feasibility of initial costs Pass/Fail Not required dard strategy for traffic maintenance. Based on this strat- Adequacy of structural designs Pass/Fail Not required egy, the agency develops a baseline scenario for project Adequacy of M&R activities Pass/Fail Not required Annual maintenance costs Numerical rating 10% completion and determines daily road user costs. Future rehabilitation costs Numerical rating 50% The agency then allows the bidders to propose alternate User costs Numerical rating 30% work-zone lane-closure strategies in their submittal. Future work zone disruptions Numerical rating 10%

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59 Contractor's Selection Strategies 5-year remaining useful-life requirement specified in the hand-back criteria. Upon the release of the RFP, the contractor reviews the The contractor uses the probabilistic approach for contract provisions and the standard agency practices. The LCCA. contractor evaluates potential risks and develops bidding The agency currently uses a discount rate of 3 percent. strategies accordingly. The key aspects of the contractor's risk The contractor reviews the historic discount factor pub- assessment and strategies are summarized as follows: lished in OMB Circular A-94 and proposes a triangular distribution for discount factor with 4 percent as the The contractor evaluates the adequacy of the agency-specified most likely value and 2.5 and 6.5 percent as the mini- alternatives and the potential for considering other pavement mum and maximum values, respectively. types. The contractor takes into consideration various influ- The NPV will be used, to be consistent with the agency encing factors, such as the contract period, hand-back crite- practice. ria, performance criteria, and estimated service lives and Service-life estimates: The contractor selects a triangular costs of the initial structure and subsequent M&R activities. distribution with a 10 percent variation on either side of The contractor reviews the agency's M&R guidelines and the agency's estimated values. For instance, if the expected practices and identifies if any adjustments are warranted. service life of a pavement is 20 years, the contractor will use The contractor reviews the agency's service-life estimates a triangular distribution with 20 years as the most likely and identifies any potential adjustments. The contractor value and 18 and 22 years as the minimum and maximum considers adding a risk factor to the service-life estimates service lives, respectively. of alternatives to account for statistical variations in the Initial and maintenance costs: The contractor does not use agency's estimates. risk factors for initial and scheduled maintenance costs. The contractor reviews the agency's LCCA parameters. To However, the agency will make annual adjustments to main- account for the uncertainties in the inputs, the contractor tenance costs with inflation. prefers using the probabilistic approach for LCCA. Future rehabilitation costs: The contractor determines that Although the agency will share the economic risks associ- a 10 percent risk factor to future costs will be optimal to ated with future rehabilitation costs, the contractor intends minimize the future losses and maximize the chances of to add a risk factor to account for uncertainties in projected winning the bid. In the LCCA, the contractor uses a proba- future costs. bilistic distribution for future rehabilitation costs that varies The contractor does not include a risk factor for M&R uniformly between the projected estimate and the 10 per- costs, as the agency shares the risk of economic inflation. cent above it. For instance, if the expected rehabilitation Similarly, the initial costs do not have a built-in factor for cost of an alternative is $150,000, the contractor will select economic inflation. a probabilistic distribution in the FHWA RealCost software The contractor recognizes that user costs will play a signifi- that varies uniformly between $150,000 and $165,000. cant factor in determining the winning bid. The contractor Project completion time: The contractor estimates the proj- performs demand-capacity analysis of the existing traffic ect completion time of initial and subsequent rehabilitation patterns to identify optimal lane closure strategies. activities assuming a normal production rate associated Since the lane closure timings have an impact on project with 10-hour lane closure (see Table C2). completion time and road user costs, the contractor con- User costs: The contractor considers investigating feasible siders performing further analysis for strategy selection. options for the following maintenance of traffic strategies: The contractor recognizes the importance of shorter com- 5- to 7-hour/day lane closure (only 1 lane open during pletion time and fewer traffic disruptions for maintenance closure). and rehabilitation activities. 10-hour/day lane closure (only 1 lane open during closure). Contractor's Selection of Inputs Based on the contractor's selection strategies, the contrac- Table C2. Number of required work zone days. tor finds it necessary to make adjustments to the agency's Alternative Alternative Alternative Alternative Alternative Activity practices as follows: 1 2 3 4 5 Initial 30 35 30 36 40 construction LCCA framework: Rehab 1 7 1 21 1 4 Rehab 2 20 2 0 0 4 The agency's process uses a 40-year period, but the con- Rehab 3 7 3 0 0 0 tractor adjusted this value to 45 years to account for the Note: Number of work zone days required to complete 5 miles of two lanes.

