Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers (2013)

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57 If an agency’s objective in using performance specifi cations is to enhance quality, pro- mote innovation, and/or shift performance risk to the industry, traditional design- bid-build (DBB) delivery with a fi xed-price, sealed-bid procurement process may not always offer the best approach to selecting a contractor and delivering a project. This chapter discusses various alternatives to the traditional process in the context of how they can be used to help advance an agency’s performance objectives and the goals of rapid renewal. PERFORMANCE SPECIFICATIONS AND PROJECT DELIVERY The delivery approach selected for a project largely drives the extent to which an agency can allocate responsibility for performance to the contractor. As illustrated in Figure 6.1, the contractor’s responsibility for a project’s performance under DBB does not extend beyond the end of construction or, possibly, a limited (1-year) materials and workmanship warranty. In contrast, a design-build-operate-maintain (DBOM) 6 PROJECT DELIVERY AND PROCUREMENT CONSIDERATIONS Chapter Objectives This chapter addresses • How the selection of performance requirements can vary with project delivery method; • Various alternatives to the traditional fi xed-price, sealed-bid procurement process and the potential advantages they offer; and • The use of quality and other performance-related pay adjustment strategies to moti- vate contractor behavior.

58 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS contract inherently exposes the contractor to more performance risk as the contractor assumes responsibility for design, construction, and the repair and rehabilitation mea- sures required over the contract’s maintenance period (usually one life cycle or longer). The degree of performance risk allocated to the contractor under design-build (DB) and warranty projects falls between the two extremes. When deciding to use a performance specification, the agency must consider how a particular delivery approach and its inherent conventions regarding design and postconstruction maintenance affect the selection of performance parameters and the setting of limits or thresholds commensurate with the degree of performance risk to be assumed by the contractor. For example, specifying high-level performance require- ments on a DBB project is inappropriate as it would require the contractor to assume risk for items over which it has minimal control or influence. At the other end of the project delivery spectrum, a DBOM project primarily favors the selection of high-level performance parameters that focus on user needs (e.g., safety, comfort, accessibility), as materials and construction requirements represent unnecessary constraints on a contractor required to assume whole-life performance risk. Other variants of the four delivery approaches discussed in this chapter (e.g., design-build-finance-operate and maintenance contracts) are not specifically addressed in these guidelines or in the companion guide specifications. However, the parameters Figure 6.1. Risk allocation and contract delivery.

59 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS used to monitor and evaluate the contractor’s performance in maintaining the asset over time would be comparable to those in the DBOM case. Another project delivery approach receiving considerable attention as of late is construction manager at risk (CMR). In the case of CMR, although the contractor may be able to provide some early input on design and constructability issues, the performance specifications are not fundamentally different from those implemented under DBB. Design-Bid-Build Design-bid-build (DBB) is the traditional project delivery system through which an agency contracts with separate entities for design and construction services. Given this separation of services, a DBB project presents few opportunities for a contractor to provide input on design and constructability issues. Specifying high-level performance parameters under this approach is therefore inappropriate, as that would require the contractor to assume risk for items over which it has minimal to no control. Implement- ing a performance specification under the DBB approach primarily involves end-result parameters to address specific project goals (e.g., use of a smoothness requirement on a pavement project). The goal of such a performance specification is not to monitor and evaluate a product’s performance over time (as may be the case for a performance warranty or a specified operations and maintenance period) but to • Focus on material properties and construction practices deemed to have the most effect on long-term performance; and • Incorporate financial incentives/disincentives to promote enhanced quality or durability. Design-Build Design-build (DB) is a delivery system in which the agency retains a single entity to design and construct a project. In contrast to DBB delivery, a DB project offers more opportunities for a contractor to provide input on design and constructability issues, especially if innovation is an agency goal. Several of the more prescriptive materials and construction requirements typically included in a DBB specification can there- fore be eliminated or relaxed under DB to extend more flexibility to the contractor. However, by relieving the contractor of further responsibility for facility performance at the end of construction (beyond the standard materials and workmanship war- ranty), the agency is still limited to an acceptance plan based primarily on end-result properties similar to those included under the DBB approach. In exchange for providing more design freedom and for reducing its typical inspec- tion and testing activities to accommodate an accelerated construction schedule, the agency may tighten up the acceptable tolerances under DB to help ensure that schedule or cost considerations do not compromise quality. Performance Warranties Performance warranties are used to guarantee the integrity of a product and the contractor’s responsibility to repair or replace defects for a defined postconstruction period (e.g., 5 to 10 years). Warranties may be applied to both DBB and DB projects

