Performance Based Contracting

More than 30 years of implementation of PBCs has resulted in a broad base of global experiences with PBCs and demonstrated their strengths across diverse environmental, economic, and engineering circumstances. Proponents of PBCs claim that they have the potential to significantly reduce lifecycle costs compared to traditional contracting approaches. The most frequently cited research on the efficiency of PBC versus traditional contracting modalities was done by Pekka Pakkala (2002, updated in 2007). The comparisons between PBCs and traditional contracting approaches in those studies need to be treated with caution, however, as both studies report potential savings rather than confirmed and proven savings based upon comparative analysis of the actual spending on PBCs and traditional civil works contracts. The research effort described in this report sought to carry out an evidence-based analysis of the cost-effectiveness of PBCs by undertaking a comprehensive ex post performance assessment of road projects and road assets from the viewpoint of evaluating different long-term road asset management strategies. In doing so, this research activity also attempted to answer the following question on adoption of PBCs as much as possible: Are PBCs actually leading to more efficient road asset management than traditional civil works/maintenance contracts?

This document provides an overview of the experiences with routine road maintenance groups (RMG) and routine road maintenance microenterprises (ME) in eight countries in Latin America (Colombia, Peru, Honduras and Bolivia), Asia (China, Nepal and Laos) and the Pacific (Kiribati). It was prepared by the World Bank as a reference document for other countries interested in introducing a similar approach, providing them with a description of the steps followed and approaches applied in different countries, and allowing them to better understand the different options available and the reasons for selecting any specific one.

The following chapter provides an overview of the experiences in the eight countries, describing the general characteristics of routine maintenance groups and microenterprises, and highlighting the similarities and differences between the countries. This is done by looking at the coverage of the RMGs and microenterprises in the different road networks, the maintenance activities carried out by them, the management of the RMGs and microenterprises by the entity responsible for the roads (including formation, training, procurement, supervision and payments), and the costs and financing of the RMGs and microenterprises. This section concludes with a table providing a full overview of the current status of the road maintenance groups and microenterprises in the eight countries.

The subsequent chapters provide more in-depth detail of the different experiences in the eight countries. In the case of Peru, the approach in the departmental and rural roads has been treated separately from that in the national roads, due to the very different nature of the microenterprises concerned in terms of their formation, activities, management and financing. Apart from the information regarding the current coverage, activities, management and costs, the case studies also provide a historical overview of the introduction of the approach and its replication and expansion over the years.

This document was prepared by Serge Cartier van Dissel, road management and maintenance consultant for the World Bank who has been working with road maintenance groups and microenterprises for over 15 years. He has been involved directly or indirectly in most of the experiences described in this document.

Climate change has negative implications for transportation investments, especially those managing maintenance using output and performance-based road contracts (OPRC).

 

Currently, climate change risks are generally carried by the asset owner through the  Force Majeure provisions of the contract, and treated as ‘unforeseen’ events, with costs reimbursed as Emergency Work reimbursements. This not only impacts on the financial performance of the OPRC, but in some situations, may make OPRCs a less than ideal modality for maintaining road networks.

 

OPRC projects therefore face a number of pressing climate related issues compared to traditional contracting arrangements which, if addressed, will contribute to more resilient infrastructure:

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·        Explicitly recognizing that climate change presents serious challenges to operations and maintenance (O&M) and long-term viability of infrastructure assets

·        Finding a way to estimate climate change risks since historic data does not reliably represent future climate

·        Accounting for climate change in OPRC design to realize the full potential economic and social benefits

 

Managing these uncertainties is key to development successful OPRCs. Allocating the risk of climate change to the stakeholder parties best suited for handling the impacts is essential.

 

Report from Ontario which reviewed experiences with winter maintenance under performanced based contracting.

It was found that there were serious failings. Even though ministry staff, including engineers, raised serious concerns during the procurement process that the majority of winning contractors would not be able to meet their winter maintenance commitments because of insufficient equipment, these lowest-price contractors were still awarded the contracts.

It was found that over the past five years, since MTO changed its highway maintenance contract process in 2009, the state of Ontario’s highways has deteriorated immensely, costing money and lives.

World Bank Transport Report TB-42C.

