Senior Road Executives Programme 2013 PerformanceBased Road Contracting

Senior Road Executives Programme 2013 Performance-Based Road Contracting A New Approach To Road Network Management Kulwinder S Rao Senior Highway Engineer, GTIDR kulwindersrao@worldbank. org

Content • What is a Performance Based Contract ? • Why introduce Performance Based Contracts? • Performance Based Contract Concepts • Types of Contracts • Practical Application of PBCs • Issues to be considered • Final Word 2

Traditional Road Contracts o “Ok, tell me what to do and how to do it” – Risk on the owner to design, specify, and control the work – Price driven approach- Lowest price Follow their Recipe! o Use Recipe or M&M specifications – Material to be used (e. g. Polymer modified bitumen) – Method (required processes) 3

What is an Output and Performance Based Road Contract (OPRC)? q “Tell me what you want, but not how to do it” “the Contract…. to perform the services to be provided by the contractor and to execute, complete, and maintain the Works” –WB OPRC document “an approach to contracting that provides disincentives, or both to the contractor to achieve performance standards or targets for measurable outcomes and sometimes outputs” -NCHRP (US) 4

OPRC- A different way of Road Management Road Agency Planning Design Physical Investment Build Contract Management Construction Supervision Contracts Financing Maintenance PMMR Transfer to owner Source: Y Kamhi 5

Content • What is a Performance Based Contract ? • Why introduce Performance Based Contracts? • Performance Based Contract Concepts • Types of Contracts • Practical Application of PBCs • Issues to be considered • Final Word 6

Why use Performance Based Contracts? Issues o o o o Challenges with quality or performance or both Limited resources, shrinking budgets Fast deteriorating infrastructure Higher User/Public expectations Frequent claims and variations Lack of expenditure stability Most risks with the employer 7

Why use Performance Based Contracts? Potential Benefits o o o Transfer risks to private sector Accelerated construction Fostering innovation Pay as performance Achieve fixed levels of service Ability to achieve expenditure stability – Avoids frequent claims and contract amendments o Do more with less – Reduction in contract administration requirements o Achieve life-cycle cost savings o Value for money 8

Value for Money Value of money= Change in Levels of Service Change in cost Better Value for Money if o The LOS remain the same and cost declines o The LOS improve for the same cost o The LOS improve and cost declines 9

Reported Cost Savings in OPRC as compared to traditional contracts o o o o Norway: 20– 40% Sweden: +/- 30% Finland: 30 -35% Holland: 30 -40% Britain: >10% Australia: 10 -40% New Zealand: 20 -30% USA: 10 -15% o Canada • Alberta +/- 20% • British Columbia: +/- 10% • Ontario: +/- 10% Source: Review of OECD contracts ( 2003) 10

Content • What is a Performance Based Contract ? • Why introduce Performance Based Contracts? • Performance Based Contract Concepts • Types of Contracts • Practical Application of PBCs • Issues to be considered • Final Word 11

Implementation Methodologies Design Bid Maintain Build Bid Transfer Bid Input Based contracts Maintenance Contracts (PMMR) DBT- Design & Build Contracts DB 0 MT - OPRC format 12

Setting and Measuring Performance Levels of Service(LOS) relates to all the facets of performance that a contractor is responsible for – Key business driver influencing all asset management decisions. – Cater to present and future demand – SMART – Cover Safety, Serviceability, and Sustainability – Auditable and easily Monitored “What gets measured gets done”. 13

Levels of Service q Usability of the Road. Four Overall Criteria Levels Groups q Road User Comfort. q Durability Measures. q Other elements. 14

Service Levels- Road Usability 1. Road is trafficable at all times. 2. No interruptions Usability of the Road 15

Service Levels- Road Comfort q Pavement Surface Defects • Potholes (max dimension< 150 mm), max no 5/km) • Cracks (<3 mm wide) • Rutting (max<20 mm, <10 mm in 5% area) • Edge failure q Shoulders (drop< 4 cm) ROAD SURFACE PROFILER: Calibrated equipment q Road Roughness 1. Max IRI 4. 0 m 2. Avg IRI 3. 0 m (2. 0 for single interventions) 16

Service Levels- Road Durability Threshold Deflection Value 0. 7 mm measured with FWD 17

Service Levels- Other Elements 1. Signaling 2. Road Safety Other Elements 3. Drainage Structures 4. Vegetation 5. Structures 6. Slopes 18

Performance linked Payment Mechanism Payment Schedule should ensure Value for Money Key considerations: • Clearly defined Payment Schedule • Keep the contractor interested in all contract phases • Balance income vs expenditure • Consequences for non-conformance • Guarantees • Contractual Deductions • Delay Damages • Payment Reductions 19

Asset Handing over ep aym ent Cost Examples of Payment Models anc Payment schedule Adv Value of deferred payment Cost curve Poor pavement (upfront rehabilitation work) 1 year overlay 1 year maintenance anc Cost ep aym e Adv 3 years maintenance Payment schedule Cost curve Good pavement maintenance works upfront 1 year overlay 3 years maintenance Time Asset Handing over 6 years maintenance nt 2 years rehabilitation 1 year maintenance Source: Y Kamhi Time 20

Risk Allocation q Equitable sharing of risk q Allocate risk to the party best able to manage the risk q Share some part of risk as an incentive to minimize this risk. 21