60 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS to similar effect, assuming that the agency provides sufficient latitude to the contractor with respect to the design and construction of the warranted project element(s). A warranty allows the agency to expand the performance measurement strategy used under DBB or DB to include functional parameters that monitor and evaluate the actual performance or condition of the project over time. The protection against defec- tive work and premature failure offered by the warranty allows the agency to eliminate or relax some of its standard materials and construction requirements if doing so can help save time and/or minimize disruption in the interest of rapid renewal. Given their limited duration, short-term performance warranties primarily protect the agency against only premature failures. Although a warranty provision of suf- ficient duration to address long-term performance can be developed, bonding issues may limit the practicality of implementing such a specification. Design-Build-Operate-Maintain Under DBOM a single entity designs, constructs, operates, and maintains a project for a specified period (usually the life cycle of the project element or longer). Note that the DBOM approach can be extended to include private-sector financing as well. The assignment of postconstruction maintenance responsibility and, with that, allocation of whole-life performance risk to the contractor allows the agency to shift its emphasis from the end-result acceptance properties relied on under the DBB and DB methods to postconstruction measurement strategies that evaluate the actual per- formance or condition of the facility over time. Given the degree of performance risk assumed by the contractor, performance specifications implemented under a DBOM approach should provide contractors maximum flexibility with regard to design, con- struction means and methods, and the repair and rehabilitation measures that will be required over the contract period. Few, if any, materials and construction requirements should be included in the measurement strategy to avoid undermining the effectiveness of the risk transfer to the contractor. To motivate the contractor to provide high-quality construction and to perform preventive maintenance in a timely and efficient manner, the contract term should be of sufficient duration to expose the contractor to the consequences of its actions (i.e., allow the contractor to enjoy the profits that may stem from high-quality work and to suffer losses resulting from poor workmanship and planning). Ideally, this concept will lead not only to significant efficiency gains, but also to technological innovation. PROCUREMENT CONSIDERATIONS The traditional fixed-price, sealed-bid procurement process may not always offer the best approach to selecting a contractor. Various alternatives to the traditional process are therefore discussed in this section in the context of how they can be used to help advance project goals. As summarized in Figure 6.2, some methods may be more ap- propriate than others given the level of performance requirements and delivery method selected for a project.

61 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS To the extent possible, the procurement process should be tailored to align with the performance specifications and delivery method selected for a project. In this sense, the performance specifications, delivery method, and procurement strategy can act as complementary components of an overall performance contracting system designed to achieve a project’s goals (see Figure 1.2). Cost-Based Procurement Options Traditional Low-Bid Approach Most highway construction contracts are awarded to the contractor that submits the lowest responsive bid. This low-bid procurement approach has long-standing legal precedence, promotes open competition, and provides the lowest initial price that responsible, competitive bidders can offer. Furthermore, awarding only on the basis of price and responsiveness introduces relatively little subjectivity into the evaluation and selection process. In general, this lowest-price-responsive-proposal approach is most appropriate for small to medium-size projects with a relatively standardized design and for which no innovation or time savings are sought. To help achieve performance goals, the agency can link its prequalification process to the contractor’s ability to meet certain minimum prescribed requirements related to the contractor’s quality management systems, per- sonnel, and past performance on similar projects. However, in the interest of rapid renewal, the agency may also wish to consider factors such as the construction schedule, traffic disruption, and quality enhancements in a competitive framework. By incorporating these factors into the procurement pro- cess, the agency can provide bidders with an incentive to optimize their bid prices against rapid renewal goals. For example, if construction duration is critical, cost-plus- time bidding can provide the optimum trade-off between cost and time. Figure 6.2. Procurement strategies versus delivery approach and performance requirements.

