Legal Environment for Warranty Contracting

Due to the public expectation of better road performance accompanied by economic development and population growth over the past decades, state highway agencies have been under intense pressure for continuous improvement in the quality and cost efficiency of transportation projects. To meet these challenges, state highway agencies must seek innovative approaches to deliver highway projects, including outsourcing some of the agency’s functions and shifting maintenance responsibilities to contractors. Many states have implemented alternative contracting methods in project programming and execution to provide lasting and functional roadways at the optimum life-cycle cost to the public. The performance warranty is one of the innovative practices that has been declared operational by the Federal Highway Administration since 1996. Use of warranties in some states has required changes to state legislation and agency regulations. This paper discusses the laws and regulations needed to successfully incorporate performance warranties into current contracting practices and avoid litigation. The state of Alabama is used as an example of a state considering the use of performance warranties. Proposals for laws and regulations will be outlined.     

Cost-Effectiveness Evaluation of Warranty Pavement Projects

Warranty contracts are expected to enhance product quality and service life at lower life-cycle cost. Recognizing that such benefits could be offset by the generally higher costs of warranties, an assessment of the relative cost-effectiveness of warranty contracts compared to their traditional counterparts is currently of great interest. Using pavement data from Indiana, this paper evaluates the costs, effectiveness, and cost-effectiveness of warranty and traditional contracts. Effectiveness was measured in terms of pavement condition and treatment service life. The paper determined that the warranty contracts generally had higher agency costs but produced pavements with superior condition and service life, and lower construction periods and work-zone user costs, compared to their traditional counterparts. Over a 5-year period, the warranty contracts were found to be 27–30% less cost-effective than their traditional counterparts. Over the long term, the warranty contracts were found to be 70–90% more cost-effective on the basis of service life and 58–65% more cost-effective on the basis of both service life and pavement condition. The study results suggest that the higher long-term cost-effectiveness of warranty contracts is more perceptible when both cost and effectiveness are viewed over the entire life of the pavement treatment and when both agency and user cost are used in the cost analysis. The paper discusses certain aspects of such comparative evaluation studies that could lead to biased inferences and calls for careful screening of warranty and traditional contracts for such studies.     

Valuing the Warranty Ceiling Clause on New Mexico Highway 44 Using a Binomial Lattice Model

In 1998 the New Mexico State Highway and Transportation Department (NMSHTD) agreed to pay $60 million for a 20-year pavement warranty on their Route 44 project (NM 44, now US 550). The warranty includes a ceiling clause that caps total expenditures at $110 million. As the first long-term highway warranty in the United States, the transaction set a controversial precedent that parties interested in innovative highway contracting, including other state department of transportations (DOTs), the USDOT, sureties, and contractors, view as a test case for evaluating pricing and cost-effectiveness. An interim audit report published by the State of New Mexico [Abbey (2004). Rep. to the Legislative Finance Committee, State Highway and Transportation Department, Santa Fe, N.M.] provides invaluable fiscal projections and challenges the cost effectiveness of the $60 million expenditure. This paper presents an independent analysis of the effectiveness of the warranty clauses. Based upon NMSHTD data, the analysis contends that $60 million was a fair cost of the 20-year pavement warranty at the time of acceptance if the expenditure ceiling is not considered. Furthermore, this paper argues that the ceiling on expenditure can be valuable. Using the real options approach, the paper evaluates the warranty ceiling clause on NM 44 and some policy suggestions are discussed.     

Warranting Quality of Steel Bridge Coating

Civil infrastructure systems, particularly the highway and bridge systems, have become a focal point of attention both nationally and among researchers. Because many of the nation's bridges have been identified by the Federal Highway Administration as deficient, more attention needs to be given to the quality of bridge coatings, which act as inhibitors of bridge deterioration. This paper represents an extended study by the authors to establish and implement contract warranties for steel bridge coatings. First, the earlier activities in warranting the quality of bridge coatings are reviewed. Next, the writers focus on the basic categories of a steel bridge coating warranty, especially the warranty period and defects for which the contractor is held responsible. The paper further illustrates the functioning of a hybrid model for nondestructive quality assessment of steel bridge coatings. The model provides objective and quantitative analysis to improve the coating quality assessment process. This approach prevents potential conflicts that might arise between the state Department of Transportation and the bridge-coating contractors during the warranty implementation.     

