Chapter 3: Warranty Implementation

European warranty programs evolved independently and therefore have some differences in their implementation. This chapter describes the technical and management aspects of the individual warranty programs in the host countries. It describes in detail the products warranted, length of warranties, scope definition, precontract award, contract award, payment and final acceptance, and operation and maintenance.

It should be noted that this chapter specifically discusses material and workmanship and short-term (5 years or less) performance warranties. The general definition of these warranties is described in chapter 2, while long-term performance warranties, PPCs, and DBFO contracts are discussed in chapter 5.

Products Warranted

The specific products warranted under asphalt pavement warranties varied by country and warranty type. In standard Danish and Swedish contracts, only the asphalt layers delivered by the contractor are subject to warranty. Road markings are also warranted when relevant. Germany warrants hot mix asphalt pavement, subbase aggregate, and subgrade. Germany also places the responsibility for all of these products on the prime contractor. The prime is responsible for all of these items independent of whether it is an earthwork contractor, paving contractor, or other prime. Products warranted in U.K. asphalt pavement warranties vary from the surface treatment material only for maintenance projects to the entire roadway project on design-build projects. Like Germany, the United Kingdom places the responsibility of the warranty on the prime contractor.

Length of Warranties

As briefly discussed in chapter 2, the warranty period of material and workmanship warranties and short-term performance warranties varied between 2 and 5 years in the host countries. The hosts interviewed by the scan team could not comment on the original decision as to the length of the warranty periods, because these decisions evolved long before any of the hosts began working in the programs. Table 3.1 depicts the warranty periods, type of warranty, and type of specification for the host countries. The period listed represents the longest warranty period for the product or performance measure on the entire pavement. Some warranties have varying lengths on products and performance indicators as described on the following pages.

In standard U.K., Spanish, and German contracts, the host country's highway agency completes the design in a method specification fashion. The host countries required material and workmanship warranties in these standard contracts. The United Kingdom employed a 2-year warranty period, Spain employed a 1-year period, and Germany employed a 4-year period. In the case of agency-supplied design, the highway agencies are only asking for material and workmanship warranties.

For short-term performance warranties, the highway agencies provided an end result specification and gave the contractors more flexibility in material choice and mix design. Standard Danish and Swedish contracts, as well as U.K. design-build contracts, utilize end result specifications by the agencies. The warranty period for these contracts is 5 years in Denmark, Sweden, and the United Kingdom.

The Danish Road Directorate provided us with more detail on the length of the individual performance requirements. The Danish process was summarized in the following seven steps:

• Preparation of project and pavement design end result specification.
  • – Performed by agency or consulting firm.
• Preparation of tender documents.
  • – Performed by agency or consulting firm.
• Tender.
  • – Low bid or economical most feasible bid using best-value system.
• Award of contract.
• Construction.
• Hand over.
  • – Initial inspection performed by agency and contractor.
• Period of warranty.
  • – Assessment of performance performed by agency.

The Danish system works within established functional pavement requirements that are correlated to the end result specification. The highway agency has established a set of warranty periods that vary with these functional pavement requirements.

As seen in table 3.2, surface regularity and profile and drainage of surface water are only warranted for the first year of the product. Friction, rutting, instability, and durability are warranted for the full 5 years. The actual performance measures for each of these functional pavement requirements are discussed in the next chapter. The Danish system recognizes that the ideal warranty period should be long enough to provide assurance of pavement performance, but not so long as to unnecessarily inflate contract prices.

The Danish system also uses a bidding technique that allows contractors to offer alternate designs with longer life cycles in consideration for a discounted bid. Normally in asphalt pavement warranties, the individual highway agency uses the bidding document to describe the expected design life for the technical solution. However, the Danish system allows contractors to present an alternative solution during the bidding process. If the technical solution is evaluated to have a longer design life, the alternative bid may be accepted by the agency, thus rewarding the contractor through a discounted bid in the evaluation period. Table 3.3 on the following page provides an example from an asphalt paving project in Ribe County, Denmark, from 2002.

The Danish Road Directorate design provided to the contractors in table 3.3 had a design life of 14 years. “Contractor C” provided a design with a design life of 15 years as confirmed by the Directorate. Rather than award the bid on a first cost basis, the Directorate uses an annuity (average yearly value in present worth) to award the contract. Although Contractor C's bid was the highest first cost, it was awarded the bid on the basis of its lowest average yearly cost.¹

¹ The example shown in Table 3.3 is the cost portion of a more comprehensive best-value procurement process. The entire procurement process is shown in Figure 3.2 later in this chapter.

