Roads and Traffic Authority NSW

IMPROVING QUALITY AND CUTTING COSTS THROUGH PERFORMANCE CONTRACTS

AUSTRALIAN EXPERIENCE


Malcolm Frost
General Manager, Infrastructure Maintenance

and

Christine Lithgow 
Manager, Contract Legal Services 




World Bank
Road Management Training Seminar
Washington DC, USA
17 - 18 December 1996 




1. INTRODUCTION

On 24 October 1995 a large Australian construction contractor assumed responsibility for the maintenance of a large proportion of the arterial road network in Sydney, New South Wales.

The contractual arrangement under which the contractor, Transfield Maintenance, operates is of unique form. Transfield have contracted to the client, the Roads and Traffic Authority of New South Wales (RTA) to achieve specified condition standards for a period of ten years in return for a fixed payment stream. Hence, the contract is known as the Performance Specified Maintenance Contract (PSMC).

The uniqueness of the contract lies in the allocation of performance risks between the client and the contractor. The RTA has specified the performance standards which it requires for each of the road, bridge and traffic assets within the contract network. Transfield has guaranteed that it will program, design, and supply all works required to achieve the specified performance standards. Achievement of the RTA's standards by Transfield ensures that it receives payment instalments of predetermined value.

As a result of this contract the RTA can continue to provide a quality road network to road users at a reduced cost, free of the many risks which traditionally constrain effective road standard management.

This paper describes the business environment in which the contract was developed, the process used in its establishment, the form of the contract and its performance after one full year of operation.


2. BACKGROUND

BUSINESS CONTEXT

In general terms, road agencies exist to manage the roads and traffic system under their jurisdiction. Whilst the extent of the responsibilities of individual agencies may vary due to statutory differences and government choice, the road agency is generally recognised as the owner and manager of the roads system. The RTA's Mission statement, presented below, could be regarded as a generic statement of the role of a road agency and hence apply, in general terms, to most agencies.

RTA MISSION

Manage road related transport infrastructure and provide safe and efficient access to the road network for the people of New South Wales.

The primary objectives of the "roads" division of a roads agency would be similar to most other road agencies, and could be expressed as:

These primary objectives reflect the role of a road agency as the manager of the roads system and hence as the client for the provision of those road based services which actually deliver the achievement of the objectives. As many road agencies, including the RTA, also have responsibility for the provision of at least part of these road services their corporate plans will generally also include secondary objectives relating to the efficient and effective delivery of services and safer and more environmentally acceptable work practices. This distinction between the client (buyer) and road services (seller) roles of road agencies is important to any decision on service delivery methods.

It can be noted from the primary objectives that road maintenance is not an objective of a road agency in its own right. This reflects the fact that the assets being maintained are provided for a purpose which contributes to the organisation's achievement of its primary objectives. For example, a bridge exists to support the efficient movement of people and goods and to minimise transport costs, whereas a warning sign exists to reduce road accident potential.

Hence, and notwithstanding the fact that maintenance is often a significant proportion of a road agency's total program budget, road maintenance is an "invisible" function which is undertaken only to ensure that assets continue to satisfy their purpose for existing and continue to contribute to the organisation's broader primary objectives.

In this context the role of asset standards and performance becomes a critical feature of the road agency's primary client function. With the fact that assets deteriorate with the effects of time and are consumed by usage, and with the budgetary constraints under which all agencies operate, it is clear that assets cannot be maintained to their "new" condition. In fact, maintaining the condition regime stable at a level below the new condition is the least "whole of life" cost option, and hence the preferred maintenance strategy of any road maintenance agency. This brings about a number of challenges for road agencies:

These are the fundamental questions which face all road asset managers. With the trend towards performance based management we now see these issues begin to take precedence over the resource allocation and productivity issues which have dominated asset management development in recent years. Knowledge in this area will see the nature of the relationship between the client (the road agency) and the service provider (road agency, agents or contractors) change from one of work output specification to one of performance, or road condition, specification.

SERVICE DELIVERY CONTEXT

A shift in the method of specification, from work output to performance, will see a commensurate shift in the risk exposure of the road agency, particularly where service provision is outside the road authority. In a work output specification environment the client is responsible for determining the quantity, type and location of work outputs required to achieve the desired performance levels. As the bulk of the performance achievement risk resides with these decisions the client carries a considerable risk. However, in a performance specification environment the client carries no direct risks arising from these decisions, but will be exposed to a risk premium on service delivery to cover the service provider's increased risk profile.

It was indicated above that performance specification is a form of the relationship between a client and a service provider, irrespective of whether the service provider is an in-house supplier, an agent or an external contractor. Whilst an identical form of specification can be applied to any client/service provider relationship, the extent of the risks carried by the road agency will differ. Under in-house supply the performance specification is a management tool, with all of the traditional risks remaining with the agency, yet controlled by management accountabilities. Under an external contractor the agency disposes of direct responsibility for those work design, materials and process risks relating to the service delivery function. An agency arrangement will lie somewhere between the two.

The effective allocation of performance risk away from the client is dependent on the service provider having, and maintaining, the skills and experience to turn the performance specification into a work output plan. Traditionally, this skill and experience has predominated in road agencies. To be fully effective as part of any agency or externally contracted arrangement the establishment and maintenance of these skills outside of the road agencies will need to be encouraged and nurtured.

A shift in the method of specification, from work output to performance, will see a commensurate shift in the risk exposure of the road agency, particularly where service provision is outside the road authority. In a work output specification environment the client is responsible for determining the quantity, type and location of work outputs required to achieve the desired performance levels. As the bulk of the performance achievement risk resides with these decisions the client carries a considerable risk. However, in a performance specification environment the client carries no direct risks arising from these decisions, but will be exposed to a risk premium on service delivery to cover the service provider's increased risk profile.