The support of Performance Based Contracts (PBCs), from initial concept to final delivery, is essential if the best outcomes are to be achieved for the road users. This report, completed as part of the Opus International Consultants overall review of PBCs for the World Bank under contract 7158253, focusses on the existing training materials and resources available and provides recommendations on the updating, expansion or creation of materials to increase the chances of overall success.

The report recommends a more structured approach to the materials available, with a clearer intent on the audience and the topics addressed. Although some material would be duplicated between the audiences, it is recommended that materials be developed that focus specifically on:

• The Executive Level
o World Bank Staff
o Government/Road Agency Exec Management
• The Management Level
o Road Agency “Owner” of the PBC
o Agency Procurement Team
• The Delivery Teams
o Road Agency contract management team
o Consultants and
o Contractors.

Based on the review, a modular “topics of focus” approach to the training and resource materials is recommended, with the following modules included to address the primary issues that have been observed to be hampering success:

• Introduction/Objectives of Asset Management and how PBC facilitates the paradigm shift;
• PBC Types and Case Studies;
• Structuring the PBC according to AM Strategy;
• Governance Structures (and the impact of outsourcing on the Road Agency);
• Contract Development;
• Tender Process;
• Risk Management; and
• PBC Delivery.

The review has also considered the means of delivery of the training, with a mix of face-to-face and remote training considered appropriate for various levels of training.
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World Bank Report TP-42A.

 

Performance Based Contracts (PBC’s) are not new to the transport sector, with many variants in use in different countries for close to two decades. International lending institutions – such as the World Bank – have played a significant role in pushing PBCs into developing nations as part of loan assistance packages.

However, there has been a tendency for a “one-size-fits-all” approach to the implementation, with the result being a variation in the success of any implemented PBCs, as well as a significant proportion of the proposed PBCs not making it to the contract award stage. To address these issues, the World Bank has commissioned a Review of Performance Based Contracting in the Road Sector (contract number 7158253) led by Opus International Consultants Limited.

The project is in two phases:

• Phase 1: Being about reviewing projects to determine what makes projects succeed; and
• Phase 2: Being the development of better guidance on the selection of the appropriate PBC for given situations.

 

This report presetns the results of Phase 1 wherein experiences in a range of sites are reviewed.

World Bank Transportaton Research Note 46.

The road sector represents a significant asset to any country – both in terms of the physical cost to build it, and the social and economic benefits that it facilitates. Good asset management in the road sector is about obtaining the desired benefits at the least whole-of-life cost, and it is therefore natural to seek to implement a robust asset management approach on what is typically a nation’s largest asset.

Performance based contracting (PBC) necessitates the identification of many of the cornerstones to asset management, such as knowing your asset, managing risks and determining the sustainable level of service for the funds available. Performance based contracting is therefore a proven method to deliver a paradigm shift in all parties responsible for the management and preservation of the road infrastructure, including addressing construction quality issues, delivering consistent levels of service and reducing the opportunities for corruption.
The document is intended to provide World Bank transport sector staff, Ministries of Transport and road agencies of developing and transition countries with a summary understanding of the benefits, and risks, of applying the PBC approach. The aim of this note is to help the reader understand:
• What asset management is and why it is important;
• How performance based contracting delivers good asset management; and
• What the issues and challenges are to successfully implementing a performance based contract.

This note is supported by the Review of Experience (Opus 2012a) and a Technical Guide (Opus 2012b) documents. The focus of the work is on PBCs with a significant contract term and not performance based Design-Build contracts. It is not intended to cover performance based design-build only contracts. Similarly the work does not seek to address in any detail the funding options (road taxes, general taxes, external borrowing, tolls etc.) that may be used to fund the works and for this reason it does not address public-private-partnerships specifically, noting however, that a robust PBC underpins all successful PPP projects.

World Bank Report TP-42B.

 

Performance-Based Contract (PBC) methods are widely used for road maintenance in developing countries. There are many reasons why road agencies have decided to introduce these methods, e.g., better transparency, increased focus on workmanship and reduced long term costs. The World Bank (the Bank) has supported and financed almost 50 PBC projects over the last 15 years. Currently, most PBC projects are developed on the basis of Sample Bidding Document for Output- and Performance-based Road Contracts (OPRCs).