The warranty period length varies across the host countries and, in most cases, within the countries. The host countries strive to select the warranty period length that: (1) provides assurance of pavement performance, without unnecessarily inflating contract prices, and (2) provides the optimum opportunity for innovation from the contracting community. Material and workmanship warranties employ method specifications and are shorter term (1 to 4 years). Short-term performance warranties employ end result specifications and have a 5-year warranty period.

Definition of Existing Conditions

The project scope definition process was not absolutely consistent throughout the host countries, but it shared many of the same attributes. Many of the differences stemmed from historical practices within the host countries, as well as the type of specification being used (method or end result).

In all of the host countries, the highway agencies and not the contractors determine the existing traffic loads and climatic conditions for the pavement design, although some of the countries employ consultants for this task. These traffic loads and climatic conditions are used for design purposes and dictate the terms of the warranty. In material and workmanship warranties, as well as short-term performance warranties, the contractors rely on these data for design. The results of inaccurate design data are discussed in the next chapter. It should also be noted that contractors are required to collect their own traffic data and make their own traffic projections in the case of longer-term PPCs and DBFO contracts, as described in chapter 5.

Procurement

The European host countries' procurement award processes vary significantly from that in the United States. All of the host countries allow for past performance and other nonprice factors to be incorporated into the contractor selection. They noted that this process was critical to the success of their warranty programs. The incorporation of past performance and other nonprice factors into the procurement process correlated with both the initial selection of more qualified contractors and more accountability in the enforcement of any corrective action required under the terms of the warranty. The two main methods of incorporating nonprice factors into procurement are project-based prequalification (short listing) and best-value procurement.

Project Prequalification (Short Listing)

U.S. highway agencies are accustomed to using prequalification processes for contractors on an annual basis, but these prequalification processes are usually quite general and the process is not used on a project-by-project basis. Germany, Spain, and the United Kingdom employ a project-based prequalification process, which is commonly referred to as short listing in U.S. public building construction. These European systems are similar to those used in U.S. design-build highway procurement systems.

The United Kingdom employs a strenuous project prequalification process for contractors bidding all project types, but it is even more strict in its design-build procurements. Spain employs a rigorous prequalification process, particularly on its maintenance procurements. The German Federal Ministry of Transport also employs a project short-listing process. Project prequalification criteria vary by country and project, but the following general requirements were noted as short-listing criteria by each country:

• United Kingdom: past experience, performance rating, financial soundness, and quality of the company's human resources procedures.

• Spain: minimum staffing and equipment standards of the contract (for example, a professional engineer is required to be on staff; minimum work force and required equipment is available).

• Germany: bidder's staffing, financial condition, work experience, and past quality of work being “state of the art.”

The Danish Road Directorate and the Swedish National Road Association do not use a project-based prequalification process as a rule given the small number of contractors in their countries. However, the Swedish National Road Association did note short listing for unique projects on the basis of the availability of special resources on selected projects. Sweden's annual prequalification process also includes specific elements, such as economic strength, environmental requirements, and safety requirements.

Best-Value Procurement

This key procurement difference between the United States and the European hosts involved the use of best-value procurement rather than a reliance on low-bid selection. All of the countries award on a “best-value” procurement process. A best-value procurement process is defined as:

A procurement process where price and other key factors are considered in the evaluation and selection process to enhance the long-term performance and value of construction.

All of the host countries pointed to the use of best-value procurement as a critical component in the success of their warranty programs. For warranties to function effectively, highway agencies and the industry must have a higher level of trust and greater confidence in the contractor's ability to perform. Best-value procurement is one mechanism to promote this trust and confidence.

The mechanics of the best-value processes varied by country, but all of the processes shared some common characteristics. As shown in figure 3.1, the goal of a best-value selection is to balance cost with noncost factors to achieve long-term performance and value of construction for the public. All of the systems employ a two-envelope bidding (or proposal) system. The contractor submits a price proposal in a separate envelope from the technical (or qualifications) proposal. The technical envelope is always assessed (or scored) prior to the opening of the price proposal. Opening the price proposal occurs only after the assessment of the technical proposal to ensure that the price proposal will not influence the assessment of the technical offer.

