Performance-Based Maintenance Contracting: Another Tool

The Transportation Research Board released a report on June 12, 2009 about Performance-Based Maintenance Contracting (PBCM). The report looks at the practice world wide, explores the potential to reduce costs, improve levels of service in the maintenance arena as well as those factors which appear to be limiting the use of PBCM.

Performance-Based Maintenance Contracting (PBMC) is a contracting method that provides incentives and/or disincentives to the contractor to achieve desired outcomes or results; in its purest form, PBMC does not detail how, when, or where to do the work. [There are many names for PBMC used around the world from Total Maintenance (Texas) to Asset Management (Virginia) to Managing Agent contract (UK)]

Performance-Based Maintenance Contracting (PBMC) was first implemented on a wide scale in British Columbia and since then has become a mainstay of maintenance contracting in Australia, New Zealand, England, and Finland, and to an increasing degree in other countries, including the United States. As Deputy Secretary of Transportation for the Commonwealth of Virginia, we signed the first fixed-price, long-term contract in the US for performance-based turnkey Interstate highway maintenance. Other states now include Florida and Texas. I have written about it here as has my colleague Len Gilroy here.

Typically, maintenance contracts (with specifications) are for individual contracts for everything from mowing, signs, guardrails, drainage, lighting, snow removal, pavement repair, painting stripes, picking up dead animals etc. Thus, PBMC represents a departure from standard practice in that it contracts for a wide variety of services all in one contract rather than numerous contracts with specification such as mow the grass 4 times this summer, or paint signs 2 times. The PBMC contract will typically provide outcomes desired from fence line to fence line. In a performance based contract, it would say “keep the grass no more that 6 inches high” (and there is no specification that is needs to be mowed if some other method is available); for the signage, PBMC would be based on reflectivity measures, thus not specifying how many times the signs are painted (after all they may not need it). Guardrails: replace when certain problems occur as opposed to “replace guard rails every other year” (Yes that is done whether needed or not) And so on and so on.

The report contains a great amount of detail, but a few significant conclusions are in order:

The use of Performance-Based Maintenance Contracting (PBMC) is accelerating worldwide. By 2005, 35 countries had performance-based maintenance contracts. By early 2006, approximately 15 more were exploring this approach to maintenance.

  • In the United States and Canada, there are already many examples of PBMC
  • PBMC reflects a long-term trend in changing the focus of upper management and maintenance managers to outcomes, especially those that are customer oriented.
  • Evidence suggests that PBMC results in better outcomes at lower cost with less risk and more financial predictability for highway agencies.
  • The evidence on whether PBMC results in improved levels of service is not consistent. (Comment: Difficulties arise on how to measure and compare contract results with in -house staff results)

A couple of telling conclusions:

  • A number of agencies are skeptical about the claims of cost savings, even though studies provide evidence that these cost savings exist. (Comment: This is a problem the “naysayers” raise and is a problem for the advocates to counter attack because the public sector numbers are always understated and never accurately recognize overhead or assets used in the running the “maintenance business”)
  • PBMC, despite the success touted by its advocates, is controversial. There is a risk that a large part of the maintenance organization of a transportation agency will be privatized. As a result, a large number of public employees might have to seek employment with contractors if they wish to continue doing similar work. In-house maintenance staff becomes unsettled with the potential loss of worker protection and the possibility of reduced pay or benefits. (Comment: This is not unusual particularly in unionized states, however typically we have seen better opportunities in the private sector for the employees who end up with higher wages. This not an easy “sell” to the bureaucracy who feels secure in the state employment.)

Every state is facing a budget crunch on their highway program. We know that there is no panacea for highway maintenance costs however the PBMC has distincct advantages and should be included in every state’s tool kit of contracting options.

The reasons are obvious but just to recap:

• Fixed long-term price (no change orders, beats inflation)
• Performance-based results
• Cost Savings
• Reduction/transfer of risks
• Fewer contracts to administer
• Savings in administrative staff and resources
• Program stability

Shirley Ybarra is a former senior transportation policy analyst at Reason Foundation, a nonprofit think tank advancing free minds and free markets.