LANE RENTAL: CREATING INCENTIVES FOR EARLY COMPLETION OF ROAD WORK. Michele Cyna

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1 October I992 Transport No. RD-12 TRANSPORTATION, WATER AND URBAN DEVELOPMENT DEPARTMENT THE WORLD BANK LANE RENTAL: CREATING INCENTIVES FOR EARLY COMPLETION OF ROAD WORK Michele Cyna Delays in the completion of road maintenance work are subject to severe contractual penalties that are seldom enforced. In heavily trafficked routes, typical of urban areas, these delays substantially increase road user costs through reduced levels of service. Lane rental is an alternative contractual arrangement that charges the contractor for the time that road lanes are closed while they are being repaired. It creates a strong incentive for early work completion and saves time and accident costs. Many Bank highway projects involve maintenance, strengthening or widening of existing roads. Such works under traffic cause a decrease in the level of service during execution in the form of travel time delays, and a higher accident rate, especially on congested routes. It is therefore important that the work schedule is respected. Most road agencies deal with this issue by including severe delay penalties (or liquidated damages) in the maintenance contracts. However, such penalties are not often enforced for various reasons and thus they don't succeed in creating a real pressure for on-time completion. The UK Department of Transport has designed special clauses for work under traffic which give the contractor an incentive for early work completion and provide the basis for a comprehensive comparison of existing bids, including the time component (see annex for a simulated example). This type of contract could be used in some Bank projects. BASIC PRINCIPLES The bidding documents set two prices, one for the daily lane rental (or bonus/charge rate) during the work period, and another one for lane rental during the maintenance period (or maintenance rental rate). A maximum time is given in the bidding documents. Each contractor indicates in the bid the proposed time schedule to complete the work. (1 of 5)07/17/ :21:06 AM

2 If the contractor finishes the work before the time quoted in his bid, he gets paid the bonus/charge rate for each day of early completion. If there is a delay, the contractor pays a total charge equal to the bonus/charge rate times the number of days of delay. Furthermore, if the contractor has to make repairs after the completion date, he will be charged a maintenance rental rate for the amount of time of additional lane closure. If laws and regulations or procurement procedures do not allow bonuses, the same type of contract can be set with a daily charge for every working day until the completion of the work. The bonus for early completion is then turned into a reduced charge which provides a similar incentive for shortening the duration of the work. This setting can apply for the whole work, or if relevant, to a defined number of road sections. Each section can have its own completion time and its own bonus/charge rate. CONTRACT CLAUSES Work. A special clause defines the working day in the bidding document. It is the engineer's choice and it can include weekends as well as night work. Because time becomes such an important criterion in the work award, a clause specifies that the contractor is not allowed to work outside the working day unless with the engineer's permission. Such permission should only be granted on very special occasions because it could be resented by other contractors as an unfair advantage. Bad weather. When the engineer agrees that the weather conditions have made it impossible to work for at least 4 continuous hours, the lost time will be excluded from the due time for completion. Variation clauses. The usual clauses concerning the impact of project variation or quantity increases on the completion date remain, but the contractor must file his claim for an extension of time for completion more quickly, e.g. within 7 days instead of 28 and the engineer must respond within 7 days when he has no time limit in the standard clauses. Traffic management installations. Since lane rental contracts relate to work under traffic, a clause is added to cope with traffic management installations: they have to be in accordance to the regulations and their set up and removal has to be approved by the engineer. Bonus/charge clauses: A number of specific clauses deal with how and when to pay/deduct the bonus/charge including the charge for maintenance work. SETTING THE RENTAL RATES The daily lane rental rate is a very important feature of this type of contract. If it is too low, it fails to provide an incentive; and if it is too high, contractors may want to protect themselves from possible delays by committing to a very conservative time for completion. The daily rental rate should also relate to the economic cost of a delay in the work completion. The recommendation of the UK Department of Transport is to compute the costs to road users in term of delays (2 of 5)07/17/ :21:06 AM

