WORKSHOP – CONTINUING PROFESSIONAL DEVELOPMENT

Introduction to Performance Based Contract

for Road Projects Biemo W.Soemardi
Agenda

• Contract – Context and Definition

• Types of Contract (construction – public infrastructure)
• Performance Based Contract
• Preparing for PBC in Road Projects

PBC - Workshop CPD HPJI 5 Septermber 2016 2

DEFINITION AND CONCEPT OF CONTRACT
3
 http://www.merriam-webster.com/
CONTRACT
Simple definition:
• a legal agreement between people, companies, etc.
• a document on which the words of a contract are written
• an agreement to kill a person for money

Full definition:
• a binding agreement between two or more persons
or parties; especially : one legally enforceable
• a business arrangement for the supply of goods or
services at a fixed price
PBC - Workshop CPD HPJI 5 Septermber 2016 4
Elements of Contract
• Offer
• Acceptance
• Considerations
 Object
• Quality
• quantity
 Terms and Conditions

PBC - Workshop CPD HPJI 5 Septermber 2016 5

 Nature of Object of Agreements defines
method of procurement and type of contract

 Clearly/Specifically  Invitation to Bid

defined products or (lowest cost)
services

 Negotiated products  Invitation to

or services Negotiate
(best value)
PBC - Workshop CPD HPJI 5 Septermber 2016 6
TYPES OF CONTRACT
5 Septermber
PBC - Workshop CPD HPJI 7
2016
Contractual Arrangement
PROJECT
FINACIAL OWNER
AGENCIES
DESIGN
ENGINEERING USER
CONSULTANT
INSURANCE
SURETY
AGENCIES

CONTRACTOR

SUB- SPECIALTY-
SUPPLIERS
CONTRACTOR CONTRACTOR

PBC - Workshop CPD HPJI 5 Septermber 2016 8

 Contractual Arrangement
• Complex and involves different parties with different tasks and interest
• Construction Contracts depend on the type and size of project

• Contract types:
 Based on Organization of Agreement
(conventional, design-build, CM, BOT)
 Based on Method of Cost Calculation and Reimbursement of fee
(lump sum, unit price, cost plus fee)
 Based on Method of Reimbursement/Payment
(monthly certificate, progress payment)

PBC - Workshop CPD HPJI 5 Septermber 2016 9

Risk Share on Contract Forms

OWNER

CONTRACTOR

Lump Sum
Contract (w/ Guarantee Guarantee
Lump Sum Lump Sum many Unit Price Maximum Maximum Cost-Plus- Cost-Plus-
Contract Contract w/ Changes) Cost w/ Cost w/ Fixed Fee Percent Fee
w/o Some OR Sharing Sharing
Changes Changes Cost-Plus Clause Clause
w/ (50/50) (75/25)
Guarantee
Maximum
Cost

PBC - Workshop CPD HPJI 5 Septermber 2016 10

Risk Share on Contract Forms
LUMP SUM
MIN
MIN

LUMP SUM w/ VARIATIONS

OWNER’S FLEXIBILITY
OWNER’S CONTROL

COST + FIXED FEE

COST + % FEE

MAX
MAX

MIN OWNER’S RISKS MAX

FIRM OWNER’S PROJECT DEFINITION CHANGEABLE
MAX CONTRACTOR’S INCENTIVE TO PERFORM MIN 5 Septermber 2016 11
Risk Share on Contract Forms
TYPE OF
OWNERS’ VIEW CONTRACTORS’ VIEW
CONTRACT
Risk only for change orders and completion time Total risks for work in contract document

Cost variance only on change orders and claims Cost variance, price, quantity, efficiency
LUMP SUM Schedule variance Schedule variance

Earned value on schedule of values for determining Earned value on schedule of values for determining
payments payments

Risk for quantities outside paylines and for price

Risk for quantities of pay items
and efficiency variance

UNIT PRICE Variance on quantities outside engineers estimates

Cost variance, price, quantity, efficiency
and for change orders on unit price

Schedule variance Schedule variance

Total risk unless guaranteed maximum by
No risk unless guaranteed maximum price
COST contractor
REIMBURSIBLE
Cost variance, price, quantity, efficiency Reports cost variance
(COST PLUS)
Schedule variance Schedule variance
5 Septermber 2016 12
Traditional / Conventional Contract Method
• (assumed) Output oriented based on set(s) of input

Method specification Output/end-result specification

Both commonly limited to the quality at the end of delivery of output (short-term)

• Describes activities to be performed

• (typically) no incentive for performances
PBC - Workshop CPD HPJI 5 Septermber 2016 13
Limitation of Traditional / Conventional Contract Method
• The quality (performance) of object beyond contract period
 Incorrect/inaccurate design assumptions
 Changing the conditions of operation
 Changing behavior of utilization or operation
• Costly and lengthy process to mitigate
 Planning and budgeting
 Procurement
 Compatibility
PBC - Workshop CPD HPJI 5 Septermber 2016 14
Performance Based Contract
for Road Projects
5 Septermber
PBC - Workshop CPD HPJI 15
2016
Development and Application of PBC
• Early in 1980s is USA: public sector services
(health, social and education)
• Performance Based Logistics

