A Financial Model to Estimate Annual Payments Required under Performance Based Contracts

Abstract

Over the last couple of decades there has been an increased interest by road agencies to adopt performance based contracts (PBC) for road maintenance as a means to increase the efficiency of maintenance operations. PBC is a type of contract in which payments for the management and maintenance of road assets are explicitly linked to the contractor successfully meeting or exceeding certain clearly defined minimum performance indicators. This paper presents the development of a user-friendly tool for estimating the annual payments by the government that will be required by potential contractors to undertake a PBC project. The model is expected to be useful to both the public and the private sectors. For example, a road agency planning to launch a PBC program will need to make an estimate of the annual payments that the agency will have to make to the private contractors. Conversely, private contractors interested in competing for the PBC program will have to make an estimate of the annual payments to include in their bids. The applicability of the tool is demonstrated through a numerical example of a potential road PBC project. The model can also be applied to other types of transport infrastructure, such as a railway or waterway. The model can be used to carry out sensitivity analyses. For example, the user can change the value of an input parameter (e.g., construction cost) and obtain the resulting impact on the project financial internal rate of return, or other key model output.