Managing Enhanced Risk in the Mega Project Era (2022)

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34 NCHRP LRD 86 to provide schedule and/or cost relief to the contractor if there are delays in obtaining the agreement that are not caused by the contractor or if the nal railroad agreement includes material changes to the requirements described in the information pro- vided to the proposers prior to the proposal due date. B. Pre-Award In this section, the risks and respective contract provisions associated with the pre-award phase are addressed. ese in- clude procurement and selection procedures, insurance, bond- ing, and warranty requirements, as well as contract payment and incentive/disincentive terms. 1. Delivery Methodology and Procurement Process e procurement process for a project is relevant to risk management in a number of ways. Using alternative delivery methods in combination with best-value or qualication-based selections has been cited by many researchers to lead to a collab- orative project environment, improve communication, provide a higher level of trust, and better allocate risk among project stakeholders.93 Procurement tools such as pre-RFP industry re- view meetings and one-on-one meetings with short-listed pro- posers during the pre-proposal period allow the owner to en- gage in a dialogue with prospective contractors to determine the pros and cons of the proposed approach to risk allocation for the project and obtain other input from proposers allowing the owner to make decisions regarding how best to manage risk. In addition, the owner’s ability to consider qualications of rms and individuals on each proposer’s team helps to ensure that the selected team will have the capability of avoiding problems and managing risk eectively. a. Size and Complexity Mega projects are particularly well suited for alternative proj- ect delivery methods. ere are a number of reasons for this, including timing issues where fast completion is a primary goal, allocating project specic risks to the party best able to manage those risks, and the need to integrate specialized design and con- struction for complex projects in order to achieve project goals. Indeed, the list of reasons are as various as the types of proj- ects. From interviews conducted with the 35 project managers/ directors in this study, and with three representing DBB projects, it was evident that the norm for most state transportation agen- cies was to use alternative project delivery methods rather than DBB on mega projects (exceeding $100 million in this study). DB and P3 were the most commonly used methodologies, followed by CM/GC. Several examples are discussed below. 93 Sogand Hasanzadeh, Douglas Gransberg, Behzad Esmaeli & Ghada Gad, Impact of Owners’ Early Decisions on Project Performance and Dispute Occurrence in Public Highway Projects, J. Leg. Aff. Dispute Resolut. Eng. Constr., ASCE, 10(2).0451804 (2018). See also, Robert M. Leicht, Keith R. Molenaar, John I. Messner, Bryan W. Franz, and Behzad Esmaeili, Maximizing Success in Integrated Projects: An Owner’s Guide, e Pennsylvania State University (2016). (3) Legislation. Relevant federal laws include Railroad Highway Projects, 23 C.F.R. § 646, subpt. B (2021), which de- scribes policies and procedures for advancing federal-aid high- way products through preliminary engineering, ROW, and con- struction; Reimbursement for Railroad Work, 23 C.F.R. § 140, subpt. I (2021), which describes policies and procedures for reimbursement to the states for railroad work done on projects undertaken pursuant to the provisions of Railroad-Highway Projects, 23 C.F.R. § 646, subpt. B (2021); Physical Construc- tion Authorization, 23 C.F.R. § 635, subpt. C (2021); Installation of safety devices, 23 U.S.C. § 109(e) (2021); Increased Federal share, 23 U.S.C. §  120(c) (2021); Railway-highway crossings, 23 U.S.C. § 130 (2021), which provides a detailed description of a program for the elimination of hazards of railway-highway crossings; Highway Safety Improvement Program, 23 U.S.C. § 148 (2021); Reimbursement, 23 C.F.R. pt. 140 (2021); Finding of cost eectiveness, 23 C.F.R. § 635.205(b) (2021), relating to the cost eectiveness of force account construction for the ad- justment of railroad facilities; Coordination, 23 C.F.R. 635.307 (2021), requiring that railroad work to be coordinated with the physical construction to prevent unnecessary delay or cost; Au- thorization, 23 C.F.R .635.309 (2021), which lists conditions for authorizing physical construction, and, 23 C.F.R .635.309(b) (2021) requires state transportation agencies to provide a state- ment that no railroads are aected by the project, that railroad work has been completed, or that arrangements have been made to complete the railroad work during highway construc- tion. Railroad Highway Insurance Protection, 23 C.F.R. 646, subpt A (2021), describes provisions for the use of federal-aid funds for the costs of public liability and property damage in- surance obtained by contractors for both their own operations and on behalf of railroads on or near whose ROW the contrac- tor will be working in during the construction of the project. Also relevant are Highway Safety Improvement Program, 23 C.F.R. 924 (2021), and Grade Crossing Improvements, 23 C.F.R. 646.214(b) (2021).92 (4) Summary recommendations. To address the risks of delays and increased costs relating to railroad coordination, the owner should perform sucient due diligence to identify any potential impacts a project may have on railroad ROW or that may interfere with railroad operations and should begin coor- dinating with the railroad in the early planning stages of the project. For P3 or DB projects, it is best practice for the project owner to enter into an agreement with the railroad that sets forth the parties’ respective obligations, and then require the contrac- tor to comply with the requirements of the executed railroad agreement. Where the railroad agreement is not executed by the time a DB or P3 contract is executed, the owner should consider providing the dra railroad agreement to proposers prior to the proposal due date, and then include provisions in the contract 92 For additional information and guidance, see Federal Highway Administration, Railroad Coordination on Federal-Aid Highway Proj- ects (updated 2/12/2018), https://www. wa.dot.gov/federalaid/150731. cfm.

NCHRP LRD 86 35 project delivery methods experience, scope of work, aggressive- ness of schedule, political pressure, and existing structures en- tailed in such large size projects. For P3 projects, such as the NCDOT I-77 Express (HOT) Lanes project, the interviewee mentioned that the owner oered a developer-ratio adjustment mechanism as a way to reduce risk to the developer and attract more bidders. (See Excerpt 23.) During the procurement phase of the I-77 Express (HOT) Lanes Project, NCDOT used one-on-one meetings to identify areas of risk of particular concern to the bidders, ultimately hold- ing 70 one-on-one meetings that mostly focused around the RFP language. ese meetings provided NCDOT the opportunity to revise the dra in light of the discussions on the risks perceived by the rms. is resulted in seven revisions to the RFP, obtaining feedback from the bidders on each revision. b. Project Delivery Method e process for procuring a construction contract depends in large part on the selected delivery method. For example, DBB contracts are usually awarded to the lowest responsive re- sponsible bidder.94 For DB projects, the selection criteria usu- ally involve evaluation of technical proposals as well as price. Each project delivery method is unique; thus, each project will need to be carefully analyzed to determine which method is the most appropriate for its requirements. As complex and larger projects increasingly move away from traditional DBB delivery methods,95 understanding the procurement processes for alter- 94 Nancy Smith, Patricia de la Peña, Edward Kussy, Sonik Sethi, Porter Wheeler, Jonathan Gifford, and Shirley Ybarra, Public-Private Partnership (P3) Procurement: A Guide for Public Owners, Federal Highway Administration, Report No. FHWA- HIN-18-004, (2019). 95 Gerald Yakowenko, Megaproject Procurement: Breaking from Tradition, Federal Highway Administration, Public Roads (2004), https://www. wa.dot.gov/publications/publicroads/04jul/08. cfm. Excerpt 23 – Relief/Compensation Events I-77 Express (HOT) Lanes Project, NCDOT 13.3 Developer Ratio Adjustment Mechanism Provisions 13.3.1 General e provisions of this Section 13.3 sets forth the conditions and requirements under which NCDOT will provide limited credit enhancement support for the Project and to facilitate the nancing of the Project (“Developer Ratio Adjustment Mechanism”). e Parties acknowledge that the Developer Ratio Adjustment Mechanism is not intended to guarantee a minimum return on investment to the Equity Members. Payments under the Developer Ratio Adjustment Mechanism are subject to, and contingent upon satisfying, the conditions and requirements of this Section 13.3. **** 13.3.4 Eligibility for Payment and Notice 13.3.4.1 Developer may request that NCDOT make payments under the Developer Ratio Adjustment Mechanism only if the projected annual Total Debt Service Coverage Ratio for the next forecasted debt service payment is forecasted to be below the DRAM Trigger Ratio (“DRAM Trigger Event”). • CDOT elected to use the CM/GC delivery method on proj- ects in its mountain corridor including the I-70 Vail Pass project. CDOT determined that the project would benet from contractor input on project innovations, constructa- bility, estimating, and risk reduction measures. CDOT also believed that CM/GC would enable it to facilitate important stakeholder control to a much greater extent than the DB method. It also viewed CM/GC as complementing the im- plementation of context sensitive solutions for environ- mental issues. • For the Tappan Zee Bridge Replacement Project, with a total project cost of $3.9 billion, the sheer size (rather than the complexity) helped drive the decision of NYDOT and the New York State ruway Authority to use DB in order to shi certain risks of the project to the design-builder. • For the I-15/I-215 Interchange Improvement (Devore) Project, the complexity of the project was the primary driver for Caltrans’ decision to use DB. e interchange is a major arterial for trucking, recreation, and commuting, and serves a signicant amount of truck trac from the Ports of Long Beach and Los Angeles. is heavy trac reg- ularly led to ve-mile backups on I-15. Accordingly, project speed, trac management, and safety were all major con- cerns. ese were compounded by the complex set of bridge structures and the necessity for obtaining additional ROW. With the DB delivery method, the project was able to come in under budget, a year early, and was recognized for its workplace safety. In terms of competition, given the size of the project, many interviewees cited the size of the project as having an eect on the number of bidders. More large non-local rms and/or joint ventures were seen to take the high risk and bonding require- ments entailed in such mega projects. An average of three bid- ders submitted proposals on each of the DB projects studied. Cited reasons for fewer bidders included bonding requirements,

