# Executive Summary

Many transportation agencies have discovered that traditional highway
contract administration procedures and project delivery methods do not
meet current demands. In the United States, both Federal and State
agencies are turning to innovative contracting procedures to accommodate
reconstruction and growth. The primary goal for the majority of
innovative contracting procedures is to deliver projects *faster,*
without compromising safety or quality or increasing costs. Quite often,
increased safety, higher quality and decreased cost can be achieved,
while delivering projects at a faster pace. In the United States, the
use of innovative contracting practices has been on the rise, since the
early 1990s, and the highly publicized success of numerous "mega
projects" is encouraging more agencies to experiment with innovative
contracting methods. Likewise, numerous European nations are employing
alternative contracting methods to meet increasing infrastructure needs.
Recognizing the similarities and benefits that could result from an
international examination of innovative contracting procedures, a
diverse team of experts was assembled to research, document, and promote
the implementation of best practices found in Europe that might benefit
US practitioners. The Federal Highway Administration (FHWA) and the
American Association of State and Highway Transportation Officials
(AASHTO) jointly sponsored this study, under the National Cooperative
Highway Research Program (NCHRP).

In June of 2001, a team comprised of Federal, State, contracting, legal,
and academic representatives traveled to Europe to investigate and
document innovative contract administration procedures that are employed
in Europe to cope with growing transportation needs. See Appendix A for
the names and affiliations of the scanning team members. The team
traveled to Lisbon, Portugal; The Hague, Netherlands; Paris, France; and
London, England. Additionally, the team met with Swedish transportation
officials while in the Netherlands. The ministries of transportation,
numerous private sector contractors, and research organizations involved
in contract administration hosted the team. Appendix B lists the names
of the organizations and their representatives.

In recent years, the European community has faced a multitude of
problems that are similar to those that the US transportation community
faces today. The scan team discovered that European highway agencies are
better exploiting the efficiencies and resources that the private sector
offers, through the use of innovative financing, alternative contracting
techniques, design-build, concessions, performance contracting, and
active asset management. European agencies have created contracts that
focus on the users, while equitably allocating risk and seeking to
establish an atmosphere of trust in the implementation of procedures.
The United States can directly and immediately employ many European
procedures to help cope with its most urgent transportation needs.

# Drivers of Change in Europe

Until the late 1980s, traditional European methods of contract
administration were very similar to those in the United States. Public
transportation agencies retained tight control over the design and
construction of the highway systems. Prescriptive specifications and low
bid procurement methods were the public sector tools of choice for
procuring new works in both the United States and Europe. In the late
1980s, approximately 10 years before change occurred in the United
States, European agencies began to make significant changes to contract
administration techniques. The scan team quickly realized that the
drivers for change in Europe were some of the same problems that are
faced in the United States today. Some of the most significant drivers
of change in Europe included the following:

+--------------------------------+-------------------------------------+
| -   Growing infrastructure     | -   Adversarial relationships       |
|     needs                      |                                     |
|                                | -   Claims oriented environments    |
| -   Inadequate public funds    |                                     |
|                                | -   Perceived lack of maintenance   |
| -   Insufficient and           |     efficiency                      |
|     diminishing staff          |                                     |
|                                | -   New European Union directives   |
| -   Lack of innovation in      |                                     |
|     delivery                   | -   User frustration                |
|                                |                                     |
| -   Slow product delivery and  | -   Political discontent            |
|     delays                     |                                     |
|                                |                                     |
| -   Cost overruns              |                                     |
+--------------------------------+-------------------------------------+

These problems are certainly not unique to Europe; most US States share
some, if not all, of them. (Even the European Union (EU) Directives are
analogous to Title 23 and FHWA's regulations.) This report describes
tools and techniques that European transportation agencies and private
sector groups used to overcome their problems. Many of the tools and
techniques can be directly and immediately applied in the United States,
if legislative and political environments allow.

# Report Organization

The report is organized in the areas of alternative financing,
contracting techniques, design-build, concessions, performance
contracting, and asset management as shown in the figure below.

