[Federal Register Volume 61, Number 77 (Friday, April 19, 1996)]
[Rules and Regulations]
[Pages 17243-17245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9558]



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DEPARTMENT OF TRANSPORTATION

Federal Highway Administration

23 CFR Part 635

[FHWA Docket 95-21]
RIN 2125-AD61


General Material Requirements; Warranty Clauses

AGENCY: Federal Highway Administration (FHWA), DOT.

ACTION: Final rule.

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SUMMARY: The FHWA is adopting, as final, a current interim final rule 
that revises the use of guaranty and warranty clauses on Federal-aid 
highway construction contracts. This final rule permits greater use of 
warranties in Federal-aid highway construction contracts within 
prescribed limits.

EFFECTIVE DATE: August 25, 1995.

FOR FURTHER INFORMATION CONTACT: Mr. James Daves, Office of 
Engineering, (202) 366-0355 or Mr. Wilbert Baccus, Office of the Chief 
Counsel, (202) 366-0780, Federal Highway Administration, 400 Seventh 
Street, SW., Washington, DC 20590.

SUPPLEMENTARY INFORMATION: On August 25, 1995, the FHWA published in 
the Federal Register (60 FR 44271) an interim final rule along with a 
request for comments, revising its regulation regarding warranty 
clauses on Federal-aid highway construction contracts. That action 
permitted the greater use of warranties in Federal-aid highway 
construction contracts within prescribed limits.

Discussion of Comments

    The public comment period for the interim final rule closed on 
October 24, 1995. The FHWA received 20 written responses from 19 
organizations including 11 associations, six State Departments of 
Transportation (DOTs), and two private companies. The responses 
concerning this interim final rule are available for review at the 
Federal Highway Administration, Public Docket Room 4232, Office of the 
Chief Counsel, 400 Seventh Street, SW., Washington, DC 20590.
    Of the 20 responses received, 13 comments did not support the 
interim final rule and seven did support the interim final rule. The 
significant comments are summarized in the following discussion.

Requiring Warranties

    An association responding to the interim final rule stated that by 
revising its regulation the FHWA was requiring

[[Page 17244]]

the use of warranty clauses on Federal-aid highway construction 
contracts. This statement, however, is inaccurate. The FHWA removed its 
regulation prohibiting the use of warranty clauses, but left it to the 
State DOTs to decide when or if they will use warranty clauses. If 
warranty clauses are used on Federal-aid highway construction 
contracts, it will be because the State DOT chooses to use them, with 
FHWA concurrence.