62 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS Cost-Plus-Time Bidding Cost-plus-time (A + B) bidding uses a cost parameter (A) and a time parameter (B) to determine a bid value. The cost component (A) is the traditional bid for the contract items and is the dollar amount for the work to be performed under the contract. The time component (B) is the total number of calendar days required to complete the project, as estimated by the bidder, multiplied by an agency-determined daily road user cost (RUC) to translate time into dollars: A + B(RUC) = total bid. The total bid value is used only to evaluate bids. The contract amount is based on the bid price (A), not the total bid value. The number of days bid (B) becomes the con- tract time. Note that the lowest combined bid may not necessarily result in the shortest B time. A + B bidding relies on the contractor to provide the optimal combination of cost and time. Multiparameter Bidding To incorporate the value of quality in the bidding and contractor selection process, the agency may extend the A + B bidding concept to include an additional cost parameter (C) related to quality. The total bid value is used only to evaluate the low bidder. The contract amount is based on the bid price (A), not the total bid value (A + B + C). To incorporate a quality parameter into the bidding process, NCHRP Report 451 (Anderson and Russell 2001) suggests using the multiparameter equation in the form of (A + B)C, where C is a quality factor used to adjust the contractor’s bid based on anticipated or bid quality levels. For example, if the agency collects contractors’ his- torical quality data, this past performance on agency projects could be used with the pay factor equation to determine the quality factor for bid evaluation. Calculating the quality factor as the inverse of the pay factor equation (1/PF) reduces bids from contractors with high quality levels on past projects (i.e., pay factors exceeding 100%) while increasing bids from contractors with poor quality on past projects (i.e., pay factors less than 100%). This approach thus rewards contractors for higher levels of quality delivered on previous projects for the agency. Note that under this approach, the C quality parameter is used only to determine the low bidder. Once the project is under way, the agency assesses the quality level actually achieved on the project for payment purposes. Alternatively, the agency can allow contractors to estimate and bid their own C quality value. The contractor will then be held to achieving the quality level bid or risk receiving reduced payment. This approach can be implemented by applying a factor of Cactual/Cbid to the results of the pay factor equation. If the contrac- tor exceeds the quality level bid (Cactual/Cbid >1), payment would be increased. If the contractor could not meet the quality level bid (Cactual/Cbid <1), payment would be decreased. Design and Bid Alternatives The multiparameter bidding concept can also be used to evaluate alternative designs and alternative bids proposed by contractors (e.g., asphalt versus concrete pavements, steel versus concrete bridges). In this case, C represents a life-cycle cost adjustment factor that the agency can use to help ensure that the alternate proposal will not impair the service life and maintainability of the project (similar to how value engineering

63 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS proposals may be used after contract award). Alternates can be used to allow competi- tion to drive the most cost-effective material choice or design and to shift some design responsibility to the industry, particularly if the agency is not otherwise authorized to use design-build. Potential advantages and disadvantages associated with using alter- nates, as well as the other cost-based procurement methods discussed in this section, are summarized in Figure 6.3. Best-Value Procurement Cost-based methods have the advantage of being the most similar to the highway industry’s traditional low-bid approach to procuring construction contractors. How- ever, if the agency wishes to transfer more performance responsibility to the industry (e.g., through design-build delivery or warranty provisions), those approaches may not offer sufficient flexibility with regard to evaluating technical factors, such as inno- vation and quality enhancements, which do not readily lend themselves to a strict first- cost or life-cycle cost comparison. Best-value procurement allows agencies to consider key technical factors, in addi- tion to price, in the bid evaluation process to help select a capable, qualified contractor that understands the agency’s performance expectations for the project. By aligning the nonprice technical factors included in the solicitation documents to the project goals and performance specifications, the agency can create a more transparent (albeit still somewhat subjective) way to consider performance goals in the contractor selection process. Evaluation System Planning Early in the project development process, the agency personnel assigned to the project should begin to outline a plan for evaluating the proposals submitted. The evaluation and selection plan should describe the evaluation factors and their relative importance (weighting), proposal rating guidelines, and other information critical to maintaining the integrity and fairness of the selection process. Adherence to this plan will help the agency defend its selection decision in the event of a bid protest. A key element of evaluation system planning is identifying the evaluation crite- ria that will be used to assess the ability of proposers to meet the needs and goals expressed in the project’s performance specifications. For example, although not a complete guarantee of quality and/or innovation, the experience of consultants and subcontractors in relevant specialty areas can often serve as an indicator of the pro- posers’ ability to successfully complete the project or a particular portion of the work. Such information can be obtained either through a request for qualifications (RFQ) or a prequalification process. The technical proposals submitted in response to a request for proposal (RFP) can then provide further indication of the proposers’ understanding of the work and ability to meet the performance specifications. For example, if the per- formance specifications will transfer construction quality management responsibility to the contractor, the RFP can require proposers to address their general approach to quality management in their technical proposals. By evaluating and scoring these approaches, the agency can continue to exert some control over the approach used to ensure quality.