36 NCHRP LRD 86 Procuring P3 projects adds a greater level of complexity, which needs to account for the length of the agreement term, as well as the inclusion of new elements (such as operations and maintenance). Typically, the determination whether P3 propos- ers meet responsibility standards is made at the short-listing phase and is subject to an updated review at the proposal phase. As is the case for all procurements that involve selection on a basis other than low price, the procurement documents should include clear and well-dened selection criteria and evaluation processes as well as relevant information regarding the process so that proposers understand the rules of engagement.98 With the projects studied, the selection method was a signi- cant decision to be made by the owner, considering the project objectives, as well as the applicable statutes. e selection meth- od for two of the three DBB projects included in the study was low bid while the UDOT I-15 Express Lanes Project was based on price + time bidding. DB projects mostly used best value (10 out of 14 projects). P3 projects used best value as well, with the exception of the MDOT I-75 Modernization Project, which was low-bid driven by contracting community resistance to a best value selection method. e CM/GC projects studied used a mix of best value and qualications-based selection. e rela- tive weightings of technical and cost ratings varied signicantly, ranging from 10 percent (technical) and 90 percent (cost) for the PennDOT Rapid Bridge Replacement P3 project, to 50 per- cent each (technical and cost) for the MnDOT TH 212 Project. Excerpt 24 contains provisions regarding best value criteria in the Indiana East End Crossing Project RFP. With their associated large size and complexity, most of the projects studied included a two-step process. e three DBB projects followed a one-step process. e two-step process in- volved a request for qualications (RFQ) followed by an RFP with the short-list qualied contractors who were selected on a best value basis. (See MnDOT RFQ instructions for the I-35W Minnesota River Bridge Replacement Project at Excerpt 25.) Half of the CM/GC projects used a two-step process with short-listing, while the remaining half used a one-step process, with the contractors primarily selected based on qualications at a stage where they were not locked to a price, such as with 98 Smith, et al., supra note 94. For airport progressive DB procurements, the process starts with the owner short-listing several proposer teams from their responses to the RFQ. Short-listed teams would be issued an RFP. e nal selection process uses a one-on-one interview process, during which the owner provides the proposers a technical problem to solve. e owner then evaluates the solution and how the team works together. For airport lump-sum DB procurements, the owners use a point-based three-stage evaluation process in the RFP. e three stages start with qualication packages submission, with proposers required to achieve 80 percent of evaluation points to be placed on a short list of rms requested to provide a preliminary design submittal. Proposers that receive 90 percent or more of evaluation points for the technical submittal then move to the nal step, involving a price proposal submittal that is considered by the owner in conjunction with the qualications and technical submittal. See, Pramen P. Shrestha, Brandon J. Davis & Ghada M. Gad, ACRP LRD 38: Legal Issues Related to Large-Scale Airport Construction Projects, Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, Washington, D.C., 2020. native delivery methods utilized on transportation mega proj- ects becomes increasingly signicant. A 2006 National Cooperative Highway Research Program report summarized the results of more than 50 case studies, identifying four primary concepts relevant to best-value sys- tems: parameters, evaluation criteria, rating systems, and award algorithms.96 ere were many dierent ways to evaluate pro- posals and select contractors, including: • award to the lowest bidder with a responsive technical proposal; • selection using a formulaic approach (which can involve point scoring or adjectival ratings converted to scores, and can be based on adjusted bids, adjusted scores, weighted criteria); • selection using a “cost-technical tradeo” method which can be quantitative (using a point scoring system for the technical rating) or qualitative (with technical proposals evaluated using an adjectival or other non-point rating sys- tem); and • award to the best technical proposal for a xed price set by the owner. e low bid and best proposal/xed price methods were and remain the simplest to use and, therefore, are easier to imple- ment by a transportation agency with no DB experience. How- ever, because of the focus of the low bid method on price, the ability to compete for innovative design solutions is reduced. e best proposal/xed price method is most used when the owner has determined that the desired project scope exceeds the budget and needs to obtain the maximum scope possible for the funds available. Many owners elect to use a formulaic approach, possibly because it is viewed as more objective, although that is questionable since point scoring by its nature involves subjective decisions. In some cases, the agency is required by law to use a formulaic approach.97 e tradeo method allows the greatest degree of discretion in the selection process, recognizing that it may be better to rely on the selection committee to consider the relative merits of dierent proposals and decide which oer best meets the owner’s needs, instead of trying to set a formula in advance of seeing the proposals, without knowing what might be oered. 96 Sidney Scott, Keith R. Molenaar, Douglas D. Gransberg, and Nancy C. Smith, NCHRP Report 561: Best-Value Procurement Methods for Highway Construction Projects, Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, Washington, D.C., 2006, pp. 8-9. 97 See, e.g., Minn. Stat. § 161.3426(b) (2020), Design-Build Award, which requires the use of an adjusted score approach, as follows: (b) e commissioner shall announce the technical proposal score for each design-builder and shall publicly open the sealed price proposals and shall divide each design-builder’s price by the technical score that the Tech- nical Review Committee has given to it to obtain an adjusted score. e design-builder selected must be that responsive and responsible design-builder whose adjusted score is the lowest.

NCHRP LRD 86 37 Excerpt 24 – Procurement/Selection Method East End Crossing, Indiana Finance Authority RFP document– 5.2 Best Value Determination e best value determination will be based on the following 100 point scale. e Financial Score will represent up to 75 points of the total score and the Technical Score will represent up to 25 points of the total score. A Proposer achieving 100 percent of the points available for the Financial Score will score 75 points and a Proposer achieving 100 percent of the points available for the Technical Score will score 25 points. e determination of apparent highest ranked Proposal shall be based on the highest Total Proposal Score computed as follows: Total Proposal Score (max. 100 points) = Financial Score (max. 75 points) + Technical Score (max. 25 points) 5.2.1 Financial Score e Financial Score (maximum of 75 points) will be comprised of the sum of the MAP Score and the Financial Proposal Feasibility Score. e MAP Score (maximum of 72.5 points) will be based on the value of Base MAP (determined pursuant to Section 5.5), normalized to the Proposal containing the lowest value of Base MAP, calculated as follows: MAP Score points= Lowest Value of Base MAP X 72.5 Proposer’s Value of Base MAP e Financial Proposal Feasibility Score shall be a maximum of 2.5 points. Financial Score = MAP Score + Financial Proposal Feasibility Score 5.2.2 Technical Score e Technical Score (maximum of 25 points) will be comprised of the sum of the Technical Proposal Score (maximum of 22.5 points) and the Schedule Score (maximum of 2.5 points). e Technical Proposal Score will be calculated based on the TPEC evaluation score for the Preliminary Performance Plans (maximum 100 points) as described in Section 5.4.1. e Preliminary Performance Plans for technical scoring purposes will be divided into three parts; the Preliminary Project Management Plan elements as further described in Section 5.4.1.1, the Preliminary Design-Build Plan elements as further described in Section 5.4.1.2 and the Preliminary Operations and Maintenance Plan elements as further described in Section 5.4.1.3. e TPEC evaluation score is the sum of the values of the three parts described in the preceding sentence. e Technical Proposal Score will be calculated using the following formula: Technical Proposal Score = TPEC evaluation score X 0.225. e Schedule Score (maximum of 2.5 points) will be based on the Proposer’s schedule for Substantial Completion as compared to the Base MAP Date, normalized to the Proposal containing the greatest schedule acceleration to Substantial Completion from the Base MAP Date, calculated as follows: Schedule Score = Dierence (in calendar days) between (i) Proposer’s scheduled date to achieve Substantial Completion and (ii) the Base MAP Date X 2.5 points Dierence (in calendar days) between (i) the earliest scheduled date to achieve Substantial Completion shown in any conforming Proposal, and (ii) the Base MAP Date the CDOT Military Access, Mobility and Safety Improvement project. c. Legislation e procurement method for a mega project can be restrict- ed by state and local legislation. Traditionally, public contracts were required to be awarded to the lowest responsible bidder. Alternative delivery methods, such as DB and P3s, may not be well suited for such limitations as they can severely curtail the ability to measure technical plans and expertise of the deliv- ery team. To address this, specic legislation has been adopted across the country permitting, and in some cases requiring, public entities to use DB or P3s to deliver projects. e scope of such authorization varies from jurisdiction to jurisdiction. Some states grant DB authority across the board, with few, if any, limitations on what sort of projects can use it. Other states will authorize one project at a time, or pilot program of projects, or individual local entities to use DB for their projects. California is a state with a case-by-case legisla-