It was indicated above that performance specification is a form of the relationship between a client and a service provider, irrespective of whether the service provider is an in-house supplier, an agent or an external contractor. Whilst an identical form of specification can be applied to any client/service provider relationship, the extent of the risks carried by the road agency will differ. Under in-house supply the performance specification is a management tool, with all of the traditional risks remaining with the agency, yet controlled by management accountabilities. Under an external contractor the agency disposes of direct responsibility for those work design, materials and process risks relating to the service delivery function. An agency arrangement will lie somewhere between the two.

The effective allocation of performance risk away from the client is dependent on the service provider having, and maintaining, the skills and experience to turn the performance specification into a work output plan. Traditionally, this skill and experience has predominated in road agencies. To be fully effective as part of any agency or externally contracted arrangement the establishment and maintenance of these skills outside of the road agencies will need to be encouraged and nurtured.


3. CONTRACT DEVELOPMENT

CONCEPTUAL PHASE

In 1990 the RTA initiated the development of a pilot road maintenance contract project in its Sydney region. The objectives of the pilot were to establish the feasibility of contracting road maintenance and to measure differences in cost, quality, and responsiveness between a contractor and the RTA workforce.

The concept of applying a performance contract model in the first instance was considered, however, it was felt that, given the dearth of private sector expertise in road maintenance, it was necessary to minimise risk exposure to both parties. Moreover, the RTA recognised that the establishment of a performance based contract would require a sound register of asset extent and condition, information on historical work outputs and a methodology for the objective measurement and reporting of asset performance. As none of these factors were adequately addressed at that time, and due to the risk factors outlined above, the RTA elected to adopt a more conventional style of contract. The conventional approach also gave the RTA more control over the day-to-day activities of the contractor and this was of comfort to the RTA during the pilot phase.

CONTRACTING FEASIBILITY

At the time when the pilot contract was let, road maintenance was essentially a government monopoly, the private sector having little involvement other than as an activity, or job, contractor. In consultation with industry it was agreed that the initial contract would be designed to nurture the necessary skills and understanding within both the RTA and industry.

The development of the contract commenced with an internationally advertised invitation for expressions of interest for the provision of assistance. This allowed the RTA to canvass international practice, and take advantage of international experience.

The RTA elected to engage an Australian firm which had joined with experienced firms in the United Kingdom and Europe. The subsequent contract approach was based on UK Department of Transport practice for the maintenance of major motorways in that country. The general approach was modified to suit road conditions in the pilot areas, Australian contractual procedures and Australian management practices and quality regimes.

The RTA pilot comprised 2 contracts with the private sector and, for the purposes of comparison and evaluation, a "contract agreement" with the RTA workforce entity responsible for the network prior to the pilot. The 2 private sector contracts were:

(a) Maintenance management contract

(b) Maintenance delivery contract

The following points should be noted with respect to the 2 contracts:

The results of the pilot over its initial twelve months were impressive and beyond initial expectations.

This result left little doubt as to the feasibility and effectiveness of road maintenance contracting, and led to the RTA restructuring its entire Sydney organisation to take advantage of the gains in efficiency and effectiveness which resulted from the adoption of this new maintenance management philosophy, and to commence planning for a new generation of contract based on performance specification.

On expiry of the initial terms of the maintenance management and maintenance services contracts in 1993 the RTA elected to retender the services for a further two year term. The results of that retendering process were:

Therefore, after compounding the incremental savings the average rates of maintenance services by the private sector contractor were then a total of 37% below the rates being delivered by the workforce prior to the commencement of contracting, an impressive result.

Prior to the second round of tendering, the RTA took the opportunity to revisit the contract documentation, and incorporate lessons learned in the first round. For the maintenance services contract, this involved the drafting of new, project specific, Conditions of Contract, as distinct from the adaptation of construction documentation used in the initial contract. The maintenance management contracts were also redrafted and simplified. This new documentation significantly simplified the contracts and hence their interpretation and management. This involved close liaison between the technical staff and contract legal experts.

INITIATION PHASE

As indicated previously, the 2 contracts (maintenance management and maintenance services) developed in the contracting pilot were chosen to minimise the risk exposure of both the RTA and the private sector whilst both parties established new skills and an understanding of the issues and risks involved.

Following the success of the pilot, the continued reduction in the cost of work, and the improved understanding of the task by industry, the RTA elected to further expand its extent of contracted road maintenance, using a performance specification form of contract (also known as a "service level agreement", "benchmarking contract" or "end product contract") in 1994.

The stated objectives of this contract were :

The RTA was aware at this time that a fully performance based road maintenance contract had not been successfully implemented. It considered that, in the absence of a proven methodology, it should not constrain the ability of the private sector to put together innovative and potentially effective solution by over specifying the RTA's requirements from the outset. Hence, the initial invitation for proposals simply stated the RTA's objectives and some broad parameters for the contract. These parameters were:

Proponents were asked to submit Concept Proposals which contained sufficient information for an assessment panel to consider against criteria which included consistency with the objectives, methodology, capability, commercial merit and other benefits.

Following the assessment of Concept Proposals four proponents were shortlisted to proceed with detailed studies and the preparation of a commercial Contract Proposal. Again, the RTA did not specify any requirements which may have limited the ability of Proponents to put forward innovative and effective proposals. Each proponent was required to submit a Contract Proposal which was materially consistent with their Concept Proposal.

During the ten month tender period the four Proponents were provided with all available current and historical data relating to the roads to be contracted, relevant RTA manuals and documents, and were given access to RTA staff and facilities as required to gain an understanding of the asset maintenance task. In addition, the RTA provided an outline of those minimum terms and conditions which would be included in any contract. These indicative conditions only related to insurance and security, access to the network and statutory reporting.

