Federal-Aid Highways: Increased Reliance on Contractors Can Pose Oversight Challenges for Federal and State Officials
Published: 2008-01-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pressure on state and local governments to deliver highway projects and services, and limits on the ability of state departments of transportation (state DOT) to increase staff levels have led those departments to contract out a variety of highway activities to the private sector. As requested, this report addresses (1) recent trends in the contracting of state highway activities, (2) factors that influence state highway departments' contracting decisions, (3) how state highway departments ensure the protection of the public interest when work is contracted out, and (4) the Federal Highway Administrations' (FHWA) role in ensuring that states protect the public interest. To complete this work, GAO reviewed federal guidelines, state auditor reports, and other relevant literature; conducted a 50-state survey; and interviewed officials from 10 selected state highway departments, industry officials, and FHWA officials.
section_title: What GAO Found
paragraphs: State DOTs have increased the amount and type of highway activities they contract out to consultants and contractors. State DOTs are also giving consultants and contractors more responsibility for ensuring quality in highway projects, including using consultants to perform construction engineering and inspection activities as well as quality assurance activities. Many state officials reported that they expect the amount of contracted highway activities to level off over the next 5 years, due to factors such as uncertain highway program funding levels. State DOTs indicated that the most important factor in their decision to contract out highway activities is the need to access the manpower and expertise necessary to ensure the timely delivery of their highway program, given in-house resource constraints. Officials said that they must contract out work to keep up with their highway programs. Of the 50 departments that completed GAO's survey, 38 indicated that they have experienced constant or declining staffing levels over the past 5 years. While state DOTs consider cost issues when making contracting decisions, cost savings are rarely the deciding factor in contracting decisions, and none of the 10 departments that GAO interviewed had a formal process in place for systematically assessing costs and benefits before entering into contracts. State DOT officials that GAO interviewed believe that they have sufficient tools and procedures in place to select, monitor, and oversee contractors to ensure that the public interest is protected. However, implementation of these mechanisms is not consistent across states, and state auditors reported weaknesses in several states. State DOTs also face additional challenges in conducting adequate oversight and monitoring, given current trends in the use of consultants and contractors. For example, while state employees are always ultimately responsible for highway project acceptance, they are increasingly further removed from the day-to-day project oversight. Officials from all 10 state DOTs that GAO interviewed said that current trends may lead to an erosion of in-house expertise that could affect the state DOTs' ability to adequately oversee the work of contractors and consultants in the long term. Because states have broad latitude in implementing the federal-aid highway program, FHWA has a limited role in states' use of consultants and contractors. Typically, FHWA's focus is on ensuring that state DOTs are in compliance with federal regulations when contracting out, such as ensuring that federal bidding requirements are met. FHWA has conducted both local and national reviews that have also identified various risks related to the increased use of consultants, including weaknesses in state quality assurance programs and an increased potential for conflicts of interest. While FHWA has identified these risks, it has not comprehensively assessed how, if at all, it needs to adjust its oversight efforts to protect the public interest, given current trends in the use of consultants and contractors.

section_title: Letter
paragraphs: The nation’s economic vitality and the quality of life of its citizens depend  significantly on an efficient transportation network. For the past several  decades, population, income levels, and economic activity have risen  considerably, and with the increases in these areas have come  considerable increases in travel demand. Transportation infrastructure has  not kept pace with these increases. According to the Department of  Transportation, investment by all levels of government remains well below  the estimated amount needed to maintain the condition of the nation’s  transportation infrastructure, and to fund improvements to the  performance of the network. In 2005, of the over $75 billion expended for  capital outlays and maintenance for highways, the federal government  accounted for about 40 percent and state and local governments  accounted for about 60 percent (see fig. 1).
As demands on the transportation system grow, states and localities are  looking for alternatives to direct government provision of transportation  infrastructure and services. Consistent with longer-term trends in  privatization of public services, states and localities have looked to  increased private sector participation in delivering highway infrastructure  and services. A 2003 survey by the National Cooperative Highway  Research Program found that the use of contractors and consultants had  continued to increase and had also expanded into activities previously  done principally by public agencies, such as activities related to inspection  and quality assurance of highway facilities and activities related to  obtaining right-of-way for highway infrastructure projects.
Proponents of privatization have long suggested that using private sector,  market-based incentives offers the potential advantages of obtaining  infrastructure or services faster than if provided solely by the public  sector, at a potentially lower cost. However, some critics have raised  concerns that the increased use of consultants and contractors contributes  to a loss of accountability, a decline in the skill levels and experience of  public sector staff, lower quality projects, and the inefficient use of public  funds.
To assist Congress as it assesses the future of the federal surface  transportation and highway programs, we studied the extent of  contracting by state departments of transportation (state DOT). This  report addresses (1) the recent trends in the contracting of state highway  activities; (2) the factors that influence state DOTs in deciding whether to  contract out activities and the extent to which state DOTs assess costs and  benefits when making such decisions; (3) how state DOTs protect the  public interest when work is contracted out, particularly when consultants  and contractors are given substantial responsibility for project and service  quality and delivery; and (4) the Federal Highway Administration’s  (FHWA) role in ensuring that states protect the public interest.
To address these issues, we reviewed relevant literature and survey data to  identify general trends in contracting and to establish a general baseline  for comparison with current levels of contracting. We also reviewed the  literature to identify available information regarding the costs and benefits  of contracting out highway activities versus performing them with in- house staff. We sent an inquiry to state auditing agencies and received and  reviewed state auditor reports from 11 states that addressed issues  relating to state DOTs’ use of consultants and contractors. We also  conducted a Web-based survey of all 50 state DOTs to determine the  extent to which state DOTs contract for services across 7 categories of  highway activities. We surveyed state DOTs to determine (1) the factors  they say are leading them to contract out activities or to keep work in- house and (2) information about potential future trends in contracting.  The survey also gathered data on state DOTs’ use of a variety of different  contract types and techniques, such as design-build contracts. We  received a 100 percent response to our survey. Appendix III contains  tables summarizing the state DOTs’ responses. We conducted a correlation  analysis to identify factors—such as state economic and demographic  measures—that may be associated with the level of contracting reported  in the survey. We also interviewed state DOT officials in 10 different states  to gather information on their perceptions of the costs and benefits of  contracting, on the ways in which state DOTs define and seek to protect  the public interest, and on how state DOTs’ use of consultants and  contractors is evolving. In selecting state DOTs to interview, we used a  nongeneralizable sample, rather than performing random sampling. We  chose this approach to ensure that the sample set included state DOTs  with a range of outsourcing experiences and practices. We interviewed  industry stakeholders from 6 different organizations knowledgeable about  the outsourcing of highway activities to obtain additional perspectives on  the costs and benefits of contracting and on how state DOTs seek to  protect the public interest. Finally, we interviewed FHWA officials at the  national level, as well as at 10 division offices corresponding to the state  DOTs selected for interviews, to obtain information on FHWA’s policies,  guidance, and oversight of state contracting practices and on the role  FHWA plays in ensuring that states protect the public interest. We  reviewed program and process reviews from FHWA’s national and division  offices to identify key areas of oversight focus and key findings that have  been reached in such reviews regarding states’ contracting and quality  assurance procedures.
For this report, we limited the scope of our review to contracts where  consultants or contractors are paid to provide a service related to highway  infrastructure. Although essentially contractual relationships, we did not  include public-private partnerships—where a private firm takes effective  ownership of a facility and assumes control over it, usually for an  extended period of time—in the scope of our work. Another GAO review  focusing specifically on public-private partnerships related to highway  infrastructure was under way concurrently with this review, and a final  report will be issued later in January 2008. We conducted this  performance audit from November 2006 through January 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives. Appendix I contains more information on  our objectives, scope, and methodology.
subsections: section_title: Background
paragraphs: FHWA assists states’ efforts in building and maintaining highways through  the federal-aid highway program. The agency distributes highway funds to  the states through annual apportionments established by statutory  formulas and by allocating discretionary grants. The states may obligate  funds for construction, reconstruction, and improvement of highways and  bridges on eligible federal-aid highway routes and for other purposes  authorized in law once FHWA has apportioned the funds to the states.  About 1 million of the nation’s 4 million miles of roads are eligible for  federal aid.