# Alternative Financing

There are many innovative alternative financing techniques in use in
Europe that have direct application in the United States. Two primary
differences should be considered in the discussion of alternative
financing in Europe. First, the countries visited on the scan do not
have taxes dedicated to transportation needs. This means that gasoline
taxes and the like are not earmarked for transportation projects, but
are put into a general fund with other taxes. The general funds provide
money for a variety of needs, including transportation projects, but no
taxes are specifically dedicated for transportation projects. The second
difference is that European governments do not offer tax exempt
financing for public transportation projects, as is done in the United
States. This causes private financing to be much more competitive with
public financing. For example, in the United Kingdom (UK), the savings
realized for using publicly guaranteed funds, in lieu of private funds,
is sometimes less than 1 percent.

Alternative funding sources in Europe utilize a combination of bond and
bank financing. Private financing is being utilized much more readily
than in the United States. In some cases, governments have reached
ceilings for public debt; and, in others, private financing provides a
much more competitive solution to the public need. For example, the
Netherlands, there is a joint development project, in which a
public-private venture is completing a critical highway, while, at the
same time, enhancing the private developer's real estate investment in
the adjacent area. The Dutch also created a real-toll tunnel project as
a corporation and plan to transfer ownership to the private sector by
selling shares of the corporation to the public when the tunnel is
operating profitably. In Portugal, concessionaires bid for the rights to
maintain and operate existing highways, creating a type of off balance
sheet approach to funding maintenance and operation for the government.

The scan revealed several new alternative financing payment mechanisms.
As in the United States, real tolls are in use, but, in some situations,
real tolls meet with public and political resistance. Both Portugal and
the UK are using systems of "*shadow tolling"*. Shadow tolls are an
alternative financing payment mechanism in which the government pays a
concessionaire for a project, based on the number of vehicles that use
the facility. The government thereby receives the initial project
financing from the private sector concessionaire, and the concessionaire
takes the risk/reward for the number of vehicles that use the road.
Traditional sampling methods and high tech real count mechanisms are in
use to count the vehicles for the shadow toll payments. In the UK,
shadow tolls are evolving from a payment per vehicle scheme to a payment
based on highway performance and availability. Finally, in all
countries, the team found examples of the temporary transfer of existing
government assets and revenue sources to the private sector. Transfers
appeared in a variety of methods, from maintenance to real tolls, for
durations of up to 35 years.

# Contracting Techniques

European transportation agencies are utilizing a wide variety of
alternative contracting techniques that could have a tremendous impact
on the efficiency and effectiveness of contract administration in the
United States. The report discusses these techniques in terms of
procurement, contract types, and payment mechanisms. Similar to the US
relationship between the State DOTs and the FHWA, the EU directives
establish minimum requirements for procurement, but individual countries
can develop unique contracting techniques that fit distinctive needs.

The most notable difference between European and US procurement methods
is that *best value* is used almost exclusively in all types of
procurements. The team observed virtually no evidence of low-bid
selection. The Europeans have found that best value selection, utilizing
transparent and uniform processes, enhances competition and innovation.
In cases of long-term maintenance contract procurements, the business
culture and quality were weighted much more significantly than the price
and technical portions of the procurement. There was also widespread use
of short listing in selections to ensure technical competence in the
procurements. In cases of public-private and privatization ventures,
careful consideration was given to the economic benefits of the
procurement. The public sector transportation agencies have dedicated
significant effort to evaluating and assessing best value proposals,
and, in some cases, significantly changed their organizational
structures. The report includes a discussion of a "*Public-Private
Comparator"* utilized by both the Netherlands and the UK in making the
procurement decision. Finally, the ministries of transportation visited
on the scan utilized confidential discussion processes much more readily
than in the United States. There was concrete evidence given for an
increase in design and construction innovation due to these discussions
in the procurement phase.

This report includes discussion of a number of contract types being
utilized in Europe. The United States is currently employing a number of
these techniques, but the scan revealed new techniques that have merit
for implementation in the States. Some of the contract types discussed
in this report appear in the box below. Specific examples are discussed
later in the report.