Figure 3.1: Common attributes of European best-value procurement procedures.

The criteria assessed in the technical proposal varied on a project-by-project basis throughout the host countries. Value can be added to projects through two general categories: contractor qualifications or contractor enhancements to the project. Contract qualifications are assessed through criteria such as past experience, past performance, project personnel, management structure, etc. Contractor enhancements vary greatly, but can include time-related issues, design enhancements, traffic management plans, safety plans, environmental mitigation, etc. The owners choose these best-value parameters and create evaluation criteria from them on a project-by-project basis.

A key to success in best-value procurement involves the transparency of evaluation plans. Procurement documents must clearly convey how the evaluation criteria will be scored and how the cost and technical proposal will be combined. Transparent criteria and scoring methods convey to the contractors how they will be evaluated and what they should focus on in their proposals. These processes must be transparent to the proposers so that they know how to weight their costs and efforts in their proposals. Procurement documents must clearly convey the owner's project goals if the owner is to receive the best proposals.

The manner in which the tradeoff analysis is conducted between the price and technical proposals varies by country and by project within each country. Some examples only employ two criteria of price and qualifications or past performance. If the lowest price comes from the highest technical rating, then the project is awarded to the lowest bidder. If the lowest bidder does not have the highest technical rating, then the agency performs a tradeoff analysis to determine if the higher technical scores provide the public with better long-term value. If it can be determined that better value is achieved from one of the higher technical offers, then the award is made to a company other than that offering the lowest bid.

Some of the best-value decisions account for more than just price and qualifications. In these cases the tradeoff analysis is more complex and requires more intricate award methods. The Swedish National Road Association and the Spanish Road Association offered two examples of best-value methods that include evaluation criteria such as past performance, personnel, management plans, technical approach, and alternate bids. Three examples are shown in figures 3.2, 3.3, and 3.4. Figure 3.2 is an extension of table 3.3.

All of the host countries pointed to prequalification and best-value selection as a key to the success of their warranty programs. They stated that the use of nonprice factors in the award of future projects motivated the contractors toward better construction performance and more amicable negotiations of solutions to any problems encountered during the warranty period.

Bonding Requirements

The use of warranty bonds is standard practice in the United States, but bonds are not found on all projects in Europe. Bonds insure a contractor's financial solvency during the warranty period in case any remedial work is required. The key difference in the countries that required bonds was in the bond amount. The German Federal Ministry of Transport, the Danish Road Directorate, and the Swedish National Road Association required some type of warranty bond while the United Kingdom had no bonding requirements. Figure 3.5 depicts the bonding requirements of the host countries.

Figure 3.5: Bonding requirements of host countries.

For projects over 250,000 Euros, the German Federal Ministry of Transport requires a bond equal to 5 percent of the construction cost through project acceptance (performance bond), and then reduces the bond to 2 percent throughout the remainder of the project (warranty bond). The German contracts may involve several different warranties for different elements of large jobs, some of which may have different warranty periods and varying portions of the total project cost.

Standard Danish contracts use a declining bond rate system. A performance bond in the amount of 15 percent of construction costs is required during construction. A warranty bond of 10 percent is required during the first year of the warranty period, but the amount is then reduced to 2 percent for the final four years of the contract. Recall that the standard Danish warranty period is 5 years. The Danish Road Directorate thinks that these amounts better represent the risk involved in the construction and warranty process. A bond of 10 percent could be used throughout the process, but the bond would certainly cost the agency more than the reduced amount in the final 4 years. The Danish Road Directorate assumes it will find the major defects in the first year and it is willing to pay more for the bond. It does not wish to pay the increased bond costs in years 2 through 4 when defects may be less likely to occur.

The British Highways Agency takes a different view. It stated that its rigorous prequalification process and the existence of a small pool of relatively large contractors negates the need for a bonding process. Ginny Clarke, the British Highways Agency's Chief Highway Engineer, stated that “this is a nice world where we look after everybody.” The British Highways Agency relies on its prequalification process to hire only contractors that can and will correct any defects in their work. They do not incur the costs of bonds on their projects.