Risk Allocation- Example Design & Construction • Ground conditions • Construction risk • Quality risk Maintenance • Axle overload • Excess of projected number of vehicles Financial • Exchange rates) • Employer credit rating Political • Civil war / riots • Expropriation / nationalization Force Majeure • Floods • Earthquakes • Epidemic Employer/ Donors Contractor Source: Y Kamhi 22

Typical Guarantee Structure +3 months from SC. Notice to Proceed ~2 months before SC Pre Transfer Bond Performance Bon during Maintenance Phase Performance Security during Construction phase Tender Bond Substantial Completion 2 -3 Years +1 year from Date of handover from Transfer 23

Remember the balance… LOS Cost Risk 24

Content • What is a Performance Based Contract ? • Why introduce Performance Based Contracts? • Performance Based Contract Concepts • Types of Contracts • Practical Application of PBCs • Issues to be considered • Final Word 25

Types of PBCs… Many names for PBCs • Output and Performance Based Road Contract (OPRC- World Bank) • Performance based Maintenance Management Contract (PMMRWorld Bank) • Performance Specified Maintenance Contracts (PSMC- NZ, Australia) • Asset Management Contract (USA) • Contract for Rehabilitation and Maintenance (CREMA-Argentina) • Managing Agent Contract (UK) • Area Maintenance Contract (Finland, Ontario, Canada) • Engineering, Procurement and Construction Contract (EPC) • “Turnkey” Contract 26

Types of PBCs… Depending on scope of activities and asset addressed • Single activity (e. g. Lane marking) • Set of related activities (e. g. Rest Area) • Single asset (e. g. Bridge) Depending on coverage of the network • Corridor • Area wide 27

Types of PBCs… Hybrid Contract • Combination of unit prices and lump sum • Combination of method and performance specifications Phase linked • • Maintenance Contract Design Build Transfer (DBT) (with or without Warranty) Design Build Operate Maintain Transfer (DBOMT) Design Build Finance Operate Maintain Transfer (DBFOMT) • Concession with tolling rights 28

Types of PBCs… Concession DBOMT/OPRC Hybrid • Contract Duration • Innovation • Flexibility • Contractor’s Risks • Cost Savings PMMR Ad measurement (traditional) contracts Force Account Input Driven Outcome Driven 29

Content • What is a Performance Based Contract ? • Why introduce Performance Based Contracts? • Performance Based Contract Concepts • Types of Contracts • Practical Application of PBCs • Issues to be considered • Final Word 30

Major Civil Works in Liberia adopting Performance Based Contracting • • Red Light to Gbanga Road Gbanga to Ganta Road Cotton Tree Buchanan Road Monrovia City Streets Vai Town Bridge Caldwell Bridge Fuel Unloading Facility US$ 166 Million US$ 70 Million US$ 50 Million US$ 19. 6 Million US$ 18. 1 Million US$ 8. 3 Million US$ 11. 3 Million Plus Monrovia Port Concession (Private Investment US$ 120 million) US$ 450 million+ in a Post Conflict Fragile State 31

Liberia OPRC- Key features Long Term Contracts (DBOMT methodology) Length Rehabilitation Maintenance Periodic (KM) period (after maintenan Period Project name (including 6 Rehabilitation ce months period) mobilization) Monrovia to Gbarnga Lot 1 Gbarnga to Ganta Lot 2 180 69 36 months 18 months 7 years At the 8 th year of the project 8. 5 years At the 8 th year of the project Duration 10 years with handing over under agreed conditions 32

Liberia OPRC- Key features Single Intervention Contracts (DBT methodology) Project name Length (KM) Bokay Town To Buchanan Monrovia City Streets Rehabilitation Status Period (including mobilization) 57 25 months Completed on schedule 25 37 months Completed. Defect Liability Period of one year. Taking over under agreed conditions 33

Liberia OPRC- Key features Single Intervention Contracts (DBT methodology) Length Construction Time including mobilization 240 m 36 months Completed 18 months On schedule. Project name Vai Town Bridge Caldwell Bridge 120 m Remarks Defect Liability Period of one year. Taking over under agreed conditions 34

Results…… o Before o After Monrovia City Streets Cotton Tree To Buchanan Road 35

Results…… o Before o After Vai Town Bridge In Monrovia Red Light Ganta Guinean Border Road 36

And costs…… DBOMT DBT INPUT 37

Content • What is a Performance Based Contract ? • Why introduce Performance Based Contracts? • Performance Based Contract Concepts • Types of Contracts • Practical Application of PBCs • Issues to be considered • Final Word 38

Issues to be considered • Length of Contract term • Shorter vs Longer • Establishment of LOS • Costing • Overall linkage to Network LOS • Incentives and Disincentive • Usually focus is only on disincentives • Contractor Selection Criteria • Low Bid vs Best Value 39

Issues to be considered • Internal Agency Support • Inertia because of long history of Input contracting • Threat to jobs, wages or benefits • Training • Change in culture • Agency staff and contractor • Multi Year Funding Commitment • Safeguards • Clearing the ROW before signing of contract 40

Content • What is a Performance Based Contract ? • Why introduce Performance Based Contracts? • Performance Based Contract Concepts • Types of Contracts • Practical Application of PBCs • Issues to be considered • Final Word 41

Final word • PBCs represent a new paradigm • Based on increasing experience around the world, PBCs have much to recommend it • This approach is not panacea • But a valuable instrument in a road agency’s contracting toolkit Partnership and Trust are key to success! 42

Senior Road Executives Programme 2013 Thank you for your attention Kulwinder S Rao Senior Highway Engineer, email: kulwindersrao@worldbank. org The World Bank 43