As a condition of receiving federal funds, states must adhere to federal  laws and regulations. In particular, states must ensure that their highway  program activities comply with title 23 of the United States Code (U.S.C.)  and title 23 of the Code of Federal Regulations (C.F.R.), which contain  provisions relating to the federal-aid highway program. FHWA has issued a  number of regulations to implement and carry out these provisions. These  provisions in title 23 relate specifically to states’ use of consultants and  contractors. For example, states must comply with the Disadvantaged  Business Enterprise Program requirements of 49 C.F.R. Part 26, which  requires that a certain percentage of contracts be awarded to small  businesses owned and controlled by socially and economically  disadvantaged individuals, including minority and women-owned  businesses. Contracts for engineering and design services that are directly  related to a construction project and use federal-aid highway funding must  be awarded in the same manner as a contract for engineering and design  services under certain provisions of the Brooks Architect-Engineers Act,  which establishes a qualifications-based selection process in which  contracts for architects and engineers are negotiated on the basis of  demonstrated competence and qualification for the type of professional  services required at a fair and reasonable price. While state DOTs are  subject to many federal laws and regulations regarding contracting, they  are not required to follow the Federal Acquisition Regulation when  contracting for federally funded highway activities, except for the cost  principles in 48 C.F.R. Part 31. Other specific federal provisions relating to  state DOTs’ contracting practices are summarized in table 1.
For projects using federal-aid funding, FHWA has also promulgated  regulations that establish design, construction, and materials standards for  highway projects that are on the National Highway System. In general,  states’ laws, regulations, directives, safety standards, design standards,  and construction standards apply to highway projects that are off of the  National Highway System.
FHWA has authority to oversee any project that receives federal-aid  highway funds. However, the agency has increasingly delegated  responsibility for oversight to state DOTs since the passage of the  Intermodal Surface Transportation Equity Act in 1991. Oversight roles and  responsibilities are outlined in stewardship agreements that each FHWA  division office executes with its respective state DOT. These stewardship  agreements outline when FHWA will have project-level oversight, or what  is known as “full oversight” over a project, and when that responsibility  will be delegated to states. Stewardship agreements vary in how full  oversight is determined. A stewardship agreement may indicate that full  oversight occurs on only “high-profile” projects, which will be agreed upon  by the state and the division office, or there may be a specific dollar  threshold, such as all interstate projects that are over $1 million. Generally  speaking, FHWA has project-level oversight for a relatively limited number  of federal-aid projects. Recently, FHWA developed guidance on the  development of stewardship agreements and encouraged its division  offices to revise their agreements on the basis of this guidance to achieve  more consistency throughout the agency. Among other things, the  guidance encourages the division offices to use risk management  principles to determine where to focus their stewardship activities. The  guidance also recommends that division offices develop performance  measures to better track the health of the federal-aid highway program in  their states. However, the guidance gives state DOTs and division offices  broad flexibility in determining how risks should be assessed and how  performance should be measured.
In addition to having oversight over some specific projects, FHWA division  offices oversee state DOTs through reviews of the departments’ programs  and processes. Some of these reviews occur annually, and others are  undertaken at the discretion of the division office on the basis of areas  where there may be increasing risk to the highway program. These reviews  are meant to ensure that states have adequate controls in place to  effectively manage federally assisted projects and will generally result in  recommendations and corrective actions for the state DOTs.
Over the past several years, GAO has expressed concerns about FHWA’s  oversight role. For example, we reported in 2005 that FHWA lacked a  comprehensive approach in its oversight efforts. We found that even  though FHWA had made progress in improving its oversight efforts, such  as establishing performance goals and outcome measures to limit cost  growth and schedule slippage on projects, FHWA had not linked these  efforts to its day-to-day activities and was not using them to identify  problems and target oversight. More generally, we have also raised  concerns about federal transportation policy. For example, we have  reported that federal transportation funding is not linked to system  performance; that the federal government does not have direct control  over the vast majority of the activities that it funds; and that highway grant  funds are apportioned to state and local governments by formula, without  regard to the needs, performance, quality, or level of effort of recipients.  Transportation and other experts recently told us that the nation’s  transportation policy has lost focus, and that the nation’s overall  transportation goals need to be better defined and linked to performance  measures that evaluate what the respective policies and programs actually  accomplish.
section_title: States Have Increased the Contracting Out of Highway Activities, and Consultants and Contractors Increasingly Have Substantial Responsibility for Ensuring Quality and Delivery of Highway Projects
paragraphs: State DOTs have increased the amount and type of highway activities that  they have contracted out to consultants and contractors over the past 5  years. In particular, state DOTs have increasingly contracted out  preliminary engineering, design, right-of-way, and construction  engineering and inspection activities. We also found that state DOTs have  increasingly given consultants and contractors more responsibility for  project quality through a growing trend to contract out construction  inspection and engineering activities. Some state DOTs have used broader  contracting types and techniques that give additional responsibility to  consultants and contractors. For example, some state DOTs have used  consultants to serve on their behalf as project managers or program  managers to oversee and manage day-to-day activities on highway  projects.
subsections: section_title: States Have Increasingly Contracted Out Highway Activities
paragraphs: On the basis of our survey (see sidebar) and discussions with state  officials, we found that states have increased the extent to which they  contract out some types of highway activities to consultants and  contractors (see fig. 2). Our survey results indicated that over the past 5  years, more than half the states have increased the amount of preliminary  engineering, design, and right-of-way activities as well as construction  engineering and inspection activities they have contracted out to third  parties. A fewer number of states have increased contracting out of  maintenance and operations activities.
Federl-Aid Eligible Preventive Mintennce:  Inclde ctivitie such asvement  preervtion, safety improvement, nd  eimic retrofit.
Right-of-Wy: Inclde ctivitie such asnd  pprsa, lnd prchase negotition, nd  assnce progr for individua nd  business diplced y highwy project.
Officials from 27 of the 50 states responding to our survey indicated that  their states had increased the contracting out of construction engineering  and inspection activities over the past 5 years, although half the states  report contracting out 25 percent or less of this work. In our interviews,  several states indicated that they have recently had to increase their use of  consultants for construction inspection activities. For example, the South  Carolina DOT began to increase its use of consultants to perform  construction engineering and inspection work in 2000. Department  officials estimated that they will contract out about 10 percent of  construction engineering and inspection work next year. Prior to 2000, the  South Carolina DOT only contracted out construction inspection and  engineering work on certain large, complex projects. Maryland State  Highway Administration officials also said that they have been giving what  have been traditionally in-house construction engineering and inspection  activities to consultants, contracting out about 60 percent of these  activities.
Officials from at least 3 state DOTs we interviewed indicated that they  would prefer to keep construction inspection and engineering activities in- house to retain greater control over the quality of contracted work. For  example, Illinois highway department officials said that they always assign  an Illinois highway department engineer to oversee the consultant because  they do not like to have consultants oversee other contractors and  consultants, but that they need to contract out inspection activity for  projects that require expertise they do not have in-house. The Maryland  State Highway Administration officials also said that they would prefer to  retain the construction engineering and inspection activities in-house, but  they have been unable to hire a sufficient number of staff. According to  Utah DOT officials, the agency has been able to avoid contracting out any  construction engineering and inspection activities so far, but they would  likely contract out such activities in the future if workload burdens on in- house highway department staff continue to increase.
section_title: Some State DOTs Have Broadened the Types of Contracts and Contracting Techniques That They Use
paragraphs: Some state DOTs have used certain types of contracts where contractors  assume more responsibility and risk for project delivery and day-to-day  highway project oversight. For example, design-build contracts allow  contractors to be involved in both the design and the construction of a  highway project, and project management contracts (1) can assign  additional oversight responsibilities to contractors or consultants and   (2) can result in contractors overseeing other contractors. Figure 4 shows  the number of states using these types of contracts and the frequency with  which they use them.
As figure 4 shows, more than half of the state DOTs have used a design- build approach at least once, and 20 state DOTs have not let any design- build contracts over the past 5 years. Our survey also indicates that many  state DOTs still have constraints on their ability to use design-build  contracting. Fifteen state DOTs reported that they do not have authority to  enter into design-build contracts, and an additional 10 state DOTs reported  that they have only limited design-build authority. Few states have  experience with other contracting methods asked about in our survey.  Five states reported that they had used project managers for more than 10  contracts, and 3 states reported having used construction  managers/general contractors more than 10 times to oversee and manage  the day-to-day activities of a project.
Our survey also asked about a variety of other contracting techniques that  state DOTs may use in an effort to help minimize construction time and  cost, such as cost plus time bidding (A+B), incentive and disincentive  contracts, and lane rental contracts. Almost two thirds of the states  indicated that they used more than one of these contracting techniques at  least occasionally. Of the contracting techniques included in the survey,  states reported using incentives and disincentives and cost plus time  bidding most often over the past 5 years (see fig. 5).
While some states have used these contracting techniques in their highway  projects, many states reported that they did not use them very often. For  example, only 10 states reported using more than 1 technique frequently.  Of these states, only 4 reported using more than 3 of these techniques  frequently. Two states reported using these tools either rarely or not at all.