This guide has been developed on the underlying presumption that good asset management is an essential goal of any Bank investment in the on-going management of a road network, and that PBC is a proven way (but not the only way) to drive the paradigm shift in all parties typically needed to achieve good asset management.

The term OPRC represents a spectrum of contract models, while the term PBC is the general term for all contracts using performance-based methods. Currently, in order to maximize value for money, OPRCs are dramatically evolving in line with road asset management principles. According to the results of the PBC review project (P118614), there are three principal scenarios where PBCs are applied:

I. unpaved roads PBC;
II. paved roads in a generally poor-fair condition (DBMOT PBC); and
III. paved roads in a generally good-excellent condition (Network Management PBCs).

This guide is intended to assist those new to the topic of PBCs to understand what they are, how they align with good asset management and what the key issues are to consider before (and during) implementation.

The guide commences with a discussion on what constitutes good asset management, before describing how PBCs assist in the delivery of good asset management. The guide then addresses the key issues associated with making an implementation successful, concluding with an overall PBC implementation decision tree and checklist.

TRB’s National Cooperative Highway Research Program (NCHRP) Legal Research Digest 61: Legal Aspects for Performance-Based Specifications for Highway Construction and Maintenance Contracts explores how performance-based specifications differ from traditional design or method-based specifications and the risk allocation differences between the these methods.

TRB’s National Cooperative Highway Research Program (NCHRP) Synthesis 426: Performance-Based Highway Maintenance and Operations Management explores performance-based management practices that are applied by state departments of transportation (DOTs) in highway maintenance and operations.

The report investigates and details Brazil’s successful experience with performance based contracts for the management of the road infrastructure and explores approaches for future improvements in Brazil’s performance based program.

This report reviews recent experience in the Europe and Central Asia (ECA) region with contractual public private partnerships (PPPs) in the transport sector. The review and evaluation of successes and failures of past investment projects can provide valuable lessons to governments on the options they have for infrastructure spending and the pre-requisites for those options. Whilst the review covers the whole region, the primary focus is on the Central and Eastern European and South-Eastern European (CEE/SEE) countries as they were the first within the Europe and Central Asia region to follow the global trend of using PPPs 1 in the implementation of infrastructure projects. For the purposes of the study, the CEE countries are defined as the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia, and the SEE/economies countries as Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Kosovo, FYR Macedonia, Montenegro, Romania and Serbia.

TRB’s National Cooperative Highway Research Program (NCHRP) Synthesis 389: Performance-Based Contracting for Maintenance explores experience with performance-based maintenance contracting in places where it has been adopted, including such issues as whether it has the potential to reduce costs and improve maintenance levels of service.

A short flyer from the FHWA outlining the advantages and opportunities of performance based contracting for new construction.

This study was to evaluate the international practices and methods that are used by many progressive road authorities and attempt to explain which practices might be more effective and meet the demands of the road infrastructure. This report is divided into two sections to distinguish the project delivery methods used for “Capital Investments” and those that are used for “Maintenance Practices”. The countries chosen in this study are Australia (states of Victoria & Western Australia), Canada (the provinces of Alberta, British Columbia & Ontario), England, Estonia, Finland, New Zealand, Norway, Sweden, The Netherlands, and certain Departments of Transportation (DOT) in the USA (FDOT, MNDOT, NCDOT, VDOT, Maryland State Highway Administration, and DDOT - maintenance only).

Presentation on key issues that need to be considered before introducing performance based contracts ... at least if you want them to be successful!

This report presents a summary of the Consultant’s, findings and recommendations following a technical fact finding and project preparation mission in Mozambique to prepare OPRC pilot projects. The focus for the mission was road selection and collection of technical data for preparation of OPRC bidding documents. In addition, the Consultant met widely with stakeholders to discuss performance-based maintenance, of which there is some experience in Mozambique, and identify the most appropriate strategy for project implementation in the local context.