The Contract Proposals submitted by the four proponents were evaluated by an evaluation panel of RTA and private sector people with a broad range of technical, legal, strategic and financial skills. The private sector representative was a senior manager of the international consulting firm Booz Allen and Hamilton. An independent "probity auditor" was also used to ensure that the process was fair and equitable. The assessment was undertaken in terms of predefined criteria, which included:

DETAILED DEVELOPMENT

Due to significant differences in the approach to the contract proposed by the proponents the RTA could not commence development of the contract documentation until a preferred proponent for the contract had been selected. Hence it was decided early in the process that the documentation would be drafted to reflect the selected proposal, with the details being negotiated between the RTA and the preferred proponent.

Development of the contract documentation commenced immediately after the selection of Transfield as the preferred proponent. The first draft of the contract comprised an amalgamation of the RTA's views on the obligations of the contractor, based on Transfield's offer, and those terms, conditions and warranties which the RTA considered were necessary to protect its interests.

The development of the final execution version of the contract documentation was then based on the outcome of extensive discussion and negotiation between the RTA and Transfield. During this period the RTA and Transfield jointly developed a number of procedures which were required to support the development of the contract and which were not fully developed in the Contract Proposal.

The development of the contract documentation took seven months. The result is described in the following section.

Despite the extensive negotiation over such a long period the acceptable features of Transfield's offer were fully represented in the contract. The primary elements of the offer, price and target standard, were unchanged.

STAFF ISSUES

Staff will be affected wherever an organisation contracts works which is currently performed by the organisation's own resources. The management of this aspect is one of the most critical, and often overlooked, elements of any contract establishment project.

The RTA advised its staff and their unions of its intention to explore the feasibility of the contract prior to its invitation to the private sector for expressions of interest. A series of briefings were provided to all staff by management, setting out the scope, staging and timing of the proposed process. It was agreed at those briefings that the RTA would keep its staff and the unions informed on the progress of the project as milestones were reached. To this end, further briefings were held immediately after shortlisting of the four proponents, and after the selection of Transfield as the preferred proponent.

Prior to the establishment of the contract the RTA employed 89 people on works which would be included in the contract. Transfield's offer included a provision for their employment of up to 35 of these people, where Transfield were satisfied of their suitability and willingness to work.

Extensive negotiations between the RTA and unions preceded the RTA's execution of the contract. These negotiations focused on arrangements for dealing with the affected staff, the nature of any redundancy payout package, and the number of staff affected and/or to be taken by Transfield.

The final position was that the RTA transferred 44 of the affected staff to other duties within the RTA and gave voluntary redundancy packages to a further 40 employees. Only 5 staff took up the offer of employment by Transfield.


4. DESCRIPTION OF THE CONTRACT

The fundamental premise of the contract is Transfield's obligation to manage and perform maintenance services on the network so as to ensure that all assets in the network are maintained to a condition that is fit for purpose, in good order and condition and in accordance with the specified condition standards and other requirements of the contract over the full 10 year term of the contract. In return the RTA is obligated to pay Transfield the tendered fixed price in specified monthly instalments.

Transfield must inspect, prioritise, finance, design, and construct maintenance works in such a way that its obligations are satisfied. This includes maintenance works of any nature which Transfield considers to be necessary to satisfy its obligations, including routine, periodic, rehabilitation and replacement works.

Hence, the contract effectively transfers the stewardship of the network and all assets in it, in terms of condition, from the RTA to Transfield.

DOCUMENTATION

The contract documentation has been organised to maximise future flexibility of the contract, and specifically drafted in "plain english" to ensure ease of interpretation.

In preparing the documentation the RTA recognised that the ten year term of the contract demanded clear and precise interpretation of the intentions of the RTA and Transfield in entering into the contract. Whilst those individuals involved in negotiating the terms and conditions of the contract understood the nature of the "deal" it was highly probable that those individuals would not be involved with the contract over its full term. Given the potential for circumstances to arise during the term which could give rise to revision to aspects of the contract it was important that the documentation predicted such circumstances and make unambiguous provision for its treatment.

The contract is made up of five parts, as described below. Whilst each part is a separate document the contract uses the interaction of the parts to describe the nature of the contract.

The Conditions of Contract fully describes the terms and conditions of the contract and is the "legal" part of the contract. The function of each of the other parts of the contract is described in the Conditions of Contract, which also describes how each part would be changed as a result of a change to any other part.

The Conditions of Contract for the PSMC were specifically drafted by the RTA for the purposes of this contract. An initial draft was prepared based on the tender lodged by Transfield and used as the basis for extensive detailed negotiation between the RTA and Transfield. The final document reflects the agreed position reached by the parties.

The RTA and Transfield agreed at the outset that the documents should be prepared in such a way that the probability of variation to the Conditions of Contract was low. It is anticipated that any future changes to the contract will able to be facilitated by changes to the other contract parts, avoiding the need to vary the Conditions of Contract. However, in the unlikely event that a future variation to the Conditions of Contract eventuates it will require a formal deed to be executed by the RTA and Transfield.

The Code of Maintenance Standards is the "technical specification" of the PSMC. The Code specifies the target performance standards to be achieved by Transfield over the term of the contract. A detailed description of these performance standards is contained elsewhere in this paper.

The Code of Maintenance Standards contains a separate "standard" for each of the 51 distinct classes of asset maintained by Transfield under the contract. A list of these asset classes is contained in Attachment 1.

An example of a typical standard is shown at Attachment 2. Each of the standards is identical in structure and specifies:

Maintenance Rationale: the purpose of the asset's existence
Asset Types: the various types of asset covered by the standard
Inspection Plan: the frequency of inspection and a reference to the inspection procedure
Level of Service: the overall condition standard to be achieved for the asset type
Intervention Standard: the severity of a defect which demands the initiation of a maintenance response, and the time allowed for that response
Local Variations: any variation from the general performance standard which applies to an isolated road section or asset

Based on the successful application of these standards in the PSMC the RTA is in the process of introducing the maintenance standards used in the PSMC into its entire maintenance operation. This includes the introduction of modified standards into specifications for design/construct/maintain contracts.