While our survey results do not indicate widespread use of these different  types of contracts and contracting techniques, these results do not  indicate that the use of these contracts is not an important or growing  trend in state contracting. State officials we interviewed told us that many  of these types of contracts, which are relatively new to some state DOTs,  are actively being considered and their use is likely to grow in the future.  In addition, some techniques are more suited to projects in congested  areas—such as lane rental contracts—and some states may have fewer  such projects than others. Other contract types, such as design-build  contracts, are often used for projects that are large and complex in scope,  which may be relatively rare in some states.
section_title: Most States Do Not Expect the Level of Contracting to Increase over the Next 5 Years
paragraphs: While many state DOTs have increased their contracting out of various  activities over the past 5 years, officials at many highway departments  anticipate a slowing of this trend. As figure 6 shows, most state DOTs  reported that they expect to maintain their current level of contracting  over the next 5 years. For some activities, a number of states even expect  to see declines in their level of contracting. For example, 15 state DOTs  reported that they expect their contracting of design activities to decrease  over the next 5 years. State DOT officials responded in the survey that  their expectations for their contracting levels over the next 5 years are  based on their expectations for highway program funding levels,  legislative considerations, anticipated workload, and staffing levels. For  example, the Oregon DOT officials stated in our survey that they expect  their funding levels for highway projects to greatly decline by 2010,  thereby reducing their need for consultants. However, the department  noted that if they are able to secure new funding, they anticipate  continuing at their current level of consultant use, which is at a historical  peak for the department.
Some states anticipated growth in their contracting for certain activities.  For example, Pennsylvania and Utah DOT officials responded that they  believe their state will increase contracting out work to consultants and  contractors for all seven categories of highway activities. In addition,  another state official indicated that its state DOT expects to increase its  contracting out of federal-aid eligible preventive maintenance work in the  next 5 years due to an anticipated shift in its program to focus on system  preservation, rather than capital projects.
section_title: State DOTs Indicate That Lack of In-house Staff and Expertise Are the Most Important Drivers in States’ Contracting Decisions
paragraphs: State DOTs indicate that the most important factor in state DOTs’ decision  to contract out highway activities is the need to access the manpower and  expertise necessary to ensure the timely delivery of their highway  program, given in-house resource constraints. While state DOTs consider  cost issues when making contracting decisions, cost savings are rarely the  deciding factor in contracting decisions, and no state we interviewed  regularly performs formal assessments of costs and benefits before  deciding whether to contract out work. Several studies have attempted to  compare the costs of in-house and contracted work, although limitations  in the studies’ methodology make it difficult to conclude that the use of  consultants and contractors is more or less expensive than using public  employees over the long term. In addition to staffing and cost issues, there  are other considerations, such as the desire to maintain in-house expertise  that can play a role in a state DOT’s decision of whether to contract out  highway activities.
subsections: section_title: Need to Supplement In- house Staff and Access Expertise Are the Major Drivers in the Decision to Contract Out Work
paragraphs: In our survey, state DOTs listed “lack of in-house staff” as “very important”  or “important” in their decision to contract out work more than any other  factor for all seven of the highway activities included in the study, as  shown in table 2. Furthermore, all of the highway department officials that  we interviewed said that they do not have the in-house staff resources  available to deliver their program in a timely manner, so they must  contract out work to deliver projects and services. For example, Illinois  DOT officials said that at this point, they rely on consultants to fulfill the  department’s work demands.
In recent years, state DOTs have experienced a substantial growth in  funding for their highway programs, without a commensurate increase in  staffing levels. Results from our survey show that the majority of state  DOTs have experienced constant or declining in-house staffing levels.  State DOTs indicated that staff reductions occurred most frequently in the  areas of design, construction engineering and inspection, and  maintenance, as shown in table 3.
Of the 50 states that completed the survey, only 12 highway departments  stated that they employ more professional and technical highway staff  than they did in the past 5 years. The remainder of the highway  departments said that their workforces have either stayed the same or  decreased over the last 5 years.
Analysis of Census of Governments data also illustrated these trends in  staffing at state DOTs. From 1992 to 2005, employment at state DOTs  across the country declined by a little over 0.5 percent annually. At the  same time, state spending on highways increased by 0.2 percent annually,  in real (inflation-adjusted) terms. These trends have resulted in an  increase in the amount of highway spending per employee at state DOTs,  with each state DOT employee on average having to “manage” a larger  amount of his or her state’s program. Overall, across the country, state  DOT inflation-adjusted expenditures per employee have grown by 0.75  percent annually from 1992 to 2005.
Officials at every state DOT we interviewed also acknowledged challenges  in delivering highway infrastructure and services demanded, given their in- house staffing situations. Several of the officials cited budgetary issues  and political pressure to reduce the size of government as constraints on  their ability to hire additional in-house staff. For example, Illinois DOT  officials, whose staff has been cut nearly in half since the 1970s, stated  that these staff reductions have been primarily linked to budget issues,  such as those associated with the state’s public employee pensions. In  South Carolina, the legislature has not substantially changed the highway  department’s staffing levels despite the department’s increased program  size. Consequently, department officials stated that there is more work to  do than the department can handle with its in-house staff alone.
Officials from several state DOTs also mentioned that market conditions,  including a lack of qualified engineers and the higher salaries paid in the  private sector, limit their ability to hire and retain qualified personnel,  even when they have the budget authority to do so. In Georgia, DOT  officials said that the department is often engaged in bidding wars with  private firms for prospective employees, and that they simply do not have  the ability to offer equivalent compensation.
In addition to supplementing ongoing shortages of in-house staff, many  state DOTs viewed contracting as a valuable strategy for managing short- term workload fluctuations. For example, Louisiana Department of  Transportation and Development officials said that contracting is  beneficial because it provides them with added flexibility and allows them  to respond more rapidly to spikes in their highway program than if they  had to bring new in-house staff on board. Once work slows, contracting  also allows the state DOTs to draw down their workforce without having  to lay off in-house employees. In our survey, state DOTs listed the desire  to “maintain flexibility or manage variations in department workload” as  “very important” or “important” more frequently overall than any other  factor except “lack of in-house staff” in their decision to contract out  work.
In addition to increasing their overall level of manpower, state DOTs also  frequently contract out work to access specialized skills or expertise they  may not have in-house, according to our survey results and interviews  with state highway officials. For example, the Pennsylvania DOT does not  always have the specialized skills in-house to do certain geotechnical  analyses and environmental impact assessments, so this work is  contracted out. Several state DOTs also indicated that they tend to use  consultants on complex projects that require more specific expertise. For  example, Illinois DOT officials told us that they typically use consultants  for larger, more complex projects that generally will have a higher  associated dollar amount due to the need for specialized expertise. In  addition, Louisiana Department of Transportation and Development  officials said that they usually hire consultants to design the more complex  and larger projects due to a decrease in design staff as well as in-house  expertise. Maryland State Highway Administration officials also indicated  that staff reductions in their agency have had a disproportionate effect on  positions requiring more experience and has led to the agency using a  greater proportion of consultants on large projects.
section_title: Cost Savings Are Not a Major Driver in Decisions to Contract Out Work
paragraphs: Cost savings do not appear to be an important driver in the trend toward  the increased contracting out of highway activities. Of the seven factors  listed in the survey that might potentially lead a state DOT to decide to  contract out an activity, “to obtain cost savings” was listed as “very  important” or “important” the least number of times of any of the factors,  across six of the seven highway activities studied. Furthermore, “to obtain  cost savings” was listed by states as “of little importance” or “of no  importance” the most times of any factor for five of the seven highway  activities studied, as table 4 shows. During our interviews, no state DOT  official cited cost savings as a primary reason for their departments’  increased use of consultants and contractors in delivering their highway  program. The Georgia DOT initially attempted to perform some cost- benefit analyses when the department was going through a surge in its  contracting out work; however, the department abandoned these efforts  after it became apparent that the results of the analyses did not matter  since the department needed to contract out the work regardless.
While cost savings are rarely the driver in the decision to contract out  highway activities, the perception of higher contracting costs may  influence states to continue to perform activities in-house, rather than  contracting out the activities. In our survey, state DOTs listed the higher  costs of consultants and contractors as a “very important” or “important”  factor in the decision to use in-house staff to perform an activity more  times overall than all but one factor, as shown in table 5. As an example,  officials at the Pennsylvania DOT conducted an evaluation and found that  it would be more expensive to contract out for highway line painting and  decided to continue to do the majority of this work with in-house staff.
section_title: State DOTs Do Not Formally Assess Costs and Benefits before Contracting Out Work
paragraphs: Although state DOTs consider cost issues and estimate the costs of  performing certain activities, none of the 10 departments from which we  interviewed officials had a formal process in place to systematically or  regularly assess the costs and benefits of contracting out activities before  entering into contracts. State officials we interviewed acknowledged  difficulties in accurately comparing costs of work performed in-house and  work performed by contractors and consultants. For example, Minnesota  DOT officials stated that they have difficulties in determining how to  properly calculate overhead rates for in-house staff. Reports from state  auditors in several states also acknowledged difficulties in comparing the  costs of using consultants versus using in-house staff. Some reports also  found that the highway departments in their states did not thoroughly or  adequately study costs associated with the use of consultants compared  with in-house staff to effectively manage the use of consultants, or actively  negotiate with consultants to ensure that contract prices were fair and  reasonable.
