Valuing the Warranty Ceiling Clau on
New Mexico Highway 44
Using a Binomial Lattice Model Abstract:
In 1998 the New Mexico State Highway and Transportation Department (NMSHTD) agreed to pay $60 million for a 20-year pavement warranty on their Route 44 project (NM 44, now US 550). The warranty includes a ceiling clau that caps total expenditures at $110 million. As the first long-term highway warranty in the United States, the transaction t a controversial precedent that parties interested in innovative highway contracting, including other state department of transportations (DOTs), the USDOT, sureties, and contractors, view as a test ca for evaluating pricing and cost-effectiveness. An interim audit report published by the State of' New Mexico [Abbey (2004). the Legislative Finance Committee, State Highway and Transportation Department. Santa Fe. N.M.] provides invaluable fiscal projections and challenges the cost effectiveness of the $60 million expenditure. This paper prents an independent analysis of the effectiveness of the warranty claus. Bad upon NMSHTD data, the analysis contends that $60 million was a fair cost of the 20-year pavement warranty at the time of acceptance if the expenditure ceiling is not considered. Furthermore. this paper argues th
at the ceiling on expenditure can be valuable. Using the real options approach, the paper evaluates the warranty ceiling clau on NM 44 and some policy suggestions are discusd.与你并肩同行
Introduction：
State Departments of Transportation (DOT) turned increasingly proactive when awarding large highway pavement contracts as a result of the United States Federal Highway Administration's (FHwA) Special Experimental Projects (SEPs). SEP No. 14, implemented in 1990, opened the door for innovative contracting methods including lane rental, cost-plus-time bidding, design.build techniques, and warranty claus. The warranty claus hold contractors liable for reparationfor performance failures within a warranty period that typically extends from 5 to 7 years.
Though New Mexico was not among the original eight states that initiated the u of warranties under SEP No. 14. they have since evaluated the option of warranty contracting and success-fully applied it to the New Mexico State Route 44 Project (now U.S. 550),
confuwhich travers 118 mi (190 km) from 1-25 at San Ysidro northwest to Bloomfield, near the Four Corners area. When considering the prospect of infiltrating the northwest corner of New Mexico, New Mexico State Highway and Transportation Department (NMSHTD) [renamed New Mexico Depa
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Transportation (NMDOT) in 2003], determined that the future maintenance and rehabilitation costs of the upgraded 118 mi of roadway would total about $16,000/lane-mi/year over a rvice life of 20 years (May et al. 2003) totaling just over $15I million. Additionally, they determined that the roadbed and surface upgrades would take almost 27 years to complete using normal contracting methods. In an effort to keep the highway in good condition for the long term, NMSHTD purchad a 20-year warranty agreement from Mesa PDC who in turn guaranteed the pavement performance during the warranty period. Thc' NM 44 warranty broke new ground in both length and cost. It was the first long-term highway warranty in the United States and.,at $62 million, the most expensive. Since conception, its economics and applicability to other projects has been a subject of debate. Moreover, the two ceiling claus in the warranty agreement that limit cumulative traffic volume and maintenance expenditures have been neither examined nor evaluated. In this paper we address the cost effectiveness of the warranty claus in the NM 44 project.
1 Warranty Provisions for NM 44
Two primary participants, NMSHTD and Mesa Project Development Contractor (PDC),
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a division of Wichita, Kan.-bad Koch Performance Roads, Inc., cooperated on the NM
44 project. The NMSHTD laid out design criteria, performance requirements, and oversight procedures, and estimated a life-cycle cost to establish the overall prent value of the expected maintenance during the 20-year warranty period. Through team building and open communications, NMSHTD was able to monitor performance without responsibility for performance, while Mesa PDC was able to gain insight into the development and award process along with the limitations and constraints that had to be addresd.
To carry a long-term warranty agreement, a professional rvices contract was introduced. Basic items included delineation of responsibilities and appropriate protocol for repairs, costing, and reimburment. The final price on the warranty was comprid of $60 million for a 2pavement warranty and, $2 million for a 10-year structures warranty to cover bridges, drainage, erosion, etc. for a total of $62 million in warranty liability. Mesa
PDC also agreed to a 3.5% inflationary risk on future maintenance costs. Bad on the numbers, the warranty pricing was $6,400/lane mi/year, a 60% reduction as compared to the initial evaluation ( Mav et al. 2003). Additionally, the warranty duration was limited by three ceiling claus: (1) 20 years
of rvice life: (2) 4,000,000 equivalent single axle loads (ESALs); and (3) $114 million in total expenditures, of which $1 l0 million is the ceiling for the pavement warranty and $4 million is the ceiling for the structure warranty. Thus, in return for $62 million. Mesa PDC agreed to provide up to $114 million in repairs over a period of 20 years or 4 million ESALs. To ensure the fiscal liability was met. the warranty was also backed by a performance bond.
The parties established what constitutes warranted pavement defects bad on objective criteria such as smoothness, rutting, transver crack spacing, crack width, potholes, depressions.bleeding, raveling,and delaminations. Becau the warranty provider shoulders the risks associated with performance, they have a strong incentive to assure quality in the design, composition, and construction of the pavement. The parties also developed plans to monitor performance and perform both preventative and routine maintenance to ensure the highway’s health.