38 NCHRP LRD 86 authorized WSDOT to use DB for the “Alaskan Way viaduct re- placement project” (SR 99 Tunnel DB project). Specic legislation is oen needed for P3 projects due to com- plexities associated with the inclusion of private nancing in the contract. Many states have statutory P3 authorization that speci- es the procurement methods for such projects, usually requiring some sort of best value process, among other requirements, for any P3 project in the state. is provides for some consistency in the projects, but also is used to assuage concerns about “privatiza- tion” and avoid pitfalls experienced by other projects.101 d. Summary Recommendations Selection of the project delivery method is one of the most crit- ical decisions to be made by an owner. Generally, the project drives the delivery method. No single delivery method is ideal for every 101 Federal Highway Administration, Center for Innovative Finance Support, State P3 Legislation, https://www. wa.dot.gov/ipd/p3/ legislation/ (last visited November 20, 2021). tive approach.99 While some statutes permit the use of alterna- tive project delivery for mega projects, some cases legislation requires use of a specic methodology.100 RCW 47.01.402 (3) 99 See, CA. SB. – 4 Public contract: design-build: Public private partnerships (2009-2010), which authorized ve local agency DB transportation projects and ten Caltrans DB projects) by adding sections 14661.1 and 70391.7 to the Cal. Gov’t Code, both of which have since been repealed; Chapter 6.5 (commencing with section 6800) and section 20688.6 to the Cal Pub. Cont. Code, which have also been repealed; and amending section 143 of the Cal. Sts. and High. Code, which is current through 2021. In 2010 California AB 2098 increased the number of design-build projects authorized under SB 4 by authorizing the RCTC to use the design-build method of procurement for the Route 91 Corridor Improvement Project. See also, California AB No. 1523, (2017), which authorized the SBCTA to use the DB contracting process by adding sections 130828 and 130828.1 to the Cal. Pub. Util. Code, current through 2021. 100 See, Design-Build Institute of America State Statute Report 2021 (guide to state design-build laws), https://dbia.org/wp-content/ uploads/2021/01/2021-DBIA-State-Statute-Report.pdf. Excerpt 25 – Procurement/Selection Method I-35W Minnesota River Bridge Replacement Project, MnDOT RFQ document– 4.3 SOQ Evaluation and Scoring MnDOT will evaluate all responsive SOQs and measure each Submitter’s response against the project goals and selection criteria set forth in this RFQ, resulting in a numerical score for each SOQ. MnDOT will use the following criteria and weightings: a) Submitter Experience (15 Points): Experience with the construction of long-span bridges and roadway projects of similar scope and complexity Experience with the design of long-span bridges and roadway projects of similar scope and complexity Experience of the proposed participants successfully working together as an integrated team Experience with projects with similar environmental challenges Experience with Design-Build delivery b) Key Personnel Experience (60 Points): e 60 points will be scored in accordance with the following sub-criteria: Project Management Team 25 points Quality Management Team 5 point Structural Team 15 points Roadway Team 10 points Permitting Team 5 points ` c) Project understanding and Approach (25 Points): Provide a narrative explaining the risks and opportunities associated with the Project goals listed in Section 1.2 along with how the Submitter’s teams will function to address them. Describe how the Submitter’s teams will interact with each other and eectively communicate with MnDOT’s oversite team in a co-located oce. Describe how the Submitter’s teams will resolve issues, manage risks, and manage quality. d) Legal and Financial (pass/fail) 4.4 Determining Short listed Submitters MnDOT will total the scores for each responsive SOQ and prepare a ranked list of Submitters. MnDOT anticipates short-listing at least three, but not more than ve most highly qualied Submitters that submit SOQs.

NCHRP LRD 86 39 a. Size and Complexity As projects become larger and more complex, the risks associated with the projects change and so does the nature and coverage amount of insurance. For instance, beyond the obvi- ous increase in the limits in the standard Commercial General Liability (CGL) policy, owners may require umbrella polices to extend the limits available for a variety of the coverages required. And since many large contractors have corporate insurance pol- icies available, owners may permit those policies to cover the umbrella policy requirement in lieu of having the contractor procure a separate policy for that purpose. Professional liability insurance is another product with limits and coverages aected by the size and complexity of the project. It is not unusual to see policies in the neighborhood of $5 million, $10 million, or $20 million required on mega proj- ects because of the potential losses the project may face. ere are several issues with professional liability insurance on mega projects. First, professional liability policies are generally “claims made” policies, which means they cover claims made during the period of the policy, not when the claim occurred. is means that unless a policy is in place at the time of the claim (which can be years aer completion of a project), there will be no coverage. is is typically addressed by requiring the contractor to pro- vide an extended reporting period (ERP) that will cover claims made even if a general policy is not in place at the time. ERPs can range from ve to ten years. Generally, when an entity has a professional liability practice policy, that policy and its limits cover all claims made during the policy period. us, a policy with a $5 million limitation will only satisfy $5 million in claims, even if claims in excess of that amount are made in the policy period. is means that when a contract requires $5 million in coverage, there may not be $5 million avail- able to satisfy claims from the project as they may be consumed by claims made on other, unrelated projects. To address this, some owners will require a “project specic” policy that provides coverage solely for that project. ese policies are expensive, with costs passed on to the owner. Plus, since it may also be tapped by the design-builder, it may not provide the amount of coverage the owner seeks. Another program option used on mega projects is where CGL coverage broadens to provide excess coverage for contrac- tors, subcontractors, suppliers, etc., and oen includes ancillary policies to cover specialty lines of insurance (i.e., automobile, pollution, etc.). is is known as a contractor-controlled insur- ance program (CCIP). Mega projects also oen carry owner- controlled insurance programs (OCIP) where the owner ac- quires the CGL coverage, as well as other ancillary policies if desired.105 CDOT has implemented the OCIPs on many of its CM/GC and DB projects, such as the I-70 West Vail Pass Auxiliary Lanes Phase I Project. (See Excerpt 26.) e inter- viewee for this project considered it an eective cost-ecient 105 Robert Alfert, Sarah Guo, 15 ings You Must Know About Insuring Mega-Projects: e Core Insurance Instruments, Risk & Ins. (April 2, 2019), https://riskandinsurance.com/insuring-mega-projects- part-two/. project. Owners need to determine the most important concerns about the project, whether they are time, money, stakeholder in- volvement, innovation, or nancing, among others. Many owners have selected DB as their preferred delivery method for mega projects. When assessing delivery methods, it is important to take into account an owner’s statutory authority to use alternative deliv- ery methods. States have various laws that can permit, bar, require, or circumscribe the use of particular delivery methods for dier- ent types of projects. Many factors must be considered in choosing a delivery method for a project, and owners need to take them all into account in order to ensure a successful project. 2. Insurance Requirements Insurance provisions are a prime example of a contractual clause that must be carefully reviewed to properly allocate risks. Insurance allows for the owner and contractor to push the risk of loss to a third party. ere is a wide variety of insurance prod- ucts on the market to cover an assortment of perils. e type of insurance policies carried in projects vary depending on a wide range of factors (project delivery method, complexity, size, state law, etc.), however, nearly all construction contracts will carry insurance policies that share common coverages.102 Determin- ing which insurance products, endorsements, and coverages should be used on a project, requires the owner to assess the project risks, the potential losses, the availability of insurance products to cover those risks at a commercially reasonable price, and which party has access to those policies. is is a special- ized area of practice, and both owners and contractors rely on in-house or independent risk managers in putting together a project’s insurance requirements. Although professional liability is the traditional treatment for errors and omissions in design, there are alternate insurance policies that can provide similar coverage.103 Owners Professional Protective Indemnity (OPPI), for example can provide two types of coverage: (1) additional limits over the practice policies of the design professionals hired for work on the project; and (2) pro- tection against professional liability claims made directly against the owner. is is useful for DBB projects where the owner and designer bear the design risk. Contractors Protective Professional Indemnity Insurance (CPPI) which is similar to OPPI but is pur- chased by DB contractors covers: (1) excess indemnity for claims brought by the insured contractor against the professional liability policies of design rms in contract with the contractor or design- builder; and (2) coverage for professional liability claims brought against the design-builder directly. 104 102 American Institute of Architects (AIA) Risk Management Pro- gram, Protect Yourself: Consider a Limitation of Liability Provision (2018), https://www.aia.org/articles/6075794-protect-yourself-consider-a- limitation-of-. 103 Jennifer S. Shane, Douglas D. Gransberg, Kelly C. Strong, Strategies for Managing Complex Projects, e Second Strategic Highway Research Program, (SHRP 2) Report S2-R10-RW-1, Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, Washington, D.C., 2014. 104 Rodney J. Taylor, Professional Liability Insurance for Construction Projects, IRMI (April 2012).

40 NCHRP LRD 86 some owners allow for probable maximum loss limits that are based on an assessment of what would likely be the maximum loss a facility were to incur. (See Excerpt 27 from the Indiana East End Crossing project.) Determining the probably maximum loss can be a very complex and technical undertaking, and since it may underestimate the potential loss, owners will require review and approval of any such an assessment. Another long-term insurance concern on mega long-term projects is the availability of insurance products. It is possible that over time insurance required by a contract may no longer be available in the marketplace or may become prohibitively ex- pensive in relation to the coverage. For this reason, many P3 contracts contain provisions that allow for the waiver of, or al- ternate products for required insurance. ese requirements are not that the coverages are dicult to get or go up in price, but rather they are impossible or impracticable to obtain. (See Ex- cerpt 28 Orange County, California Transportation Authority (OCTA)). In the event these clauses are invoked, the concessionaire will usually need to provide some sort of assurances, security, or substitute policy for the unavailable insurance. Such provi- sions allow for the owner to assume certain risks and keep the concessionaire from defaulting under the contract for failure to provide the required insurance. b. Project Delivery Method Every project delivery method will contain dierent contrac- tual relationships and methods for risk allocation which sub- sequently will aect how insurance policies and limits should be adjusted. For example, professional liability insurance is program to handle insurance claims, especially with the con- tractor being responsible for deductibles. UDOT also utilizes a rolling OCIP for all its capital improvement projects and re- quires the contractor’s participation if the engineer’s estimate is more than $75 million.106 UDOT developed an OCIP Manual to provide a general overview of its program107, as well as a web- portal for contractors. OCIPs were used on its $163 million I-15 Express Lanes Project. Special coverages and provisions clauses are also an impor- tant consideration in mega projects, as by their very nature, they are high-dollar ventures that few companies can complete. When a concession is added in a P3 scenario, these projects also become long-term engagements. ese factors mean that spe- cial types of insurance provisions are sometimes needed. Two examples are probable maximum loss limits for builder’s risk policies and commercial unavailability. Builder’s risk and property insurance policies are usually writ- ten for the replacement value of the entire project, which oen corresponds to the contract price. But where there is a facility that has a minimal chance of a total loss, for instance a ten-mile toll road is unlikely to be completely destroyed in one occurrence, or a bridge is generally not going to lose its approaches or entire deck, full replacement value may not be appropriate but could be very expensive, especially in a long-term concession. Instead, 106 Construction Manual of Instruction, 44, UTAH DOT (2016). 107 UDOT, Insurance Manual: Rolling Owner Controlled Insurance Program (OCIP) Manual, UTAH DOT (2020). https://drive.google.com/ le/d/1BNXm_nVLoXzjBsyilTcWdXODoBPJuYXe/view (last visited Nov. 20, 2021). Excerpt 27 – Insurance Requirements East End Crossing, Indiana Finance Authority Exhibit 9, Section 1(c): Builder’s Risk The policy shall provide coverage per occurrence up to the full replacement cost or a loss limit based on a Probable Maximum Loss (PML) study of the covered property loss, and will include reasonable sublimits for professional fees, demolition and debris removal, without risk of co-insurance; provided, however, that the policy may include appropriate sublimits for earthquake, earth movement, tsunami and flood but in no event less than $50,000,000 aggregate each for earthquake and flood. If a PML option is used, then the study supporting the PML must be provided to IFA, and the PML may only be used as an alternative if it is approved, in writing, by IFA. Excerpt 26 – Insurance Requirements I-70 West Vail Pass Auxiliary Lanes Phase I Project, CDOT RFP – 2.2 C. Minimum Proposal Requirements …CDOT may, at its election, implement an Owner Controlled Insurance Program (OCIP) for the construction of this Project. Lines of insurance coverage may include any or all of the following: Workers Compensation, Commercial General and Excess/Umbrella Liability, Contractors Pollution Liability, and/or Builders Risk. CDOT reserves the right to determine who participates in the OCIP.