64 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS Figure 6.3. Comparison of cost-based procurement options. - equipment duraon) -

65 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS The agency should begin to think about evaluation factors soon after identifying the project goals and preparing the performance specifications. Project goals typically fall into the categories of time, budget, and quality, and evaluation factors generally follow suit, falling into the categories of schedule, price, and technical criteria. Evalu- ation factors may be set up on a pass–fail basis, in which the proposers have to meet certain minimum prescribed requirements to be responsive, or on a more qualitative, best-value basis, in which evaluators rate the proposals according to the evaluation criteria included in the RFP. Either way, to be effective, each criterion should be defined in terms of some measurable standard against which responsiveness can be measured. Evaluation factors should be designed to solicit information that can support meaningful comparison and discrimination among competing proposals. When identi- fying these factors, the agency should consider the time and effort that proposers will have to invest in preparing responsive proposals and that agency personnel will invest in evaluating the information. Implementing a Best-Value Selection Process Several options are available for evaluating and selecting a contractor (e.g., adjusted bid, weighted criteria, trade-off analysis). Although all are viable approaches, the adjusted bid method is the most common approach for first-time users. (Caution: Some states may specifically prohibit the use of a best-value process or restrict the selection process to a specific method.) Regardless of the exact selection mechanism used, the RFP must clearly establish and communicate a transparent process by which the agency will evaluate proposals and select the successful contractor. A general process for implementing best-value procurement is described in this section. For additional information, refer to NCHRP Report 561, Best-Value Procurement Methods for Highway Construction Projects (Scott et al. 2006). Negotiated Procurements for DBOM Given the long-term nature of most DBOM contracts, the best-value procurement pro- cess is often supplemented with (if not supplanted by) complex financial negotiations, particularly if the private-sector partner is financing all or part of the initial construc- tion. Typically, the agency identifies a fixed O&M term (e.g., 30 years), for which con- tractors propose an annual payment schedule or cash flow curve. If construction-phase services were also financed by the contractor but will not be compensated through toll revenue, the payment schedule may also include repayment of the initial construction and financing costs. Note that in preparing its proposed payment schedule, the contractor will want to ensure that the project will provide a reasonable return on its invested capital, net of design and construction, operation and maintenance, various reserve or coverage funds, and other expenditures. A positive net present value (NPV) of the net proceeds from the project represents a viable opportunity for the contractor, as does a project for which the internal rate of return (IRR) on invested capital exceeds that which can be obtained by investing funds elsewhere.

