Officials Unsure of Impact of Highway Warranties

Mon February 26, 2007 - National Edition
Giles Lambertson

A warranty system for construction of highways in the United States is supposed to raise the quality of the finished work, be cost-effective and require less project supervision by state transportation officials. Do the warranties accomplish all that?

State officials aren’t sure. A national research organization given the assignment of sorting out the true value of the warranties hasn’t been able to reach a definitive answer either. This much is certain: Warranties remain a challenge for contractors.

The Federal Highway Administration (FHWA) at one time restricted the use of warranties on projects receiving federal funding because the long-term oversight and review of guaranteed work sounded a lot like maintenance; spending of federal funds on highway maintenance was prohibited.

Because warranties had been used in Europe for some time to apparently good effect, U.S. transportation officials examined the European experience. In 1991, the Intermodal Surface Transportation Efficiency Act (ISTEA) delegated more responsibility to states in federal-aid projects. State transportation officials who had wanted to try warranties in highway construction projects were encouraged to try more innovative contracting procedures, including warranties. And in 1995, warranties became fully acceptable to federal highway officials, except for maintenance contracts.

By 2006, more than two-thirds of state Departments of Transportation (DOTs) had authorized at least one major warranty highway construction project and in some states warranties had become the rule. Michigan remains the volume leader in warranty work.

“Over the last 10 years, we’ve had over 1,000 of them,” said Pat Schafer, pavement managing engineer of the Michigan Department of Transportation (MDOT). “We have the most.”

As in many other states, the introduction of warranties into Michigan’s contract negotiations came at the insistence of the state legislature. The perceived need for more cost-effectiveness in major highway work and more assurance of quality in finished roadways led state lawmakers to turn to warranties.

Michigan’s elected leaders declared that guarantees should be contractually required “where possible.” This open-ended stipulation led to more widespread use of warranties in Michigan than in states where a percentage of new construction was specified.

The Federal Highway Administration defines a warranty as “a type of performance-based contract that guarantees the integrity of a product and the constructor’s responsibility for the repair or replacement of defects.” While most contracts contain some liability for contractors after a project is completed, fully warranted projects extend such liability for years.

For example, asphalt and concrete pavement laid down in Ohio carries a contractor’s warranty for a full seven years, according to Chris Engle of the Ohio Contractors Association. Lesser projects such as bridge decking and chip-sealing are guaranteed by contractors for two years.

“I wouldn’t say a contract warranty is unusual here,” Engle said. “It is relatively common for things such as new pavement.”

Types of Warranties

Two types of warranties generally are used by state Departments of Transportation: materials and workmanship. Those warranties are specifically tied to elements of construction rather than to overall performance of a new roadway. This narrows the responsibility for work done and leaves contractors less liable for post-construction disappointments that result from factors beyond their control.

Ohio is one of the states that limit warranties to materials and workmanship.

“You have to link a defect to a materials issue or a workmanship issue,” said Bill Lindenbaum, deputy director of construction management in the Ohio DOT. “It is not just a matter of someone saying, ’I have a problem with this; go fix it.’”

Warranties came into play in Ohio highway work in 1999 after the premature failure of a stretch of Interstate 270 on the outskirts of Columbus. Engle said the crumbling of the relatively new roadway couldn’t have happened at a more convenient time and place for backers of warranties: It coincided with the start of the legislative session a few miles away in the capitol.

“The failure occurred just as the Department of Transportation was going to the legislature with a new budget,” Engle said, “In fact, the particular pavement that failed was an experimental pavement.”

Concerned legislators immediately turned to warranties to reduce future failures.

Initially, the DOT was required to have at least 20 percent of new highway work built under warranty. That later was reduced to no more than 20 percent. Lindenbaum said that the 20 percent minimum had DOT officials looking at projects “that warranties really would not apply to properly.” He cited the example of highway lane striping that flaked away, though it was expertly applied, because it was affixed to an unstable surface.

“We have pulled back on the number and types of things that we warrant,” Lindenbaum said. From 10 percent to 20 percent of projects now are contracted under warranty — mostly new pavement, but also bridge decking, bridge painting and some preventive maintenance projects such as chip sealing.

Bridge decks in Ohio have produced most of the defects that have triggered subsequent warranty work by contractors. High performance concrete is used in such pours and cracking is more likely. Where cracks indeed have developed, contractors have returned and repaired the defective decking.

Upper Midwest states — Michigan, Ohio and Wisconsin — are where highway warranties are most common; they are less common in the Southeast, though Florida is an exception to that.

Some states use warranties sparingly or not at all. For example, Texas has many, many miles of pavement cutting across its expanse, but construction warranties there are relatively uncommon. Guarantees in Texas DOT contracts mostly are for pavement markings, replacement of pavement markers and sheeting on highway signs.

“There is a possibility we could see an increase in warranties, but that’s not for sure,” said Mark Cross, an information specialist at the Texas Department of Transportation.

Value of Warranties

States went to contractual guarantees in the hope that taxpayers would get the most for their tax dollars. The jury is still out on whether that’s what they are getting.

“We think it is helping us to have no catastrophic failures,” said Schafer of Michigan DOT, “but we’re not sure yet.”