NCHRP LRD 86 41 tor provide professional liability insurance to cover errors and omissions associated with the design. e limits of the policy should be in line with the size of the project. Furthermore, be- cause of the self-consuming nature of the policies, and the pos- sibility that a practice policy should be tendered, owners should consider either increasing limits or requiring a project policy. When addressing builder’s risk, owners should be cognizant of the dierences between full replacement value and probable maximum loss coverage, as there are positive and negative as- pects to each. And nally, given the types of insurance and cov- erages provided, contractors will likely request that the contract contain a provision addressing unavailability of insurance. 3. Surety Bonds and Other Performance Security Surety bonds and other types of performance security, such as letters of credit and parent company guarantees, serve an important function in managing project risk, by ensuring that the owner has a means of recourse if the contractor fails to perform.110 Bonds are legally binding agreements between three enti- ties: project owners as the bond obligee; contractors as the bond principal; and the surety company that issues and guarantees the bond.111 In addition to requiring payment of premiums for issuance of bonds, the surety also obtains an indemnity agree- ment from the contractor or its parent company as security for the possibility that the bond may be called upon. e dierent types of bonds vary in their specic conditions. For example, bid bonds guarantee that if chosen as the winning bidder, the 110 For an extensive discussion regarding surety bonds and alternative performance security, including the purpose, history and legislative framework for surety bonds, pursuing remedies, commercial issues, current practices and the surety industry perspective, see Michael C. Loulakis, Shannon J. Briglia & Lauren P. McLauglin, TCRP LRD 40: Legal Issues Involving Surety for Public Transportation Projects, Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, Washington D.C., 2012. [hereinaer referred to as Loulakis, TCRP LRD 40]. 111 Todd Bryant, Construction Bonds Explained, Construction Executive, (May 26, 2019) https://constructionexec.com/article/ construction-bonds-explained. especially important for projects which use integrated project delivery methods such as DB, P3, CM/GC or any other deliv- ery method in which the contractor plays a role in the design process. Most instances involving defects in DB projects trig- ger insurance coverage issues, as CGL generally does not cover design errors which are subject to a dierent type of insur- ance.108 In addition, professional liability policies generally do not provide coverage for contractual obligations in excess of the professional standard of care. is means that, among other things, a professional liability policy will not cover a breach of an express warranty to provide services beyond the standard of care, such as guaranteeing the outcome of a design. c. Legislation State legislation can sometimes specify what insurance is required and what entity is obligated to provide it. In Califor- nia, for an owner on certain projects to require the contractor to purchase builder’s risk insurance, the owner must request that the contractor separately list its price for the insurance on its bid form. Workers compensation insurance is a require- ment in almost every state. Likewise, legislative authority for certain types of delivery methods may specify what sort of insurance is required. By way of example, design-builders are required by statute to carry professional liability insurance in California,109 d. Summary Recommendations Contracts are about risk allocation and risk transfer. Insur- ance provides the owner and contractor the opportunity to transfer risk to a third party. is risk transfer is key in mega projects, with their potential for large losses. Standard insur- ance policies that are found on most construction projects will be required, with their limits adjusted based on the sort of risks posed by the design and construction of the project. Also, if an alternative delivery method is used, such as in the case of a DB, CM/GC, or P3 procurement, it is critical that the contrac- 108 See, Loulakis, NCHRP LRD 68, supra note 72, at 70. 109 Cal. Pub. Cont. Code § 6826(b) (2021) (repeal contingent). Excerpt 28 – Insurance Requirements I-405 Improvement Project, OCTA 9.2.8 Commercial Unavailability of Required Coverages If, through no fault of design-builder, any of the coverages required in this Section 9 (or any of the required terms of such coverages, including policy limits) become unavailable or are available only with commercially unreasonable premiums, Authority will, in its reasonable discretion, consider alternative insurance packages and programs proposed by design-builder, which in the opinion of the Authority provide coverage equivalent to that specified in the Contract. Design-builder must demonstrate to Authority’s satisfaction that it has exhausted all efforts to place the required insurance coverages, and shall advise Authority of the specific results of those efforts. Design-builder shall not be entitled to any increase in the Contract Price for increased costs resulting from the unavailability of coverage and the requirement to provide acceptable alternatives.

42 NCHRP LRD 86 duce the performance bond amount to 50 percent, leaving the payment bond at 100 percent as required by law.113 As can be seen from the Bay Bridge example, project size alone can present an obstacle to 100 percent bonds. Only a lim- ited number of sureties have the ability to provide bonds equal to 100 percent of the value of a mega project, or to participate as co-sureties in providing such bonds, and only a limited num- ber of contractors have bonding capacity to obtain such bonds. Limitations can include the overall nancial capabilities of the contractor, the current backlog of the contractor, the state of the market, the level of risk associated with the project (bridges and tunnels generally involve a higher level of risk than at-grade projects), and availability of security products for mega projects. us, both the risk to the project and the available pool of con- tractors must be considered when establishing the amount and types of payment and performance security for a project. Another limitation on the availability of bonds for the larger and more complex mega projects is the duration of the contrac- tor’s obligations for the project. Sureties view longer term con- tracts as riskier, as underwriting determinations are based on the overall nancial capabilities of the contractor and other fac- tors known at the time the bond is issued. Longer term contracts present a greater chance of changes to those factors during the term. Owners may nd an even narrower pool of contractors able to obtain bonds for larger projects with construction dura- tions in excess of ve years. Due to the size and complexity of mega projects, most such projects involve the participation of multiple contracting rms, with bonds issued by co-sureties and subject to reinsurance, allowing the sureties to spread the risk and expand their capac- ity to issue large single bonds.114 e scope of work may also present issues for sureties in making decisions regarding issuance of performance bonds for mega projects. While sureties are accustomed to the risks asso- ciated with DBB projects, the underwriting decision becomes more dicult for projects that include design services or op- erations and maintenance services, or contracts involving the supply of transit vehicles.115 For certain projects, the owner may be willing to consider performance bond forms that exclude coverage for design, provided the owner benets from the re- duced premium charged for the bond.116 For certain projects, if the surety market is not willing to underwrite the risk, or the 113 See, Cal. Civ. Code § 9554 (2021). e Bay Bridge project faced numerous challenges before it was nally completed. See, Isabel Angell, Why the New Bay Bridge Cost $6.4 Billion, Sept. 4, 2013, https://www. wnyc.org/story/316201-brief-history-64-billion-bay-bridge/. 114 Loulakis, TCRP LRD 40, supra note, 110, at 50-51. TCRP LRD 40 provides an extensive amount of information on the surety market’s perspective on bonding transportation mega projects, including the eect of bonding requirements on competition, underwriting considerations for major projects, and the scope of bonded obligations, id. at 32-42, 49-55. 115 Id. at pp. 51-54. 116 See, id. at 20, 47. is approach was used for the Exposition Metro Line Construction Authority’s 2006 DB contract for the Mid- City/Exposition Light Rail Transit Project. contractor must accept the job. If not, the owner has the right to recover its costs related to the bidder’s refusal to sign the con- tract, or may have the right to demand payment of the full bond amount as liquidated damages. Payment bonds are generally re- quired by statute to account for the fact that public property is exempt from mechanics liens and guarantee the contractor will pay all of its workers, subcontractors, etc. in accordance with the contract and applicable law.112 Performance bonds cover the contractor’s performance obligations. If the contractor defaults, the surety has the obligation to take one of the following actions: (a) step in to nish the work, (b) nd another contractor to n- ish it, or (c) pay damages to the owner up to the limits stated in the bond. Letters of credit are bank instruments requiring payment on demand, and similar to bonds require payment of a fee as well as security to assure the bank that it will be repaid in the event of a call on the letter of credit. Due to the nature of letters of credit, it is a much simpler process to make a demand on a letter of credit than to enforce a surety bond. A guarantee is a promise by a third party, typically a par- ent company or other aliated entity, that the contractor will perform its obligations. In some cases, a performance guarantee is provided, giving the owner the right to require the guarantor to take over the contract. However, in most cases the guarantee does not include an agreement that the guarantor will in fact perform the work, but instead gives the owner the right to col- lect damages from the guarantor if the contractor fails to per- form. Guarantees thus serve essentially the same function as a performance bond—namely, to provide additional assurance to the owner that the project will be completed pursuant to the terms of the contract. One important dierence between guar- antees and bonds is that guarantees are provided by an aliated entity for little or no additional cost to the owner, while bond premiums can be a signicant project expense. One potential issue with guarantees is that, if the contractor has failed, there is also a likelihood that the guarantor will be in nancial dif- culty. Guarantees are generally considered dicult to enforce and for that reason bonds and letters of credit are considered better security. a. Size and Complexity Mega projects present certain challenges with respect to performance security, due to the size of the project as well as the scope of work included in alternative delivery contracts. Caltrans, in discussions with industry representatives regard- ing construction of the viaduct section of the east span of the San Francisco-Oakland Bay Bridge, was advised that, although they could obtain 100 percent payment bonds for projects in the billion-dollar range, if necessary, performance bonds were not available in that amount. Caltrans proceeded to assess the level of risk associated with the default and also engaged in extensive discussions with the surety market, ultimately deciding to re- 112 Loulakis, TCRP LRD 40, supra note 110, at 12.