3 and increased accidents, and to set the level of the bonus/charge rate to half of the daily users costs plus all of the estimated daily supervision costs. The UK Department of Transport has developed a model, named QUADRO, which calculates the road users cost as a function of works length, the percentage of Heavy Good Vehicles (HGV), the maintenance season average daily in the traffic, and the physical characteristics of the road and the work. For instance, the cost for a 3 km works length on a dual 2 lane motorway with I primary lane, 2 secondary lanes and contraflow in operation will be $12,000 per day when there is 20 percent HGV and a 30,000 average daily traffic. However, in the UK, rates above $40,000 per day are not used since they provide little additional incentive. The UK experience has shown that the maintenance daily rental rate could achieve its purpose when set to half of the bonus/charge rate. However, this rate could be different for night-time maintenance than for day-time maintenance work, the latter being higher than the former. The quoted example sets the maintenance rate from 6 a. m. to 6 p.m. to 2/3 of the bonus/charge rate and from 6 p.m. to 6 a.m. to 1/6 of the bonus/charge rate. EVALUATION OF THE PROCEDURE Lane rental contracts first appeared in the UK in From 1984 to 1989, 100 lane rental contracts were let at a total contract price of $500 million. The UK Department of Transport estimates that more than 2400 days of lane closure were saved, compared to conventional contracts, which represent economic savings of some $100 million. The total bonus cost was about $16 million or 3.2 percent of the total contract price. Because contractors are charged when they have to close the lanes again to remedy defects in their work, the UK Department of Transport noticed an improvement in the overall quality of the works in lane rental contracts. The UK Department of Transport also feels that the bonus/charge are easier to agree than usual bonus/charge schemes because they are based on the actual lane closure. Their experience is that the lane rental contracts conditions have avoided contractual problems and disputes. Nevertheless, one should be careful in selecting such a procedure because contractors will be very sensitive to any additional charge and therefore they will take advantage of any variation in the project or in the project quantities to extend the due time for completion. In order to achieve the objective of shortening the works duration, the project has to be very well defined and the quantities have to be calculated as accurately as possible. When trying to assess if such contracts are relevant in developing countries, two issues must be addressed: economic efficiency and implementation. The Bank is involved in many road strengthening and rehabilitation projects throughout the world where lane closures occur on heavily traveled roads. A project is a good candidate for lane rental contract when the economic savings offset the additional contract cost This is likely to happen in congested areas regardless of the value of time in the given country. Thus, although it seems likely that few countries could extend lane rental contracts to 2/3 of their trunk road network as the UK intends to do, many projects, especially in urban area, could be eligible for these contracts. Supervision is often weak in developing countries and liquidated damages are very seldom applied. However, monitoring lane rental is easy since it depends on whether the lane is closed or not to traffic. Provided that supervision does not allow extending due time for completion, the lane rental criteria is easy to apply in any country, especially since the lane rental payment comes out of the monthly statement and it would require a very (3 of 5)07/17/ :21:06 AM

4 strong case to pay it back to the contractor. Moreover, introducing a new scheme can provide incentives to staff for implementing it properly, whereas it is more difficult to enforce liquidated damages that have been very weakly enforced in the past. CONCLUSION Lane rental contracts can have a significant impact on the actual completion time of road maintenance works, resulting in savings in vehicle operating costs and a decrease in accidents and in aggravation to travelers. They provide a very convenient way to compare bids regarding time and price. If the daily rental rate is based on economic costs of delays, this method also provides a more logical way to handle differences in completion time among bids. Given the pros and cons of lane rental contracts, the best candidates for such contracts in developing countries would be non-complex projects with little physical contingencies, such as road strengthening in heavily traveled routes. Thus, lane rental seems best suited for well defined and well supervised work under traffic on highly traveled roads taking place outside the bad weather season. To Learn More Stephen J. Gaj "Lane Rental, an Innovative Contracting Practice." TR News no September-October. U.K. Department of Transport "M20 Motorway". Sample of bidding documents. Contact: Michele Cyna (ext ) ANNEX: Example of a Simulated Comparison of Bids under Lane Rental Contracts The bid comparison is made on the basis of price and time. The lowest time proposal is selected and the adjusted price of the other proposals is calculated by adding to their price the difference between the proposed time and the lowest time (in days) multiplied by the bonus/charge daily rate. The contractor with the lowest adjusted price is awarded the contract. Motorway Repair Contract: Maximum Allowable Contract Period 70 days, Bonus/Charge $5,000 per day. Tenders received in order of price Completion Adjustment from Tender Price Time Number of days base time $ (in days) over base time $ A 705, ,000 B 727, ,000 C 730, ,000 D 745, ,000 E 762, ,000 (4 of 5)07/17/ :21:06 AM

5 F 775, Adjusted pricing and order of tenders for evaluation purposes Tender Adjusted Price Award Placing C 730, ,000 = 740,000 lst B 727, ,000 = 747,500 2nd A 705, ,000 = 765,000 3rd F 775, = 775,000 4th E 762, ,000 = 802,500 5th D 745, ,000 = 805,000 6th (5 of 5)07/17/ :21:06 AM