Risk-Based Model for Valuation of Performance-Specified Pavement Maintenance Contracts

Many transportation agencies have started outsourcing maintenance activities to contractors by means of performance-based contracts. These outsourcing contracts are intended to transfer performance-based risk from transportation agencies to private contractors for a premium cost. Even though such contracts provide numerous benefits to both contractual parties, there are equally many concerns with their implementation. Certainly, one of the most important concerns is how to quantify performance-based risk. This paper presents a general and flexible framework for quantifying the performance-based risk in terms of premium cost for different contract specifications and preventive maintenance and rehabilitation strategies. The framework developed consists of three modular components: (1) the reliability-based pavement performance model; (2) the preventive maintenance and rehabilitation models; and (3) the pricing model. The developed framework is illustrated using the current design and rehabilitation methods for flexible pavements.     

Ontology for Relating Risk and Vulnerability to Cost Overrun in International Projects

Risk management is about identifying risks, assessing their impacts, and developing mitigation strategies to ensure project success. The difference between the expected and actual project outcomes is usually attributed to risk events and how they are managed throughout the project. Although there are several reference frameworks that explain how risks can be managed in construction projects, a major bottleneck is the lack of a common vocabulary for risk-related concepts. Poor definition of risk and patterns of risk propagation in a project decrease the reliability of risk models that are constructed to simulate project outcomes under different risk occurrence scenarios. This study aims to extend previous studies in risk management by presenting an ontology for relating risk-related concepts to cost overrun. The major idea is that cost overrun depends on causal relations between various risk sources (namely, risk paths) and sources of vulnerability that interfere with these paths. Ontology is used to develop a database system that represents risk event histories of international construction projects and to construct a model for estimation of cost overrun. It will form the basis of a multiagent system that can be used to simulate the negotiation process among project participants about sharing of costs considering the risk allocation clauses in the contract, sources of vulnerability, and causal relations between risk events and their impacts. The ontology is constructed by interaction with Turkish contractors working in international markets and extensive literature review on risk-related concepts. The validation test results provide evidence that the ontology is fairly effective to help Turkish contractors to assess cost overrun by considering sources of vulnerability and risk in international construction projects.     

Safety Risk Identification and Assessment for Beijing Olympic Venues Construction

New technologies, new materials, and innovative designs have been extensively adopted in Beijing Olympic venues construction. The extreme requirements for time deadline and competition function expose the venues construction to high risks. These risks would potentially bring negative impacts on the site safety performance. Meanwhile, there is a lack of systematic management for safety risks in China’s construction industry, especially for large projects such as the Beijing Olympic venues construction. This paper identifies and assesses safety risk factors inherent in Beijing Olympic venues construction with the involvement of 27 experienced and highly respected experts from government agencies, the construction industry, and academe through brainstorming, workshop discussions, and questionnaire surveys. The finding reveals that more than half of the critical safety risk factors are from contractors and subcontractors such as: lack of emergency response plan and measures; workers’ unsafe operation, and contractors ignoring safety under schedule pressure. Based on these critical safety risks, a risk register is composed and a model is developed in application of the analytic hierarchy process to assess the status of risks on site safety. The model has been attempted in two Olympic venue projects under construction and the validity has been approved. The risk checklist, register, and assessment model developed in the paper were integrated into the risk management system that has been used for Beijing Olympic venues construction.     

Relationship between Organizational Sizes and Contractors’ Risk Pricing Behaviors for Weather Risk under Different Project Values and Durations