NCHRP LRD 86 43 Owners may request legislative authorization to reduce the required bond amounts for large projects, unless the authority already has the legislative authority to leave the bond amount to the discretion of the contracting entity.123 Caltrans had leg- islative authority allowing a reduced bond amount for the San Francisco Bay Bridge project.124 For the WSDOT Alaskan Way Viaduct SR 99 Bored Tunnel Alternative DB project, with a contract value of $1.089 billion, the owner determined that the project risk would be covered by a surety bond of $500 million (Excerpt 29). e owner obtained special legislation allowing a reduced bond amount.125 123 See, e.g., Tex. Transp. Code §§  223.250(b) and (c) (2021), Performance or Payment Bond; Cal. Pub. Cont. Code §  6825(a) (2021), Payment and Performance bonds (Repeal contingent). 124 Cal. Pub. Cont. Code § 10222 currently provides as follows: (a) Each bond shall equal at least one-half of the con- tract price, except as otherwise provided in Section 9554 of the Civil Code, in the California Toll Bridge Authority Act (Chapter 1 (commencing with Section 30000) of Division 7 of the Streets and Highways Code), or in subdivision (b). (b) Notwithstanding subdivision (a), for projects with a contract price greater than two hundred y million dollars ($250,000,000), the Department of Transportation shall have the discretion to specify that the payment bond shall equal not less than one-half of the contract price or ve hundred million dollars ($500,000,000), whichever is less. 125 Wash. SB 5499 (3) (April 26, 2009) states: (a) On highway construction contracts administered by the department of transportation with an estimated contract price of two hundred y million dollars or more, the depart- ment may authorize bonds in an amount less than the full contract price of the project. If a bond less than the full con- tract price is authorized by the department, the bond must be in the form of a performance bond and a separate payment bond. e department shall x the amount of the perfor- mance bond on a contract-by-contract basis to adequately protect one hundred percent of the state’s exposure to loss. e amount of the performance bond must not be less than two hundred y million dollars. e payment bond must be in the amount xed by the department but must not be less than the amount of the performance bond. e secretary of transportation must approve each performance bond and payment bond authorized to be less than the full contract price of a project. Before the secretary may approve any bond authorized to be less than the full contract price of a project, the oce of nancial management shall review and approve the analysis supporting the amount of the bond set by the department to ensure that one hundred percent of the state’s exposure to loss is adequately protected. All the requirements of this chapter apply respectively to the individual perfor- mance and payment bonds. e performance bond is solely for the protection of the department. e payment bond is solely for the protection of laborers, mechanics, subcontrac- tors, and suppliers mentioned in RCW 39.08.010. (b) e department shall develop risk assessment guidelines and gain approval of these guidelines from the oce of nancial management before implementing (a) of this subsection. e guidelines must include a clear process for how the department measures the state’s exposure to loss and how the performance bond amount, determined under (a) of this subsection, adequately protects one hun- dred percent of the state’s exposure to loss. cost of premiums is prohibitive, the owner will need to consider accepting alternate forms of security such as parent company guarantees. b. Project Delivery Method e type of delivery method used will have a signicant impact on the contractor’s ability to provide performance security and may also aect premiums. For DBB and CM/GC projects, the construction type of work is consistent with in- dustry norms and thus should be a non-issue, but the size of the project as well as any unusual risk allocation provisions will be subject to scrutiny by the sureties in making their underwriting decisions. For alternative delivery projects, sureties are concerned about non-construction work included in the scope as well as the risk allocation provisions in the contract. “Other issues that concern sureties on all projects, but particularly megaprojects, include extremely complicated designs and onerous contrac- tual risk-shiing provisions. e more complicated the design, the more onerous the terms, or a combination of both, the less appetite the surety industry will have to issue a performance bond.”117 c. Legislation e Miller Act,118 applicable to federal contracts, requires contractors to post performance and payment bonds on con- tracts that exceed $100,000 in value.119 e statute requires a payment bond with a surety satisfactory to the ocer for the pro- tection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person. e amount of the payment bond shall equal the total amount payable by the terms of the contract unless the ocer awarding the contract deter- mines, in a writing supported by specic ndings, that a payment bond in that amount is impractical, in which case the contracting ocer shall set the amount of the payment bond. e amount of the payment bond shall not be less than the amount of the performance bond.120 Each state has its own version of the Miller Act, known as the “Little Miller Act,” which requires performance and pay- ment bonds for contractors bidding on construction, alteration, or repair of any public building or most public works projects in the state.121 e contract amount for which the bonds are re- quired can vary from state to state, and state law oen does not allow the same degree of exibility as the Miller Act. As of 2011, thirty-two states require 100 percent performance and payment bonds for public works projects exceeding certain threshold contract prices.122 117 Id. at 18. 118 74 Pub. L. 321, 49 Stat. 793 (1935) (codied as amended at U.S.C. tit. 40) (2021). 119 40 U.S.C. § 3131(b) (2021). 120 Id. § 3131(b) (2). 121 Loulakis, TCRP LRD 40, supra, note 110, at 18. 122 Id. See also, National Association of Credit Management, Manual of Credit and Commercial Laws, ch. 20 (50 State Construction Law Survival Manual: Contract Claims, Mechanic’s Liens, Payment Bonds & Bankruptcy), rev. 2019.

44 NCHRP LRD 86 that supplies the new product would bear the risk of failure of the product during the warranty period.128 As part of its adop- tion of the “Design-Build Rule,” FHWA modied the warranty regulation to allow short-term general warranties and longer term performance warranties for DB projects.129 Warranty provisions must be carefully draed to properly al- locate risks to dierent parties. In general, express warranty pro- visions in construction contracts require the contractor’s work to be free of defects and in conformity with the design provided by the owner and obligate the contractor to x defects discov- ered during the warranty period.130 Warranties for DB contracts also need to address responsibility for defects in design. Regardless of whether the contract includes an express war- ranty, the contractor may be deemed to have provided implied warranties.131 Such warranties do not obligate the contractor to repair defects but give rise to liability for damages incurred by the owner. Contractors oen seek to limit their liability for de- ciencies in the work by disclaiming implied warranties in their contracts. However, such disclaimers are not commonly includ- ed in highway contracts, as transportation agencies are reluctant to release contractors from liability for latent defects that might not be discovered until years aer the project is complete.132 Furthermore, certain implied warranties cannot be disclaimed and exist in all contracts regardless of a disclaimer, such as the 128 Prior 1991, the FHW had a longstanding policy that restricts the use of warranties on Federal-aid projects to electrical and mechanical equipment. e rationale for the restriction was that such contract requirements may indirectly result in Federal-aid funds participating in maintenance costs, and the use of Federal-aid funds for routine maintenance is prohibited by law. Federal Highway Administration, Construction Program Guide, Warranties, (updated 6/27/2017) https:// www. wa.dot.gov/construction/cqit/warranty.cfm. 129 Design-Build Contracting, 67 Fed. Reg. 75,902 (Dec. 10, 2002), adding 23 C.F.R. pt. 636 and modifying pts. 627, 635, 637 and 710. 130 Michael A. Scheer, Warranty/Guarantee Provisions in Construction Contracts, Mondaq, (Aug. 3, 2015). 131 Alex Benarroche, An Implied Good Workmanship Warranty Exists for All Construction, Level Set, blog, Feb. 13, 2019 (last updated Feb. 3, 2021), https://www.levelset.com/blog/workmanship-warranty/. See also, Kevin P. Walsh, Identifying and Mitigating the Risks Created by Problematic Clauses in Construction Contracts,  9 J. Leg. Aff. Dispute Resolut. Eng. Constr. (2017). 132 However, in most states, as a matter of law, the contractor’s liability for defects in its work product will be cut o once the statute of repose expires. See, Loulakis, NCHRP LRD 68, supra note 72, at 83-86 and App. B. d. Summary Recommendations Performance security for a mega project, particularly for those using an alternative delivery method, presents certain challenges. e number of contractors with sucient bonding capacity to cover the value of a mega project is limited, resulting in use of joint ventures to bid on the projects. In addition, for a variety of reasons, the owner may need to consider accept- ing bonds for less than 100 percent of the contract value. While this is permitted under the Miller Act, and a risk assessment typically shows that even a disaster scenario would not require a 100 percent bond, this may present issues in states where leg- islation requires agencies to obtain 100 percent bonds for their projects, regardless of size. It should be noted that a reduction in the bond amount does not necessarily result in lower premiums, as underwriting considerations are based on the contract value and the potential exposure of the surety if a maximum probable loss occurs, rather than the bond amount. Ultimately, the owner will need to determine just how much protection it needs and at what cost. 4. Warranty Requirements Owners should ensure that their projects are correctly de- signed and built and that problems will be remedied. Express warranties provide a mechanism to ensure that the contractor will perform the work properly and will remedy any defects dis- covered, without charge to the owner, for the duration of the warranty period. In 1995, FHWA adopted a regulation permit- ting express warranties for federal-aid projects, subject to cer- tain restrictions.126 is regulation was adopted aer FHWA analyzed the results of a special evaluation (SEP-14) that deter- mined that highway warranties could help prevent unnecessary maintenance and repair costs resulting from premature failures due to poor construction methods or poor quality of mate- rials.127 In addition, FHWA concluded that the use of highway warranties could enable states to try new products despite the lack of an adequate performance record, since the contractor Loulakis, TCRP LRD 40 supra note, 110 at 58 discusses the legislative his- tory of Wash. SB 5499, stating that it “explained that this change was based on ‘recent activity in the surety market and on industry information’ that sureties ‘do not generally sell bonds in which the value of the bond exceeds $500 million. . . . the “maximum risk at any given time on a highway con- struction project…is about 30 percent of the contract amount.’” 126 Guaranty and warranty clauses, 23 C.F.R. § 635.413 (2021). 127 See, Federal Highway Administration, Construction Program Guide, Special Experimental Project No. 14 – Alternative Contracting, https://www. wa.dot.gov/construction/cqit/sep14.cfm. Excerpt 29 – Bonding Requirements Alaskan Way Viaduct (SR99) Bored Tunnel Alternative Project, WSDOT [Contract Value: $1.089 billion] 19. Surety Bonds. Design-builder shall provide a Performance Bond and a Payment Bond, each in the amount of $500,000,000.