The Maintenance Services Specification specifies the RTA's mandatory requirements for management of the maintenance on the network and the contract. This specification established RTA requirements relating to:

During development of the Maintenance Services Specification the RTA recognised the risk allocation principles inherent in the contract and ensured that the RTA did not specify any maintenance work process or material requirements which could shift risk back to the RTA. Hence, the Maintenance Services Specification takes a minimalist position, only specifying the RTA's minimum mandatory requirements.

The Commercial Schedules contain all of the commercial information which relates to the contract. This part contains 12 "stand-alone" schedules which cover:

As the Commercial Schedules specify the payments due to Transfield under the contract it is important that adequate management procedures are in place to ensure that the Schedules are consistent and compatible with other parts of the contract at any time. For example, any change to the inventory must be concurrently reflected in variation to the Benchmark Information and the Base Fee Payment schedule.

The fixed price payments to Transfield for the performance of the maintenance services required to achieve the specified asset condition standards are based on the extent of the inventory of the assets existing at the commencement of the contract. The contract describes procedures for adjusting the amount of payment due to changes in the extent of that inventory during the contract term.

The Benchmark Information contains an inventory of the assets which are the basis of the payment stream specified in the contract. The inventory of each asset type is in sufficient detail to support he mechanisms for adjustment specified in the contract.

The Benchmark Information also contains the Pavement Model which is the basis for management of future variations to certain factors which affect pavement performance and for which the RTA bears some risk. The Pavement Model input and output data provided in the Benchmark Information is a hard copy of the critical inputs and outputs of the computer model held by the RTA and Transfield to determine the value of any future adjustments.

The use of the Benchmark Information and Pavement Model is described elsewhere in this paper.

PAYMENT

The contract provides for three forms of payment to Transfield for services provided.

The Base Services are all activities required to maintain the assets to the standards specified in the contract and to fulfil all other obligations under the contract apart from activities comprised in Provisional and Additional Services. The Base Services fee is a stream of monthly payments for which the timing and amount are specified in the Commercial Schedules. The sum of the Base Services fee is the fixed price for the contract. The Base Services Fee is $170.2 million AUD over the ten years.

Payment of the Base Services fee is made by the RTA so that each specified monthly payment reaches Transfield on the specified date. There is no need for Transfield to invoice the RTA for the payment of the Base Services fee.

The Base Services fee specified in the contract is subject to annual adjustment to account for movements in the economy which affect resource input costs in accordance with a procedure specified in the Commercial Schedules.

Provisional Services are activities which Transfield is obligated to provide under the contract and which arise from circumstances which the RTA and Transfield are unable to predict and which would force Transfield to incur cost in order to satisfy its obligation to maintain specified standards. The contract limits the Provisional Services to:

The amount of any payment to Transfield for an agreed Provisional Service is determined using rates for labour, materials and other inputs specified in the Commercial Schedules. Payments of Provisional Services by the RTA are made on the basis of claims submitted by the contractor.

Additional Services are those activities which are not Base or Provisional Services but which the RTA contracts Transfield to deliver under the contract. Generally, Additional Services will be maintenance work relating to activities which are excluded from the Base Fee.

The need for an Additional Service may be generated by either the RTA or Transfield, with the RTA being the sole determinant of whether the work proceeds. In making its assessment the RTA relies on an estimate of cost for the proposed work supplied by Transfield, with the estimate also used in determining the method of procurement of the work.

Where the estimated cost of an agreed Additional Service is less than $100,000 AUD then the RTA is obligated to direct Transfield to undertake the work. Where the cost is between $100,000 and $500,000 AUD the RTA may either direct Transfield to undertake the work, put the work to tender or undertake the work itself. Where the estimated cost of the work exceeds $500,000 AUD then the RTA is not entitled to direct Transfield to undertake the work and must put the work to tender or undertake the work itself.

Payments for Additional Services are made on the basis of progress claims submitted by the contractor in a similar fashion to normal forms of contract.

RISK ALLOCATION

The fundamental premise of the PSMC is that Transfield is contracted to achieve specified road condition standards over the term of the contract and must program, fund, design and deliver whatever works are required to achieve those standards.

Under this arrangement Transfield have accepted all risks associated with the planning, financing, design, materials, delivery of maintenance work, except in those limited circumstances where the contract provides otherwise. Those excepted risks for which the RTA has retained some responsibility are described below.

As the contract is not concerned with the methodology adopted by Transfield to the specified standards it is silent on the matters of work process and materials specification which predominate in most forms of contract. In preparing the contract the RTA ensured that it did not specify any process or other work input which could imply an RTA requirement concerning the method of achievement of the standards and hence constrain Transfield in its delivery and shift risk to the RTA.

The contract assumes that Transfield have taken all risks involved with the achievement of the road condition standards except where expressly specified in the contract. Those risks for which the RTA continues to bear some responsibility are described below.

The fixed contract price includes all routine bridge maintenance activities, but excludes major activities such as strengthening, rehabilitation and replacement. The distinction between routine and major is based on the nature of the most cost effective repair technique, with routine activity deemed to include periodic works, removal of safety hazards and works needed to prevent or inhibit deterioration.

This exclusion is designed to limit the risk exposure to the contractor and hence to limit the RTA's price exposure for this low probability, high cost work.

Transfield are responsible for identifying any bridge element defects in accordance with the inspection plan and intervention standards and determining the minimum life cycle cost repair option. Where the minimum cost option is of a nature which constitutes major repair work Transfield must submit a business case to the RTA for consideration.

Where the RTA agrees to the proposed repair the work is performed as an Additional Service. On the completion of any such authorised repair work Transfield must maintain the bridge element to satisfy the specified standards for the remainder of the contract.

Where the RTA does not agree to the proposed repair then Transfield must continue to inspect the bridge element and initiate any work required to maintain the element to the condition specified in the Code of Maintenance Standards.

The rationale for an exception covering major embankment repairs is similar to that for major bridge repairs, that is, the low probability and high cost of such works creates risks which are best handled by exception.