The philosophy of the British Highways Agency was echoed throughout the host countries. There is a strong feeling from the highway agencies that contractors are making the right decision for the right end result. Moreover, the use of prequalification and/or best-value procurement creates long-term relationships with the contractors. The agencies work strategically with their industry to create a culture of partnership and continuous improvement. The contractors know that they must correct their defects if they wish to be considered for future work. If a warranty bond is called, it will be reflected in their future proposals for a number of years. Likewise, the highway agencies are best served if their contractors succeed and they work closely with them to ensure their success

Design and Construction Contract Award

Design and construction contract award involves the allocation of responsibilities for design, material selection, and quality assurance/quality control (QA/QC). On projects involving material and workmanship warranties, the design and construction contract award process in the European host countries is similar to that of the United States. However, those projects employing short-term performance warranties require the contractor to perform more of the design. Also, the European host countries use more contractor material selection and QA/QC than found in the United States. A brief discussion of these responsibilities follows.

In all of the host counties, the agency designs the pavement structure. Where short-term, performance-based warranties are being used (Denmark, Sweden, and U.K. design-build contracts), the contractor may select another design from the owner's catalog and the owner must approve selection. The contractor may also select a noncatalog design, but it will be at his or her own risk. In all cases, the contractor performs mix design of bituminous mixtures and submits the job mix formula to the agency for review. The final mix design must be within the limits set by the agency.

With the exception of the Swedish National Road Association and the Danish Road Directorate, material selection is controlled by the agency. Germany, Spain, and the United Kingdom provide preapproved lists of material sources from which the contractor can choose. The use of alternative sources is encouraged, but they require approval from the agency. Sweden and Denmark differ slightly because some of the major contractors own the aggregate sources. These sources are monitored and approved by the agencies.

As stated throughout this report, there is more partnership between the European host counties and the industry than found in the United States. Accordingly, the European host countries rely heavily on contractor quality control (CQC). The agency takes an audit role in the QA process. Of the host countries, standard German contracts are the most similar to those in the United States and involve three tests: a suitability test, a self-monitoring test (QC), and an owner test (QA). The Danish system places more responsibility on the contractor. The contractor performs the QC and must submit the data to the agency during production and construction. No third-party control is required. However, most Danish contractors are certified in accordance with ISO 9000. The British Highways Agency relies heavily on CQC for both standard and design-build contracts. A third party is typically hired by the agency to monitor the contractor's processes, but little testing is done. The agency relies heavily on contractor quality management plans and incorporates their performance into the following procurements through prequalification and best-value selection. The Swedish system is similar to the Danish and U.K. systems in that the contractors do all of their own testing, and the agency inspects and audits. Contractors or third parties do all tests. In fact, the Swedish National Road Agency does not have its own laboratories.

The Danish Road Directorate employs a unique use of warranties in relation to the QC system. If the QC limits are not met but the contractor believes that the product will perform as desired, the contractor can extend the warranty period in lieu of paying a penalty or correcting the work. This extended warranty places more risk on the contractor but it does give the Directorate confidence in the product. This system has great potential in the United States to create a better relationship between the industry and the public sector.

Payment

Payment for work involves verifying work as complete and distributing payments. Retainage, incentives, and disincentives are common considerations in the final payments. The European host countries' philosophy on payment and retainage is closely related to their bonding philosophy described above. The host countries varied in their use of incentives and disincentives, as described below.

Since significant CQC is used, the European host countries make verification for payment in an audit fashion at the end of the project or in milestones. The German Federal Ministry of Transport uses visual inspection at the completion of construction according to the specifications. In standard Danish contracts, the contractor is paid after the work has been completed and accepted by the agency. On large projects the contractor may be paid on account. The Swedish system pays by unit volume, square meter, or ton, according to milestones. The British Highways Agency pays for work as completed. An inspector for the owner, who is typically a third-party consultant, is present on the projects.

Some countries equate their use of bonds to a retainage system. In Germany, for example, payment is made according to completion, with a 5 percent performance bond and a 2 percent warranty bond withheld depending on project size until the end of the 4-year warranty period. The Spanish system makes payment during construction, and then final payment at the end of the 1-year guarantee period. The Spanish system also delays payment during construction for the verification process. The Swedish system pays for all work except for one-half of the bond amount, which is released after completion of the warranty period. The U.K. system is unique in that there is no retainage or bonding system. While there is a performance warranty, there are no retainage or bonding requirements. Again, the British system relies heavily on the prequalification and best-value procurement system to ensure the quality of the work. Retainage systems are not conducive to long-term partnering relationships.

