Trends in the Procurement Models for Highway Maintenance

Tony M Porter

Tony M Porter BE (Civil) (Hons), FIPENZ Opus International Consultants Limited 215 Hastings Street Private Bag 6019 Napier New Zealand Telephone +64 6 833 5100 Facsimile + 64 6 835 0881 Mobile 021 463 276 E-mail: [email protected]

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Tony M Porter

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Trends in the Procurement Models for Highway Maintenance By: Tony M Porter BE (Civil) (Hons), FIPENZ Opus International Consultants Limited 215 Hastings Street Private Bag 6019 Napier New Zealand Telephone +64 6 833 5100 Facsimile + 64 6 835 0881 Mobile 021 463 276 E-mail: [email protected]

ABSTRACT The author’s company is currently engaged on term maintenance contracts in New Zealand, Australia, Malaysia and England. The paper draws on the experience gained in the management of Highway Networks in these countries to discuss the various procurement models being employed and the trends in the way the work is specified. In particular the trend towards “outcome” based contracts is examined. 1.

INTRODUCTION

Internationally there is a strong trend towards outsourcing of Highway Maintenance activities. The author has recently had the opportunity to observe trends in New Zealand, Australia, Malaysia, Britain, and North America. It is evident that as the Road Controlling Agencies (RCA’s) gain confidence in the success of outsourced maintenance, the scope of the work being outsourced tends to be expanded. This has evolved to the point where we are now seeing contracts that encompass all aspects of network management being let in a number of countries. These maintenance contracts now typically include winter maintenance, management of emergencies (such as flooding), and public relations, in addition to the development and on-going up-dating of the Asset Management Plan for all assets in the road corridor. In addition to the pavement the assets maintained within these contracts may include: • Embankments • Tunnels • Slopes • Retaining structures • Rest area facilities • Signs, including variable message signs • Emergency telephones • Waterways • Culverts • Bridges • Lighting • Guard-rails • Fences Road Controlling Authorities are increasingly drawing the various components together into a single contract and moving from specification of the required inputs to specification of the desired outcomes. However, internationally there is still a wide variation in both the way the work is specified and the procurement models that are employed. This paper looks at these variations and discusses some trends that are emerging.

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DEFINITIONS

Unfortunately there is no universally accepted jargon used by the industry when discussing term maintenance contracts. Indeed, in the author’s experience, there is often a good deal of variation in the meaning of terms within individual countries. A number of agencies have recognised the difficulties this creates and are moving to standardize the definition of terms within their jurisdiction (e.g. Austroads Research Project NT & E 9904 – “Development of Performance Contracts and Specifications” which is due for completion later this year). However the author is not aware of any published nomenclature at this time. The following definitions are used in this paper. • Contractor: the team undertaking the physical work on the network • Network Consultant: the team providing the professional engineering advice for the management of the network. (Note: In some procurement models the “Consultants” role is provided by the RCA and in others by the “Contractor”. It is not always a stand-alone role) • PSMC: Performance Specified Maintenance Contracts • RCA: Road Controlling Authority • DBFO: Design, Build, Finance, Operate procurement model • Perpetually green contracts that can be extended indefinitely subject to the consent of both parties. 3.

ROLES

Before outlining the current models used for Contract Maintenance it is necessary to define the roles of the various parties. For the purposes of this discussion three separate roles are defined: RCA The RCA is the Asset Owner’s representative and as such is responsible for: • setting the network performance expectations • agreeing the investment needs • managing all funding issues with the funding agency • approving the asset management plan • auditing the performance of both the “Consultant” and the “Contractor”. The RCA is the Principal in all Network Management Contracts. Consultant The “Consultant” provides much of the professional engineering input into the management of the network. The “Consultant” is typically responsible for: • operating the Management Systems (i.e. the Pavement Management Systems, Slope Management Systems, Bridge Management Systems etc) • condition surveys/monitoring • deterioration modelling • drafting the Asset Management Plan • checking work programmes and • auditing and certifying field achievement. In this context the “Consultant” is typically responsible for overall management of: • Road Safety Outcomes • Environment Outcomes and • the Clients’ Financial Outcomes (when outside a lump sum environment). The “Consultant” also typically has responsibility for interfacing with other Stakeholders such as utility operators, adjoining road control authorities and the general public.