Transfield are responsible for identifying defects in major embankments and determining the optimum repair technique. Where the optimum technique is of a nature which constitutes major repair work Transfield must submit a business case to the RTA for consideration.

Where the RTA agrees to the proposed repair the work is performed as an Additional Service. On the completion of any such authorised repair work Transfield must maintain the embankment to satisfy the specified standards for the remainder of the contract.

Where the RTA does not agree to the proposed repair then Transfield must continue to inspect the embankment and initiate any work required to maintain it to the condition specified in the Code of Maintenance Standards.

The contract includes a standard definition of Force Majeure events which includes such events as earthquake, bushfire, extreme weather or flood, war, riot, blockades and contamination. The basic definition is that Force Majeure applies for events which could not have been reasonably predicted, are beyond the control and could not have been avoided by the RTA or Transfield.

The RTA is liable to reimburse Transfield for costs incurred by it as a result of a Force Majeure event as a Provisional Service.

One particular type of Force Majeure event is a storm event of greater than 1 in 10 year recurrence interval. The RTA will reimburse Transfield for additional costs incurred by it and resulting from such an event where Transfield can demonstrate that the event occurred and that actual damage resulted. The demonstration of the occurrence is by way of rainfall pluviograph records at stations specified in the contract. However, notwithstanding the occurrence of an event Transfield must be able to prove that any damage is a direct result of the rainfall and is in excess of normal maintenance.

The contract specifies assumed maximum growth factors for each road section for both commercial and total traffic. The initial growth factors have been used to determine future traffic and truck volumes for use in the Pavement Model which is the basis of Transfield's fixed price.

The RTA and Transfield share the risk associated with differences between those growth forecasts and actual traffic and truck volumes measured during the term of the contract. The pavement component of the fixed price can be adjusted each year by an amount equal to the difference between the total pavement maintenance cost using the benchmark model and an analysis using the same model with measured traffic volumes, extrapolated at the assumed growth rates.

Where measured traffic volumes are less than those forecast then future payments to Transfield will be reduced, and vice versa.

The fixed payments to Transfield are based on an inventory of all assets existing at the date of commencement of the contract. In developing the contract it was considered to be in the interests of both the RTA and Transfield for provision to be made to vary the amount of these payments due to variations in the extent of the asset inventory during the term of the contract.

Transfield are contracted to collect inventory information on an ongoing basis. At each anniversary of the contract the measured inventory is compared with the initial inventory and a variation made to future payments to account for any differences. The difference in payments is determined using the unit annual rate for each asset type specified in the Commercial Schedules.

The RTA and Transfield share inventory risks which arise in the period between contract anniversaries. Where new assets are introduced Transfield must maintain those assets to the standards specified for that asset type in the Code of Maintenance Standards, notwithstanding that an increase in payments will not be provided until the next contract anniversary. However, where the total annual cost of any change in inventory exceeds an amount specified in the Commercial Schedules then the payments will be increased at that time.

Initial analysis revealed two lowly trafficked roads (2% of network length) in poor condition which would require significant investment to bring up to the Level of Service standard of other roads in the network. It was agreed by the RTA and Transfield that the level of investment required was not justified and hence that these roads be excluded from the Level of Service calculation.

Although the excluded roads are not included in the determination of the Level of Service Transfield is responsible for responding to defects in accordance with the Intervention Standards specified in the Code of Maintenance Standards.

There are a range of impacts of parties other than the RTA or Transfield on the condition of road assets and their need for maintenance attention. These impacts are outside of the control of both parties with cost and workload impacts unable to be forecast. However, in many cases the RTA is able to take action to recover any costs which may arise.

The contract allows for the reimbursement of costs arising from defined third party actions to be paid to Transfield as a Provisional Service. The defined third party actions are:

Transfield bears all risks associated with actions of third parties other than those defined in the contract and listed above.

QUALITY REGIME

The PSMC is a Quality Assurance contract and is managed in accordance with the international quality standard ISO 9001.

The contract requires Transfield to prepare a Quality Plan and other quality documentation, known as the Contract Procedures, to be compatible and consistent with the contract and other Contract Procedures and to satisfy the RTA's requirements as specified in the Maintenance Services Specification.

The Maintenance Services Specification specifies the RTA's requirements for each of the Contract Procedures, including the Quality Plan. The Contract Procedures are:

Transfield are required to submit its Contract Procedures to the RTA for review, and the RTA is able to direct Transfield to change the Contract Procedures so that they satisfy the RTA's requirements as specified in the Maintenance Services Specification. On this basis the RTA only accepts risks which arise from its specified requirements, which are limited to those minimum mandatory requirements which are related to RTA or Government policy.

Transfield are obligated to perform all of its services under the contract in accordance with its Contract Procedures and to monitor its own performance and compliance with the systems, procedures, processes and test plans specified in those procedures. A monthly report which provides details of all nonconformances recorded is provided to the RTA as a precondition to payment. These monthly reports also provide the RTA with advice concerning the disposition and corrective action implemented by Transfield for each recorded nonconformance. In this regard a nonconformance may also include failure to achieve specified Intervention Standards.

As the contract is not concerned with the nature of work outputs, but simply with the achievement of road condition standards the RTA is generally not concerned with the quality of work output. Poor quality work will not achieve the condition standard desired by Transfield and result in the need for further work by Transfield to correct the deficiency and satisfy their performance obligations. Hence, the need for close surveillance and audit of work quality by the RTA is avoided, to a large degree, by the design of the contract. However, the RTA has implemented a regular audit plan involving audit of the condition of samples of each asset to ensure that intervention standards are being achieved.