There is little use of incentives in the European host countries. The Spanish, Danish, and U.K. philosophy is to place the responsibility for performance as described in the specifications on the contractor. If the pavement does not comply with specifications or quality is insufficient, the agency can withhold payment until corrective action has been taken. A negotiation process is used in questions of specification compliance, but the warranty is enforced. The German system is similar, but they reserve the right to assess penalties in addition to requiring corrective action. The Swedish system does utilize an incentive/penalty system at project completion and will sometimes use a similar system at the end of the guarantee period.

Final Acceptance

In all host countries, a final acceptance of the project is made at the end of construction to signify the start of the warranty period. The formality of this final acceptance varies according to the level of QA applied by the host agency during construction. The German Federal Ministry of Transport uses perhaps the highest level of QA during construction and its final acceptance consists of a visual inspection done as a drive-though inspection after construction is complete. The British Highways Agency uses an on-the-job consultant throughout construction who verifies payment during construction and provides a final acceptance at the end of the project. The Danish warranty goes into effect at the end of construction independent of the owner's final acceptance. The Swedish system relies heavily on CQC during construction so the final acceptance is very rigorous. The Swedish National Road Association inspects all documents, including test protocols, verifications, and other contract demands. It then performs a visual inspection and a detailed road survey.

At the end of the warranty period, there is an official closeout function where the pavement is inspected and an assessment made as to whether the pavement has performed as expected. Much of this inspection relies on the individual country's pavement management system, which is discussed in chapter 4. In general, however, the level of inspection at the end of the warranty period is similar to that at the end of construction that was previously described. In Germany, there is a drive-through inspection. The agency presents a detailed “punch list” to the contractor. In the case of disputes, a joint inspection may be carried out. The German Federal Ministry of Transport is beginning to measure friction as an acceptance criterion. The Danish Road Directorate uses a third party to conduct a road survey and visual inspection, contract demands, and test protocols. The Swedish National Road Association only inspects the pavement at the end of the warranty period if it is required as determined through the pavement management system. If it is required, the agency, or third party, conducts a road survey and inspects all documents, including test protocols, verifications, and other contract demands.

Conclusions

The use of asphalt pavement warranties is so entrenched in the European host countries' culture that few of the hosts could explain the evolution of their programs. Warranties have simply been in use since before our hosts started working, and in some cases, before they were born. The warranty system has helped to establish a spirit of partnership and trust between the agencies and their industry. The contractors know that they are responsible for the quality of their work and that the chances of winning the next project directly relate to the quality of performance on their current project. Without best-value selection and project-based prequalification (short listing), the warranty programs would not be as effective.

The lengths of warranties vary. As a general rule, material and workmanship warranties are shorter (1 to 4 years) and performance warranties are longer (5 years). In all cases of performance warranties, the contractors have more responsibility for design and QC. The Danish system provides for varying lengths of warranties, depending on the particular assessment criterion.

All of the bidding processes evaluate more than just price. Examples of life cycle evaluation criteria are prevalent. All counties employ project-based prequalification and/or best-value procurement and point to the procurement procedures as a critical element of program success. Nonprice factors being evaluated can include past experience, performance rating, financial soundness, and quality of the company's human resources procedures, to name only a few. Examples of nonprice factors holding more weight than price factors are not uncommon—particularly on longer-term contracts.

Bonding requirements and payment procedures are closely related and vary from country to country. Only the United Kingdom does not employ bonding or retainage. All of the other host countries employ varying levels of bonding and retainage. Some countries hold retainage until the end of the warranty period.

The European host countries more frequently allocate design, materials, and QC responsibilities than their American counterparts. While the agencies perform existing conditions assessment and pavement structure design in projects using material and workmanship warranties, they perform fewer activities in those projects with performance warranties. In all cases, contractors perform more QC activities than in the United States.

The European hosts strongly believe that contractors are making the right decision for the right end result. Moreover, the use of prequalification and/or best-value procurement creates long-term relationships with the contractors. The agencies work strategically with their industry to create a culture of partnership and continuous improvement. The contractors know that they must correct their defects if they wish to be considered for future work.