Warranties have been used for years in a wide variety of consumer products to protect consumers from inferior workmanship. Historically, however, state DOTs have not used warranties for road construction but have internalized the risk of poor workmanship. Warranty clauses in PPP agreements guarantee that a roadway will meet a certain level of quality or else repairs will be made at the private contractor's expense. The intent is to create incentives for the contractor to deliver a high quality product to reduce future maintenance and repair costs.
Two types of warranties are used in highway construction: (1) materials and workmanship warranties and (2) performance warranties. Under the former, the contractor is responsible only for defects caused by poor materials and workmanship. Under the latter, the contractor is responsible for the facility meeting certain agreed upon performance thresholds over an agreed upon period of time irrespective of whether materials and workmanship meet initial requirements (U.S.DOT 2004).
Warranties may have a higher initial cost because contractors may increase their initial bids to include contingency funds for correcting problems during the warranty period. However, warranties may result in lower life-cycle costs than those of traditionally contracted projects because there is an improvement in the quality of the initial project (U.S.DOT 2004). The Wisconsin DOT explored the relationship between quality and whether or not the project had a warranty, and found that warranted pavements performed significantly better. The Wisconsin DOT study indicates the warranted pavements are performing better than similar non-warranted pavements based on the measured International Rough Index and Performance Distress Index (Carpenter et al. 2003).
However, despite the performance advantages of warranties, some state transportation agencies cite the additional resources and expertise required to specifying them as a disadvantage. As mentioned earlier, the warranties requirement may preclude smaller contractors from competing against larger firms that have the financial capacity to acquire large bonds that support the warranty requirement. Also, some contractors are reluctant to enter into warranty agreements owing to the increased liability and risk (Carpenter et al. 2003).
Initial construction warranties (along with maintenance standard) were considered as an important concern by all respondents in our state DOT survey, with almost three-quarters of the U.S. respondents considering it as "very important."
Examples of warranties in practice are Virginia's State Route 288 and New Mexico's US Highway 550 (former SR-44). For Virginia's State Route 288, a design-build-warranty approach, was chosen for the construction of 10.5 miles of new highway, expansion of 7 miles of existing highway, construction of six new interchanges, modification of two interchanges, and construction of 23 bridges along the roadway to finish the road quickly and with minimal delays. The project is thought to have been completed 3.5 years earlier than if a traditional DBB approach was used (U.S.DOT 2004). The state saved $47 million in construction costs, and the project was completed seven months ahead of schedule.
New Mexico's construction of US Highway 550 encompassed an innovative warranty concept. In 1998, the state entered an agreement with a private partner to design, manage construction, and provide innovative warranties for the 118-mile highway segment. The warranties expire based on time (20 years for pavement, 10 for structures), money ($110 million for pavement, $4 million for structures), or equivalent single axle loads (ESALs) ($4 million for pavement, $2 million for structures), whichever comes first. An ESAL is defined by the FHWA as "the damage per pass to a pavement caused by a specific axle load relative to the damage per pass of a standard 18,000 pound axle load moving on the same pavement." The warranties cost $60 million for pavement and $2 million for structures, essentially leaving the private partner with a maximum monetary risk of $50 million for pavement and $2 million for structures (from the total monetary value of $114 million of the warranty). New Mexico DOT has been independently verifying ESAL calculations provided by the private contractor. Accurate calculation of current ESALs and projection of future ESALs is important because over-calculation could result in early termination of the warranties, and much of the expensive maintenance work is expected to take place towards the end of the contract. Findings of a recent report indicate that whereas expected ESALs in the early part of the contract were overestimated, the growth rate of ESALs was underestimated. However, recent data suggest growth in ESALs appears to slowing down (McClure et al. 2008). Yet, if the higher growth experienced over the first few years is sustained, the date of warranty expiration might be accelerated, requiring the New Mexico DOT to incur pavement maintenance expenditures toward the later years of the infrastructure life cycle.