Notwithstanding the above, there are certain activities involved in the maintenance services which are not related to work output and which are not "correctable" in the event of a nonconformance. The contract makes provision for deductions from payments for nonconformance in these management and response activities, which include failure to repair a defect within the specified response time, respond to a complaint or representation within the specified time, inspect in accordance with the inspection plan, advise the public of proposed works and be available at all times. Deductions are made from Base Fee payments at rates specified in the Commercial Schedules. The amount of the deduction increases with the number of occurrences each month to establish a suitable , with a specified maximum number of incidents beyond which the nonconformance becomes a material breach of the contract.

As the contract is based on the achievement of specified road condition standards the testing of Transfield's achievement of those standards is the RTA's primary measure of whether Transfield is satisfying its obligations under the contract. At each anniversary of the contract Transfield is requires to measure and report the achieved Level of Service for each asset type. Where the achieved Level of Service satisfies or exceeds the target specified in the Code of Maintenance Standards then no further action is required by either party. However, in the event that Transfield fails to achieve the target standards the contract makes provision for the recovery of the standard or deduction from future payments.

Should the measured Level of Service be less than the target standard Transfield and the RTA must agree on a program of remedial work outputs, additional to those planned by Transfield in its work program, which would restore the asset to the target Level of Service if performed instantaneously. This remedial program would include the location, work type, output quantity and agreed cost of the required works. The RTA then retains one twelfth of the total cost of this remedial program from the monthly Base Fee payments over the following twelve months, or until such time as the remedial program has been completed. If Transfield completes the entire remedial program prior to the next anniversary of the contract then the RTA refunds all of the monies retained. If Transfield does not complete the entire program of remedial works before the next anniversary then the monies retained by the RTA are forfeit by Transfield.

Hence, the contract makes provision to ensure that the RTA receives the service for which it makes payments, and provides sufficient incentive to Transfield to achieve the targeted road condition standards.

REVIEW AND CHANGE

Given the ten year term it is critical that provision be made for the refinement of the contract to reflect changes in circumstances which may effect its performance. Such circumstances may include changes to specified condition standards, revised management or reporting requirements, changes in the limits of the RTA's responsibility, new quality or documentation standards etc.

Generally any such changes would be accommodated by variation to the Maintenance Services Specification or the Code of Maintenance Standards. Where the RTA determines that such a change is necessary it is required to consult with Transfield regarding the impact of the proposed change on Transfield's work program or organisation and the extent of variation in cost which may arise. The implementation of any proposed change is at the sole discretion of the RTA and includes simultaneous amendment of all related parts of the contract, including any adjustment to future Base Fee payments agreed by the RTA. The assessment of these price impacts is performed in accordance with procedures described in the contract.

As a general principle the contract anticipates that most changes will be proposed and negotiated in conjunction with a formal annual review required by the contract. These reviews, which are undertaken at each anniversary of the contract, are designed to consider:

PERFORMANCE SPECIFICATION

A robust and objective performance specification regime which adequately describes the condition of the assets and their ability to effectively deliver their intended purpose is the key to the success of this contract. It was this area which required the greatest developmental effort.

Put simply, Transfield are obligated to manage and maintain all of the assets so that they are in a condition which is "fit for purpose" at all times. Whilst the Code of Maintenance Standards specifies target condition standards for each asset the primary obligation is to ensure that the assets are suitable for the purpose set out in the maintenance rationale section of each standard. This obligation is not limited by the specified standards.

The contract adopts a two tier approach to the specification of the standard for each asset type. The first tier, the Level of Service, is a performance indicator which represents the condition of the entire inventory of assets in the asset type and is generally some statistical measure of that condition. The Level of Service is measured once a year, at each anniversary of the contract. The second tier, the Intervention Standard, is designed to ensure that isolated defects in assets are recognised and repaired in a timeframe consistent with the risks corresponding to the defect. The Intervention Standard comprises the inspection frequency, defect severity which demands a response, and the response time. The application of Intervention Standards provides a "safety net" to the Level of Service by ensuring that those limited number of assets which may be in poor condition, but are allowable under the statistical Level of Service, are repaired before they become a risk.

In developing the Code of Maintenance Standards the RTA sought out similar approaches taken by a number of road agencies and adapted the various methodologies to the contractual environment. This required the development of a defect inspection and classification system to support the management of the Intervention Standards. Moreover, the RTA also developed a number of new performance indicators to represent the Level of Service of the non-pavement assets.

Typical performance indicators used to specify the Level of Service are:

The condition index is generally a statistical representation of the distribution of defect severity across the entire inventory of an asset achieve type.

A typical Maintenance Standard is shown in Attachment 2.

DATA AND INFORMATION

Prior to the commencement of the contract the RTA, as the maintaining authority, routinely collected information on maintenance outputs, road performance and traffic volumes. All of this information was made available to the tenderers for the contract at the commencement of the tender period to enable them to understand the network and its performance, to forecast future maintenance requirements and to prepare a tender price. It was clear to the RTA that the risks factored into tender prices would decrease with improved understanding of the network by the tenderers.

In entering into the contract the RTA was conscious of the need to continue to acquire information about the network and the associated maintenance effort and ensured that the required information continued to be collected by Transfield and made available to the RTA. Hence, the RTA has transferred responsibility for routine data collection on the network to Transfield, with the costs included in the fixed Base Fee.

The information which Transfield is required to maintain and supply to the RTA includes a time series of:

Transfield have established a comprehensive road information system integrated by an ArcInfo Geographic Information System for the management of the information it requires for the management of the network and in accordance with the contract. The RTA has been given direct access to that system via a modem connection and can access all network information, including future work plans, in real time.

TECHNOLOGY AND INNOVATION

The nature of the contract allocates responsibility for work selection, design and delivery solely to the contractor. Hence, the choice and application of technology and the pursuit of innovation in materials, processes and management is a matter for Transfield.

Innovation and technical advancement is clearly in the interests of the contractor under a performance based contract. Where improved technology, process, design or management can be brought to the work it may reduce the long term cost of achieving the specified standards. Under a fixed price arrangement any reduction in cost of work results in a commensurate increase in the contractor's margin.

