2008 MdQI Conference January 30, 2008 Performance-Based - - PowerPoint PPT Presentation

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Performance-Based Maintenance Contracts (PBMC)

Pekka Pakkala, Sr. Transportation Eng.

SAIC

2008 MdQI Conference January 30, 2008

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Overview

• Introduction to Performance-Based Maintenance

Contracting

• Risks
• Performance Measures
• Choosing a Contractor
• Partnering
• Importance of a Good Contract
• Summary

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Introduction to Performance Based Maintenance Contracting

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• Future Perspectives
• Integration & Bundling of Services
• Funding Level Fluctuations & Shortcomings
• Staff Reductions/Aging Administration
• Preservation on Existing Network
• Maintenance Contract Capability
• New Market for Contract Maintenance
• Changing Roles to Strategic Management &

Good Governance

• Public Accountability
• Improvements in IT Systems
• QC/QA By Contractors
• Risk Allocation/Management

Framework For Change

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What is Performance-Based Contracting?

• A maintenance approach where a

private contractor assumes responsibility for managing and maintaining the condition of assets to pre-defined set of conditions or LOS.

• Focuses on what to achieve (outcomes)

rather than how to achieve it

• It is pro-active versus reactive

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Management

• Administration
• Accounting
• Planning/Staffing
• Project Mgmnt
• Decision Making
• Yearly Work Plans
• Project deliverables

How is Performance-Based Maintenance Contracting is Different Than Traditional Maintenance Contracting?

• Work Orders
• Responding to

Customer Complaints

• Having a MMS
• QA/QC Plans
• Self Inspection
• Traffic Management

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Maintaining

• Must Do The Work
• Meet the Performance Standard (LOS)
• Find Supply Chain Partners & Supplies
• Coordinate the Maintenance Activities
• Respond to Defects (Customer
• Pro-actively Inspect Assets (QC) and

How is Performance-Based Maintenance Contracting is Different Than Traditional Maintenance Contracting?

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Partnering Issues

OWNER AGENCY CONTRACTOR SUB-CONT. SUB-CONT. SUB-CONT. SUB-CONT. SUPPLIERS

PARTNERING

P A R T N E R I N G PARTNERING

PARTNERING

P R O J E C T

Source: Finnra - Pekka Pakkala

P A R T N E R I N G

Design/Eng Partners SUPPLY CHAIN MANAGEMENT

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Traditional Outsourcing

Owner Agency TRAFFIC SIGNS GUARD RAIL LINE MARKING CLEANING P O T H O L E S & P A T C H I N G

• VEG. & TRASH

Emergency Response

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New Management Of Roads

Owner Agency TRAFFIC SIGNS GUARD RAIL CLEANING P O T H O L E S & P A T C H I N G

• VEG. & TRASH

Emergency Response

LINE MARKING CONTRACTOR

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Owner Agency Role Changes

• Develop clearly defined Scope (what you want)
• Communication & Buy-in of Key Stakeholders
• TRUST between Client & Contractors
• Developing Outcome/Performance Measures
• Changing to Asset Owners/Management
• Risk Allocation
• Developing Good Contracting Agreements
• Owner must be an active participant
• Contractors will be Responsible for Work & Processes
• HQ & District Offices Have A Common Effort
• PBMC involves a culture change – this is a new way of
• Develop Project Partnering

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Owner Decision Matrix

Traditional (Method Based) Performance Based (Outcome Based) RISK Sharing NO YES Keep Control (Decision Making) YES NO Innovation NO Potential Savings Minor/Some Potential Less Management NO YES Reliance on Asset Management NO YES

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How is Performance-Based Maintenance Contracting Different Than Traditional Maintenance Contracting?

• Specify desired outcomes instead of
• Contractor determines what work will be
• Innovation in management and
• Puts all contractors on even playing field

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Brief History of Transportation Performance-Based Maintenance Contracting in the US

• Virginia was first
• Followed quickly by D.C., Texas,
• Projects have been a mix of asset