While formal assessments are not undertaken, officials from several state  DOTs we interviewed generally perceived contracting out to be more  expensive than using in-house staff, particularly for engineering services.  In fact, no state DOT official we interviewed perceived engineering work  to be cheaper on an hourly basis when contracted out. However, some  officials indicated that they found opportunities for cost savings in some  circumstances for specific activities. For example, the Utah DOT found  that it was cheaper to contract out its pavement management data  collection work because it allowed the department to avoid having to  invest in the expensive equipment required, which tends to become rapidly  outdated. Officials from another state DOT acknowledged that there were  potential cost efficiencies through contracting if contract employees were  laid off during periods of reduced activity, such as during the winter  months. This department conducted an analysis that found that if the  agency laid off consultant construction inspectors for at least 3 months  out of the year, the agency’s cost for the inspectors would equal that of in- house employees. However, officials stated that the department has not  laid off consultant inspectors consistently due to concerns that the  department would not be able rehire them once their services were  needed again.
A number of studies have attempted to compare the costs of contracting  out and using in-house staff for highway activities. In our review of these  studies, we identified a series of methodological issues and other  limitations that make it difficult to make any conclusions about whether  consultants and contractors are more or less expensive than public  employees over the long term. In addition, we reviewed other studies that  have attempted to synthesize the results of existing cost comparisons and  have raised many of these same issues. First, numerous challenges exist in  obtaining accurate and reliable data to make comparisons. Such  challenges include difficulties in properly assigning in-house overhead  costs to specific projects and activities, finding “like” projects to compare,  and using state DOT systems and records that have incomplete and  unreliable data. Second, very few of the studies we reviewed sought to  systematically determine the benefits resulting from contracted work or  in-house work, thus providing an incomplete picture as to the extent to  which contracting out highway activities might or might not be desirable.  For example, additional costs of using consultants or contractors could be  offset by benefits in completing the project more quickly than it would  have been done by in-house staff, or the quality of the work may be worth  the premium paid for the service. Finally, the studies did not adequately  consider the long-term implications of contracting out work or performing  it in-house, such as long-term pension obligations associated with in-house  employees that are not incurred when work is directly contracted out.
section_title: Additional Factors Can Also Play a Role in Contracting Decisions
paragraphs: In addition to the factors that we have previously discussed, other  considerations can play a role in a state DOT’s decision of whether to  contract out certain activities. Next to the staffing issues that we have  previously discussed, state DOTs most frequently reported using  consultants to meet specific time frames or to increase the speed of  completion of a task as an “important” or “very important” factor. State- level legislative requirements and policy mandates are also sometimes  factors in state DOTs’ decisions to contract out work. For instance, the  South Carolina Legislature enacted a budget provision in 1996,  encouraging the highway department to use private contractors for bridge  replacements; surface treatments; thermo-plastic striping; traffic signals;  fencing; and guardrails, whenever possible. In our survey, the Alaska DOT  responded that one of the reasons it contracts out preliminary engineering  work is to satisfy direction that it has received from the state government  on using consultants. Conversely some states may also have legislative  limitations on their ability to contract out work. For example, the  California DOT, until recently, had only limited authority to contract out  engineering services under the California constitution.
Regarding the decision to keep work in-house, the most commonly cited  factor in both our interviews and our survey was the desire to retain key  skills and expertise. State DOTs recognize that they need to maintain a  core of employees with sufficient experience and expertise to be able to  effectively oversee and manage consultants and contractors and to also  develop the expertise of more junior highway department employees. In  both our interviews and our survey, State DOT officials stated that they  often consciously keep certain activities in-house so that employees can  improve their skills.
The results from our survey indicated that state DOTs’ perceptions  regarding differences in quality between work performed in-house and  work contracted out may at times be an important factor in decisions to  keep work in-house. For preconstruction activities in particular, “belief  that work will be of a higher quality if performed by in-house staff” was  one of the factors most frequently listed as being “very important” or  important” in the decision to perform work with in-house staff.  Furthermore, one state DOT noted in the survey that the consultants they  have used to perform construction engineering and inspection work did  not have adequate experience to effectively do the job. In our interviews,  few state officials expressed strong beliefs about differences in quality  between in-house and contracted out work, although some departments  acknowledged that the quality of work varies, depending on the firm being  used, and that there have been issues regarding the performance of  specific firms.
We also performed a correlation analysis to determine whether the  amount of work that state DOTs contract out is associated with certain  demographic or economic conditions in the state. The level of correlation  between most of the economic and demographic variables selected for the  analysis and the percentage of work that state DOTs contract out was  relatively weak or nonexistent. However, among the variables that we  considered, the percentage of a state’s population living in urban areas had  the strongest positive correlation with the amount of work that states  contract out in preliminary engineering, design, and construction  engineering and inspection activities. This correlation may occur  because, as state DOT officials told us, they are more likely to contract out  larger and more complicated projects, and there may be more of these  types of projects in those states that are more urbanized. Also, for the  majority of activities studied, there appears to be a moderate positive  correlation between the amount of work contracted out and the pace at  which states’ populations have grown. This correlation is consistent with  the possibility that more rapidly growing states contract out greater  amounts of work to help meet surges in their workload spurred by the  increased demand for highways that growing populations foster, but may  also be due to other factors.
section_title: State DOTs Use Various Controls to Protect the Public Interest, but They Face Additional Challenges Arising from Current Contracting Trends
paragraphs: State officials we interviewed told us that they have sufficient tools and  procedures in place to monitor and oversee contractors to ensure that the  public interest is protected. These tools and procedures include such  things as prequalification of contractors and consultants, regular  monitoring procedures, assessments of work performed, and standards  and requirements for certain types of work. However, 10 of the 11 state  auditor reports we reviewed found weaknesses in state DOTs’ contracting  and oversight practices. With current trends in contracting state DOTs  face additional challenges in conducting adequate oversight and  monitoring. In particular, states’ oversight has generally become further  removed from the day-to-day work on a project, and state officials  expressed long-term concerns in retaining adequate expertise and staff  needed to adequately oversee a growing contractor and consultant  workforce.
subsections: section_title: State DOTs Use a Variety of Tools and Processes to Protect the Public Interest, Although Such Controls Are Inconsistently Applied
paragraphs: State DOTs’ contracts with consultants and contractors include a variety  of mechanisms and controls that are intended to address potential project  risks and protect the public interest, and the state officials with whom we  spoke believe that the controls they have in place are adequate to protect  the public interest. For example, state DOTs may prequalify consulting  firms and contractors to ensure that those bidding on projects will be able  to successfully perform contracted activities. A previous survey on state  contracting practices found that state DOTs use a prequalification process  for about two thirds of the activities they contract out. The survey found  that prequalification processes were most common for design, right-of- way, and operations activities, while prequalification processes where less  common when contracting out for maintenance and construction work. A  majority of state DOT officials we interviewed also stated that they have  prequalification processes for at least some activities. As part of their  prequalification requirements, state DOTs examine consultants’ and  contractors’ previous job experience and work capacity to identify  individuals and organizations from which the agency may accept a bid. In  addition, for engineering services, state DOTs are required to use a  qualification-based selection process to identify best-qualified bidders. It is  only once these best-qualified bidders have been identified that the  highway department enters into price negotiations to determine a “fair and  reasonable” price for the contracted services.
States also report that they have policies to regularly monitor and assess  consultants and contractors during the project and upon project  completion and may include these assessments into prequalification  determinations for future projects. State officials indicate that a state  employee is always ultimately responsible for any particular project or  service and, therefore, are responsible for ensuring that consultants and  contractors are performing the work according to contract provisions and  other applicable standards and specifications. State DOTs may address  poor performance on an ongoing project by requesting that the contractor  or consultant replace a particular employee or by requesting that the  contractor or consultant address any construction mistakes. In extreme  circumstances, state DOTs can also withhold payment to consultants or  contractors. A poor performance rating at the end of a highway project  may result in a reduced chance of securing future contracts.
All state DOTs have policies and rules governing consultant and  contractor independence. For projects on the National Highway System,  state DOTs require consultants and contractors to certify that they do not  have any potential or perceived conflicts of interest. Some state DOTs  have prohibitions against performing both design and construction  inspection activities.
State DOTs have also developed various standards, specifications, and  policies to help ensure that the public interest is protected on highway  projects. State DOTs require that standards and specifications be followed  whether work is performed by department staff or contracted out. When  work is contracted out, state DOTs outline all relevant standards and  specifications—such as design and construction standards, and  specifications regarding materials acquisitions—in the terms of the  contract after a winning bidder has been selected.