There is no doubt that Transfield's tendered price, and those of the other tenderers, included assumptions regarding future technology and innovation which they would bring to the contract. The risk of their assumptions being realised is borne by Transfield. In developing the contract the RTA recognised these risks and did not seek to limit future commercial advantages to Transfield which may arise from innovation it brings to the contract.

The contract also requires Transfield to undertake reviews, and update where necessary, its maintenance methods with regard to world best practice, developing standards, technological developments and changes to work practices affecting the general road industry.

CONTRACT SUPERVISION

RTA administration of the contract is vested in the Contract Manager, who may appoint representatives to assist. The current Contract Manager is an experienced road engineer who allocates approximately 50 percent of his time to the contract. The Contract Manager is supported by a full time road foreman who undertakes surveillance of Transfield's operations and audits Transfield's satisfaction of the Intervention Standards.

CLIENT/CONTRACTOR RELATIONSHIPS

The contract is designed to operate under the principles of Cooperative Contracting, or "Partnering". Such an approach is fundamental to the success of any long term contract, and in particular a maintenance contract. Due to the nature of the maintenance task and the constantly changing environment in which road maintenance is undertaken it is not possible to clearly specify and document all of the circumstances which may arise. Hence the ongoing management of the contract by both parties requires close liaison and cooperation in the application of the principles of the contract to the task.

One of the advantages of a performance based contracts over more traditional work based contracts is the minimisation of risks associated with application of a contract to changing maintenance circumstances. With the contractor's primary obligation being to maintain all assets to a condition which is fit for purpose many of the usual interpretation problems are avoided. The RTA found it far easier to establish contract documentation which defined responsibilities and procedures for management of maintenance issues for this contract than under its other maintenance contracts.

With the commencement of the contract the RTA and Transfield established a "Partnering Charter" which set out the "mission" and shared objectives of the contract. This charter was signed by members of the RTA and Transfield project teams and is prominately displayed in the offices of each.

The contract's dispute resolution procedures have been designed to facilitate and encourage the resolution of differences between the RTA and Transfield. The parties have each acknowledges that the objective is to avoid formal disputes, and minimise the impact of disputes, by giving prompt attention to the issue at the appropriate level and addressing differences in a fair and cost effective manner. The RTA and Transfield have jointly established protocols and procedures to ensure that disagreements are addressed promptly at the project team level and to have disagreements elevated to more senior officers of each organisation where not resolved in a predetermined timeframe. The hierarchy of these officers and the time available to each to resolve a difference is specified in the Commercial Schedules.

To assist in the facilitation of effective communication between the parties a weekly project team meeting is held involving the RTA contract management team and Transfield's project management team. Issues relating to the performance of the contract and matters requiring attention are identified at these meetings and processes implemented to resolve issues in a mutually acceptable way.

After the first year of operation of the contract no difference between the parties has been elevated to a dispute and involved other than the project team.


5. RESULTS

COST COMPARISON

As indicated earlier in this paper the cost of maintenance using both the RTA workforce and private sector contractors reduced significantly since the commencement of the RTA's contracting initiative in 1992. The cost of work by the RTA workforce and contractors in mid 1995 were approximately 25 percent and 37 percent respectively less than in 1991.

Based on these reduced rates by the RTA workforce the average historical annual maintenance expenditure on the contract network was $18.6 million AUD. However, annual road condition measurements over the three year period preceding the contract showed that road condition was deteriorating at an average rate of 4 percent per annum at this level of investment. Using the HDM3 pavement model the RTA estimated that investment of a further $4.8 million AUD per annum into road maintenance would arrest this rate of deterioration and stabilise condition on the network.

The contract provides for the delivery of road conditions which improve during the term of the contract, by up to 13 percent in some areas. The RTA forecast that a further $5.5 million AUD per annum would be required to emulate the condition profile guaranteed by Transfield under the contract. Hence, the RTA estimates that it would need to spend approximately $28.9 million AUD per year, at its current level of productivity, to deliver the same level of service as that provided under the contract.

The total cost of the contract over the ten year term is $187.7 million AUD, including the $170.2 million base fee payment, $4.8 million AUD for supervision and an allowance of $12.7 million AUD for provisional and additional services.

By entering into the contract the RTA will therefore save approximately $101 million AUD over its ten year term, or 35 percent. It should be remembered that this is after the 25 percent improvement in productivity already achieved by the RTA workforce as a result of the contracting initiative. Of course, in addition to this financial saving the RTA has also discharged a large proportion of its road maintenance risks to Transfield. The value of other improvements which arise from the contract, in the areas of responsiveness, technical innovation and environmental management, has not been estimated.

In November 1996 the RTA awarded the third round of the initial schedule of rates contract in western Sydney. The tendering process saw a number of contractors tender below the rates in the previous contract, including a tender by the RTA workforce which was most competitive. The contract was won by the same private sector contractor as the previous two rounds, with average rates 25 percent below the previous contract rates. By compounding these incremental savings the cost of maintenance under this contract has now reduced to only 48 percent of the cost prior to the commencement of the contracting initiative in 1991.

A graph of the trend in maintenance costs since 1991 is shown below. This shows that the costs have steadily reduced and that the performance contract provides the lowest cost of delivery achieved to date, notwithstanding the risks taken by the contractor compared to the other forms of delivery. The graph also shows the improvement in the productivity of the RTA's own workforce, particularly with respect to their recent tender for the schedule of rates contract.

CONTRACTOR PERFORMANCE

The contract has now been in operation for more than one year, and has seen the completion of the first performance review.

Transfield have satisfied all of their contractual obligations and performance targets during the first year. In some cases Transfield have exceeded the performance targets, and have hence made an investment for the future. Where performance targets have been exceeded then Transfield will either have to do less work in the future to satisfy future targets or they have generated a cushion against future unforseen circumstances.

The RTA has not needed to impose any of the contract's sanctions for non-performance on Transfield.