NCHRP LRD 86 45 e contractor’s warranty obligations should be covered under the performance security provisions for the original work unless the owner agrees to release the security. It is not uncom- mon for owners to allow for a replacement of the original per- formance bond with a smaller warranty bond. If the contractor enters into a separate agreement to perform long-term main- tenance work, that contract would need to identify any perfor- mance security required for that work. a. Size and Complexity Projects of any size can benet from warranties, both to en- courage quality during design and construction and address problems that are discovered following completion. For proj- ects where the contractor is responsible for the design and con- struction of the project, the contract terms frequently require the contractor to warrant that both the design and construction of the work will be free from defects, and in some cases may require the contractor to warrant that the project is t for its intended purpose. ese warranties are viewed as suitable by owners in order to ensure that they receive the full benet of en- gaging a single entity to both design and construct the project. However, contractors may nd these provisions objectionable because they require a higher standard of performance for the design work and may result in liability that will not be covered by insurance. To respond to the contractor’s concerns, some owners may be willing to limit the “tness for purpose” war- ranty to specic elements of the project or qualify it with refer- ence to the scope of work. In addition, if the owner’s primary purpose in using DB is merely to accelerate delivery and avoid liability for contractor claims relating to design defects, the owner may be willing to relieve the contractor of responsibility for design defects that do not involve negligence--thus resulting in the owner’s retaining the same post-completion responsibil- ity that would apply for DBB contracts. Excerpt 31, a provision from the SBCTA Phase 1 of the I-10 Corridor project, provides an example of this approach. Finally, if the owner is looking for the contractor to remain responsible for project performance on a long-term basis, it should consider including maintenance obligations in either the original contract or a separate maintenance contract. Warranty bonds. Contractors working on mega projects must dedicate a signicant amount of their bonding capacity to warranty of good workmanship, which warrants that work will be suciently free of any major defects.133 ere are several types of express warranties included with construction contracts that are used to allocate risks regardless of size or project delivery method. Examples of such warranties in standard contracts include: materials and equipment warran- ties, which provide that all materials and equipment furnished will be new and of good quality; a work warranty, which war- rants that the work performed by contractor will conform to contract documents; and a repair warranty, by which a contrac- tor warrants the completed work for a period of time aer com- pletion of the project.134 e warranty period can be from one to three years or more, depending on the type of project type of funding, and federal, state, and local limitations, as well as the type of warranty. Long-term warranties are dicult to obtain as contractors have an interest in closing out projects. Long-term warranties for federal-aid projects may not be permitted under FHWA rules.135 An owner may opt to have specic items subject to a long-term performance warranty. For instance, the con- tract may include a general two-year warranty, with a ve-year performance warranty for pavement. (See Excerpt 30 from the FDOT SR 30 -Pensacola Bay Bridge Replacement DB project agreement.) Warranty enforcement is subject to challenges, as contrac- tors may argue that poor maintenance or negligence on the part of the owner caused the loss. is defense is one of the reasons that owners may require the contractor to undertake responsi- bility for maintenance following completion. In fact, a capital maintenance agreement, procured at the same time as the con- tract, could be used to eectively extend the warranty period far beyond traditional warranty periods, and may be desirable for products that the owner has not used previously. Such an agree- ment provides compensation to the contractor for its mainte- nance eorts, giving the contractor an incentive to perform high quality work during the design and construction phase in order to increase its prots on the maintenance contract. 133 Benarroche, supra note 131. 134 Richard S. Robinson, Warranties in Construction Contracts: Contractor’s Draing Considerations, omson Reuter’s Practical Law Real Estate, 2015. 135 See, Guaranty and warranty clauses, 23 C.F.R. § 635.413 (2021). Excerpt 30 – Warranty Requirements SR 30 - Pensacola Bay Bridge Replacement, DB Project, FDOT e DB Firm shall provide at a minimum the three (3) year warranty period as dened by Article 338, Value Added Asphalt Pavement, Division II, Standard Specications. e DB Firm may provide a longer warranty period than the three (3) year minimum. e DB Firm shall provide at a minimum the ve (5) year warranty period as dened by Article 475, Value Added Bridge Components, Division II, Value Added Specications. e DB Firm may provide a longer warranty period than the ve (5) year minimum. e DB Firm shall provide a minimum one (1) year warranty for all components of the Gulf Breeze Wayside Park improvements. e park asphalt shall provide the minimum 3 year Value Added Asphalt warranty as described above.

46 NCHRP LRD 86 the Caltrans 15/I-215 Devore Interchange DB Project, warrant- ing that the design work performed by the design-builder and its subcontractors meets accepted standards of the industry. is is the equivalent of provisions in the owner’s direct con- tracts with the design professional (i.e., the architect or engi- neer) for DBB or CM/GC projects. DB and P3 contracts may include a more comprehensive warranty that the completed project will meet certain minimum performance levels. In all cases, warranty provisions should be clearly draed to avoid the potential for future disputes. It does not appear that implied warranties vary with the project delivery method. Most jurisdictions hold that certain warranties are implied in a construction contract that does not disclaim them, and these implied warranties are substantially similar from state to state. DB projects receiving federal aid have some constraints with respect to the length and scope of warranties, as well. For this reason, owners will sometimes require, either in the contract or under a separate contract, that the contractor provide capital maintenance for a period of years post construction. One of the benets of P3 agreements is the transfer of respon- sibility for long-term operations and maintenance of the facility to the contractor. e contractor will be required to ensure the project meets specied performance requirements during the term. In addition, P3 agreements typically include handback provisions requiring the contractor to return the facility to the owner in a specied condition at the end of the term. Together these provisions operate similar to a long-term warranty, requir- ing the correction of design and construction defects during the term, however unlike a typical general warranty, the contractor is compensated for its long-term obligations. Another dierence is that the project must meet certain performance requirements regardless of whether there was defective work. By shiing the risk of operations and maintenance to the concessionaire, the owner may be assured the project will be well maintained. is is of particular importance for revenue producing projects, such as toll roads and transit projects, where the willingness of customers to use the facility may be Templates/Media/les/archive/binary/contractors_construction.pdf.  such projects over an extended period, thereby running the risk that they might not have sucient capacity to undertake future projects. Performance bonds remain in force through comple- tion of all work on the project, including warranty obligations, and can also be called upon to cover liability for latent defects aer the warranty period ends. To reduce this exposure and allow contractors to re-gain bonding capacity aer the project is complete, owners have generally been willing to allow the contractor to replace the original bond with a reduced war- ranty bond. is reects the fact that potential damages follow- ing project completion are far less than what could be expected from a catastrophic event during construction. Although the bond may be called a “warranty” bond, the terms should make it clear that the bond secures all of the contractor’s obligations under the contract that survive completion. ese replacement bonds are commonly valued at ten percent of the contract price (See again Excerpt 31), but the owner should assess the risk for each project to determine whether a higher amount is appro- priate. Warranty bonds have been permitted on projects such as the Caltrans I-15/I-215 Interchange Improvement Project, RCTC Route 91 Corridor Improvement Project, MnDOT I-35W Minnesota River Bridge Replacement, NYDOT and New York State ruway Authority Tappan Zee Hudson River Crossing Project, and the Indiana Financing Authority/Indiana Department of Transportation’s I-69 Major Moves. Notably, the ability to substitute a warranty bond does not appear to be a critical issue for many contractors, possibly because their sure- ties are willing to release bonding capacity as the contractor’s risk diminishes with completion of the project. Nevertheless, inclusion of a warranty bond provision in the contract may be viewed favorably by industry and owners should consider it for that reason. b. Project Delivery Method For DB projects the contract should include an express war- ranty regarding the adequacy of the professional services the design-builder provides.136 Excerpt 32 includes language from 136 See, Mark C. Friedlander, Contractors’ Construction Warranties, Schiff Hardin LLP., (1994), https://www.schiardin.com/ Excerpt 31 – Warranty Requirements I-10 Corridor Contract, SBCTA 10.1.3. Warranty Bond (a) Subject to Sections 10.1.1(c) and 10.1.2(c), upon Final Acceptance, DB Contractor may obtain a release of the Performance Bond and Payment Bond if DB Contractor provides to SBCTA and maintains a warranty bond in the form of Exhibit 8-C, or such other security as SBCTA may approve in its sole discretion, that guarantees performance of Work required to be performed during the period following Final Acceptance, including Warranty Work and Plant Establishment Work, and which shall also constitute a payment bond guaranteeing payment to Persons performing such Work (the “Warranty Bond”). . . . (b) If used, the Warranty Bond shall be [10 percent of the Contract Price]. SBCTA will release the Warranty Bond upon the later of expiration of the Warranty Period or Plant Establishment Period.