Performance specified maintenance contracts (PSMC) have been operational in New Zealand for more than six years. These contracts are driven by key performance measures (KPMs) that are used to define the expectations of the road agencies and monitor the progress and performance of the contractor. As the effectiveness and efficiency of the KPMs is vital for achieving the desired results, it is essential to examine the  effectiveness of the current KPMs in controlling and directing the maintenance contracts. The report examines the interpretations of the collected data using average and mode. The poor representation of the total network condition by the traditionally used average is illustrated by numerous examples. Alternative representation of the network condition is proposed and illustrated by using the mode of the data set.

This Paper shares knowledge on how to systematically phase out force account procedures, phase in contracting and prepare government for a changed role. It provides guidance to government policy-makers at central and local level, World Bank staff and professionals involved in de-linking road maintenance from direct public service provision. The Paper was prepared by reviewing existing reports, developing a questionnaire, visiting case study countries, and holding interviews and workshops with stakeholders including Road Agencies, Construction Councils, Contractors and Consultants. The reference section offers sources providing more detailed information.

The objective of this Note is dissemination of best practice and knowledge sharing on how a Government road agency can prepare for phasing out force account procedures in the public sector and creating an enabling environment for contracting out road maintenance.

This report is the product of joint research by the US Federal Highway Administration and the World Bank to assess contract road maintenance practices in selected countries with the objective of providing operational guidance on planning, budgeting, tendering and administering works.

This paper presents the accounting and financial data to analyse the investment costs, including the cost of using private finance. It presents the Highways Agency’s expenditure on DBFO, the structure of the deals, the DBFO companies’ income, the costs (including the cost of debt) and the returns to shareholders to provide evidence about the financial operation of DBFO.

This study on Performance-Based Standards for the Roads Sector was carried out by an OECD Working Group under the RTR Programme 2001-2003. The report explores the case for regulatory reform of the heavy vehicle sector, examining regulatory principles and current practice. Examples of performance-based standards are examined, implementation issues are discussed and potential outcomes are presented based on experience and research from participating countries.

The successful introduction of performance based maintenance requires that a country have in place appropriate policies, legislative framework, institutional capacity (client, contractors and consultants), as well as the necessary technical expertise. This report evaluates the viability of introducing performance based maintenance to Indonesia. It identifies a number of key issues which need to be addressed to ensure successful implementation.

A set of presentations and training materials associated with the report (13 MB) can be downloaded here.

Materials presented at a training course to introduce performance based contracting to China

The successful introduction of performance based maintenance requires that a country have in place appropriate policies, legislative framework, institutional capacity (client, contractors and consultants), as well as the necessary technical expertise. This report evaluates the viability of introducing performance based maintenance for expressways in Hubei province, China. It identifies a number of key issues which need to be addressed to ensure successful implementation.

Paper by Paul Hardy examining the potential benefits of adopting a performance contract approach. It offers the authors opinion on the feasibility of achieving these benefits and the practicality of measuring them.

The method of delivering road maintenance has progressively evolved. Historically, road agencies have moved from using in-house force account to traditional method-based maintenance contracting. Many countries are now heading towards performance-based contracting (PBC), an approach that has been deployed rapidly in the road sector in the past decade. However, while PBC offers a number of benefits for road agencies and road users, it is a relatively new approach and there are several aspects that need careful consideration to ensure that the goals of PBCs are fully achieved.

The purpose of this Note is to review the worldwide experience with the PBC approach, highlight the main advantages, the steps involved and the results generated. The document is intended to provide World Bank transport sector staff, Ministries of Transport and road agencies of developing and transition countries with a clear understanding of the benefits, and risks, of applying the PBC approach. A separate Resource Guide (to be released by the World Bank in 2006) will offer more detailed information and resources pertaining to performance-based contracting.

World Bank Transport Note TRN27. The purpose of this Note is to review the worldwide experience with the PBC approach, highlight the main advantages, the steps involved and the results generated. The document is intended to provide World Bank transport sector staff, Ministries of Transport and road agencies of developing and transition countries with a clear understanding of the benefits, and risks, of applying the PBC approach. A separate Resource Guide (to be released by the World Bank in 2006) will offer more detailed information and resources pertaining to performance-based contracting.