+----------------------------+-----------------------------------------+
| ### Contr                  | #### Contracts not Currently Used in US |
| acts Similar to US Methods |                                         |
|                            | -   Active Management Payment Mech.     |
| -   Concessions            |     (AMPM)                              |
|                            |                                         |
| -   Design-Build           | -   Management Agency Contracting (MAC) |
|                            |                                         |
| -   Design-Build-Maintain  | -   Private Finance MAC                 |
|                            |                                         |
| -   Des                    | -   Framework Contracts                 |
| ign-Build-Operate-Maintain |                                         |
|                            | -   Alliancing                          |
| -   Finance-Design-Build   |                                         |
| -Operate-Maintain-Transfer | -   Joint Development                   |
|                            |                                         |
| -   Two-Phase Contracts    | -   Target Pricing                      |
|                            |                                         |
| -   Strategic Partnering   | -   Integrated Supply Chain Management  |
+----------------------------+-----------------------------------------+

In summary, all of the contracts promote methods of creating more
partnership between the public and private sectors. European contracts
have evolved toward placing more public trust and responsibility in the
private sector. The contracts discussed in this report provide concrete
examples of how some European countries are equitably reallocating
contractual risk to leverage the efficiency of the private sector.

Alternative procurement methods and contracts require non-traditional
payment mechanisms to optimize their benefits. The biggest difference
from the traditional payment methods is that payments are not based on
units of work completed, but on availability of the product at the end
of the project. The private sector providers are required to carry much
more of the costs during and after construction. They are then paid on
the basis of availability (i.e., number of lanes open), quality of
performance (i.e., smoothness), and/or safety (a reduction in the number
of crashes, measured against a baseline). Disincentives were observed on
maintenance contracts, and incentives were readily used for safety. In
more traditional contracts, award fees for mobilization and milestone
payments were observed. In concession contracts, payments are evolving
towards a purely performance based scheme.

# Design-Build

In the countries visited, design-build was observed to be the
contracting method of choice for all projects, ranging from green-field
construction to pure maintenance contracts. Where concession and
public-private partnerships were studied, design-build was inherent in
the process. In the UK, the Highways Agency's contracting method of
choice is design-build, and it has almost completely replaced the
design-bid-build method. As in the United States, there is no singularly
consistent design-build contract, but more consistent characteristics
are present. Design-build contracts are more consistently awarded on a
best value basis. In the best value analysis, life-cycle costs are
analyzed using net present value (NPV) of return on investment (ROI).
The only problems with the design-build method were encountered in the
UK, where it was acknowledged that the preliminary designs were carried
too far, prior to tendering. The United States is lagging far behind the
Europeans in design-build award procedures. Another area where the
Europeans are more efficient than the Americans is in writing *outcome
(value) specifications.* US practitioners are struggling with similar
performance specifications and this report includes some tools observed
for developing outcome specifications, which are directly and
immediately applicable to US design-build practices. In Europe, the
issue of quality in design-build contracts is being dealt with through
the use of 5to10 year warranties and 30-year concessions. The use of
alternative financing, operation, and maintenance, in conjunction with
design-build contracts, minimizes the need for owners to perform
time-consuming and redundant quality assurance (QA) roles. In summary,
the design-build techniques observed in Europe promote a level of
partnering and early contractor involvement not yet witnessed in the
United States.

# Concessions

While the United States is employing only a minimal number of
quasi-public concession and private transportation projects, the
European countries visited on the scan are leveraging concessions for
major portions of their highway systems. Portugal, for example, has gone
from 431 km of concessions, in 1991, to a planned 2700 km of concessions
in 2006 -- representing 90 percent of its national highway network. The
concession system is allowing Portugal to complete its strategic
National Road Plan in 2006, where the use of traditional methods were
anticipated to take until 2014. Motorways in Europe utilize concessions
for both construction and maintenance. Concession periods vary, but were
commonly found to be 30 years. The Dutch are promoting concession
periods that equal 75percent design life of the product. Both public
agencies and concession companies are commonly using long-term
warranties, but the team observed widespread use of maintenance
contracts, in lieu of warranties. A variety of concession structures
were observed that ranged from fully private, to quasi-public, and fully
public entities, with varying requirements for private sector equity.
Drivers for the use of concessions range from lack of public funding to
a belief that private financing and maintenance delivers a higher
quality product and provides benchmarks for public sector performance.
Concessions are also discussed in the performance contracting section of
this report.