Nor is anyone else certain what the warranties are producing. To find out, the Transportation Research Board is funding a national survey/research project through its National Cooperative Highway Research Program. The board exists to advise federal officials and others on technical and scientific questions and the program researches transportation issues to offer practical solutions.

A consulting firm is conducting the research. The Philadelphia office of Trauner Consulting Services is working two contracts on construction warranties that were “smushed together,” said Crawford Jencks, Highway Research Program director. The first one began in 2005; the combined project won’t be completed till 2008. An interim report has been sent to a review panel and will be available in April, at which point a second phase of the study will kick in.

Jencks said the initial report acknowledges “the effectiveness of warranties is still a matter of debate among state agencies.” The consultant contacted all 50 states and responses were received from 38 of them, a number roughly equivalent to states that have warranty experience.

Sid Scott is Trauner’s vice president and point man on the construction warranties project. He said the initial reports indicate that cost effectiveness is not yet a certain benefit of warranties.

“We determined that it is really difficult to quantify the savings on warranty projects,” he said, “though there have been some reports that they feel it is cost-effective in some cases and in some respects. There have been kind of mixed results on the cost question.”

One of the efficiencies that was expected to come with highway warranties was a reduction in DOT staffing of projects. It was assumed that contractors would do more policing of projects themselves, but experience has shown otherwise, according to some state officials.

“Reduced staffing was one of the things that was touted early on,” Ohio DOT’s Lindenbaum said, “but we still have to have the right support staff to monitor a project.”

In fact, he added, warranty projects sometimes require more staff support. He cited the example of a contractor working on a subgrade contour.

“The contractor might say the area is soft, to his mind, though it passed our requirement,” Lindenbaum said. “The contractor fears the ’softness’ might cause a failure at a future time, so we document the conditions at the site.

“We document conditions in situations like that so that we can go back if there is a failure to see if workmanship failure or materials failure is involved. This is a different level of inspection. Arguably, this is a higher level of record-keeping.”

Schafer, the Michigan DOT pavement managing engineer, said flatly, “On the bigger projects, we have not been able to reduce inspections.”

A Question of Quality

The other major factor driving warranties, besides cost, is quality. The assumption was that if contractors were required to guarantee their work for a longer period they would deliver a more durable product. But this assumption, too, has not yet proven true.

Lindenbaum certainly is not convinced that better roadways are being constructed because of warranties, though he concedes that might be true.

“There is not a real analysis that I can point to,” he said, “but my observation is that there is a little more care being taken by contractors. For example, for asphalt pavement, they will put a little higher quality binder in the asphalt.

“But the product we are getting is very similar to the product we would get in traditional contracting. In my point of view, if a contractor is going to do quality work, he is going to do quality work whether he is under warranty or not.”

The author of an earlier report from the National Cooperative Highway Research Program has the same view. Donn Hancher, a professor of construction engineering and management at the University of Kentucky, examined highway warranties in 1994, shortly before they began a period of exponential growth as a contract staple at some DOT agencies.

“I don’t think there really is an advantage in warranties,” Hancher said. “I think that if contractors do really good work anyway, they aren’t going to do poor quality work just because there is a warranty. You simply aren’t going to get work unless you do good work.”

Yet the bond requirement of warranty projects does influence the bidding process on major projects and sometimes determines who bids. Whether a reduced field of bidders drives project costs higher is another unsettled subject of speculation among DOT executives and researchers. What is undisputed is that warranties can be a big hurdle for a small contractor to overcome if he wishes to bid on a job.

“I think that the official position from the Associated General Contractors [AGC] is that warranties are not conducive to competition because of a higher percentage of smaller contractors in this country compared to other countries,” Trauner Vice President Sid Scott said, “and that taking on the additional warranty burden of bonding reduces competition. But the contractors we spoke to in our research, those that had done it for a while, said it worked for them.

“They have to make an investment to raise the quality of the work, but they feel that they are getting better quality, too. It was a mixed reaction from contractors overall, but the ones who have done it for a while say that they feel that it is a benefit to them.”

Brian Deery, the senior director of AGC’s highway and transportation division put it this way: “You go with the market. For a smaller contractor, warranties can be a problem. It is difficult for them to come up with the warranty bond, and then it becomes a liability on their books until the warranty goes away. Contractors are limited by their contracting capacity and until a warranty goes away, it limits the amount of contracts you can perform.

“Having said all that, contractors try to work with a DOT. They try to manage the risk the best they can. That’s what they have to do.”

Deery acknowledged that some state transportation departments are working with contractors to “mitigate these concerns.” Their efforts include, for example, keying warranties to actual traffic conditions when traffic projections are exceeded and establishing dispute review panels.

“It is a balancing act,” he said.

Engle, of the Ohio Contractors Association, succinctly described the feeling among the members of the association: “By and large, I think the contracting community is not really thrilled with warranties.”

But that community will continue to work with transportation officials to make warranties work for everyone. They have little choice. Barring an unexpected call for their abolition in the final Highway Research Program report, warranties will continue to be a factor in the bidding process, in Ohio and elsewhere.

“Our legislative requirement has lessened a little bit,” said Lindenbaum of Ohio DOT, “so we are not warranting as much work as at the beginning. But warranting is here to stay.” CEG

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