NCHRP LRD 86 47 Excerpt 32 – Warranty Requirements I-15/I-215 Interchange Improvement (Devore)Project, Caltrans DB 104-15.1 21.1.1 Project Warranties Design-builder warrants that: (a) all design Work furnished pursuant to the Contract Documents shall conform to all professional engineering principles generally accepted as standards of the industry in the State; (b) the Project shall be free of defects (including design defects except to the extent that such defects are inherent in prescriptive specications included in the Contract Documents, unless (i) design-builder has actual or constructive knowledge of such defects and (ii) design-builder fails to request a change thereto by Department); (c) materials and equipment furnished under the Contract Documents shall be of good quality and, when installed, shall be new; (d) the Work shall meet all of the requirements of the Contract Documents; (e) the specications and/or drawings selected or prepared for use during construction are appropriate for their intended use; and (f) the Project shall be t for use for the intended function pursuant to and in accordance with the specications of the Contract Documents. aected by its overall condition. P3 contracts include various mechanisms for assuring performance of the concessionaire during the operations and maintenance phase, including noncompliance points regimes and in some cases availabil- ity payments (See the Indiana East End Crossing example at Excerpt 33). Noncompliance points regimes permit the owner to assess noncompliance points for various breaches of the concession- aire’s obligations during the operations and maintenance phase. e accumulation of points may result in liquidated damages, increased monitoring and remedial plans, and other remedies. Noncompliance points regimes are intended to (i) incentivize performance and address nonperformance; (ii) address the legal diculties in exercising remedies for smaller but repetitive breaches; and (iii) provide clarity to proposers/concessionaires and their lenders as to what is expected of them so they can properly model and bid the P3 project. Availability payments are a form of deferred compensation for the concessionaire, payable during the operations and maintenance phase, that may be reduced by the concessionaire’s failure to meet performance requirements or make the project available for use by cus- tomers. Availability payments are another mechanism for pro- viding incentives for the concessionaire to ensure the quality of the design and construction of the facility, as well as the quality of the maintenance during the term of agreement. At the end of the term of a P3 contract, the concessionaire will hand the facility back to the owner. e P3 contract should include mechanisms for ensuring that the facility is not returned in a state of poor repair, requiring the owner to undertake im- mediate and signicant capital rehabilitation. Accordingly, P3 agreements typically include handback provisions that dene the required condition of the facility at the end of the term, a time frame for identifying and commencing any needed capital work in order to ensure the work is completed by the end of the term and security for the performance of these obligations. To inform an owner’s decisions on these issues, an up-front analy- sis must be made, which typically considers the anticipated life of various elements of the project, the desired residual life of the elements at handback, and the length of the term. To assure performance, handback provisions may include requirements for capital and handback reserves that serve as collateral and a source of funds for handback work, as well as handback letters of credit or holdbacks to support the concessionaire’s obligations. c. Legislation FHWA regulations need to be taken into account when considering warranties on federal-aid projects. For DBB and CM/GC projects, Guaranty and warranty clauses, 23 C.F.R. §  635.413 (2021), generally limits warranties to a particular product or feature of the project, with FHWA approval required for the specied warranty requirements.137 But for DB projects, general project warranties are permissible. For such projects, the general warranty period must be short, “generally one to two years,” unless the project is a P3, in which case the period can be “appropriate for the term” of the concession.138 e regulation also allows additional exibility for DB con- tracts that include performance warranties. In that case, the RFP must provide detailed performance criteria.139 If the contractor 137 23 C.F.R. § 635.413(a) and (b) (2021). 138 Id. § 635.413(e). 139 Id. § 635.413(e)(2).

48 NCHRP LRD 86 Excerpt 33 – Noncompliance Points East End Crossing, Indiana Finance Authority Article 11- NoNcompliANce eveNts ANd NoNcompliANce poiNts 11.1 NoNcompliaNce poiNts system 11.1.1 Attachment 1 of Exhibit 12 to this Agreement sets forth a table for the identification of Noncompliance Events and the “Cure Period” (if any) available to Developer for each such Noncompliance Event. Noncompliance Points are a system to measure Developer performance levels and trigger the remedies set forth or referenced in this Article 11. The inclusion in Attachment 1 of Exhibit 12 to this Agreement of a breach or failure to perform bears no implication as to whether the breach or failure is material. For purposes of this Section 11.1, “Cure Period” shall be that which is identified in the context of Noncompliance Events, as indicated in the table labeled “Assessment Categories” in such Attachment 1. exhibit 12- AttAchmeNt 1- NoNcompliANce poiNt system Ref Main Heading Subheading Failure to: Assessment Category Cure Period # of Points Construction 26 O&M O&M Plan Comply with the requirements of Operations and Maintenance Plan not specically identied elsewhere in this Attachment 1. B* 14 Days 1 26 * If a category “B” Noncompliance Event is not fully and completely cured within the cure period, Noncompliance Points shall first be assessed at the end of the first cure period, and shall be assessed again at the end of each subsequent cure period (of duration equal to the prior cure period), as described in Sections 11.3.5 and 11.3.6 of the PPA. is selected through a best value procurement, the RFP may allow proposers to oer alternate warranty proposals that im- prove on the base warranty requirements, provided the alternate is provided in addition to the base proposal.140 d. Summary Recommendations Warranties serve an important role in risk alloca- tion and risk transfer. ey can align the interests of the owner and contractor in delivering a successful project. A warranty will deliver value to the owner because the contractor will be incentivized to design and build the project so as to limit the likelihood of future warranty claims. Owners should obtain express warranties from their contractors addressing the de- sign, materials, and workmanship of the project. ey should also consider what warranty coverage is needed (general war- ranties for the entire project, performance warranties for spe- cic elements). Likewise, the owner will need to set the war- ranty term, taking into account any statutory or regulatory limitations, as well as the contractor’s likely pricing of such obligations. As the owner will no longer be making payments to the contractor, some security for the contractor’s obligations may be warranted based on the circumstances. Owners who are willing to cede some degree of control over their facilities 140 Id. § 635.413(e)(4). may consider using a P3 delivery model, which transfers to the concessionaire almost all of the risk for warranty type issues for the term of the concession. 5. Payment is section discusses risks related to contract payment mechanisms, as well as nonpayment/cashow risks. ere are many forms of compensation mechanisms in transportation construction contracts, the most common being based on lump-sum, unit-price, and cost reimbursable pricing. More re- cently, other types of payment regimes have evolved in connec- tion with alternative delivery contracts that include a nancing component, such as availability payment mechanisms. Lump sum contracts are oen used on large projects and DB contracts within the U.S. as they shi the risk and reward of dierences in quantities and costs to the contractor.141 Progressive design-build, requiring rm-xed pricing for design services followed by a contract with a guaranteed maxi- mum price for the construction work, is an alternative to DB. is phasing approach is “a strategy that involve[s] reimburs- 141 Sidney Scott & Kathryn Mitchell, Federal Highway Administration, Alternative Payment and Progress Reporting Method, Task #2, (updated 7/24/2017), https://www. wa.dot.gov/ programadmin/contracts/etgpayment.cfm.