66 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS The following discussion identifies the general steps involved in implementing a best-value procurement process. For further details, refer to NCHRP Report 561, Best-Value Procurement Methods for Highway Construction Projects (Scott et al. 2006). 1. Develop qualifications, technical, schedule, and cost evaluation criteria. The nonprice factors and their maxi- mum point values or weightings should align closely with the goals and the actual value that the criterion brings to the project. 2. Devise a scoring system to evaluate the proposal’s responsiveness to the evaluation criteria established in the RFP. If using an adjusted bid approach, divide price by the total score to determine the adjusted bid. If using a weighted criteria method, score and sum the technical factors and price to determine the total score. 3. If using a two-phase selection process, prepare and issue an RFQ. (Otherwise, proceed to Step 7.) An RFQ con- stitutes the first phase of a two-phase procurement approach. The purpose of the RFQ is to narrow down the number of interested proposers to a short list of three to five qualified and capable firms that may then respond to the RFP. The short list is based on an evaluation of the statements of qualifications (SOQs) that prospective contractors submit in response to the RFQ. The RFQ is not intended to solicit specific ideas on how each firm will meet the performance specifications. Rather, an RFQ process should be used to identify firms capable of effectively delivering the project, reserving the evaluation of specific design and construction approaches for the RFP stage. The RFQ solicitation should include the following items as a minimum: • Project description; • Statement of project goals and objectives; • Procurement schedule; • SOQ submittal requirements; • Explanation of the SOQ evaluation process, including evaluation factors and their relative importance, and the short-listing process; • General discussion of the RFP, to the extent this information is known at the time of RFQ issuance; • Other pertinent provisions (e.g., protest procedures, state and department rights and disclaimers, and equal opportunity requirements); and • Forms required for the SOQ. 4. Receive SOQs. A Closer Look: Implementing Best Value

67 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS 5. Evaluate SOQs as described in the evaluation plan and determine which are fully responsive in meeting the qualifications criteria. Criteria may be evaluated on a pass–fail basis or using a point score to determine respon- siveness. While project-specific needs and goals will drive the exact technical factors included in an RFQ, typical evaluation factors address the following: • Proposer’s understanding of the project and issues; • Key personnel experience and qualifications; and • Proposer’s resources and ability to handle a project of similar size and complexity. 6. Announce the short list of fully responsive SOQs. 7. Publish the RFP for the short-listed competitors. If required qualifications were previously established through an RFQ stage, the RFP should focus on the approach proposers will take to complete the project. To the extent possible, the RFP should not reevaluate factors that were already evaluated at the RFQ/SOQ stage, unless such information has undergone significant changes in the interim. In the case of a single-phase procurement, the RFP should address both qualifications and the technical approach to the project. The RFP solicitation should include the following items as a minimum: • Scope of work, plans, and specifications; • Procurement schedule and process; • Project goals and objectives; • Required qualifications (if an RFQ step was not used); • Proposal submittal requirements (for both the price and technical proposals); • Explanation of the proposal evaluation process, including evaluation factors and their relative impor- tance, the evaluation method, and the selection process; • Method to carry forward the SOQ qualifications ranking/scores into the final evaluation; • Other pertinent provisions (e.g., protest procedures, state and department rights and disclaimers, and equal opportunity requirements); and • Proposal forms. 8. Evaluate the submitted proposals against the RFP requirements and determine which are fully responsive. The agency may require that the proposers submit separate technical and price proposals. Open the technical pro- posal first and evaluate it for responsiveness, then score the responsive proposals in each technical area. Then open the price proposals to determine their responsiveness to the pricing requirements. 9. Eliminate any nonresponsive proposals. continued

68 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS 10. Roll up evaluation results and determine the total point score for each responsive proposal. At this stage, the department may issue a request for clarification to individual proposers, schedule oral presentations, or hold discussions with proposers to clarify or verify certain aspects of the proposal. The results of this communication will be factored into the evaluation. 11. Compute the final scores and select the proposer offering the best value to the agency. For adjusted bid, the following formula may be used: AB = P/T where AB = adjusted bid, P = project price, and T = technical score. Award to ABmin For weighted criteria, the following formula may be used: TS = W1S1 + W2S2 + … + WiSi + W(i + 1)PS where TS = total score, Wi = weight of factor i, Si = score of factor i, and PS = price score. Award contract to the proposer that earned the highest total score. The price scores are typically normalized against the lowest price. The adjusted score calculation is simple and easier to implement. The weighted criteria can be more complex to implement but allows greater flexibility in determining the relative importance of price versus various other evaluation criteria. For example, if innovation is a project goal, higher weights could be assigned to technical criteria than to price. Alternatively, if the agency is faced with a tight budget, price can be given the higher weight, encouraging technical approaches that will reduce costs. A Closer Look: Implementing Best Value (continued)