Funded by PPIAF, this is a comprehensive three-day training course covering the key aspects of performance based road maintenance developed for the World Bank by Cowi consultants in Denmark. This course was presented in Thailand and China, and variations of it in other countries. The file contains all training and background materials. The contents include:

Module 1: Introduction and overview of PMMR
Module 2: Compliance monitoring
Module 3: Long- term asset modeling
Module 4: Changes required by road administration and the consulting and contracting industry
Module 5: Sample Bidding Document of the World Bank for PMMR
Module 6: Other resources for getting information on PMMR
Case Study 1: Argentina
Case Study 2: Uruguay
Case Study 3: Denmark
Case Study 4: PMMR for routine maintenance using micro-enterprises in Latin America
Case Study 5: Lebanon
Workshop 1: Development of performance standards and response times – introduction
Workshop 2: Development of a strategy of implementing PMMR in your country

Supplementary materials for China can be downloaded here.

Presentations and materials from a workhop held to consider the viaibility of introducing performance based contracting to Indonesia

Paper on the performance-based maintenance and management of roads (PMMR) in Chad.

Paper by Prof. K. Madelin. The paper provides recommendations for those countries considering a change to the way they procure road maintenance. The paper concludes that a stepwise, evolutionary strategy for change is required and that many benefits are achievable by adopting sound contract and management practices within a mixed environment of both publicly and privately owned organisations.

This paper looks at the asset management roles within the performance based contracts framework and compares them with the responsibilities under more conventional outsourcing models.

This article provides an overview of the different pilot projects in Latin American countries, giving special attention to the performance specifications and control procedures, how these contracts have been implemented, and what lessons can be learned so far.

This publication contains papers presented at the Tenth AASHTO–TRB Maintenance Management Conference held in Duluth, Minnesota, July 13-17, 2003. The objective of this series of conferences is to provide a forum every three to four years for the exchange of new ideas and developments in the maintenance and operations management of transportation facilities.

This synthesis examined the use of performance measures for the monitoring and operational management of highway segments and systems.

This document describes the key issues involved in developing performance specifications and presents a number of strategic options for changing the way the Agency specifies its work.

Reform of road management has been at the forefront of change in the transport sector in the last decade. This paper looks first at the New Zealand experience followed by world wide trends. A brief discussion on the provision of roading is followed by a look into the future with particular attention to the use of technology to enable better pricing and managing of roads.

This paper discusses direct roading network management experience with a variety of State Highway and Territorial Local Authority networks. The paper discusses the currently employed delivery methods namely the Conventional, Hybrid and Performance Specified Maintenance Contract (PSMC) contract methods and examines the efficiencies, which have been realised in terms of both reactive maintenance expenditure and the outcomes achieved on the ground with respect to network condition as it is currently measured for two specific examples.

This paper outlines the objectives, contract structure, the results to date and Main Roads' experience with the contracts and provides comment on key lessons learned.

The report was prepared by the World Bank Group to help improve China’s approach to private participation in infrastructure—focusing on roads, water and sanitation, and power generation—by expanding foreign direct investment and domestic financing in such projects.

Transit New Zealand has developed a long-term procurement strategy establishing a proactive approach to road maintenance. As part of this strategy Transit launched the hybrid road management and maintenance concept in the Northern Canterbury State Highway Network. This paper describes the experience attained over a 2-year period.

Conference Paper by R Dunlop of Transit New Zealand. Before deciding on the direction of road management in the 21st century, the role of roads in the land use context needs to be determined. Based on the changing technology of vehicle propulsion and the use of new technology to manage the safety of vehicles on the road, a whole new era in improved travel is about to unfold.

Paper by Tony Porter that draws on the author’s experience gained in the management of highway networks in countries such as NZ, Australia. Malaysia and England to discuss the various procurement models being employed and the trends in the way the work is specified. The trend towards “outcome” based contracts is examined in particular.

Paper by Dr. Gunter Zietlow on Performance-Based Contracts

Paper on presentation given by Papantoniou and Doyle at IRF Road World Congress in Paris. Focus is on issues facing road agencies in Australia.

Paper by M. Frost that overviews the current situation in Australia, in the context of current debates about the level of service and funding for road maintenance. The review focuses on the need for material improvements in the standard of the road system, and examines options available to government to achieve these standards.

Conference Paper by R Dunlop of Transit New Zealand