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Reason Foundation

Virginia Saving Money With Fixed-Price Interstate Maintenance Deal

Florida and international community have demonstrated there are significant savings to be had

Shirley Ybarra
May 8, 2008

Over 10 years ago, Virginia signed the first performance-based turnkey asset management maintenance contract in the country. Virginia was a leader as it secured a fixed-price, long-term contract for Interstate highway maintenance.

The turnkey concept was to contract with one contractor for management and contracting for all maintenance-fence line to fence line. Because the concept was so new, the first contract was for 250 miles of various segments of Virginia's Interstate highway and it covered all maintenance, routine repairs, preventive treatments and rehabilitative and restorative maintenance, labor materials, services and equipment necessary to meet the performance targets specified in the agreement.

Judging cost savings based on government accounting of its own costs is always difficult. Nevertheless, numerous studies tried to quantify the savings attributed to the new approach and results tended to be in the range of 15 to 20 percent savings.

Beginning in 2000, Florida's Department of Transportation (FDOT) took Virginia's lead and embraced the asset management maintenance contracts, initiating an aggressive program of securing long term performance based contracts for routine maintenance.

They viewed the benefits of the program accurately:

By August of 2005, Florida had executed 17 contracts totaling $517 million, or about $69 million annually. FDOT estimated the savings to be $105 million or 17 percent for the life of the contracts. In Fiscal Year 2003-04, FDOT even reduced its request for highway maintenance funding by $9.1 million.

Their plan envisioned 28 contracts by 2008 totaling $929 million ($121 annually) and they are on target. Just the simple fact of administering regular (numerous) contracts versus fewer long-term contracts saves taxpayers' money. Look at the statistics provided by Florida: Number of contracts: 980 vs. 28; Number of invoices processed annually: 11.760 vs. 336; number of advertisements: 950 vs. 4.

Internationally the concept has also been embraced in places like Australia and New Zealand. In the early 1990s, the Australian government tried two pilot projects. The projects produced a 16 percent cost savings, a 22 percent increase in productivity in the first year, and a 13 percent asset quality improvement.

Australia then let a 10-year performance-based contract for all activities for 450km (280 miles) of urban roads. This contract has improved the road condition by an estimated 15 percent with savings estimated at 35 percent.

New Zealand also uses 10-year maintenance contracts called "performance specified maintenance contracts." The contractor takes total responsibility for delivering services at agreed upon service levels. The Agency in New Zealand is an enthusiastic supporter of long-term outcome/performance-based contracts citing assured expenditures for maintenance and increased service levels.

In 2006, Virginia Gov. Tim Kaine signed legislation requiring all Interstate maintenance to be outsourced by July 1, 2009. The Commonwealth Transportation Board approved four contracts in February 2007 worth $157.3 million, thus outsourcing 58 percent of Virginia's Interstate maintenance. All of the contracts are five-year performance-based maintenance contracts with options to renew for up to four years. These are fixed price contracts so that certain Interstate maintenance costs are now locked in for the state.

In Virginia, by law, maintenance and operation of existing highways is the first funding priority. For many years, the excess in the maintenance account was transferred to the construction fund. When the cost of maintenance and operations exceeds the dedicated revenues, there is a "maintenance deficit." In 2002, the maintenance account experienced that deficit for the first time and in FY 2008 will be $260 million. The deficit is expected to rise to $388 million in FY 2009 and to $500 million in FY 2013.

Virginia's maintenance budget in FY 2008 is just over $1.2 billion. The long-term fixed price Interstate maintenance contracts underway are but a pittance of this budget and hardly a "brave step."

If Virginia wants to solve the "maintenance deficit" perhaps the state should be thinking more boldly: hold down the bite of inflation and lock in the costs for other roads such as the primary system. Given that the maintenance deficit is growing, Virginia could get more bang for its maintenance bucks, improve road quality and safety and deliver move value for the maintenance spending if it expands the long-term performance based approach beyond the 1,118 miles of Interstate. Virginia's state-maintained highway system consists of 58,000 miles--8,100 miles of primary and 48,300 of secondary roads-just given the number of miles, the savings could be very significant.


Shirley Ybarra is Senior Transportation Policy Analyst


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