# Performance Contracting

Performance contracting is in its infancy in the US transportation
sector, but the tools and techniques are well established in Europe.
Performance contracting provides a contractor with performance
specifications that must be met, by employing whatever means the
contractor determines most economical. Performance contracts are thought
to allow much more room for innovation through creative construction
methods---lowering the overall price of a given project. Additionally,
performance contracts necessitate alternative procurement and payment
practices, typically utilizing past performance and end product
qualities as measurements.

Performance specifications are critical elements of performance
contracting. In the Netherlands, the team observed some of the most
extensive experience with drafting performance specifications. The Dutch
are testing a series of 60 pilot projects to measure performance
contracting versus traditional prescriptive methods. They utilize a
unique method of defining performance specifications in five levels of
requirements that range from road user wishes to requirements for basic
materials and processing. Performance specifications detail both the
operating level and minimum condition of the facility at the time it is
returned to public ownership.

An item of concern in performance contracting in the United States is
QA/QC (quality assurance/quality control). In the United States,
traditional QA/QC roles and responsibilities are not effective with
performance contracting. Performance contracts observed in the scan
placed the responsibility for QC solely with the contractor, and the
owner retained only a minimal QA role. There is use of "stop" or
"control" points on projects as a means for owner QA. There are also
unique processes for penalty points and quality audits in lieu of heavy
owner inspection. In one instance, the owner gives the contractor yellow
or red cards for quality violations, like a referee in a soccer game.
One yellow card is a warning; two yellow cards, or one red card, mean
that the contractor must stop work until the violation is remedied.
Again, there is a greater sense of trust between the contractor and the
owner than exists in the United States.

# Asset Management

Because there is so much more public trust being placed in private
sector, asset management appears very differently in Europe than it does
in the United States. Europeans do not use depreciation in asset
accounting, but, rather, value assets by replacement cost. Numerous
asset valuation methods were observed. In Portugal, for instance,
concessionaires bidding for the economic ownership determined the value
of a 30-year highway asset. In this case, the market determined what the
asset was worth, and the winning concessionaire is responsible for
maintaining the asset.

Actual techniques of asset management varied from country to country.
Generally, the condition of the entire asset analyzed annually.
Additionally, maintainable items go through a more rigid assessment
every two years. The Europeans tie asset condition assessments to annual
budgets. Both set value standards and methods standard were observed as
techniques to value assets.

The outcome of European asset management is a move toward outsourcing as
the predominant method. Concessions and Managing Agent Contracts are
allowing the private sector to fulfill the day-to-day role of the
ministries of transportation, and the transportation agencies are taking
oversight role. The asset management contracts are becoming long-term; 5
to 10 year terms are commonplace in standard contracts. In the case of
concession contracts, the concessionaires, not the owners, are
developing 30-year asset management programs.

# Conclusions and Recommendations

The US highways agencies should better utilize the efficiencies and
resources that the private sector has to offer, through the use of
innovative financing, alternative contracting techniques, design-build,
concessions, performance contracting, and proactive asset management.
Agencies must focus on the users, while equitably allocating risk and
seeking to establish an atmosphere of trust in the implementation of
procedures. This report presents a number of tools to assist US agencies
in meeting their growing infrastructure needs. A documentation of
knowledge and best practices learned on the European contract
administration scan is provided in an effort to implement these tools
and make the US transportation system more efficient and effective for
the public.

The team found a number of contract administration tools and techniques
that will impact the US transportation community. Some of these items
can be directly and immediately applied, while others will require
legislative changes prior to implementation. All team members will be
actively taking opportunities to educate their peers about the results.
Additionally, the following actions will be taken by the team to
implement the most pertinent findings:

-   Utilize the TRB Legal Committee to develop draft legislation for
    alternative contract administration processes;

-   Utilize the AASHTO Subcommittee on Finance to develop a policy on
    use of concessions;

-   Utilize the AASHTO Subcommittee on Construction to develop draft
    specifications for best value procurement and design-build contract
    forms;

-   Propose research to summarize construction procurement successes
    being used in the United States that are similar to those found in
    Europe; and,

-   Identify and solicit state DOTs to evaluate pilot projects in the
    areas of innovative financing, alternative contracting techniques,
    design-build, concessions, performance contracting, and proactive
    asset management.