A problem that always annoys building employers and their consultants when drafting building contracts is whether it is more cost efficient to retain certain risks with themselves or to transfer the same to contractors, and it has long been a difficulty to accurately estimate the cost for transferring risks to the other contract party. It is a very common market practice to remove contractors’ entitlement to extension of time due to inclement weather, and in view of the significant impacts that inclement weather posed on construction progress, it would be helpful to assess the associated costs for such risk allocation exercises in order to ensure that it is a cost-effective transaction. The costs for these potential weather-caused delays are priced by contractors in their returned tenders. This risk-pricing behavior is affected by the contractor’s risk perception and risk attitude. However, merely working out contractors’ risk perception and risk attitude patterns is inadequate, as they may vary in accordance with different organizational sizes and project backgrounds. Therefore, further studies should be carried out on the implications of project information, such as project value and contract period, on different-sized contractors’ risk behaviors. In this research, a questionnaire survey was conducted to investigate the weather-risk-pricing behavioral patterns of various-sized contractors under different given project scenarios. The survey revealed that the impacts of project value and contract period (and, thus, the intensity of work and scale of exposure to weather risk) were significant on contractors’ risk behaviors, and these impacts varied in accordance with different organizational sizes. The medium-sized contractors’ pricing behaviors were rather constant under different project values and contract periods, while both small and large contractors behaved differently when the intensity of work and scale of risk exposure varied. Despite the fact that contractors of various sizes behaved differently in some given scenarios, the number of days of delaying cost allowed by them in returned tenders were generally less than the actual number of days of inclement weather affecting work.     

Factors Influencing Building Contractors’ Pricing for Time-Related Risks in Tenders

The contractors’ pricing for contract risks in tenders determines how much the employers have to pay for the risk transfer. Therefore, understanding the factors influencing the contractors’ pricing for contract risks is crucial for employers to optimize the cost effectiveness of risk allocation in contracts. This study investigates the factors that contractors perceive to be important when they are pricing “time-related” contract risks. A questionnaire survey was designed for collecting data from building contractors currently operating in Hong Kong. Contractors were not only required to rate the importance of individual factors, but also to state the cost implications when compared with normal pricing in the absence of the concerned factor. The findings reveal that a single factor may have two-sided implications (both inflating and deflating the prices) for which they can be in unequal scales. These scales vary according to the contractor size and the reasons of the differences are investigated. The findings also assist employers in formulating a cost effective contract strategy by equipping them with the necessary knowledge.     

Hybrid Prequalification-Based, Innovative Contracting Model Using AHP

Design-build, cost-plus-time, and warranty are three innovative contracting methods used by the Federal Highway Administration (FHwA). Because of the challenges inherent in the nature of these approaches, contractors need to be capable and experienced to successfully deliver projects. It is then necessary to prequalify contractors to reduce the inherent risk of a project. Therefore, the objective of the research project described in this paper is to provide a methodology that will help public owners prequalify and select contractors within the context of the three delivery methods mentioned above. As a result, a hybrid prequalification and selection model to screen contractors who want to submit bids on public projects using any of the three innovative contracting methods above was developed. The analytical hierarchy process (AHP) was used to make prequalification decisions when multiple criteria are used. In addition, three case studies were developed to evaluate the application of AHP to the prequalification criteria in the three innovative contracting methods. AHP was utilized as an effective prequalification decision-making tool that eliminates subjectivity and produces decisions built on consistent judgments.     

Computer Simulation Model: Construction Analysis for Pavement Rehabilitation Strategies

Most state highways in the United States were built during the 1960s and 1970s with an infrastructure investment of more than $1 trillion. They now exceed their 20?year design lives and are seriously deteriorated. The consequences are high maintenance and road user costs because of degraded road surfaces and construction work zone delays. Efficient planning of highway rehabilitation closures is critical. This paper presents a simulation model, Construction Analysis for Pavement Rehabilitation Strategies (CA4PRS), which estimates the maximum amount of highway rehabilitation/reconstruction during various closure timeframes. The model balances project constraints such as scheduling interfaces, pavement materials and design, contractor logistics and resources, and traffic operations. It has been successfully used on several urban freeway rehabilitation projects with high traffic volume, including projects on I-10 and I-710. The CA4PRS helps agencies and contractors plan highway rehabilitation strategies by taking into account long-life pavement performance, construction productivity, traffic delay, and total cost.     

Discriminant Analysis for Predicting Ranges of Cost Variance in International Construction Projects

Unanticipated market conditions as well as project-related risks can easily lead to cost overruns in international construction projects. For a contractor to be financially successful in international projects, a careful examination of the project is a prerequisite to understanding the cost variance characteristics. Based on the reasonably accurate characterization of the cost performance, the markup or contingency amount is determined to ensure both a decent level of profit and a good chance of winning the contract. This paper presents a classification model to categorize international construction projects, particularly faced by Korean contractors, into five cost-variation classes: extreme cost overrun, moderate cost overrun, neutral, moderate cost saving, and extreme cost saving. The model is able to characterize an international project for its cost performance prediction in comparison to the contractor’s initial cost estimate. A linear discriminant analysis is utilized to develop the predictive classification model with the support of the bootstrap method. Tests show that the proposed model is able to help cost estimators determine a proper level of cost contingency before bidding on an international project.     