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Contractor The “Contractor” undertakes all necessary maintenance work on the asset. Typically the “Contractor” is responsible for ensuring the quality of the work and undertaking quality control testing. In the same procurement models he is also responsible for identifying the work required and for prioritizing and programming such work. 4.

THE EVOLUTION OF CONTRACT SPECIFICATIONS

Documentation for contract maintenance is undergoing continual development. As RCA’s have gained confidence in the local industry, documents have been evolving from “input-based” to “output-based” and now increasingly moving to a focus on “outcome”. To help understand the evolutionary process, the author has proposed the value chain depicted in Figure 1. WHAT Physical Work Activities

Work Instructions

WHEN Intervention Criteria

WHY Levels of Service

Link Key Success Factors

Network Key Success Factors

Figure 1 RCA Value Chain Input-Driven Contracts The first stage of outsourcing is usually based on “input-based” documents, which are focussed on prescribing exactly “what” is to be done by the Contractor. The RCA provides a detailed method-based specification (ie: Work Instruction) and payment is for each individual input, i.e. • Labour is paid for by the hour • Plant is paid for by the hour • Materials are paid for on the quantity delivered to site. These contracts are known variably around the world as “Direct Labour”, “Plant Hire” or “Day Works” contracts. Typically, separate contracts are let for each maintenance activity. At this stage of development of the procurement model the “Consultant” inputs are usually provided in-house by the RCA. Output-Driven Contracts As the agencies recognise the benefits of moving their activities into a competitive environment, their documents tend to evolve and begin to seek to define the “Outputs” they require the contractor/consultant to provide. The procurement model changes to the “Conventional” model and the focus of the documents is on specifying intervention criteria and defining performance standards. The best of these documents allow the contractor flexibility in the selection of his methodology, but in a number of areas an element of the RCA’s method-based philosophy remains. Payment is based on the tendered schedule of rates. Both the New Zealand and English conventional procurement models include a separate contract for all consultancy activities on the network and require the consultant to focus on long-term management of the asset. The creation of a competitive market for network consultancy activities that occurred in both these countries has enhanced the level of engineering being applied to all aspects of highway maintenance and accelerated the introduction of new technology. The management of Highway Maintenance moved from being considered a “blue collar” profession, to being at the “leading edge” in a select number of consulting firms. Under this model a range of separate activity-based contracts for the physical work is often found. In New Zealand, the conventional procurement model sees a wide range of contracts being let and managed

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by the network consultant on behalf of the RCA. The typical range and scope of contracts let on a New Zealand network is shown in Table 1. Contract

Scope of Work

Pavement Maintenance Emergency Contract

&

A 3- 5 year contract for pavement repairs, surfacing repairs, ice gritting, incident (emergency) response unsealed shoulder maintenance, slip removal. (This is the area of greatest expenditure).

Drainage Maintenance Contract

A 3 – 5 year contract for the routine maintenance of stormwater structures and surface water channels, and drainage improvements (cutting side slopes etc).

Traffic Services Contract

A 3 – 5 year Contract for the maintenance of all signs, edge marker pegs, raised reflective pavement markers, detritus and litter removal and pothole repairs.

Minor Drainage Repair Contract

A 3 – 5 year contract for the repair of damaged stormwater structures that are outside the scope of the repairs required under the Drainage Maintenance Contract.

Structures

Resurfacing Contract

Annual highway resurfacing contract.

Milling/Recycling Contract

Annual contract for the milling and stabilisation of the insitu pavement.

Seal Widening

Annual contract for seal widening at specific sites identified where this is shown to be economic.

