Wheelin' and dealin'

Negotiating in the highway industry is receiving more attention as innovative contracting continues to thrive; warranties, design-build projects starting to become the choice of state DOTs

Highway Construction Article December 28, 2000
Printer-friendly version





They’ll take your word for it, as long as it’s spelled w-a-r-r-a-n-t-y


They’ll take your word for it, as long as it’s spelled w-a-r-r-a-n-t-y.


Innovative contracting is changing the job process of the roadbuilding industry. Some are popular, a few are not and a fraction are currently being debated. The use of warranties is creating a forum of pros and cons. It’s the way of doing business for states like Michigan, Wisconsin and Indiana, and several more DOTs may take on the trend in the near future.


"There are a number of states who have moved aggressively in the use of warranties. They like them and they’re probably going to continue to use them," Brian Deery, senior director of the highway division for the Associated General Contractors of America, told ROADS & BRIDGES. "And once a few states start using whatever the new contracting method is you often see other states kinda looking at it and saying, ‘Hey, that’s a good idea. Maybe we’ll try that.’"


But, according to Deery, contractors aren’t necessarily appreciating the effort.


The whole idea behind a warranty is guaranteeing the performance and quality of a road during a specific period of time. Most last five years, and if a problem does develop it’s the responsibility of the contractor to make any necessary repairs. Sound simple? Well, it gets complicated.


If a project calls for a warranty, the contractor has to go to a bonding company. Two bonds are needed: the payment bond and the performance bond. The latter covers the state if the contractor goes bankrupt in the middle of a job. In this case, the bonding company gaurantees they’re going to come in and finish the job. The payment bond gaurantees the contractor is going to make all payments to subcontractors and suppliers.


A bonding company will look at a contractor’s financial standing and assign a dollar value (i.e. $10 million).


"So the contractor’s bonding capacity really determines how much work he can get," said Deery. "If you’re tied up with a warranty for a whole bunch of years, you’re guaranteeing that you’re going to go back and redo the work if it needs to be redone. From a bonding company’s point of view, you have a financial commitment out there. It really limits the contractor on how much more he can go out and pursue."


And there’s only so much a contractor can control. Some states still design the asphalt or concrete mix and control how the project is constructed. Underground conditions, the weather and traffic loadings on the road are additional circumstances which make contractors leery about warranties.


"They have no control over certain things, and for that reason they’re not real anxious to offer a warranty," said Deery. "Pavement just doesn’t wear out in five years unless there’s some sort of latent problems that the contractor didn’t know about."


Deery also sees the price of construction rising if a contractor needs a bond for a warranty.


"A lot of states are debating if it’s really worth it," he added.


Everybody, however, wants a product which will last for a specified amount of time. For state officials and the motoring public, a warranty serves as a safety net, and five years of assurance is a soft demand.


"A five-year warranty is not expecting very much," Henry Rentz, director of the office of program administration for the Federal Highway Administration (FHWA), told ROADS & BRIDGES. "You would think even on a flexible pavement you would be able to get seven or eight years. A rigid pavement you would expect to get 20 years with some kind of rehabilitation during that lifespan."


Others believe innovative contracting could relieve any concerns contractors might have with warranties. For example, with a design-build project the contractor can assert control over what materials are used, how they are applied to the project and what alterations need to be done.


"I think that what you see in a lot of innovative contracting is an opportunity to bring (contractors) into the process before the bids," Gloria Jeff, FHWA deputy adminstrator, told ROADS & BRIDGES. "So when they are submitting their bid proposals they are going to say, ‘Here’s the process we think works and it is as good as, or better than, what you are proposing in your specifications.’ I think the innovative contracting options that we have make warranties a very real possibility because the principle concern of not having any control over the specifications has been lifted. The contractors now have the opportunity to determine the design specifications, therefore giving them input on the part they feel most out of control about."


But the afformentioned worries deal with warranties at the state level, not the federal. On Aug. 25, 1995, the FHWA published a rule to allow warranties as a regular federal-aid procedure. From that point on the FHWA allowed warranties on products that were under control of the contractor.


"A state couldn’t make just a general warranty," David Cox, FHWA senior engineer, told ROADS & BRIDGES. "They couldn’t say, ‘Well, we want to warrant this project against any and every possible defect.’ They had to specify a part of the project, and then it had to be a product a contractor had control over."


One certainty about innovative contracting is there’s never a lack of opinion when trying to decide on the best process. Design-build, A + B, lane rental, no excuse bonus, incentive/disincentive, the bid averaging method (BAM), liquidated savings, indefinite delivery/indefinite quantity and finance come from the same origin as warranties—all are relatively new and debatable.


Design-build


Design-build still receives criticism, but continues to gain acceptance. Making a strong case for the process is the I-15 reconstruction project in Salt Lake City. The 22-mile job, the largest design-build in the country, includes widening a six-lane highway to 10 and rebuilding over 100 bridges. In order to finish by the 2002 Winter Olympics, officials opted for design-build, which injects speed into extensive projects. Following traditional methods, the I-15 renovation would take eight years. As of September of this year, workers are on schedule to complete the task in 4 1/2 years.