Finally, federal regulations require each state agency to have an approved  quality assurance program for materials used in and the construction of  federal-aid highway construction projects. Quality assurance programs  identify contractors’ materials sampling, testing, and inspection  requirements as well as specific quality characteristics to be measured for  project acceptance. The regulations also include requirements that each  state DOT’s quality assurance program provides for an acceptance  program and an independent assurance program. In 1995, FHWA revised  its regulations to allow state DOTs to use contractor material testing data  in their acceptance decisions if accompanied by validation and verification  procedures. However, state employees must always make the final  acceptance decision. On full oversight projects, the state’s FHWA division  office is responsible for providing final acceptance of projects at the  completion of construction, but the state is still responsible for providing  project-level acceptance of construction and materials quality during  construction.
State auditors in 10 of the 11 states that responded to our inquiry found  numerous weaknesses in state DOTs’ contracting and oversight practices.  For example, one auditor’s report found that the state DOT’s  prequalification procedures do not always ensure that the most qualified  bidder is selected. Furthermore, auditors’ reports in at least 5 states found  that the state DOTs did not aggressively negotiate fair and reasonable  prices when using qualifications-based selections, or had not established  criteria to define what constitutes a reasonable price, resulting in  negotiated prices that are perceived to be too high compared with national  benchmarks, or compared with other states’ experience. In addition,  another auditor report found examples where the state DOT failed to  consistently assess consultant and contractor performance, and examples  where quality assurance procedures were not adequately followed, which  can result in lower-quality highway construction.
section_title: Current Trends in Contracting Out Pose Challenges for State DOTs in Conducting Adequate Oversight and Monitoring
paragraphs: State DOTs may encounter challenges in conducting sufficient oversight  and monitoring for highway projects, given current trends in contracting  out. For projects using federal-aid highway funds, FHWA requires that a  state highway employee always have ultimate responsibility for successful  project completion. However, when consultants and contractors have  oversight or managerial roles on a project, the state highway employee  may be further removed from the day-to-day project activities. This  situation has the potential to limit the ability of state DOT employees to  identify and resolve problems that occur during construction. For  example, the National Transportation Safety Board—in its report on an  accident in Colorado in which a car collided with a steel girder that had  fallen from an overpass—found that the state DOT did not conduct active  oversight, and that it was the department’s policy to avoid telling a  contractor how to accomplish contracted work and to avoid interfering as  the contractor carried out the work.
In addition, state highway employees are increasingly moving into project  manager roles in which they may oversee several projects. Several state  DOT officials cited concerns and challenges in conducting adequate  oversight in such situations. In some states, consultants oversee multiple  projects as well. For example, the Maryland State Highway Administration  is beginning to use construction management inspection contracts. Under  these contracts, the contractor becomes responsible for managing work  on specific projects as well as a portfolio of projects.
Erosion of state DOTs’ in-house expertise as a result of staff cuts and  retirements also creates additional risk in the long term and creates  challenges for state DOTs in effectively overseeing consultant and  contractor work. All of the state DOT officials with whom we spoke  believe that they currently have sufficient expertise in-house to carry out  their highway programs and to oversee consultants and contractors.  However, according to officials at several state DOTs, there is a “thinning”  of expertise in their departments and fewer knowledgeable staff are  available to oversee and monitor consultants. As we have previously  stated, state DOTs have not been able to hire a sufficient number of staff  to replace experienced staff who may soon be retiring. In addition, state  DOTs compete with private firms for what in some states is a relatively  small number of new engineers graduating from college. State highway  officials in several states also commented that, given the limitations  inherent in a state budget, college graduates often elect to either (1) go  into the private sector right away or (2) receive training at the state DOT,  and then leave for a higher paying job in the private sector.
Ensuring that consultants and contractors are independent and free from  conflicts of interest can be difficult. As we have previously discussed, state  DOTs are using consultants and contractors for a greater variety of  services, including project engineering and design, construction  inspection, and highway maintenance. Officials from several state DOTs  have expressed some concern because consultants and contractors may  work on multiple state projects where they are the lead on one project and  a subconsultant/subcontractor on another project. For example, one firm  may have an undisclosed financial relationship with another firm beyond  the work being done with the state DOT, and this situation could pose  difficulties if one of these firms is hired to inspect the other. While some  state DOT officials acknowledged that situations have arisen that present  the potential for conflicts of interest, none of the state DOT officials with  whom we spoke thought their agencies had any significant problems with  contractor and consultant independence.
section_title: FHWA Focuses Much of Its Oversight Efforts on Ensuring That State DOTs Comply with Laws and Regulations
paragraphs: The federal-aid highway program provides states with broad flexibility in  deciding how to use their funds, which projects to pick, and how to  implement these projects; therefore, FHWA has a limited role in  determining how consultants and contractors should be used by state  DOTs. FHWA performs project-level oversight on only a limited number of  projects. FHWA division offices also conduct reviews of state programs  and processes that are related to the use of consultants and contractors.  These oversight activities are generally limited to ensuring compliance  with federal rules and regulations. On a national level, FHWA has recently  conducted some reviews that touch on states’ use of consultants and  contractors. Through these reviews, FHWA has identified a variety of risks  associated with the use of consultants and contractors, but the agency has  not fully assessed how to respond to these risks.
subsections: section_title: FHWA Has a Limited Role in Determining How Consultants and Contractors Are Used on Highway Projects
paragraphs: FHWA has only limited authority over many aspects of state DOTs’  programs, including their contracting practices. According to FHWA  officials, the agency does not have any specific policy regarding highway  departments’ use of consultants and contractors beyond those  requirements contained in existing laws and regulations. Furthermore,  while federal law requires state highway departments to be “suitably  equipped and organized,” the law also includes a provision that a state may  engage, to the extent necessary or desirable, the services of private  engineering firms in meeting these provisions. According to FHWA, some  FHWA division offices have interpreted this regulation as providing state  DOTs with broad authority to use consultants to perform department  work. FHWA has compiled relevant legislation and regulations regarding  the contracting out of highway activities on its Web site to serve as  guidance to state DOTs when contracting out highway activities.
FHWA has also played a role in encouraging states to consider alternative  contracting techniques and methods, and to consider greater involvement  from the private sector through public-private partnerships to improve  project delivery and seek out alternative sources of funding. For example,  FHWA has encouraged contracting techniques and public-private  partnerships through Special Experimental Projects 14 and 15, with many  of these techniques allowing consultants and contractors to assume  additional responsibilities in the delivery of highway projects.
section_title: Some FHWA Oversight Activities Are Associated with the Use of Consultants and Contractors
paragraphs: While state DOTs conduct project-level oversight on the majority of  highway projects, FHWA retains project-level oversight on a limited  number of projects, based on its stewardship agreement with the state  DOT. Regarding states’ use of consultants and contractors, the agency’s  oversight efforts are generally focused on ensuring compliance with  existing laws and regulations. For example, the division office must  concur in the award of certain contracts, and when providing concurrence  for an engineering contract, a division office will seek to ensure that the  state DOT has used an appropriate qualifications-based selection process,  as required by law.
When conducting project-level oversight, division office officials will also  do at least some on-site monitoring of the work. During these on-site visits,  FHWA will assess the project’s status and verify that the project complies  with plans and specifications. As part of this process, division office  officials told us that they will often observe ongoing project activities to  ensure that materials testing and other quality control and quality  assurance procedures follow regulations. The amount of on-site oversight  varies greatly, depending on the perceived project risk, which is generally  determined according to the cost of the project, its complexity, and its  visibility to and potential impact on the public. Division office officials told  us that on projects with very high visibility, they will have an engineer on- site up to several times a week. However, for other projects, they may not  send an engineer out to the site more than once or twice over the life of a  project. According to division office officials, even when conducting  project-level oversight, they still rely on the state DOTs to properly  administer the project and that much of FHWA’s role is not to perform  direct oversight, but rather to make sure that the highway department is  doing appropriate oversight. Once the project is completed, FHWA is  responsible for final inspection and project acceptance.
FHWA also conducts oversight related to the use of consultants and  contractors through reviews of state programs and processes that may  involve consultants and contractors. To identify those areas that pose the  greatest threats or opportunities to states’ federal-aid programs and to  assist the division offices in allocating their limited resources in the most  effective manner, FHWA has encouraged a risk-based approach to  identifying areas for review, and given division offices flexibility in  determining which program areas to focus on in their risk assessments.  Through this risk assessment process, many division offices have  identified issues related to the use of consultants and contractors. We have  identified at least 15 states where FHWA division offices have conducted  process reviews specifically concerning the contracting out of work over  the past 5 years. We have also identified at least 2 other states where  FHWA division offices are currently conducting similar reviews. These  reviews focus on a variety of issues related to the use of consultants and  contractors, and many have recommendations for how state DOTs can  improve their processes for procuring and administering consultants and  contractors.