Bonding Capacity

    Four associations, two private companies and one DOT commented on 
the effect of warranty provisions on bonding capacity, particularly on 
smaller contractors. They noted that requiring warranties of several 
years typically requires the contractor to provide a performance bond 
for that period of time. The size of the performance bond could be 
quite large and, particularly in the case of smaller contractors, the 
effect on their overall bonding capacity could affect their ability to 
obtain work. The seven commenters argue that this would effectively 
stifle competition for contracts and ultimately increase the cost to 
the taxpayers. One commenter felt that the effect on smaller 
contractors violates the Regulatory Flexibility Act. Discussion of that 
comment is included in the following paragraphs, and later under the 
heading ``Regulatory Flexibility Act.''
    The FHWA believes that removing the restriction on warranty clauses 
will not stifle competition or negatively affect smaller contractors' 
overall bonding capacity and ability to obtain work. In the first 
place, experience to date has shown no negative effect on the bonding 
capacity of small businesses. State DOTs have been following their own 
procedures regarding the inclusion of warranties in non-NHS Federal-aid 
contracts since the passage of the Intermodal Surface Transportation 
Efficiency Act of 1991 (Pub. L. 102-240, 105 Stat. 1914). These non-NHS 
projects constitute approximately one-third of the FHWA's Federal-aid 
highway program, and have amounted to several billions of dollars worth 
of construction each fiscal year. The FHWA has not observed any problem 
with the bonding capacity of smaller contractors who perform work 
eligible for such warranties. This regulation allows the FHWA simply to 
extend the option to use such warranty clauses by the State DOTs on the 
remaining two-thirds of the program, and the FHWA does not believe that 
this added flexibility will be used to an extent or in such a way as to 
negatively impact the bonding capacity of small businesses.
    Secondly, the warranties allowed by this regulation are limited to 
a specific construction product or feature. This regulation does not 
apply to design engineering or full project warranties. The FHWA 
believes that this fact will limit the warranties given and, in turn, 
the contractor's exposure.
    Thirdly, the FHWA anticipates these warranties will be primarily 
applied to small specialty or experimental item contracts. As a result, 
some small businesses may benefit from the ability to offer warranties 
on specialty or experimental items, either included as one element of 
the contract or as the main element of the contract. When warranties 
are prohibited, such items are often limited to experimental item 
contracts because the contracting agent (State DOT) has no assurance of 
the item's effectiveness. By removing the restriction on such 
warranties, the FHWA believes the smaller contractors may in fact have 
greater opportunity to enter the market with their experimental items 
because they can be guaranteed by a warranty.
    Finally, the FHWA believes that the concern over this regulation's 
effect on the bonding capacity of smaller contractors is overstated. 
These warranties are expected to be relatively short term--five years 
or less. Given the type of contracts involved (relatively short term 
and for a specific product or item), the FHWA expects that the bonding 
capacity of smaller contractors will not be adversely affected.
    Since publication of the interim final rule, one State DOT has 
proposed a warranty contract provision which eliminates the need for a 
long term bond and, in turn, the criticism that warranties affect 
bonding capacity. In this State's proposal, a portion of the 
contractor's bid amount is retained and paid to the contractor on an 
annual cycle based on satisfactory performance of the item which has 
been warranted. Using such an approach, no long term bond is required 
by the contractor. The FHWA sees this as a possible alternative to 
bonding warranties, which deserves monitoring to determine if it is 
effective.

Increased Flexibility

    Six State DOTs (one DOT responded twice) responding to the interim 
final rule commented on the increased flexibility afforded to 
contracting agencies by the revision of the FHWA regulation. These 
commenters saw this as a positive change, and generally supported 
allowing contracting agencies to decide when to use warranty clauses 
within the framework of the revised regulation, with concurrence by the 
FHWA.

Design Liability

    Four associations and one private company stated that they opposed 
the contractor being liable for the design of a project under the 
umbrella of a warranty. They felt that such design exposure was outside 
the control of the construction contractor and, therefore, 
inappropriate. The warranty regulation as revised by the FHWA states 
that the warranty provision shall be for a specific construction 
product or feature. There is no mention in the regulation of design 
being warranted, as these commenters assert. Furthermore, the warranty 
regulation states that the construction contractor will not be 
obligated for items over which the contractor has no control. A 
construction contractor does not typically have any control over the 
design of a project, therefore a warranty provision could not bind them 
to the project design.

Administrative Procedure Act

    One association commenting on the interim final rule discussed the 
publication of an interim final rule as it relates to the 
Administrative Procedure Act (APA). That commenter criticized the 
FHWA's decision to waive the notice and comment requirements of the 
APA, 5 U.S.C. 553, and proceed directly to an interim final rule. The 
commenter stated that the interim final rule imposes ``significant new 
obligations on the States by granting the government the authority to 
mandate greater use of warranties on Federal-aid highway projects.'' In 
fact, the interim final rule relieves a restriction and imposes no new 
obligation or requirement on the States. It merely enables the States 
to include warranty clauses in Federal-aid highway construction 
contracts if they find such clauses would be beneficial. Warranty 
clauses have been found to enhance the quality of highway construction 
projects, so proceeding to an interim final rule in this instance was 
in the public interest. Moreover, the FHWA did solicit comments on this 
rulemaking and is considering and responding to those comments to the 
same extent it would be in the case of a notice of proposed rulemaking.