RELATIONSHIPS

The RTA and Transfield have worked hard to ensure that the relationship envisaged by the contract and in the Partnering Charter is, and continues to be, realised.

A formal meeting between the Transfield and RTA project teams is held on Friday of each week in the Transfield offices. The meetings are held to consider and resolve any issues which have arisen in the previous week, discuss Transfield's work plan for the coming week and to progress finalisation of any other outstanding matters. This allows for potential disagreements to be openly discussed at the project level and resolved before escalation to a contract dispute.

A similar consultative process was used in the first formal performance review, where the scope and approach to the review were discussed and agreed prior to the commencement of the review. This enabled the review to proceed smoothly and be finalised efficiently and effectively.

After one year of operation there have been no disputes elevated beyond the RTA's and Transfield's Contract Managers.

Given the ten year term of the contract both the RTA and Transfield will need to ensure that the nature of the relationship established in this first year is maintained throughout the contract. This is particularly important as changes to the project staff will occur during the term, with those initially responsible for establishing the contract moving on to other roles.

IMPORTANT FEATURES

There are several features of this contract, and solutions to issues which arose during its development, which are fundamental to its success. These features provide valuable lessons for agencies wishing to establish maintenance contracts in the future.

6. WHERE TO FROM HERE?

Notwithstanding the apparent success, and real savings, which have arisen from the RTA's adoption of the performance based contracting model the RTA has elected to delay any consideration of further major maintenance contracts of this type for at least two years.

This contract is of unique form, and yet to be fully tested. The RTA has decided that it will adopt this two year "moratorium" to fully test all of the elements of the contract, and to allow the opportunity to refine it as necessary before further contracts are commenced.

Whilst no new contracts are envisaged at this time the RTA has, through this performance based contract and its schedule of rates contracts, established a "toolbox" of contract options which it can apply to situations on a case by case basis.


ASSET CLASSES INCLUDED IN THE CONTRACT

PAVEMENT MAINTENANCE STANDARDS

101  Flexible Pavement     
102  Rigid Pavement   

BRIDGE MAINTENANCE STANDARDS

201  Concrete Bridge Elements   
211  Steel Element with Lead    
     Paint                      
212  Steel Element with         
     Non-Lead Paint             
221  Truss Timber Elements      
222  Non-Truss Timber Elements  
233  Bridge Railings            
234  Structure Drains           
241  Tunnels                    
242  Pedestrian Underpasses     
251  Bridge Waterway          

TRAFFIC ASSET MAINTENANCE STANDARDS

301  Longitudinal             322   Guard Barriers       
     Linemarking                                         
302  Transverse Road          323   Safety Fence         
     Markings                                            
303  Pavement Symbols         324   Traffic Devices      
311  Warning Signs            331   Traffic Signals      
312  Regulatory Signs         341   Electro-Mechanical   
313  Major Guide Signs        342   Streetlighting       
314  Minor Guide Signs        351   Boundary Fencing     
321  Non-Pavement             352   Pedestrian Fencing   
     Delineators                                         

ROUTE MANAGEMENT MAINTENANCE STANDARDS

401  Retaining Walls          431    Noise Walls         
402  Batters                  441    Median Areas        
411  Sealed Shoulders         442    Roadside Areas      
412  Un-Sealed Shoulders      443    Vacant Property     
421  Kerb and Gutter          444    Litter Collection   
422  Table Drains             451    Graffiti Removal    
423  Catch and Berm Drains    452    Cleaning Tunnel     
                                     Walls 
424  Batter Drains            453    Sweeping of Kerbs   
425  Drainage Pits            461    Abandoned Vehicles  
426  Underground Drainage     471    Attend Hazardous    
                                     Spills              
427  Sedimentation Basins     481    Control Stray       
                                     Animals             
428  Subsoil Drains              

SAMPLE MAINTENANCE STANDARD

No. : 311

Inventory Element:           Warning Signs                                   
Inventory Category:          Signposting                                     
Maintenance Rationale:       Warning signs are maintained to warn or alert   
                             drivers of road conditions                      
Inventory Types/Items:       Curves (W1)                                     
                             Intersections (W2)                              
                             Signals (W3)                                    
                             Clearances (W4)                                 
                             Obstacles (W5)                                  
                             Pedestrian, School (W6)                         
                             Railway Crossing (W7)                           
                             Advisory (W8)                                   
                             Reflective & Non-reflective signs, sign sizes   
                             A-D, steel pipe or timber posts                 
Defects:                                                                     
Asset Condition              Sign - missing; damaged (holes (gunshot or      
                             other), bent, scraped (eg by passing vehicle);  
                             graffiti on face; loss of reflectivity;         
                             coating faded or peeling off; symbol, legend    
                             peeling off or faded; dirty (mud, diesel        
                             fumes, bird droppings); bolts missing or loose  
                             Post - missing; bent, displaced, inclined to    
                             vertical; rusted (metal) or rotted (timber);    
                             protective coating (galvanising or paint)       
                             deteriorated                                    
Inspection Frequency:        6 months with alternate inspections at night    
Intervention Levels:         Missing                                         
 (Condition 3)               Loss of reflectivity >50%                       
                             Obscured for 150m on approach                   
                             Difficult to read - blemish  - face > 30%       
                                                          - symbol >30%                               
                             Bolts loose/missing affecting serviceability    
                             Misalignment - from vertical > 200mm/m          
                               - horizontally   30 degrees                      
Main Treatments:             Repair, wash or replace signs                   
                             Replace, straighten or repaint mounting         
Procedure No:                                                                
Response Times:              Obscured, missing or damaged 24 hours (post or sign)                                           
                             Loss of reflectivity          4 weeks                 
                             Difficult to read             4 weeks                   
Level of Service:            Weighted Condition Index: as per Appendix B     
                             Target Level: As per condition Index at year 1.                                              
                               (maintained at that level thereafter).
     



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