As a result of division offices’ identification of the use of consultants and  contractors as an area of high risk, FHWA headquarters has also  conducted national reviews that involve issues related to this matter.  Under its recently created National Review Program, FHWA has  completed reports on quality assurance and oversight of local public  agencies that include discussions of issues associated with the contracting  out of work. FHWA is also currently undertaking an additional review that  is looking at the administration of consultant contracts. In addition to  these reviews, FHWA has also conducted a series of annual reviews of  state DOTs’ quality assurance activities over the last several years that  have highlighted concerns related to material testing conducted by  consultants.
A final way that FHWA exercises oversight relating to the use of  consultants and contractors is through its approval of various state DOT  documents. As part of their oversight responsibilities, division offices are  responsible for approving a variety of state DOT manuals, standards, and  policy documents that establish procedures for implementing the federal- aid highway program in the state. For example, state DOTs must develop  written procedures outlining their process for procuring consultant  services, which must be approved by FHWA. FHWA must also approve  other documents that may not be directly focused on the contracting out  of work, but that address work that is often performed by consultants or  contractors. For example, division offices are responsible for approving  state DOTs’ quality assurance programs for materials on construction  projects.
section_title: FHWA Has Identified Risks Associated with the Use of Consultants and Contractors, but It Has Not Fully Assessed How to Respond to These Risks
paragraphs: FHWA has identified many ways that the contracting out of work can pose  risks to the federal-aid highway program. For example, a series of FHWA  reviews of quality assurance activities found many critical deficiencies in  state oversight of consultants in these activities, such as the lack of  independent sampling of highway materials for verification tests;  inadequate statistical comparisons of test results; and insufficient state  control of test samples, sampling locations, and testing data. Such  shortcomings in state DOTs’ quality assurance programs could potentially  have a detrimental effect. For example, in its quality assurance review,  FHWA states that pavement on highways is deteriorating faster than  expected and asserts that this is likely, at least in part, due to the identified  weaknesses in state DOTs’ quality assurance programs. In addition,  another national FHWA study related to the use of local public agencies  found that local agencies are often highly dependent on consultants to  deliver the projects and may not have the expertise to adequately oversee  the work of the consultants and to be sure of the quality of the services  they are getting. The study further found that some states may not be  conducting adequate oversight over these projects, and that the states’  reviews tend to be reactive, rather than proactive.
Division offices have also cited areas of risk associated with the growing  use of consultants. For example, an Illinois Division Office process review  raised concerns about the possibility that firms that had performed design  work for a project might also do construction inspection work on the  same project, which would pose the potential for conflicts of interest. In  our interviews with division office officials, many cited the challenges that  contracting out poses for state DOTs in regard to maintaining sufficient in- house expertise. Also, several division office officials perceived  contracting out work to be more expensive than keeping the work in- house, resulting in an inefficient use of public funds. Division office  officials we interviewed also pointed out that FHWA’s division offices have  also suffered reductions in staff and an erosion of expertise and  experience, which can hamper their oversight activities.
FHWA officials stated that many division offices also identified areas of  risk related to the contracting out of work during FHWA’s first national  risk management cycle. Although the use of consultants and contractors  was not one of the 49 key elements that division offices were required to  assess, many division offices still identified it as an area of risk. According  to FHWA, 23 division offices identified risks related to the use of  consultants as one of their top risks, with division offices finding such  risks present throughout various state DOT program areas, including in  construction, design, and right-of-way. These risks included concerns that  consultants do not have the necessary skills to complete tasks according  to federal regulations, consultants are not supplying sufficient personnel  or resources to complete jobs, and state DOTs have been overly relying on  consultants to select and manage contractors.
While FHWA has identified risks associated with the use of consultants  and contractors, the agency has not comprehensively assessed how, if at  all, it needs to adjust its oversight efforts to protect the public interest,  given current trends in the use of consultants and contractors. Also,  FHWA has not instructed its division offices to consider issues related to  the amount and type of work contracted out when outlining oversight  responsibilities in their stewardship agreements with state DOTs. Overall,  FHWA division offices generally described their role as ensuring  compliance with existing regulations and not assessing the performance of  state DOTs in achieving transportation goals. This has the potential to limit  the value of the agency’s oversight activities. For example, FHWA  acknowledges in its report on quality assurance in materials and  construction that it is possible to have a quality assurance program for  materials that is compliant with regulations, but is not performing  effectively, and vice versa. This FHWA report also finds that division  offices are often not fully aware of what components should be part of  quality assurance programs, and, as a result, the effectiveness of these  programs is not being adequately assessed.
FHWA has made progress in addressing some of the concerns related to its  oversight program and is considering additional steps to mitigate risks  associated with the use of consultants and contractors in the future. The  agency is currently developing an implementation plan in response to the  recommendations in its quality assurance report. This plan may seek to  address some of the risks associated with the involvement of consultants  and contractors in the quality assurance process. Also, FHWA is  continuing to refine its risk management approach to better identify risks  throughout the country and to more fully develop methods for addressing  identified risks. Finally, as we have previously discussed, FHWA division  offices have been working to revise their current stewardship agreements  to incorporate further considerations of risk and to also identify  performance measures that will assist in increasing accountability in the  federal-aid program, based on FHWA guidance. However, FHWA guidance  gives state DOTs and division offices broad flexibility in how they assess  risks and develop performance measures. As of October 2007, FHWA  reported that 21 of the agreements had been revised, with 15 of them  incorporating considerations of risk and performance measures. Five  more agreements incorporated considerations of risk, but not  performance measures.
section_title: Conclusions
paragraphs: State DOTs have long used contractors and consultants to augment  existing workforces. Recent trends suggest that consultants and  contractors are used more than ever before and in a multitude of different  activities—from designing projects, to appraising and acquiring rights-of- way, to managing and inspecting projects—and, in some cases,  consultants and contractors may be responsible for projects from  beginning to end. While there is no conclusive evidence of the long-term  differences in costs and benefits between using consultants and  contractors and obtaining additional state staff, this consideration is  largely inconsequential to state DOTs because many are now dependent  on consultants and contractors to deliver their growing highway programs.  Given this reality, effective oversight and monitoring of consultant and  contractor workforces become critical to state DOTs to ensure that work  is performed according to standards and specifications, and that materials  used meet quality and performance standards. While the state officials that  we interviewed generally believe they have sufficient controls in place to  conduct such oversight, there is some evidence from state auditor’s  reports that these controls are not always implemented effectively.  Furthermore, state officials we interviewed recognize that there will be  increased risk to the highway program over the long term, given (1) the  growing potential for conflicts of interest and independence issues and   (2) the reality of a changing workforce at state DOTs and difficulties in  attracting and retaining staff with key skills.
We have previously reported that there is a need for a fundamental  reexamination of the highway program and a need for national  transportation goals to be better defined and linked to performance  measures to evaluate what the respective programs actually accomplish.  Regarding the growing use of consultants and contractors by state  highway departments, FHWA’s oversight has generally been focused on  ensuring that state processes related to this matter are in compliance with  existing regulations, and has not sufficiently focused on the performance  and effectiveness of those processes in protecting the public interest or in  achieving national transportation goals. We recognize that FHWA has a  number of efforts under way that are geared toward refining FHWA’s  approach to oversight of state DOTs, including developing a plan to  address the issues raised in its national review of quality assurance  programs, working to identify areas of vulnerability to the federal-aid  highway program through its national risk management cycle, and  continuing a national program review currently under way of consultant  administration. In addition, division offices are continuing to revise their  stewardship agreements to be more risk- and performance-oriented.  However, further efforts to assess how best FHWA could adjust its  oversight and focus its activities on consistently ensuring the performance  and effectiveness of state DOTs’ programs and processes as they relate to  the management of consultants and contractors would increase the value  of FHWA oversight in this area. In addition, while several stewardship  agreements have recently been revised to incorporate a more risk- and  performance-oriented approach to conducting federal oversight, most  states have yet to revise their agreements, and some revised agreements  have not incorporated performance measures.
section_title: Recommendations for Executive Action
paragraphs: To more effectively and consistently ensure that state DOTs are  adequately protecting public interests in the highway program, given  current trends in the use of consultants and contractors, we recommend  that the Secretary of Transportation direct the Administrator of the  Federal Highway Administration, in the context of FHWA’s ongoing  activities related to quality assurance programs and risk management, to  work with FHWA division offices to (1) give appropriate consideration to  the identified areas of risk related to the increased use of consultants and  contractors as division offices work to target their oversight activities and  (2) develop and implement performance measures to better assess the  effectiveness of state DOTs’ controls related to the use of consultants and  contractors to better ensure that the public interest is protected.
section_title: Agency Comments
paragraphs: We provided copies of this report to the Department of Transportation,  including FHWA, for its review and comment. DOT officials provided  technical clarifications, which we incorporated as appropriate. The  department took no position on our recommendation to work with FHWA  division offices regarding state DOTs’ increased use of consultants and  contractors.