Semiannual Regulatory Agenda

    One association commenting on the interim final rule noted its 
objection to the FHWA's failure to publish this rulemaking in the DOT's 
Semiannual Regulatory Agenda (Agenda) prior to publication of the 
interim final rule. (The current rulemaking was published

[[Page 17245]]

in the DOT's Semiannual Regulatory Agenda on November 28, 1995.) While 
the commenter is correct in noting that Executive Order 12866 and the 
Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612) require the DOT to 
prepare a semiannual regulations agenda for publication in the Federal 
Register, neither the Executive Order nor the RFA prevent the FHWA from 
publishing a rulemaking document which has not previously been listed 
in the Agenda. Section 602(d) explicitly provides that the requirement 
to publish such an agenda does not preclude the agency from considering 
or acting on any matter not listed in such agenda.

Rulemaking Analyses and Notices

Executive Order 12866 (Regulatory Policies and Procedures) and DOT 
Regulatory Policies and Procedures

    The FHWA has determined that this action is not a significant 
regulatory action within the meaning of Executive Order 12866 or 
significant within the meaning of Department of Transportation 
regulatory policies and procedures. The revisions would merely 
accommodate expanded use of warranty clauses on Federal-aid 
construction contracts. Therefore, it is anticipated that the economic 
impact of this rulemaking will be minimal and a full regulatory 
evaluation is not required.
    This final rule makes no changes to the interim final rule and 
merely informs the public that the interim final rule remains 
unchanged. Therefore, the FHWA finds that good cause exists to dispense 
with the 30-day delayed effective date requirement under 5 U.S.C. 
553(d).

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (Pub. L. 96-345, 
5 U.S.C. 601-612), the FHWA has evaluated the effects of this rule on 
small entities. Based on the evaluation, the FHWA hereby certifies that 
this action will not have a significant economic impact on a 
substantial number of small entities. As stated above, the FHWA made 
this determination based on the fact that: (1) experience to date with 
non-NHS Federal-aid projects that allow the use of warranties has shown 
no negative effect on the bonding capacity of small businesses for non-
NHS Federal-aid projects; (2) some small businesses may benefit from 
the ability to enter the market with specialty or experimental items, 
either included as one element of the contract or as the main element 
of the contract; and (3) given the type of contracts involved 
(relatively short term and for a specific product or item), the FHWA 
expects that the bonding capacity of smaller contractors will not 
experience any significant adverse effect.

Executive Order 12612 (Federalism Assessment)

    This action has been analyzed in accordance with the principles and 
criteria contained in Executive Order 12612 and it has been determined 
that this interim final rule does not have sufficient federalism 
implications to warrant the preparation of a separate Federalism 
assessment. Nothing in this document preempts any State law or 
regulation, and no new requirements or obligations are imposed on 
States or local governments by this action. Instead, this interim final 
rule provides States with additional discretion to determine for 
themselves whether to include warranty clauses in Federal-aid highway 
construction contracts for projects on the National Highway System.

Executive Order 12372 (Intergovernmental Review)

    Catalog of Federal Domestic Assistance Program Number 20.205, 
Highway Planning and Construction. The regulations implementing 
Executive Order 12372 regarding intergovernmental consultation on 
Federal programs and activities apply to this program.

Paperwork Reduction Act

    This action does not contain a collection of information 
requirement for purposes of the Paperwork Reduction Act of 1980, 44 
U.S.C. 3501-3520.

National Environmental Policy Act

    This rulemaking does not have any effect on the environment. It 
does not constitute a major action having a significant effect on the 
environment, and therefore does not require the preparation of an 
environmental impact statement pursuant to the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321 et seq.)

Regulation Identification Number

    A regulation identification number (RIN) is assigned to each 
regulatory action listed in the Unified Agenda of Federal Regulations. 
The Regulatory Information Service Center publishes the Unified Agenda 
in April and October of each year. The RIN contained in the heading of 
this document can be used to cross reference this action with the 
Unified Agenda.

List of Subjects in 23 CFR Part 635

    Government contracts, Grant programs--transportation, Highways and 
roads.

    In consideration of the foregoing and under the authority of 23 
U.S.C. 315, the interim final rule amending the authority for 23 CFR 
part 635 and revising Sec. 635.413 which was published at 60 FR 44271, 
August 25, 1995 is adopted as final without change.

    Issued on: April 3, 1996.
Rodney E. Slater,
Federal Highway Administrator.
[FR Doc. 96-9558 Filed 4-18-96; 8:45 am]
BILLING CODE 4910-22-P