69 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS The capital expenditures identified in the cash flow curve should align with expec- tations regarding the long-term performance of the proposer’s technical approach as it relates to both the design and initial construction, as well as the maintenance and rehabilitation scheduled for the operations period. The likely differences in the techni- cal approaches offered by different proposers will preclude a direct comparison of the corresponding payment curves. For example, one proposer may plan for a large initial capital investment with minimal future outlays, while another may propose a lesser design for the initial construction to be followed by a larger investment in the future. To evaluate and compare the payment schedules offered by different proposers, one approach is to calculate the proposed cash flow on an NPV basis to determine which proposal offers the best value to the agency. Note, however, that NPV calcula- tions depend on assumed future inflation rates on costs and interest rates on debt. Given the time value of money, results beyond 20 years should be viewed with caution when assessing the risk associated with such projects. INCENTIVE STRATEGIES To be most effective, a performance specification should motivate industry to strive for excellence in performance (which for a rapid renewal project likely entails optimizing construction efficiency and providing quality workmanship, with minimal traffic dis- ruption). Achieving this objective often requires developing and structuring a payment mechanism that encourages and rewards superior performance for key performance parameters while assessing penalties for noncompliance. In developing a payment mechanism, the agency must strike a balance between value for money and effective motivation of the contractor to prevent or correct sub- standard performance. To achieve this balance, the cost of incentives must be weighed against the benefits of enhanced performance and the risks of a possible failure to the agency. • How much is the agency willing to pay to achieve a level of performance beyond the minimum prescribed? • Which performance parameters, if any, should be tied to incentives/disincentives? • Does the incentive strategy align with the payment conventions associated with the chosen project delivery method? • Have the pay adjustments been designed in a manner that will discourage distortions or behaviors that run contrary to the agency’s ultimate objectives? • Are there alternatives to monetary incentives (e.g., extension of an O&M term)? Considerations Regarding Pay Adjustment Strategies

70 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS Quality-Related Pay Adjustment Factors If measurements indicate that the facility does not comply with the performance require- ments, the specification should describe the reconstructive work or remedial action that the contractor must perform to meet the performance requirements. If, however, the nonconformance falls within an allowable tolerance, the specification may pro- vide the contractor the option of forgoing the repairs in return for accepting reduced payment. The required remedial action—or, alternatively, the pay adjustment—should reflect the severity of the nonconformance. Application of quality- or performance-related pay adjustment systems is gen- erally more evolved and prevalent for pavements than for other highway discipline areas, such as bridges and earthwork. Nevertheless, even for pavements, no uni- versally accepted method for calculating quality-related pay factors has been estab- lished. As discussed further in Framework for Developing Performance Specifications, Chapter 2, one approach proposed for use in highway construction entails develop- ment of performance-related specifications (PRS) in which mathematical models are used to perform a life-cycle cost (LCC) analysis of the as-constructed facility. More common, however, are statistically based sampling and testing plans that consider the measured variability of the product to determine pay factors. Time and Other Performance-Related Incentives Aside from such quality adjustments, incentives can also be used to help achieve other rapid renewal goals, such as accelerated completion and reduced disruption, as well as goals established for environmental compliance, public relations, and public and worker safety. In developing incentive amounts, the agency should keep in mind that the rate should be attractive enough to entice the contractor to achieve the desired result. The determination of this amount is rarely an exact calculation, and judgment is often necessary. This is particularly true for areas with less tangible—or less quantifiable— benefits, such as improved public relations and environmental compliance. Incentive payments for other areas, such as early completion and safety, have more established (albeit still somewhat subjective) calculation techniques. For example, road user costs typically factor heavily in the determination of an incentive program for early comple- tion. Similarly, user costs can also be used to generate incentives related to maintenance and protection of traffic, particularly if road or lane closures are contemplated. Safety incentive fees generally relate to reduced accident costs, with appropriate indices and indicators of impacts available from the insurance industry. Pay Adjustments and Contract Delivery The payment conventions and risk allocation inherent in various project delivery approaches also have a large bearing on the structure of incentive strategies used to influence contractor behavior. For example, the unit-price basis of DBB contracts makes them particularly well suited to pay factor adjustments that address end-of-construction quality. Conversely, the postconstruction responsibilities included in a DBOM contract should largely eliminate the need to apply such adjustments at the end of the initial construction phase. However, such contracts may include complex penalty and reward systems to address the postconstruction operation and maintenance of the facility.

