Alternate Design/Alternate Bid Process for Pavement-Type Selection (2017)

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31 CHAPTER FIVE ALTERNATE DESIGN/ALTERNATE BID CONTRACT ADMINISTRATION PROCEDURES INTRODUCTION This chapter will discuss the information gained from the syn- thesis about the post-award process in ADAB projects. It will discuss the impact of ADAB on consultant design contracts and provide information on the application of material adjust- ment factors in conjunction with ADAB projects. It also serves to summarize the previous four chapters in terms of outcomes and ADAB performance measures. POST-AWARD CONTRACT ADMINISTRATION According to both the literature and the survey, post-award contract administration is changed very little when ADAB proj- ects are executed. As will be discussed in chapter six, the Louisiana and Michigan DOTs (LaDOTD and MDOT) added a third component to the ADAB process by including a value for time. LaDOTD chose to use “cost plus time” (A+B) bidding on its ADAB projects and named it A+B+C bidding, with the C-factor incorporating the LCC-based bid adjustment factor. On its US-171 Gillis to Ragley project, the winning bid was PCC (see Table 13 for details), because even though it did not offer the lowest initial bid price proposed, the construction period was 95 working days less than the low HMA bid (Temple et al. 2004). Overall, the LaDOTD’s initial foray into ADAB resulted in three of five projects being won by HMA bidders with the remaining two going to PCC. MDOT, on the other hand, selected “lane rental” for its value of time mechanism. The results of this variation were less conclusive than those observed in Louisiana because no HMA bids were received on its pilot project. A study by Youngs and Krom (2009) suspected that no HMA bids were received because the HMA alternative required additional earthwork and concluded that the project may not have been ideal for ADAB delivery. ALTERNATE DESIGN/ALTERNATE BID CONSULTANT DESIGN CONTRACT ISSUES The issue raised about the impact of ADAB on consultant design contracts is essentially based on a perceived increased design cost for preparing two different pavement-type designs for contractors to bid on in DBB projects. Although the same issue is also true for DB projects, the fact that the DB contract is already paying for design services appears to make the issue less evident. Very little is written about this specific issue and the notion was found to be mentioned only twice in the literature, both times in SEP-14 project evaluation reports. INDOT made it a point to track the additional costs incurred by both its consultants in ADAB contracts and its in-house design personnel. Figure 13 shows the costs recorded for the alternate design services. INDOT then subtracts the design services both from the initial bid difference to show the total cost savings as a result of ADAB and from the lowest-priced bid to show the impact on the overall number. Because of the ADAB pro- curement process in this particular case, dividing the total additional design cost ($334,090) for ADAB by the difference in initial bid ($15.48 million) resulted in a significant cost savings. However, it should be mentioned Indiana used an “alternate pay items option” that required only one set of plans with both PCCP and HMA typical pavement sections (INDOT 2011). Additionally, an analysis of additional in-house costs were “determined to be negligible” (INDOT 2009). For the same set of projects, INDOT calculated that it saved $3.8 million (Duncan and Holtz 2012), which yielded a cost–benefit ratio of 11.4. That result indicates that for INDOT, the additional expense for preparing two sets of pavement designs was small compared with overall project costs. “Performance management will transform the Federal-aid highway program and provide a means to the most efficient investment of Federal transportation funds by refocusing on national transportation goals, increasing the accountability and transparency of the Federal-aid highway program, and improving project decision-making.” MAP-21: §1203; 23 U.S.C. 150(a)

32 FIGURE 13 INDOT ADAB cost analysis for 2010 (INDOT 2011). MATERIAL PRICE ADJUSTMENT FACTORS “Significant volatility in the price of asphalt cement increases uncertainties in project cost estimates and consequently con- tractors’ risk in fixed-price contracts. Therefore, contractors may consider extra risk premiums or large hidden pricing con- tingencies in their submitted bid prices to secure their financial positions against possible rising prices” (Ilbeigi et al. 2015). However, FHWA Technical Advisory T 5040.39 (2012) discourages the use of material price adjustment factors on ADAB and states The use of commodity price adjustments for material prices is not desirable for alternate bidding contracts, as it is difficult to administer equal treatment to various alternate materials. Use of these commodity price adjustments may result in different levels of material cost risk being included in the bid for alternate pavement types. (FHWA 2012) The issue of differential material cost adjustment adds an additional level of complexity to a process that is being made more complex by the decision to use ADAB. Incorporating commodity adjustment clauses to construction contracts creates a means to share the risk of material price volatility with the contractor. This may result in lower unit prices for pay items composed of volatile underlying commodities (Stone 2013). A 2009 survey by the AASHTO Subcommittee on Construction found that 40 DOTs used material price adjustment clauses in paving contracts (AASHTO 2009), which certainly indicates widespread acceptance of the practice and its potential to accrue benefits. However, research on the topic does not offer empir- ical evidence that adjustment clauses are actually changing the risk distribution in a manner that yields the desired result. Skolnik (2011) conducted a comparison of states with and without adjustment clauses with inconclusive results that failed to confirm a verifiable savings through the adjustment clauses. Two more recent studies (Ilbeigi et al. 2014, 2015) concluded that “offering price adjustment clauses does not reduce the submitted bid prices in all projects.” These two studies both observed that there were cases where the clause appeared to create marginally lower bid prices in some projects but had no perceived impact in others. Stone (2013) found that “the two sides had completely opposite views on the inclusion of price adjustment clauses when calculating initial construction costs and material specific adjustment rates.” The findings of the four studies imply that the inclusion of price adjustment clauses tends to complicate the ADAB process.