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International Examples

Source: Survey of International Contract Maintenance, Pakkala, P., TRB 2007

Type of Contract Contract Duration Contract Method Contractor Selection Criteria Activities Included Alberta, Canada Output Based 5,6 & 7 Years Unit Price 95% Price 5% Other Routine Maintenance British Columbia, Canada Output & Performance Based 10 Years Mostly Lump Sum (Few Unit Prices) 60% Price 40% Other Routine Maintenance Ontario, Canada Traditional & Performance Based (60% Outsourced) 7-9 Years (New – 7+2) Lump Sum 95% Price 5% Other Routine Maintenance New Zealand Output & Performance Based 3+1+1 Years 3+1+1 Years 10 Years Unit Price Hybrid Lump Sum Low Bid Weighted Avg. QPTO Routine Routine Plus ALL Finland Performance Based 5 & 7 Years Mostly Lump Sum (Few Unit Prices) 70-80% Price 20-30% Other Routine Maintenance Norway Performance Based 4 Years Lump Sum (Some Unit Prices) 100% Price (Conforming Tenders) Routine Maintenance England Performance Based 5 + 2 Years Lump Sum (Actual Prices) 75% Price/ 25% Other E-Mac - 100% Quality (with Target Price) ALL except Rehabilitation

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Advantages of Performance-Based Contracting for Maintenance

• Allows State and local agencies to define
• Contractors will have the flexibility to
• Encourages the introduction of innovation
• Potential relative savings
• One point of contact - Communication can

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Advantages of Performance-Based Contracting for Maintenance (Cont’d)

• Shares risks and rewards
• Can allow a re-focus of in-house staff to do other
• Owner agency can learn some new techniques
• Contractor may be able to efficiently address

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Challenges of Performance-Based Contracting for Maintenance

• New way of doing business – requires a

culture change

• Loss of control - Owner agency gives up

much of their ability to “direct” work

• Can be difficult to handle political priorities

if they aren’t covered in the contract

• Some agencies are restricted to shorter

term contracts – longer term are better

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Risks

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Risk & Control Differences

• It is important to understand and acknowledge the

control and risk factors your agency is willing to undertake.

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Balancing Risks

COSTS?? CONTRACTOR CLIENT Risk

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Balancing Risks

• Escalation Clause (Indexing - CPI)
• Incentives & Disincentives
• Capping the Risks for Unknowns
• Compensation for mobilization or by

deferring performance until end of year

• Using Hybrid Type Contract
• Risks in Traffic, Weather & Acts of God

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Performance Measures

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Performance Measures

• Form the basis of every performance-

based contract

• Define the desired outcomes for the

contract

• Come in many shapes, sizes, and styles
• Are usually developed in an iterative style
• Can be generally categorized as

“Condition” measures or “Timeliness of Response” measures

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Performance Measures vs. Performance Standards vs. Levels of Performance

• Performance Measure
• a set of defined outcome-based conditions or

response times that project personnel (Owner Agency and contractor) use to evaluate the success of the contractor

• Performance Standard
• the minimum acceptable level of performance

for a given performance measure

• Level of Performance
• a defined condition or response time

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Pass/Fail or Multi-Level Performance Measures?

• Pass/Fail
• Easier to define
• Don’t provide as much information on

performance

• Did the contractor just barely fail, or did

they badly fail?

• Performance Measure and

Performance Standard are the same

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Example of a Pass/Fail Performance Measure

• Grass height 4” or less

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Performance Measures vs. Performance Standards vs. Levels of Performance

Very Poor 1 Poor 2 Fair 3 Good 4 Excellent 5 Very Poor 1 Poor 2 Fair 3 Good 4 Excellent 5

Performance Goal –“Pass” Levels of Performance Performance Measure Grass height 4” or less, neatly trimmed around signs, curbs, etc. Grass height 4” or less Grass height 6” or less Grass height 8” or less Grass height greater than 8”

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What Makes a Good Performance Standard?

• A question to ask for each

performance standard is, “am I SMART?”

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Am I SMART?

• I – Is the performance standard something that

the contractor can Influence?

• S – Is the performance standard Specific?
• M – Is the performance standard Measurable?
• A – Is the performance standard Achievable?
• R – Is the performance standard Results-
• riented?
• T – Is the performance standard Timely?

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Choosing a Contractor

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Common Procurement Types

Price Qualifications/ Approach/ Price Low Bid Best Value Enhanced Low Bid Complexity

The goal is to get a contractor who will do a good job for a reasonable price.