Vegetation Control

A 2-year contract for the routine maintenance of vegetation on all verges, sight benches, surface water channels, rest areas and traffic islands.

Vegetation Control Tree Removal)

(Specific

A contract that targets the removal of specific trees, scrub etc that is beyond the scope of the Routine Vegetation Control contract. Only let when sufficient work has been identified.

Hydro-seeding Contract

Annual contract for the re-grassing of all recently cut batters (new construction) and any other erosion prone sites.

Routine Bridge and Structure Repair Contract

Annual Contract for the repair of minor damage/disrepair to bridges and roadside structures.

Pavement Marking Contract

A 2-Year contract for the overmarking of all pavement markings.

Guard-rail Installation Repair Contract

and

Annual contract for the construction of new guard-rails and repair of the damage to existing guardrails.

Highway Lighting Contract

Annual contract for the routine maintenance of all Highway lighting.

Minor Safety Works Contract

Annual contract for the construction of improvements to the Highway network that are justified as a result of specifically identified safety concerns.

Flood Damage Repair Contract (Additional Service)

Contracts to repair damage arising from specific climatic events. These are only let when requested by the client.

Table 1 – New Zealand Network Maintenance Contracts Outcome-Driven Contracts In recent years a number of RCA’s (e.g. Main Roads Western Australia, Virginia DOT, Transit New Zealand, Texas DOT) have developed specifications that move further across the value chain and only

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specify the desired outcomes (“Key Success Factors”) and required “Levels of Service”. The most advanced of these contracts do not include any method-based specifications and allow the Contractor complete freedom in the methodology it chooses. Under this model payment is by lump sum. In the Southern Hemisphere this is known as the PSMC procurement model. The manner in which the outcomes are specified varies but as a minimum most RCA’s define target: • roughness profiles • texture profiles • surface skid resistance profiles • rutting profiles. along with • measures to assess the residual surfacing life • measures to assess on the residual pavement life • response times in emergencies/adverse weather • minimum levels of reflectivity for signs and delineation marking • minimum condition profiles for stormwater channels and structures, street furniture and lighting. In order to allow the contractor full control over these outcomes the scope on most advanced procurement models is extended to include pavement rehabilitation, resurfacing and minor safety work, in addition to the traditional maintenance activities. Typically all the work outlined in Table 1 is included in the one contract. A single contract is let for all “contractor” and consultancy” inputs, providing the RCA with a single point of contact with its network manager. Before moving to Outcome-based contracts, the RCA needs the following: 1.

2.

3. 4.

A robust inventory of its asset. This is essential and it is amazing how many discrepancies are discovered when the inventory comes under the close scrutiny of tenderers! (However, provided the tender period is sufficiently long, any discrepancies can usually be resolved before tenders close). A good understanding of the performance of its asset and the outcomes it is seeking, both in terms of the day-to-day serviceability and any overall consumption of the asset’s value. Ensuring that the overall condition of the asset is preserved during the term of the contract is a significant issue in these contracts, which tend to be of a longer duration. (7 – 14 years). An understanding of the network’s risk profile so that equitable, sensible risk sharing can be documented. Confidence in the maintenance contracting industry. Typically these contracts are founded on a strong “partnering” philosophy, so it is essential that the parties start with confidence in each other’s ability and the will to co-operate.

As contract documents evolve across the value chain, the need for detailed methodology statements and work instructions is not removed. Rather it is moved from the realm of the RCA’s specification to that of the Contractor’s Quality Assurance system. This allows the contractor to modify and change the methodology in response to new products and technology, and avoids any unnecessary bureaucracy that may exist in the RCA. The International Contract Continuum The author’s company is currently involved in term maintenance contracts in New Zealand, Western Australia, Malaysia and England. Figure 2 below shows the authors’ perception of where the various contracts they are engaged on lie on the continuum.