71 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS DBB and DB DBB projects are generally bid and measured on a unit-price basis. That makes the application of pay factors, developed using either predictive models or statistically based acceptance procedures, relatively straightforward. In contrast, DB contracts are typically awarded on a lump-sum basis, making them less amenable to pay factor adjustments tied to quantities and unit prices. Therefore, to apply a similar pay adjust ment process to a DB contract, the agency may wish to require in the RFP that proposers submit a breakdown of quantities and unit prices for each work item subject to pay adjustment. During the construction phase, the agency can then monitor and measure the associated material quantities, just as they do on a DBB project. Warranties Warranty projects generally do not need to include quality-based pay adjustments or incentives for certain construction acceptance criteria, such as initial pavement smooth- ness, if the agency will be monitoring those criteria during the warranty period. How- ever, the agency may decide to apply pay factors to end-of-construction acceptance properties that will not otherwise be addressed as part of the warranty evaluations. DBOM The payment terms in DBOM agreements tend to be more complex than other con- tract types, particularly if the contractor finances certain front-end costs of the project (e.g., planning, design, construction) that are to be recouped through toll revenue or periodic payments from the agency during the O&M phase of the agreement. However, even without a private financing component, the payment mechanism used under DBOM is critical to the successful transfer of whole-life performance risk to the contractor. In any case, to ensure the contractor’s motivations remain aligned with the project goals, the performance requirements and associated payment mechanisms should be structured in a manner that provides clear economic incentive to the contractor to perform to the required standards and prevent and correct service failures. This can be accomplished through a system of monetary deductions for noncompliance (or bonuses for superior performance) and assessment of lane rental fees (or the like) for taking lanes out of service. For example, during the O&M phase of a DBOM project, the contractor typically receives a periodic payment (sometimes referred to as an availability payment) related to its maintenance obligations. To be entitled to the full payment, the contractor must ensure that the facility complies with the specified performance requirements. The payment remains the same as long as the required per- formance levels are met. Thus, the contractor may have to carry out a large amount of physical work to meet the required performance levels some months and very little work other months. If the agency’s goal is to receive high initial construction quality, the pay adjustment system can be used to make it cost-prohibitive for the contractor to provide poor initial quality at the risk of incurring penalties and lane rental fees to correct service failures during operation.

72 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS Perhaps the simplest way to account for performance deficiencies is to apply a straight monetary deduction to the contractor’s periodic payment. Alternatively, agen- cies can use a two-step process in which the contractor incurs a specified number of penalty points for each failure, and the accrued points are translated into a monetary deduction. In that case, deductions may not start until a threshold number of points is exceeded. Under either approach, if performance deteriorates below a certain level, other nonfinancial means can be implemented to compel the contractor to improve per- formance. They range from increased oversight to termination for breach of contract. To establish an appropriate magnitude for the payment adjustments (and/or penalty points), agencies should consider the following factors: • Importance of a particular parameter to the agency; • Extent to which the safety of the public is compromised; and • Incidence and persistence of a particular noncompliance item. In addition, adjustments may be made for the contractor’s failure to respond to performance deficiencies in the prescribed time frame. Positive adjustments can also be made to account for greater than expected usage of the facility by heavy vehicles, given their disproportionate effect on service life. Similar to warranties, the contractor’s postconstruction responsibilities should eliminate the need for quality-based pay adjustments at the end of the initial construc- tion phase. However, if timely construction completion is an issue, the agency may choose to apply incentives or disincentives to the completion of the initial construc- tion phase of the contract. Alternatively, the structure of the payment terms for the maintenance phase of the contract may also be used to inherently reward or penalize the contractor for early or late completion. By not beginning the scheduled periodic payments until after issuance of a construction completion certificate, and not adjust- ing the overall contract period (i.e., construction plus maintenance phase) as a result of the early or late completion of the initial construction phase, the contract in effect imposes a penalty for late completion and a corresponding bonus for early completion.