Qualifications/Price Bids Proposals Quals Package/Bids

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• Contract Types:
• Lump Sum
• Unit Prices
• Hybrid (Lump Sum & Unit Prices)
• May Include Escalation, Incentives & Disincentives
• Selection Criteria
• Low Bid
• Enhanced Low Bid (Lowest Conforming Bidder)
• Best Value - FDOT, DDOT & others
• 100% Quality @ Target Price (Alliance Model)
• Beginning to look at risk sharing
• Issues;
• Competency of Project Managers & Ability to Perform
• Quality Plans (Contractor Led)

Common Contract Types

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Low Bid

• Pros
• Clean and Simple
• Takes less time to

review packages from bidders

• 1-Step process
• Cons
• Ignores
• Potential for “low-
• Makes it difficult to
• Uneven playing

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Enhanced Low Bid

• Pros
• Allows agency to

consider some qualifications through a pre- qualification process

• Get lowest

QUALIFIED bidder

• Cons
• 2-step process
• May not consider

contractor’s approach for doing the work

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Best Value

• Pros
• Allows consideration of

contractor’s approach for technical, staffing, management

• Allows consideration

and comparison of innovative approaches

• Allows consideration of

qualifications

• Allows consideration of

price (but at a lower weight)

• Allows some

negotiations

• Cons
• More complicated

process

• Not legal in all States
• Requires SEP-14

approval if Federal participation

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Partnering

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Managing Expectations

• It is important to manage internal

and external expectations

• At contract start-up
• Throughout the contract
• Initial expectations will be very high –

be careful to communicate reasonable timeframes

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Managing Expectations Throughout the Contract

• Be careful to not expect/demand

performance above the defined performance standards

• If the contract doesn’t call for perfection,

don’t expect it

• Carefully communicate the requirements
• f the contract with your management and

where appropriate, with the public

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What Happens if Things Go Wrong?

• Use partnering to:
• Discuss the problem as a team
• Formulate an action plan to get the project back on

track

• Help avoid claims
• Establishing a problem resolution hierarchy with

increasing levels of management can also help to avoid claims

• Apply the disincentives/penalties in the contract if

appropriate

• If things really go wrong:
• Exercise Performance Bond

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Importance of a Good Contract

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• Cannot conceivably cover ever possible situation in a

written contract

• Clearly define the scope
• Performance Measures needs to be clearly stated and

how they will be measured.

• Customer oriented
• Project deliverables (Performance, Work plans,

Reporting Requirements & Staffing Considerations)

• Balancing the Risks (Risks are clearly identified)
• Clearly Defined Incentives & Disincentives
• Fair & Equitable
• Transparent
• Partnering is Described
• Pre-proposal Kick-off Meeting

Importance of a Good Contract

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Overall Summary

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PBMC Summary

• PBMC has been used successfully in

maintenance in the US and abroad

• PBMC involves a culture change – this is

a new way of doing business

• Take advantage of the experience of
• thers – don’t start from scratch
• Performance measures form the basis of

any performance-based contract

• Focus on what to achieve, not how to

achieve it

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PBMC Summary (Cont’d)

• Measurement methodology defines how the

contractor will be evaluated - it should be developed up front and included in the solicitation package

• Performance measurement results provide a

logical basis for applying incentives and disincentives

• There are several award methodologies available
• each has it pros and cons, but use best value or

enhanced low bid if possible

• PBMC is out there – learn about it, learn the ins

and outs, and see if it can help you to achieve your goals.

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• Consider incremental implementation
• One geographic area at a time
• Smaller contracts leading to larger contracts
• Start ASAP – the earlier the better
• Have a deliberate process

PBMC Summary (Cont’d)

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Input D riven O utput D riven O utcom e D riven

O w n Forces PSM C A lliancing Financing Separate C

• nsulting &

Physical W

• rks

C

• ntracts

“C

• nventional

contracts” H ybrid

• Innovation
• C
• ntract

D uration

• Flexibility
• C
• ntractor

R isks

• Productivity
• C
• st Savings

PBMC Summary (Cont’d)

Source: Opus Int.

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For More Information, Contact:

• Pekka Pakkala, SAIC
• 703-676-8099
• pekka.a.pakkala@saic.com
• Mark Robinson, SAIC
• 703-676-2384
• mark.d.robinson@saic.com

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Additional Resources

• INTERNATIONAL OVERVIEW OF INNOVATIVE

CONTRACTING PRACTICES FOR ROADS

• Innovative Project Delivery Methods for

Infrastructure - An International Perspective

www.finnra.fi