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UEM’s North South Expressway Concession, Malaysia NZ PSMC Main Roads Dept West Australia PSMC Contracts Traditional NZ Model UK Highway Agencies Area 13

Input

Output

Outcome

Figure 2 – International Contract Continuum 5.

TRENDS

As contracts evolve across the spectrum from input, to output and then to outcome, a number of trends can be observed. Innovation All agencies spoken to report the introduction of innovative measures as their contracts have evolved across the value chain. The innovations are restricted not only to new materials and technology, but also include significant changes in management methods employed on the contracts. The competitive market along with the qualitybased selection criteria that are used in many parts of the world drives a strong culture of continuous improvement into the tendering organisations which in-turn drive the introduction of innovative practices.

Innovation I n n o Separate Consulting & Physical v Works Contracts a t i • Own Forces o n Input Driven

• Financing • PSMC

}

Conventional contracts

Output Driven

Outcome Driven

Term of Contract It is usual to extend the term of the contract as the focus of the specification moves across the value chain.

Term of contract • Financing

Input-based contracts are typically seasonal and are • PSMC seldom longer than a year in duration. The New T Separate Consulting & Physical e Conventional Works Contracts Zealand and British conventional output-based r contracts m contracts are of three to five years duration while the • Own Forces outcome-based PSMC contracts in New Zealand and Australia are for a fixed term of 10 years. In the Input Output Outcome British DBFO model the concessions are for 30 years, Driven Driven Driven as was the initial concession for the Malaysian North South Expressway. The 100 year concession granted for Toronto’s 407 is the longest duration the author is aware of. It is becoming increasingly common to have annual quality-based extensions. However, the author is not aware of any public road controlling authorities that have moved to the “perpetually green” procurement model that is sometimes used by private companies.

}

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Risk assigned to the Contractor RCA’s assign increasing level of risk to the contract as their documents evolve across the value chain. The conventional New Zealand output-based model requires the contractor to warrant each individual repair for the term of the contract i.e. the first repair must last say 5 years, the last 1 day, so that the subsequent contract is not confounded by liability issues. The PSMC procurement models assign a significant proportion of the risk associated with parameters such as weather, traffic growth and land instability to the contractor. The objective is to assign the risk to the party best suited to manage it.

Risk carried by Contractor C o n tr a c t o r

• Financing Separate Consulting & Physical Works Contracts

R i s k

• PSMC

}

Conventional contracts

• Own Forces

Input Driven

Output Driven

Outcome Driven

There is a trend towards quality-based extensions. In these models the contract provides for an extension term to the term of the contract if the Contractor achieves the pre-defined quality hurdles. In the authors view this practice is to be commended as it provides very positive incentives for quality within the contract. Cost Savings It is difficult to quantify the extent of the cost savings achieved through outsourcing to the various procurement models, as the specified level of service often varies from that provided under the previous regime. However, all agencies report savings and often express surprise at the savings achieved in subsequent tender rounds. In New Zealand almost all agencies reported savings in each of the first three tender rounds, which extended over a period of six years. MRWA (Main Roads Western Australia) has recently moved from an in-house model to PSMC contacts for its entire network. Early indications are that they will achieve savings in the order of 25%.

RCA’s Cost Savings C o s t S a v i n g s

• Financing • PSMC Separate Consulting & Physical Works Contracts

}

Conventional contracts

• Own Forces

Input Driven

Output Driven

Outcome Driven

CONCLUSIONS Worldwide there is an observable trend towards outsourced highway management services. A number of procurement models are employed. As RCA’s gain experience in outsourcing they are seeking to maximise the benefits by moving to the outcome-based procurement models. These models: • give the RCA more certain financial outcomes • allow the RCA to transfer appropriate risk to the Contractor • encourage innovation • offer significant savings over traditional in-house service delivery models. The author is convinced that the benefits of outsourcing are maximised by moving to a fully competitive market, using a quality-based selection process. Where legislation requires acceptance of the lowest bid, specifying quality-based extensions can provide the appropriate focus on quality.