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60 Table C3. Production and cost factors for various lane closure duration. Lane Closure Number of Lanes Production Cost Factor** Duration Open During Closure Factor* 7-hour/day 1 3 1.05 10-hour/day 1 1 (Normal) 1 16-hour/day 1 0.5 1.15 24-hour/day 2 0.25 1.25 * Project completion time = production factor times normal completion time ** Contractor costs = cost factor times contractor cost under normal completion schedule 16-hour/day lane closure (only 1 lane open during closure). 24-hour/day lane closure (2 lanes open during closure). Figure C1. Pavement life-cycle strategies for The weekend closure is not considered a feasible option Alternative 1. due to lack of alternative routes to handle the heavy traffic on this segment. Using data from similar projects, the contractor deter- strategies are planned based on the expected deterioration mines the project completion time based on the productiv- trends of each pavement type in service. ity rate of 10-hour lane closure. The contractor develops production and cost factors to account for the effect of var- Step 3. Compute Life-Cycle Costs ious lane closure strategies on project completion time and costs, respectively (see Table C3). The contractor then conducts LCCA using FHWA Real- Cost. The undiscounted direct costs for various life-cycle activities of alternatives are presented in Figure C1 through Contractor Selection Process Figure C5. The direct costs are calculated for 10 lane-miles, The contractor follows the agency's process for pavement- while the user costs are calculated for 10-hour lane closure of type selection. The key steps are summarized as follows. In this two lanes in a 5-mile work zone. example, it is assumed that there will not be any non-economic Table C4 summarizes the NPV of various alternatives risks associated with the agency-specified pavement types con- obtained from the probabilistic analysis. Alternative 4 has the sidered in the selection process. Therefore, the steps involving lowest life cycle costs, followed by Alternative 5 and Alterna- the evaluation of alternatives using noneconomic factors and tive 3. Table C5 presents the summary of estimated user costs of the alternative preference screening matrix are not required. all alternatives obtained from the probabilistic analysis. These estimates are based on the 10-hour lane closure schedule and associated project completion schedule. Alternative 3 has the Step 1. Identify Feasible Alternatives for lowest user costs, followed by Alternative 4 and Alternative 2. the Project Based on both life-cycle costs and user costs, the contractor The contractor identifies the following alternatives feasible considers Alternative 4 as the preferred pavement type. for this project: Alternative 1 (conventional). Alternative 2 (conventional). Alternative 3 (long-life). Alternative 4 (long-life). Alternative 5 (composite). Step 2. Develop Pavement Life-Cycle Strategies The contractor performs structural designs and identifies life-cycle strategies for each alternative (see Figure C1 through Figure C5). The contractor takes the performance criteria into Figure C2. Pavement life-cycle strategies for account in developing life-cycle strategies. The intervention Alternative 2.