2 Discounted Cash Flow Analysis
In a recent interim report of the NM 44 warranty audit, the state of New Mexico challenged the cost effectiveness of the $62 million warranty (Abbey 2004). This interim report and its predecessor (Abbey 1999) provide invaluable cost projections on the NM 44 project and the associated warranty.
Using the data we conducted our own cost analysis bad on the information available to the NMSHTD when they made the warranty decision in 1998.So for this analysis,all warrafity benefits and costs incurred during the construction and warranty period were discounted back to the decision time in 1998, and all costs ,and payments were assumed to fall at the end of the year. Additionally, we considered only the pavement warranty which is valued at $60 million and explains 96.8% of the total warranty cost. Ignoring the structures warranty, which is valued at only $2 million, reduces ambiguity without any significant impact on the results. Farthermore. Abbey (2004) estimates that the structures warranty will expire before the end of the 10-year warranty period, while the pavement warranty probably will remain in effect for the entire 20-year term.
3 Discussion and Policy Suggestions
Due to the ceiling clau, the price of the warranty provisions in the NM 44 project
does not reflect the real cost to the NMSHTD.The ceiling clau, valued at 4.8 million/year 1998 dollar as calculated, reprents additional revenue to Mesa besides the $62 million warranty payment from NMSHTD. By declaring the ceiling clau, Mesa PDC in fact eliminates unfavorable risk while keeping profitable uncertainty. What Mesa gains is what NMSHTD los since this is a zer
o-sum game. The actual cost for the warranty provision in the NM 44 project goes up to 57.3 million/year 1998 dollar. The hurdle rate of a viable warranty provision falls to 4% (Fig. 6). Considering that the NMSHTD had to borrow at a higher interest rate to finance the NM 44 project .the warranty provision is not justified becau of the high cost of the ceiling clau.
It is suggested that the state highway agencies carefully evaluate the ceiling claus when requiring warranty rvices in lling infrastructure projects. A twofold analysis needs to be conducted so a better decision can be made. First, one must realize that the ceiling clau may be costly. The model developed in this paper is a handy approach to evaluate the ceiling clau value. Second state agencies should better determine a favorable ceiling when including ceiling claus in the warranty. A nsitivity analysis indicates that the value of the ceiling clau is elastic to the determined ceiling. A 10% increa of the ceiling in the NM 44 warranty provisions would reduce the option price of the ceiling clau by 30%. Therefore, careful lection for a ceiling can significantly reduce the impact of the ceiling clau.
The ceiling clau, in esnce, is a call option that provides flexibility to switch a decision after more information is available through locking in risks while leaving the favorable uncertainties open. The real option concept provides powerful tools not only for contractors, but also state agencies ceiling cl
aus or other trigger points in uncertain cash flows. One potential application of the real option concept in warranty contracting is to delay the warranty decision until the end of construction when more performance information is available (Cui et al. 2004). Then future maintenance savings could be estimated more accurately, and a better decision can be made on whether to purcha a warranty.
Acknowledgments：
The writers gratefully acknowledge the support for this rearch provided by the University Transportation Center for Alabama(UTCA) and the Alabama Contractors' Fees Fund.
会计岗位要求
Reforance：人脸搜索
1)Warranty Provisions for NM 44 Qingbin Cui1; Philip Johnson2; Aaron Quick3; and Makarand Hastak
2)Journal of Construction Engineering and Management, January 2008, V olume 134.Number 1, 10--17心态决定
对使用二项式格子模型的新墨西哥
44公路保修条款的评析
摘要：
在1998年，新墨西哥州公路和运输部门（NMSHTD ）为44公路项目的20年的路面保修同意支付6000万美元（新墨西哥州44公路，现为美国550干线）。该保修包括了一个支出总额上限为1.1亿美元的条款。作为在美国第一个公路的长期保修，交易开创了一个这样有争议的先例。其双方，包括其他国家的交通运输部（点），都乐于公路承包的创新。且其USDOT，担保人和承包商也认为该交易可以作为一个评估定价和成本效益的测试案例。新墨西哥洲圣塔菲议员向立法会财务委员会，国家公路和运输部[Abbey（2004年）]公布了临时审计报告。该报告提供了其成本效益为6000万美元的宝贵的财政预测。本文介绍了一个有效性保修条款的独立的分析。根据NMSHTD数据，分析认为，如果接受开支最高限额不考虑的情况下，20年保证路面，6000万美元是一个公平的费用。此外，本文认为，保修费用的支出是值得的。文章用实物期权的方法对新墨西哥州44公路评价最高的保修条款和一些政策建议进行了讨论。
导言:
由于美国联邦高速公路管理局的特别实验项目（SEPs ）的实施，国家运输部门（点）变成越来越积极的授标大量公路路面的合同。在1990年9月14号开始实施创新承包方法，包括车道租金，成本招标，
时间招标，技术设计和保修条款的建立。保修条款表明承包商负责赔偿的性能故障的保修期，通常是5至7年。