Contractor Perspective on Factors for Evaluating Installation Options for Small-Diameter Utilities

Buried municipal infrastructure is rapidly expanding due to increased urbanization. Subsequently, engineers and contractors are faced with having to designate the most effective method of installing new buried infrastructure while being mindful of cost considerations. In order to determine the most feasible underground construction method, various risks and cost factors must be assessed and analyzed. A comprehensive survey was conducted to solicit input from 28 contractors in various geographical regions throughout the United States and Canada. The intent was to determine specific risk factors and their inherent impacts, as well as to better understand cost comparison between horizontal directional drilling and traditional open-cut construction methods. This paper is relevant to practitioners and researchers because it identifies and describes risks and cost factors from a contractor perspective that can be used for evaluating installation options for small diameter pipelines in an urban environment.     

Experienced anesthetists show better reaction to central gas supply dropout--an anesthesia simulator study

The reform process underway within the Italian National Health System is aimed at making decision makers responsible for appropriate and efficient resource utilisation and at ensuring quality of care, eliminating conflict between fairness, quality and cost control. The risk for the quality of the services provided entailed by resource rationalisation is avoidable and controllable. This article explains how the Italian NHS has managed the reform process assuring quality improvement, and describes the policy and the tools adopted. As well as involving all players and the system as a whole in constant improvement, the Italian NHS's policy in pursuing quality of care is based on the adoption of a wide range of measures: measurement of health care and of clinical outcomes, systematic data collection, team work and protocols. The tools adopted, currently under implementation, to support quality control are: an integrated system of indicators for measuring efficiency and quality of NHS structures (demand and accessibility indicators, resource related indicators, activity indicators and result indicators); compulsory accreditation as a prerequisite for health care providers; a system to monitor and control the effects of the new prospective payment system; clinical guidelines (each related to a specific clinical problem); a menu of services (Carta dei Servizi) released by all NHS accredited service providers with full information and warranties regarding the services provided and their quality.     

Risks in Chinese Construction Market—Contractors’ Perspective

With China’s entry into the World Trade Organization (WTO), the Chinese construction market will be increasingly open and finally become part of the international market. Because of different social and economic systems, as well as different historical and cultural backgrounds, contractors are likely to encounter different risks in different markets. Based on questionnaires and case studies, this paper adopts an importance evaluation index and makes an importance evaluation of various risks encountered by Chinese contractors when contracting for projects in Chinese markets. This paper also makes comparisons between and analyses of the research findings and related available investigation results. The Cox–Stuart trend increase test method is applied in the current research, the results indicating that the variance corresponding to the importance index value tends to increase as the risk event importance decreases. This tendency shows that those investigated tend towards unanimity in terms of higher importance risk events. This paper also examines the reliability of the questionnaires by means of Cronbach’s Alpha Coefficient. The research shows that the main risk currently encountered by Chinese contractors in domestic markets includes owner’s irregular behavior and government departments’ interference in construction markets. China’s accession to the WTO has provided greater opportunities for international contractors to enter the Chinese construction market. Therefore the research results described in this paper can provide valuable data enabling international contractors to gain a better understanding of the potential risks in the environment of the Chinese construction market.     

Soil Penetration Modeling in Microtunneling Projects

As the need for utility service line replacement or repairs with minimum disruption to the surface have increased, so has the demand for trenchless excavation methods, in particular, microtunneling. Microtunneling is a trenchless technique that is used to install new pipelines. Microtunneling can be applied in gravity and pressure lines, permanent ducts for cables, and crossings under rails or roads. When bidding a microtunneling project, the main concern of microtunneling contractors is predicting the underground behavior of the machine. In other words, the productivity of microtunneling is the key to profit in microtunneling projects. Contractors generally predict approximate productivity based on experience, which risks cost estimation accuracy for microtunneling projects. Contractors lack a productivity model that helps them to predict driving time. This paper is a part of a series of papers covering the productivity of microtunneling projects. This paper focuses on predicting the penetration time of the microtunneling machine.     