NCHRP LRD 86 49 front costs incurred by the contractor are repaid on the back end. Some P3 agreements mitigate the risk to the contractor by prioritizing payments to the contractor in any appropriation for the agency. In addition, while agencies are not able to commit to the appropriation of funds by the legislature, the P3 agreement may include a requirement that the agency use good faith eorts to obtain the appropriation. Some highway construction contracts include provisions requiring the payment of interest by the owner on undisputed amounts that are not paid when due, which may be required by statute depending on the jurisdiction. Subcontractors also bear the risk of nonpayment or delayed payment by the owner since the contractor is typically responsible for paying subcontractors for work aer payment by the owner. e risk to subcontractors of nonpayment or delayed payment by the contractor is miti- gated by contractual or legislative requirements for contractors to pay subcontractors within a specied amount of time of re- ceiving payment by the owner and by payment bonds. a. Size and Complexity e contract value and time to complete mega projects can impact the payment provisions of a project. Mobilization pay- ments can be signicant because of the amount of startup work necessary, but owners may pay the mobilization amount over time, with various amounts being released at the achievement of certain milestones or percentage of completion of startup work. Maximum payment curves are common on mega proj- ects, where the size and duration of the project may necessitate spreading out payments as funds become available, oen from a variety of sources. b. Project Delivery Method DB contracts have up-front design and management costs that traditional DBB construction contracts do not have. is may require larger mobilization payments. All but one of the DBB and DB projects studied for this digest used lump-sum contracts. e WSDOT SR 99 Bored Tunnel Alternative Project used primarily lump-sum pricing with certain unit-price items of work. e P3 projects studied were mostly lump sum with availability milestone payments during design and construction (D&C), and availability payments during the operations and maintenance period. e Indiana East End Crossing P3 Project included D&C milestone payments with monthly availability payments for 35 years (Excerpt 34). e CM/GC projects studied were a mix of unit price, such as the CDOT Military Access, Mobility and Safety Improve- ment Project and the MnDOT Winona Bridges Rehabilitation Project, and lump sum, such as the CDOT South Gap Project and the Louisiana Department of Transportation and Develop- ment I-10 Corridor - LA 415 to Essen Lane Project. c. Legislation Most states have statutory requirements with respect to the timing of payments to contractors for DBB or DB contracts. Most commonly, contractors are required to be paid within a specied number of days aer the submittal of an undisputed able engineering and procurement, including, in some cases, the procurement of some lump-sum package items, followed by lump-sum contracts of construction or fabrication by construc- tors or fabricators that are independent of the engineering and procurement rms.” 142 Unit-price contracts or contracts with unit-price elements are oen used for DBB highway construction projects.143 With unit-price contracts, the contractor is compensated for actual quantities of work at bid prices. erefore, the owner retains the risk of quantity variations, whereas the contractor bears the risk of variations in unit costs. Unit pricing may be appropriate for smaller projects or certain types of work where quantities cannot be estimated with reasonable condence or may change signi- cantly during construction. is method becomes increasingly inecient as projects increase in complexity and size where the processing of approvals, measuring of work, and calculation of quantities consumes signicant time and resources. e admin- istration of unit-price contracts may lead to delays or disputes over variations in quantities and changes in work. Depending on the resources available to the owner for contract administra- tion, owners may prefer lump-sum contracts to reduce the need for detailed owner quantity measurement and calculations. Some alternative payment methods, including cost reim- bursable plus a guaranteed maximum price, guaranteed maxi- mum price, and target cost contracting, may mitigate the risk of cost overruns by the contractor and reduce risk premiums in contract pricing. It should be noted that while there are various standard forms of design-build contracts, there are not as many standard forms for highway contracts using GMP or TCC, how- ever there are forms of CM/GC contracts that can be adapted.144 Another payment-related risk to consider is cashow. e availability of owner funding to make payments for work per- formed is a risk for projects where 100 percent funding is not identied up front. In addition, funds may come from dier- ent sources over the duration of the work. To mitigate against this risk, some contracts include maximum payment curves that limit how much a contractor may invoice the owner for work performed at any given point in time, keeping work apace with the availability of funding. Another potential risk regarding the availability of funds for payments to the contractor is appropria- tion risk since state agencies are excused from paying for the work if the legislative body fails to appropriate funds for that purpose. Contractors generally are able to get comfortable with this risk given the political risk to the public owner of not being able to pay for an ongoing project, as well as the potential impact on the state’s credit ratings. is risk is of greater concern for P3 contractors entering into longer term contracts where up- 142 Edward W. Merrow, Industrial Megaprojects: Concepts, Strategies, and Practices for Success, (John Wiley & Sons, 1st ed., 2011). 143 Scott & Mitchell, supra note 141. 144 Daniel W. M. Chan, Albert P. C. Chan, Patrick T. I. Lam & James M. W. Wong, Empirical study of the risks and diculties in implementing guaranteed maximum price and target cost contracts in construction, 136 J. Construct. Eng. & Mgmt. 495 (2010).

50 NCHRP LRD 86 an owner’s release of retention for subcontractor work on incre- mental acceptances of portions of the project.147 Another option is to not withhold retainage at all.148 For instance, California and Indiana do not have statutory retention requirements for state highway projects. d. Summary Recommendations Mega projects generally have lump-sum payment provi- sions, or a combination of lump sum and unit pricing. e availability of project funding and cashow are key concerns for both the contractor and owner. Maximum payment schedules are oen used to allow both parties to budget for the project. Al- ternative delivery projects will oen include larger mobilization payments than DBB projects because of the increased front-end expenditures for items like design and long lead time materi- als. When establishing payment provisions, it is important that owners take into account statutory requirements regarding prompt payment of undisputed amounts, subcontractor pay- ments, and retention. 6. Incentives and Disincentives Transportation agencies have been increasingly using incen- tive/disincentive provisions to accelerate project completion and accordingly reduce trac delays and other impacts on the 147 Id. § 26.29(b)(2). 148 Id. § 26.29(b)(1). invoice. Most jurisdictions include requirements for the timely pay of subcontractors aer receipt of payment by the owner. (See example from the SH 360 Project at Excerpt 35.) ese are known as prompt payment requirements. In addition, prompt payment is required on federal aid highway projects.145 Another common statutory requirement is a requirement to withhold retention (or retainage) from each payment to the contractor, oen in the 5 to10 percent range. e retention is re- leased to the contractor with the nal payment. e purpose of the retention is to ensure performance of the contract and serve as a reserve for the satisfaction of subcontractor and third-party claims. Understanding that 5 to 10 percent of the contract value of a mega project can be signicant, some statutes allow for the retention to decrease, or stop being withheld at a certain point in the project. e funds may be held in an interest-bearing ac- count or invested in other securities where the contractor would earn a return on the funds. Retention can create challenges on federal-aid highway projects because federal regulations require full payment, including retention, to be made to all subcon- tractors as they complete their work.146 As contractors are not expected to fund retention payments to subcontractors before they are received from an owner, federal regulations allow for 145 What prompt payment mechanisms must recipients have?, 49 C.F.R. § 26.29(a) (2021). 146 Id. § 26.29(b). Excerpt 34 – Payment East End Crossing P3 Project, Indiana Finance Authority 10.1 Milestone Payment and Adjustments 10.1.1 Subject to Sections 10.1.2.1, 10.1.2.2 and 5.10.8, IFA agrees to make payments (each a “Milestone Payment”) in the amounts as calculated pursuant to Exhibit 10 and according to the schedule set forth in Exhibit 4 (in the aggregate, the “Milestone Payment Amounts”). e Milestone Payments are payments IFA chooses to make as an economic measure in lieu of larger Availability Payments, in order to maximize the overall value to IFA of this Agreement. Exhibit 10 4.3. Limitations on Milestone Payments When milestone payments are earned, payments will be made up to the lowest limiting amount that is in eect at that time, with additional monthly payments being due, subject to the actual limiting amount each month until all milestone payments that have been earned are paid. Milestone payments will be limited to the maximum aggregate milestone payment schedule as follows: a. rough June 30, 2013       $44,000,000 b. rough June 30, 2014       $73,000,000 c. rough June 30, 2015       $122,000,000 d. rough June 30, 2016       $176,000,000 e. rough June 30, 2017       $392,000,000 f. rough June 30, 2018       $392,000,000 Milestone payments will be limited to actual earned value of work completed as determined by Developer’s monthly schedule status report as approved by IFA.

NCHRP LRD 86 51 public.149 UDOT developed a timeline for its incentive/disin- centive, and liquidated damages framework in the I-15 Express Lanes Project bid documents where the project was divided into time segments, and the charges were computed based on the minimum bid and maximum calendar days of each segment. (See Excerpt 36.) In addition to time-related incentive/disincentive provisions, contracts can also include such provisions for lane closures, sharing of contingency funds/allowances, and band approaches and extra work incentives. (See an example provision from the INDOT I-69 Major Moves project at Excerpt 37. a. Size and Complexity e size of mega projects oen results in distinct parts of the project that can be completed and turned over separately from the entirety of the project. ese sections can be given their own completion deadlines with associated liquidated damages and early completion bonuses. (See NDOT, Project Neon example at Excerpt 38.) b. Project Delivery Method Alternative project delivery methods are well suited for in- centive and disincentive programs because of the risk shiing associated with the delivery methods and the amount of control and discretion the contractor has over the project. 149 NCHRP Report 652, supra note 8, contained recommendations for eective use of incentive/disincentive contract provisions on highway projects. ese included identifying if incentive/disincentive provisions will be used early in the project planning phase, considering A+B incentive/disincentive provisions in competitive markets, capping the incentives to reduce the risk of overpaying for project acceleration, using road user cost (RUC) as the basis for incentive rates, among others. e report also details the various types of incentive/disincentive provisions, such as A+B where the contractor determines the contract duration or the incentive/disincentives where the transportation agency species the contract time, as well as where to best use them. Excerpt 35 – Payment SH 360 Project, TxDOT 12.5 Payment to Subcontractors 12.5.1 DB Contractor shall pay each Subcontractor for Work performed within ten days aer receiving payment from TxDOT for the Work performed by the Subcontractor, and shall pay any retainage on a Subcontractor’s Work within ten days aer satisfactory completion of all of the Subcontractor’s Work. Completed Subcontractor Work includes vegetative establishment, test, maintenance, performance, and other similar periods that are the responsibility of the Subcontractor. 12.5.2 For the purpose of this Section 12.5, satisfactory completion shall have been accomplished when: (a) the Subcontractor has fullled the Subcontract requirements and the requirements under the DBA Documents for the subcontracted Work, including the submission of all submittals required by the Subcontract and DBA Documents; and (b) the Work done by the Subcontractor has been inspected and approved by DB Contractor and the nal quantities of the Subcontractor’s Work have been determined and agreed upon. c. Legislation State legislation and constitutional limitations can at time prevent or limit the use of bonuses, and incentive payments are not always available. e reason is that these incentive pay- ments can be considered a “gi of public funds” since they are essentially paying extra for work the contractor was obligated to perform. is issue comes up in states like California,150 New York,151 and Washington.152 ese prohibitions are not complete bars to contractual incentives but needs to be assessed when draing incentive clauses. d. Summary Recommendations Mega projects are well suited for incentive/disincentive re- gimes because their size, complexity, duration, and impact on the traveling public allow for segregating and focusing on portions of the project, as well as the project as a whole. e bonus/liquidated damages scheme for project completion is quite common. But owners can also use incentives and disincentives to encourage the minimization of lane closures to the benet of the traveling public during construcion, as well as bonuses for early opening of portions of the project, again beneting the traveling public. By using allowances and contingencies that share their unused por- tions with the contractor, the owner can encourage the contractor to innovate and focus on aspects of the project that are important and improve on them, while at the same time ensuring that the owner’s expectations, as set forth in the technical provisions are met regardless. While these programs may seem like simple and practical solutions to concerns of the owner, owners still need to be cognizant of state and federal limitations on their use. 150 Cal. Const., Art. XVI, § 6. 151 N.Y.S. Const., Art. XII, § 1. 152 Wash Const., VIII §§ 5, 7.