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61 Figure C3. Pavement life-cycle strategies for Alternative 3. Rehab 1* 5 years life $820,000 to $902,000 Figure C4. Pavement life-cycle strategies for Figure C5. Pavement life-cycle strategies for Alternative 4. Alternative 5. Table C4. Life-cycle cost estimates of feasible alternatives. Alternative Alternative Alternative Alternative Alternative Statistics 1 2 3 4 5 Mean NPV $7,670,000 $7,270,000 $6,920,000 $6,540,000 $6,860,000 Minimum NPV $6,700,000 $6,740,000 $6,370,000 $6,470,000 $6,550,000 Maximum NPV $8,780,000 $7,940,000 $7,790,000 $6,780,000 $7,240,000 90th Percentile $8,210,000 $7,570,000 $7,270,000 $6,600,000 $7,040,000 Percent difference in 17% 11% 6% 0% 5% mean NPV (lowest) Note: The values in this table indicate direct contractor costs for constructing 10 lane-miles (two lanes in a 5-mile work zone section). Table C5. User cost estimates of feasible alternatives. Alternative Alternative Alternative Alternative Alternative Statistics 1 2 3 4 5 Mean NPV $372,000 $287,000 $271,000 $287,000 $330,000 Minimum NPV $312,000 $282,000 $246,000 $287,000 $323,000 Maximum NPV $441,000 $293,000 $315,000 $288,000 $338,000 90th Percentile $405,000 $290,000 $287,000 $287,000 $334,000 Percent difference in 37% 6% 0% 6% 22% mean NPV Note: The values in this table indicate estimated user costs for a 10-hour closure of two lanes of a 5-mile work zone section.

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62 Table C6. User cost estimates of different lane closure strategies. Lane Closure Production Daily User Costs for User Costs for the Entire Duration Factor Initial Construction Project Duration 7-hour/day 3 $4,010 $144,000 10-hour/day 1 $7,960 $287,000 16-hour/day 0.5 $394,190 $14,190,000 24-hour/day 0.25 $168,760 $6,075,000 Note: The values indicate estimated user costs for a 5-mile work zone section. Table C7. Agency's evaluation of proposed pavement type. Evaluation Factor Criteria Notes Overall technical feasibility Pass No issues are found. Initial (first costs) Pass Initial costs are high compared to other alternatives but feasible. Adequacy of structural designs Pass No issues are found. Adequacy of M&R activities Pass No issues are found. Annual maintenance costs 9% (out of 10%) Annual maintenance costs are low compared to other alternatives. Future rehabilitation costs 45% (out of 50%) The expected cost is low. Only one major activity is expected. User costs 18% (out of 30%) User costs of Alternative 4 are higher than those of Alternative 3 but acceptable. Future work zone disruptions 9% (out of 10%) The probability of future major intervention is low. Total score = 81% Life-cycle costs of Alternative 4 = $6,540,000 Adjusted bid score = $6,540,000/0.81= $8,074,074 Note: Total score = 81%; life-cycle costs of Alternative 4 = $6,540,000 (see Table C4); adjusted bid score = $6,540,000/0.81 = $8,074,074. The contractor also explored the possibility of using differ- Agency's Evaluation ent lane closure strategies for Alternative 4 only. The user cost estimates of different lane closure times are presented in Upon submission of the contractors' type-selection infor- Table C6. While the 7-hour lane closure appears desirable for mation, the agency evaluates the technical and cost feasibility of the proposals. Among the scheme of other components, the managing work zone traffic, this strategy is expensive for the agency evaluates the pavement type proposed by each bidder entire project duration. Similarly, although the 16-hour or using the criteria in Table C1. For the pavement proposed in 24-hour lane closures would provide for shorter project com- this example, the agency's evaluation is shown in Table C7. pletion time, these strategies will result in longer queues, The agency finds Alternative 4 acceptable for this project excessive delays, and higher user costs. Therefore, the con- for the following reasons: tractor considers 10-hour road closure as the most feasible alternative. It has lower life-cycle costs than other alternatives. Should the contractor select 10-hour road closure for Although its first costs are higher than those of other alterna- this project, the agency is expected to use the daily user tives, it will not adversely affect on the overall system needs. cost value ($7,960) as lane rental fee for the entire project Because its expected service life is 45 years, the pavement duration. will require minimal interventions apart from scheduled maintenance. Its expected costs of scheduled maintenance are lower than Step 4. Selection of Preferred Alternative those of other alternatives. The contractor proposes Alternative 4 and 10-hour daily lane closure as the preferred pavement type and the work Because no or fewer major interventions are required, it zone strategy in the bid. will result in fewer traffic disruptions.