33 ALTERNATE DESIGN/ALTERNATE BID PERFORMANCE MEASURES AND OUTCOMES As part of the literature review, ADAB projects were identified and tabulated to furnish an unscientific sample population from which to identify trends in their outcomes. These were then evaluated regarding the following three primary motivations for implementing ADAB found in the literature: 1. Increased competition, 2. Equity of opportunity for both the HMA and PCC industries, and 3. Cost savings. Table 6 provides the details for 55 ADAB projects in 13 U.S. states and three Canadian provinces that were identified dur- ing the literature review from sources such as SEP-14 reports, journal papers, and conference presentations. For each project, the number of bids submitted for each pavement type, the low HMA bid and the low PCC bid, the percentage difference between the two bids, and the winning pavement type were tabulated. The bid prices were not adjusted by the LCC-based factor if there was one, because a number of projects did not provide those details and some agencies, such as MoDOT, do not always adjust the all bids (Roark 2011). TABLE 6 SUMMARY OF ADAB OUTCOMES FOUND IN THE LITERATURE Outcome Outcome Metric Total no. of ADAB projects 55 Total no. of bids submitted 313 5.7 bids/project Total no. of HMA bids submitted 137 No. of projects where HMA won 18 33% Total no. of PCC bids submitted 176 No. of projects where PCC won 37 67% No. of projects with no HMA bids submitted 2 Total bids received when HMA won 80 26% No. of projects with no PCC bids submitted 4 Total bids received when PCC won 233 74% Table 6 shows that a total of 313 individual bids were attracted by ADAB projects, which translates to an average of 5.7 bidders per project. The literature on the average number of conventional project bids ranges from 3.8 to 5.1 bidders per proj- ect (INDOT 2009; Mikesell 2012). Thus, it appears that the sample confirms the individual state results in the literature by exceeding the upper bound of the range. Next, the sample shows that 44% of the bids were for HMA and 56% were for PCC. While not equal, the difference between the two pavement types is not large, supporting the idea that implementing ADAB does indeed give both industries an opportunity to compete. This trend is reinforced by the fact that only six of 55 projects (11%) received bids for just one pavement type. The outcomes found in the table show that PCC pavement bids won 67% of the time. It is functionally impossible to make any conclusions based on the observed difference because of the unscientific sampling procedure, but it does point to a need for further research on the mechanics of the bid adjustment factor to verify that it is indeed fair and equitable. That research must include a comprehensive sensitivity analysis to ensure that assumptions built in each DOT’s LCCA procedure do not create an unintentional skewing of outcomes. As the study by Stone (2013) documented, the concrete industry was very much in favor of the price adjustment clauses in the ADAB, whereas the asphalt industry was very much opposed. As the discussion of LCCA in chapter three pointed out, classic LCCA is highly sensitive to the input values that are based on professional judgement or assumptions, specifically the discount rate, the analysis period, and salvage value (Gransberg and Scheepbouwer 2010). CONTRACTOR-BASED DESIGN ALTERNATIVES When DB was first implemented, it was touted as a mechanism to encourage multiple, innovative design solutions to the same design problem by permitting competing design-builders to propose varying designs that all complied with the same engineering performance criteria (FHWA 2006). Ironically, most DB projects are awarded with the DOT having provided the acceptable, equivalent pavement designs in the same manner as in a low-bid ADAB contract (Kufner 2015). The rationale revolves around two primary issues. The first is the lack of contractor liability for post-construction performance over the service life of the pavement. NCHRP Report 703 puts it this way:

34 Typical agency risks include reduced pavement performance, increased unplanned intervention, cost overruns, time delays, and associated indirect effects such as public dissatisfaction and increased work zone accidents. The agency also can perform an independent evaluation of economic and noneconomic factors to address responsibilities toward to the taxpayers, road users, and the environment. (Hallin et al. 2011) As a result of these cited risks, NCHRP Report 703 concludes that “on design-build projects, where the contractor has no responsibility for operation or maintenance, it is appropriate for the agency to reduce its risk by stipulating the pavement alternative(s) suitable for use or by specifying the selection criteria for the contractor to follow.” In doing so, the agency is forgoing the opportunity of potential benefits that may be found in contractor-furnished pavement design alternatives and sticking to tried and trusted pavement-type designs (Koch et al. 2010). The second issue involves the viability of using long-term pavement warranties as a means to mitigate the pavement per- formance risk. According NCHRP Report 699: Guidelines for the Use of Pavement Warranties (Scott et al. 2011), the primary issue is to determine whether those post-construction pavement performance aspects are truly under the contractor’s control. Distress issues related to reflective cracking, durability cracking, and alkali silica reactivity were determined to be examples of issues outside the contractor’s control. As such, the nature of the warranty must be restricted to distresses that are “measur- able and quantifiable and under the contractor’s control for asphalt and concrete pavements, respectively” (Scott et al. 2011). In high-volume urban highways where ride quality will be constantly “graded” by the traveling public, relying on a warranty can appear to be somewhat tenuous, especially since it can only be exercised when the pavement fails to meet performance criteria. The key to successfully implementing contractor-based pavement-type selection is for the agency to be able to establish realistic performance thresholds (Hallin et al. 2011) and then promulgate those key performance indicators as design perfor- mance criteria and/or specifications. The agency will likely conduct a risk assessment to determine how the potential bidders will perceive the ultimate performance risk. According to NCHRP Report 703, project-specific contractor risks begin with the contract provisions of a project. The contractor’s perceived risks increase as the “unknowns” in the proposed project increase. Contractors tend to manage these perceived risks by building financial contingencies into their bid price. Similarly, if the project criteria are unrealistic (e.g., unreasonable quality limits), the contractor perceives higher risk, resulting in a higher proposed price. (Hallin et al. 2011) Minnesota DOT (MnDOT) takes advantage of the use of alternative technical concepts (ATCs) in most of its DB projects (MnDOT 2012). ATCs permit early contractor involvement by allowing them to propose changes to the project scope during procurement, before contract award. In essence, ATCs act like value engineering change proposals where the proposer is allowed to bid the alternative if it is approved (Gad et al. 2015). Prior to 2014, MnDOT had forbidden pavement design–related ATCs, pre- ferring to prescribe the pavement-type design alternatives (Kufner 2015). However, it decided to test the potential for contractor- based design on its Trunk Highway 610 DB project that was let in August 2014. The project consisted of 3 mi of new freeway built on a new alignment. Each competing design-builder was permit to submit two pavement ATCs for review and acceptance by the MnDOT project team. The design-builder would then select one of the two approved alternatives and include it in its final proposal. The pavement alternatives were required to be designed using the MnDOT calibrated MEPDG design programs. The result was that all three short-listed teams submitted two acceptable alternatives with a total of five PCC and one HMA designs. One ATC proposed to replace the specified granular base material with full depth reclamation containing up to 100% asphalt millings. It was accepted and estimated to generate about $200,000 savings. Another proposed to replace the baseline design’s open-graded asphalt stabilized base with a geocomposite drainage layer that was estimated to save more than $500,000. The project was awarded on a best value basis with an LCC-based adjustment factor being applied to proposed HMA alternatives. The project was awarded to the second lowest bidder (Kufner 2015). MnDOT concluded that the use of ATCs to encourage both innovative design and cost savings was a successful effort. SUMMARY Conclusions Two conclusions can be drawn with regard to LCCA used as a part of ADAB procurement and are described as follows: 1. The additional cost for preparing two sets of pavement designs was offset by the savings recorded in INDOT ADAB projects.

35 2. The perception that material price adjustment clauses will reduce unit prices in paving contracts is not confirmed by the empirical research. Effective Practices Two effective practices were identified in the previous analysis. 1. Including the value of time factors such as A+B or lane rental creates a new level of competition between pavement alternatives by bringing the relative speed of construction into the contract award decision. 2. Price adjustment clauses in the ADAB process do not appear to be compatible with ADAB projects because they add a new layer of complication and are specifically discouraged by the FHWA Technical Brief (2012). Future Research Further research on the impact of the LCC-based bid adjustment factor is essential. The research could focus on a compre- hensive, possibly factorial, sensitivity analysis to ensure that assumptions built into each DOT variation of the ADAB LCCA procedure do not unintentionally skew the outcomes.