Jobs can overlap with design-build. Designs can be drawn up for a portion of a bridge, construction can begin and, at the same time, blueprints on the next phase can be finalized. Design-build puts much of the control in the contractor’s hands, which in turn offers the freedom of innovation. An added positive is it allows the contractor to play to his strengths.


"We have approved somewhere in the neighborhood of 115 to 120 projects," said Rentz. "Out of several hundred thousand projects of federal aid across the country it’s not that widespread. It has to be a unique project."


Under the Transportation Equity Act for the 21st Century (TEA-21), the FHWA is required to develop regulations on design-build by June 2001. Outreach sessions which allowed public discussion of the pros and cons of design-build were wrapped up last month, and FHWA was expected to start the regulatory process at the beginning of the new year.


There is a general fear that larger contractors will take over the design-build circuit.


"Some contractors and designers feel the big contractors will take over design-build and they will be left out," said Rentz. "The smaller firms are still needed as subcontractors, but there’s that perception by the smaller contractors that they will not be able to participate."


Subjectivity also comes into play. With a design-build project, the low bidder doesn’t necessarily win the job. Each submitted plan is examined, weighed and given a certain percentage, which is then compared to the estimated price tag.


"There are very strong and mixed feelings in the industry about design-build," said Deery. "But I think you’re going to see a growth over the next five or six years."


A + B


One of the oldest forms of innovative contracting, A + B involves combining the estimated cost of the unit prices and the time involved. The lowest bidder doesn’t necessarily win the job. A contractor’s estimate can be a bit high, but the time frame could be shorter than the rest.


The more efficient contractor has an edge here, and there are usually incentives if the project is finished early. A + B projects tend to bring the best out of a builder. Because there is a set time limit on the job, contractors tend to assign their top workers.


Safety, however, becomes a concern. Even though the best are on hand, many are forced to work long hours, at night and on weekends.


"We found even when you count those bonuses for finishing early, the cost is about the same as a traditional bid," said Cox. "In a way it’s free. The job is finished much earlier at virtually the same price."


Lane rental


Lane rental is a component of innovative contracting usually used in A + B projects. How it works is the state charges the contractor for each day a lane is closed.


The method assures the motoring public that work will take place in a lane that is blocked off. The job requires extra effort from the contractor’s standpoint, thus carries the same safety issues associated with A + B. Most rentals take place in areas of high traffic volume, where it is important to move in and out as quickly as possible. The risks involved, however, intensify.


No excuse bonus


Another innovative contracting subtitle, the no excuse bonus is self-explanatory. There is no excuse. The date of completion is fixed and there will be liquidated damages if the date is not met.


Incentive/disincentive


If the project is finished early or if the quality of the product is superior to what is specified, an incentive is offered to the contractor. However, if the project fails certain quality checks or is late, there’s a disincentive.


Bid averaging method (BAM)


Perhaps the least popular among contractors, BAM is when the DOT throws out the high bidder and low bidder, averages the price inbetween and awards the project to whoever comes closest to the average.


"Contractors really don’t like it," said Deery. "They’re putting in what they think is a legitimate bid based on what it’s going to cost them for material, labor, profit and overhead."


Liquidated savings


A Florida concept the opposite of liquidated damages, which is what is charged to a contractor who runs over the contract time. The fine compensates the state for administrative costs. With liquidated savings, the state gives the contractor a bonus for finishing early because there’s no need for the extra administrative costs. The savings, however, usually doesn’t amount to much, and other incentives awarded for finishing early are quite a bit higher.


Indefinite delivery/indefinite quantity


This method is still in its infantile stage. Indefinite delivery/indefinite quantity is when a state says it wants a certain amount of, for example, paving done during the year. It deals with a certain geographical region, but there are no set dates for the jobs. The contractor is basically on call, so when there is a need for paving the state can mobilize them quickly without having to go through the bidding process.


Finance


Simply stated, finance (i.e. design-build finance) is when the contractor supplies some of the financing and gets reimbursed at the end of the project.


There’s a reason


Pushing the buttons of innovative contracting is a workforce reduction of the state DOTs. Engineers which have handled specific duties regarding contracts are being forced into early retirement, according to Deery, leaving DOTs with limited in-house capabilities.


"So they’re sorta farming out these duties," he said. "As much as they can give to the private sector they’re trying to do that.


"A lot of the contractors, particularly the smaller ones, are very uncomfortable with some of these things that really shift a lot of risk on the contractor and makes it very difficult for the smaller contractors to compete and stay in the market."


The FHWA, however, likes the innovative approach.


"We think there’s a lot of benefits with innovative contracting," said Rentz. "A way to do business is not the only way. We’re going to be seeing more and more different techniques of designing and constructing projects. We want to share practices, both good and bad."


About the author: 
Overlay Init