We are sending copies of this report to interested congressional  committees, the Secretary of Transportation, and the Administrator of the  Federal Highway Administration. We will also make copies available to  others upon request. In addition, the report will be available at no charge  on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-2834 or at heckerj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report addresses the following objectives: (1) the recent trends in the  contracting out of state highway activities; (2) the factors that influence  state departments of transportation (state DOT) in deciding whether to  contract out activities and the extent to which state DOTs assess costs and  benefits when making such decisions; (3) how state DOTs protect the  public interest when work is contracted out, particularly when consultants  and contractors are given substantial responsibility for project and service  quality and delivery; and (4) the Federal Highway Administration’s  (FHWA) role in ensuring that states protect the public interest.
To determine the recent trends in the contracting out of state highway  activities, we performed a literature review of existing research and survey  data to identify general trends over the periods covered by those surveys  and to use as a general baseline for comparison with current levels of  contracting out. We also surveyed and received responses from all 50 state  DOTs, using a Web-based questionnaire. In developing the survey, we  consulted a representative from the American Association of State  Highway Transportation Officials (AASHTO) and also consulted a highway  expert who is a former President of AASHTO, a former head of the Utah  DOT, and an author of numerous studies on highway contracting issues.  On the basis of the information received in these consultations, we revised  our survey instrument. In addition, we conducted survey pretests over the  telephone with state DOTs in Illinois and Maryland. We also revised our  survey instrument on the basis of information we received in these  pretests. We conducted the survey from mid-June to mid-September 2007.  During this period, we sent 2 rounds of follow-up e-mails to  nonrespondents in addition to the initial e-mailing. We also made follow- up telephone calls and sent follow-up e-mails to several state DOTs to  encourage them to complete the questionnaire. We then surveyed the state  DOTs to learn about the extent to which they contract for services across  7 categories of highway activities, including preliminary engineering,  design, construction engineering and inspection, federal-aid eligible  preventive maintenance, routine maintenance activities not eligible for  federal-aid program funding, ongoing operations, and right-of-way  appraisals. We also surveyed state DOTs to determine how the levels of  contracting for these activities have changed over the past 5 years and to  gather information about potential future trends in contracting. In  addition, we used the survey to identify which factors state DOTs said are  driving them to contract out activities or to keep work in-house. Finally,  the survey gathered data on state DOTs’ use of alternative contract types  and techniques and collected information on certain contracting concerns  that are specific to design-build contracts. In developing the questionnaire  and in collecting and analyzing the data, we took steps to minimize errors  that could occur during those stages of the survey process. The detailed  survey results are available in appendix III.
Because this was not a sample survey, it has no sampling errors. However,  the practical difficulties of conducting any survey may introduce errors,  commonly referred to as “nonsampling” errors. For example, difficulties in  interpreting a particular question, making sources of information available  to respondents, entering data into a database, or analyzing these data can  introduce unwanted variability into the survey results. We took steps in  developing the questionnaire, collecting the data, and analyzing the data to  minimize such nonsampling errors. For example, social science survey  specialists designed the questionnaire in collaboration with GAO staff who  have subject matter expertise. Then, as we have previously noted, our  questionnaire was reviewed by experts in this field and was pretested in 2  states. When we analyzed the data, an independent analyst checked all  computer programs. Since this was a Web-based survey, respondents  entered their answers directly into the electronic questionnaire— eliminating the need to key data into a database and further minimizing  errors.
To gather further information on the recent trends in the contracting out  of state highway activities, we performed a series of in-depth interviews  with highway department officials in 10 states throughout the country:  Arizona, California, Georgia, Illinois, Louisiana, Maryland, Minnesota,  Pennsylvania, South Carolina, and Utah. These interviews allowed the  team to gather in-depth and contextual information on state DOT  contracting practices that could not be obtained through a survey. We  conducted all of the interviews using a data collection instrument that we  developed.
In selecting state DOTs to interview, we used a nongeneralizable sample,  rather than performing random sampling. We chose this approach to  ensure that the sample set included state DOTs with a range of contracting  experiences and practices. When selecting which state DOTs to include in  the sample, we considered a range of criteria, including (1) the region in  which the state is located; (2) the degree to which the state DOT contracts  out highway activities; (3) the range of contracting approaches the state  uses, including nontraditional project delivery methods such as design- build or asset management as reported in previous reports; (4) the legal  and policy requirements the state faces in regard to contracting out  highway activities; and (5) the extent to which the state has performed  analyses of the costs and benefits of contracting out highway activities. To  select the states for the sample, we reviewed relevant academic, expert,  state, and federal research and existing survey data on state outsourcing  activities to make an initial assessment of where various state DOTs fell  along the spectrum for each of the criteria and to identify any unique  features of the states’ outsourcing programs that would be particularly  useful to study in greater depth. For example, we looked for criteria such  as state DOTs that had developed unique contracting practices, state DOTs  that were rapidly changing the way their departments conducted business,  and state DOTs whose outsourcing experiences had been particularly  successful or problematic. Lastly, we generally sought to avoid selecting  states that had already been studied in great depth and whose contracting  experiences are already well-documented, such as Florida.
To determine the factors that influence state DOTs in deciding whether to  contract out activities and the extent to which state DOTs assess costs and  benefits when making such decisions, we used state DOTs’ responses from  our survey regarding the importance of various factors in their decisions  to contract out various highway activities and in their decisions to  continue to perform work with in-house staff. In addition, we relied on  information gathered in our in-depth interviews to further determine the  importance of various factors in contracting decisions and to gain  important contextual information on these various factors that could not  be achieved through the survey. We also reviewed the literature to identify  existing studies that sought to consider the costs and benefits of  contracting out highway activities versus performing them with in-house  staff, and we compiled and summarized the results from various studies.  We also identified methodological limitations associated with such studies  and the potential impacts they have on the reliability of any findings.
To determine whether states’ decisions to contract out highway activities  were associated with certain demographic or economic conditions in each  state, we conducted a correlation analysis. For the analysis, we used data  from our survey on the percentage of work that state DOTs contract out  for 7 types of activities. Although all 50 states completed the survey, some  states did not provide values for all activities. The number of states that  provided values ranges from 39 to 46, depending on the activity. We then  identified a series of state characteristics to test whether they are  associated with the extent to which states contract out these activities.  These variables included population, population density, population  growth over the past 5 and 10 years, the percentage of a state’s population  living in urban areas, annual vehicle miles traveled in the state, annual  vehicle miles traveled per person in the state, total lane miles per person in  the state, the number of road miles with a pavement international  roughness index score greater than 170 (a measure of pavement quality,  with a score greater than 170 indicating pavement of poor quality) per  person in the state, state per capita income, state pension fund liabilities  per person, state highway capital outlays per person, and the change in  state highway capital outlays over the past 5 and 10 years. We selected  these variables because we could identify plausible reasons that states  with higher values of these variables might be either more or less likely  than states with lower values to contract out highway activities. We  identified reasons that each of these variables could impact either highway  demand or supply conditions in a state, or could impact the state’s ability  to conduct highway activities with an in-house workforce. Data on these  various state characteristics were compiled from the U.S. Census, FHWA,  and the Public Fund Survey. We then calculated the correlation  coefficients for the 98 relationships to be tested and analyzed the results to  see if there were any clear positive or negative associations among the  variables and to assess the strength of such associations, as shown in table  6. We did not, however, analyze the associations among these variables in  a multivariable analysis because of the lack of a strong conceptual  framework based in economic theory for determining an appropriate  model. Given this, our analysis only considered the percentage of work  contracted out singly with each economic or demographic characteristic  selected and did not control for the effects of other characteristics on  contracting levels. Multivariable analysis might have revealed more  complex relationships among the state characteristics and between those  characteristics and the level of contracting out highway activities.
To determine how state DOTs protect the public interest when work is  contracted out, particularly when consultants and contractors are given  substantial responsibility for project and service quality and delivery, we  used information from our in-depth interviews with the state DOTs. In our  interviews with the state DOTs, we gathered information regarding the  manner in which state DOTs define and determine the key interests of the  public. We asked state DOTs about the various controls they put in place  throughout the highway delivery process to ensure that the public interest  is protected when work is contracted out. Along with this, we asked about  prequalification procedures, bidding processes, the oversight and  monitoring of consultants and contractors while work is being performed,  and quality assurance programs, among other things. We also conducted  interviews with industry stakeholders from six different organizations  knowledgeable about the outsourcing of highway activities to obtain  additional perspectives on how state DOTs seek to protect the public  interest. In addition, we used state DOT responses from our survey to  identify various alternative contract types and techniques that states use to  achieve desired outcomes, such as time or cost savings, and to determine  how frequently state DOTs use such techniques. Finally, we sent out a  request to auditing agencies in all states for any reports available on the  contracting out practices of state DOTs and reviewed additional reports  discussed in the literature. We reviewed reports from 11 states that  addressed their state DOTs’ use of consultants and contractors.