Subcontractor Evaluation and Management Framework for Strategic Partnering

Recently, main contractors have shifted their attitudes about subcontract procurement to more strategic and long-term partnering philosophies. The objective of this study was to present a framework for subcontractor evaluation and management to help main contractors develop more strategic and productive relationships with their subcontract partners. As the strategic performance feedback model, the balanced scorecard concept was adopted with modification. A case study was also conducted to evaluate the framework with subcontracting strategy, performance indexes, weighting, evaluation of subcontractor performance data, and feedback methods. The research results obtained can be useful as a guideline of subcontractor management for long-term partnering and also to enhance overall productivity within the construction supply chain.     

Economic Value of Combined Best Practice Use

This paper measures the value of best practices based on data taken from the Construction Industry Institute Benchmarking and Metrics database. A three-step process provides the basis for measuring the potential benefits of increased best practice use. First, a practice use index is derived to model the way in which best practices are utilized on actual projects. The index combines data from eight best practices to create a single measure of practice utilization. Second, a project performance index, combining cost and schedule metrics, is derived as an indicator of overall project performance. Third, the practice use index is correlated with cost, schedule, and overall project performance metrics. Both owners and contractors benefit from increased practice use. Potential cost savings for owners range from $1.7 to $3.4 million, depending on industry group and project size. Potential cost savings for contractors are higher, averaging $7.2 million for the typical $88 million heavy industrial project. Benefits from schedule reductions are most apparent for owners. On large building projects, schedule reductions for owners average 27 weeks. Finally, improvements in overall project performance on the order of 30% are observed for both owners and contractors.     

Analysis of Owner’s Design and Construction Quality Management Approaches in Design/Build Projects

This paper explores and classifies current approaches to evaluating quality in design/build (DB) proposals. It does so by a thorough content analysis of 78 requests for proposal (RFPs) for public DB projects with an aggregate contract value of over $3.0 billion advertised between 1997 and 2002. In most DB projects, the owner requires the DB contractor to establish a firm-fixed price on a project that has not yet been designed. Usually, the owner also fixes the project delivery period. In the traditional design/bid/build (DBB) system, quality is fixed through the plans and specifications. Thus, in DBB, with schedule and quality fixed, the cost of construction is the factor in which the owner seeks competition. Conversely, in DB, with cost and schedule fixed, the scope and hence the level of quality is the main element of competition. This paper identifies the six owner approaches to articulating DB quality requirements in their RFPs. The six approaches are quality by qualifications, evaluated program, specified program, performance criteria, specification, and warranty. These are important for DB contractors to understand so that they can craft their proposal in a manner that is both responsive to the owners’ requirements and consistent with the owner’s system to make the best value contract award decision.     

Empirical Study of the Risks and Difficulties in Implementing Guaranteed Maximum Price and Target Cost Contracts in Construction

Over the past few decades, both the guaranteed maximum price (GMP) and target cost contracting (TCC) arrangements have been regarded as alternative integrated procurement strategies for clients to mitigate risks, minimize claims, integrate the diverse interests of a complex construction project, and offer incentives to provide value-added services. However, the adoption of GMP/TCC contracts may also generate significant risks and difficulties that merit considerable attention. This paper aims to provide a concise review of the potential pitfalls of the GMP/TCC scheme in general and identifies the key risk factors and potential difficulties associated with GMP/TCC in comparison with other procurement strategies in construction in particular via an empirical survey of clients, contractors, and consultants in Hong Kong. The survey data gleaned from 45 valid replies were analyzed using the mean score ranking technique, Kendall’s concordance test, and Spearman’s rank correlation test. The survey results indicated that “involvement of inexperienced or claim-conscious contractors in a project procured by a GMP/TCC contract” was considered to be the most significant risk factor; while “design development must keep pace with main contractor’s program for tendering the domestic subcontractors’ works packages” as the major difficulty in implementing GMP/TCC projects. The research findings derived from this study are particularly essential in assisting the contracting parties to mitigate the detriments brought about by potential risks or difficulties when embarking on GMP/TCC contracts. It has also generated valuable insights into developing effective recommendations for alleviating the barriers to GMP/TCC success for future construction projects.