In Indonesia:
• Higher education – Performance Based Contract – World Bank
• Indonesia: Managing Higher Education for Relevance and Efficiency
• I-MHERE (2005-2012)
Development of PBC in Road Projects
• 1988 British Columbia, Canada
• 1990 Argentina (Toll Concessions)
G. Zietlow
• 1994-98 Uruguay, Chile, Argentina (PBC),
Colombia, Brazil, Peru
• 1995 Australia (Sydney), Estonia, Denmark
• 1996 USA (Virginia)
• 1998 New Zealand, Finland
• 2000/1 Chad, Zambia, England, India, Spain
• 2012 Vietnam
• 2013 Indonesia
PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI
Characteristics of Performance Based Contract

• Objective of PBC  assurance of long-term performance

• Characteristics of PBC:
 Outcome oriented – long-term
 Clearly defined objective
 Clearly defined timeframe
 NOT to specify activities to be performed
 Performance monitoring
 Promote innovation (efficiency – effectiveness) – performance
incentive
PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 18
Key issues in Performance Based Contract
• What is performance?
 Must be measurable and quantifiable
 It is NOT merely an (exact) output

• How can we assure (the desired) performance?

 Assurance is given by the provider
 MUST be accompanied by FAIR compensation

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 19

Key issues in Performance Based Contract
• Defining Performance
 Object of performance:
• lowest cost
• traffic (speed, travel time?); pavement (IRI, potholes?)
 Level of performance/service
• minimum, average, incremental, decrement?

• Assuring Performance
 Provider proposed method and mechanism
 Level of performance/service
• minimum, average, incremental, decrement?
 Mechanism for monitoring
PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 20
Considerations in Applying PBC in Road Projects
• Defining performance
 Who’s responsibility, at what level, are there standards?

• Contractual Arrangement
 Structure and complexity of owner (agency)
 Planning and budgeting
 Control over condition of on-service period (trans-agencies)
 System and mechanism for measuring performance, acceptance
 System and mechanism for compensation

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 21

Preparing for PBC in Road Projects
Preparation for PBC in Road Projects
• Setting up program goals
 Cost saving,
 Maintained and better level of quality or services
 Flexibility

• Institutionalize Risk Management

 Identify, quantify and analyze risks at any level
 Develop risk management strategy – appropriate risk sharing
 Formalize in contract terms

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 23

Preparation for PBC in Road Projects
• Institutional Shift
 Changing in planning and budgeting policy and mechanism to allow
for multiyear arrangement
 Engineer’s Cost Estimate vs. Cost to Complete
 Changing in payment structure and mechanism
 Changing in procurement mechanism
 Establish and maintain long-term partnership

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 24

Contractual Arrangement
ROAD
USER
ROAD
AGENCY

TRANSPORTATION
AUTHORITY
INSURANCE AGENCY
SURETY
AGENCIES CONTRACTOR

DESIGN EQUIPEMNT SUPPLIES OF

ENGINEERING TECHNOLOGY MATERIAL

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 25

Capacity Building for PBC in Road
• Institution Capacity Building of Road Agency
• Changing orientation from project to program (long-term
overall benefit) – planning, budgeting and evaluation
• (long-term) Cooperation as opposed to short-term transaction
• Selection of partner – procurement
• Risk management and contract management
• Monitoring, evaluation and control policy and mechanism

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 26

Example for Performance Acceptance

Accepted and Incentive

Target performance

Accepted and Proportional Compensation

Min Level of Acceptance

Accepted and Incentive

Target performance

Accepted and Proportional Compensation

Min Level of Acceptance

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 27

Other important issue in preparation for PBC in Road
Projects – Readiness of Contractor

• Selection of provider
 Selection shall not be based on lowest cost ONLY – beauty
contest
 Past performance
 Capacity (capital and operational)
 Method/technology, program and management
 ……….

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 28

Key Lesson Learned from Performance-Based Maintenance Contract

1. Sufficient fiscal resources and realistic performance

expectation
2. The need for training and capacity building for private sector
to implement PBC
3. Clear baseline to establish and monitor performance
indicator and standard
4. The use of simple performance indicators and user
monitoring to improve contract performance
5. Challenge within vehicle overloading
PPIAF – World Bank
PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 29
 • PBC has been said to be the most effective and
efficient form of contract mechanism for road works
• Has been world widely implemented
Looking back • Yet, no comprehensive and compelling evidence of
its success (cost effective…? life cycle cost)
and
• The biggest challenge will be readiness in changing
facing ahead in attitude toward road works, from short-term
quick-fix toward long-term gradual sustainable
improvement
• PBC opens opportunity for government in
implementing PPP (Public-Private-Partnership)
• How about other agencies?

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 30

 Terima kasih

PBC - Workshop DIREKTORAT JENDERAL BINA KONSTRUKSI 5 Septermber 2016 31