To determine FHWA’s role in ensuring that states protect the public  interest, we reviewed applicable federal laws and regulations as well as  FHWA policy and guidance documents. We also interviewed FHWA  officials at the national level as well as at 10 division offices corresponding  to the 10 state DOTs we selected for in-depth interviews. FHWA  headquarters offices we met with include the following: the Office of  Infrastructure, the Office of Asset Management, the Office of Professional  and Corporate Development, the Office of Program Administration, and  the Office of Planning, Environment and Realty. In addition, we reviewed  program and process reviews from FHWA’s national and division offices to  identify key areas of oversight focus and key findings that have been  reached in such reviews regarding state contracting procedures and  quality assurance procedures.
For this report, we limited the scope of our review to contracts where  firms are paid to provide a service related to highway infrastructure.  Although essentially contractual relationships, we did not include public- private partnerships—where a firm takes effective ownership of a facility  and assumes control over it, usually for an extended period—in the scope  of our work.
We conducted this performance audit from December 2006 through  January 2008 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Summary of the Cost Comparison Studies That We Reviewed
paragraphs: In our research, we identified a variety of studies that seek to compare the  costs of performing highway activities with in-house staff versus  contracting out the work. A variety of parties have conducted such  studies, including highway departments, state auditing agencies,  academics, industry groups, and employee unions. Some studies focused  on one particular state, while other studies considered a range of states’  experiences. Of the studies we identified, engineering activities (design,  construction engineering and inspection, or both) were the most common  focus, although we also reviewed several studies that examined the  contracting out of maintenance activities. A few studies examined a range  of activities within a state DOT’s highway program. While some studies  sought to do their own analyses, many simply reviewed and summarized  other analyses that have been performed. In addition, several of the  studies focused on the methodological challenges faced in conducting cost  comparisons and sought to suggest ways that such studies could more  effectively be structured, rather than actually performing any of their own  cost comparison analyses.
subsections: section_title: Findings on Costs
paragraphs: Of the studies we reviewed, almost all that considered engineering  activities found contracting out to be more expensive. Generally, studies  attributed this extra expense to higher salaries paid by private firms,  higher overhead costs for private firms, private firms’ need to earn a profit,  and highway department contract administration costs. Among those  studies that performed separate analyses for different types of engineering  work, there was some indication that cost differentials may vary, with  consultant and in-house costs being more comparable for certain types of  engineering activities. For example, one study by  PriceWaterhouseCoopers for the Texas DOT found that of the 13 design  activities it considered, consultants were more expensive for 8 of these  activities. The results were inconclusive for the other 5 activities. Among  those 8 activities where consultants were found to be more expensive, the  degree to which they were found to be more expensive varied from 27 to  97 percent, depending on the activity. Findings as to the degree by which  consultants were more expensive than in-house staff also varied  significantly amongst studies. For example, 1 study that reviewed 16 other  engineering cost studies found that of the studies that found consultants to  be more expensive, consultants were found to be anywhere from less than  16 percent to over 100 percent more expensive.
We reviewed only two studies that found that engineering consultants  were less expensive than using in-house employees. The first study, which  was performed by the state auditing agency in Alaska, found consultants  to be on average 24 percent less costly. The second study was performed  by the Wisconsin Department of Administration and sought to rebut  findings in an earlier Wisconsin highway department study that had found  consultants to be more expensive. We also have identified one other study  discussed in the literature that found that the cost of professional  engineering services, as a percentage of total construction costs, declined  as the proportion of engineering work contracted out increased. A few  studies also found either that there were no significant differences in costs  between in-house and consultant performed engineering work, or that  existing data limitations and difficulties in developing appropriate  methodologies made the accuracy of cost results questionable.
Among those studies that examined differences in costs between in-house  and contracted out maintenance work, the picture was more mixed than  for engineering activities, with some studies indicating the potential for  cost savings through the contracting out of maintenance activities in at  least some situations. Studies cited various reasons why contracting out  maintenance work could potentially result in cost savings, including the  reduced need for state DOTs to make capital investments in expensive  equipment, added flexibility for the highway departments to reduce  staffing during slow periods (such as the winter), and the increased  competition generated by contracting out the work. Studies that identified  cost increases associated with the contracting out of maintenance work  pointed to difficulties in administering contracts and monitoring  performance, to the lack of information to effectively negotiate prices, and  to cost escalation after work is privatized.
section_title: Methodological Issues and Other Limitations
paragraphs: We identified a series of methodological issues and other limitations that  make accurate cost comparisons difficult and potentially impact the  reliability of these studies’ findings. One of the most problematic aspects  of comparing in-house and consultant costs is establishing an appropriate  overhead rate for in-house work. State DOTs’ accounting systems are  often not set up in such a manner that they accurately capture all relevant  overhead costs and appropriately apportion them amongst individual  projects or functional units in a highway department. Also, data on in- house costs are often incomplete or unreliable. For example, in-house  staff may not accurately bill time spent on a specific project, thereby  distorting in-house costs for that project. Many studies also leave out costs  that may be relevant, such as state insurance costs. There are also other  life-cycle costs, such as the pension costs associated with additional  public employees that are difficult to quantify and not considered in most  studies. Another problem encountered, is that many studies seek to  identify “like” projects and compare the costs of those performed by in- house employees and those performed by consultants or contractors. No  two projects are the same, however, and it is often difficult to isolate other  variables that may have impacted costs.
A final weakness with the studies that we reviewed is that very few of  them sought to systematically determine the benefits of performing work  in-house versus contracting it out, thereby providing an incomplete picture  of the extent to which contracting out highway activities might or might  not be desirable. Some of the studies did use testimonial evidence  gathered through either surveys or interviews to attempt to make some  assessments of differences in quality, depending on whether work was  performed by in-house staff or contracted out. Of those studies, the  majority found that quality did not vary significantly depending on  whether the work was contracted out or performed in-house. Some  studies also provide anecdotal information on some potential benefits or  problems with contracting out work. Only one study that we reviewed  sought to quantitatively assess differences in quality between in-house and  consultant performed work. This study, performed by the state auditing  agency in Alaska, compared the number of change orders on construction  projects that had been designed by either in-house staff or consultants and  the average costs of such change orders. Using this metric, the auditing  agency found in-house performed design work to be of a higher quality.
Given that the majority of the state DOTs with we whom we met told us  that they tend to contract out larger, more complicated projects, or those  requiring certain types of expertise not possessed in-house, relying simply  on comparisons of cost may not be appropriate. If consultants are working  on larger, more complicated projects, it is reasonable to expect that the  costs of these activities, such as design work, may be higher. Also, it is not  unreasonable to anticipate that a premium would be paid for specialized  expertise. In addition, none of the studies sought to systematically quantify  whether there are any time savings associated with contracting out work  and what the value of such time savings would be for road users.
section_title: Appendix III: Summary Tables of Our Survey Results
paragraphs: This appendix presents selected results of GAO’s Web-based survey of  state DOTs (see tables 7 to 26). The purpose of this survey was to gather  information from the state DOTs about recent trends in their contracting  out of state highway activities. We surveyed the state DOTs about the  extent to which they contract for services across 7 categories of highway  activities, including preliminary engineering, design, construction  engineering and inspection, federal-aid eligible preventive maintenance,  routine maintenance not eligible for federal-aid program funding, ongoing  operations, and right-of-way. We also surveyed state DOTs to determine  how the levels of contracting for these activities have changed over the  past 5 years and to gather information about potential future trends in  contracting. In addition, we used the survey to identify which factors state  DOTs said are driving them to contract out activities or to keep work in- house. Finally, the survey gathered data on state DOTs’ use of alternative  contract types and techniques and collected information on certain  contracting concerns that are specific to design-build contracts. We sent  this survey to the 50 state DOTs. We received 50 completed surveys for a  response rate of 100 percent. However, not all states responded to every  survey question. Appendix I contains a more detailed discussion of our  objectives, scope, and methodology. We administered this survey from  mid-June to mid-September 2007.
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition, Andrew Von Ah (Assistant Director), Jay Cherlow, Steve  Cohen, Greg Dybalski, Colin Fallon, Brandon Haller, Bert Japikse, Stuart  Kaufman, Bonnie Pignatiello Leer, Jennifer Mills, Josh Ormond, Minette  Richardson, and Ryan Vaughan made key contributions to this report.