Federal-Aid Highways: Increased Reliance on Contractors Can Pose
Oversight Challenges for Federal and State Officials (08-JAN-08,
GAO-08-198).
Pressure on state and local governments to deliver highway
projects and services, and limits on the ability of state
departments of transportation (state DOT) to increase staff
levels have led those departments to contract out a variety of
highway activities to the private sector. As requested, this
report addresses (1) recent trends in the contracting of state
highway activities, (2) factors that influence state highway
departments' contracting decisions, (3) how state highway
departments ensure the protection of the public interest when
work is contracted out, and (4) the Federal Highway
Administrations' (FHWA) role in ensuring that states protect the
public interest. To complete this work, GAO reviewed federal
guidelines, state auditor reports, and other relevant literature;
conducted a 50-state survey; and interviewed officials from 10
selected state highway departments, industry officials, and FHWA
officials.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-198
ACCNO: A79431
TITLE: Federal-Aid Highways: Increased Reliance on Contractors
Can Pose Oversight Challenges for Federal and State Officials
DATE: 01/08/2008
SUBJECT: Commuter transportation
Contract oversight
Contractor violations
Contractors
Funds management
Ground transportation
Highway planning
Internal controls
Interstate highways
Performance measures
Policy evaluation
Public roads or highways
Risk management
State highways
Strategic planning
Transportation
Transportation contracts
Transportation costs
Transportation planning
National Cooperative Highway Research
Program
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GAO-08-198
* [1]Results in Brief
* [2]Background
* [3]States Have Increased the Contracting Out of Highway Activit
* [4]States Have Increasingly Contracted Out Highway Activities
* [5]Many States Have Increased the Use of Consultants and Contra
* [6]Some State DOTs Have Broadened the Types of Contracts and Co
* [7]Most States Do Not Expect the Level of Contracting to Increa
* [8]State DOTs Indicate That Lack of In-house Staff and Expertis
* [9]Need to Supplement In-house Staff and Access Expertise Are t
* [10]Cost Savings Are Not a Major Driver in Decisions to Contract
* [11]State DOTs Do Not Formally Assess Costs and Benefits before
* [12]Additional Factors Can Also Play a Role in Contracting Decis
* [13]State DOTs Use Various Controls to Protect the Public Intere
* [14]State DOTs Use a Variety of Tools and Processes to Protect t
* [15]Current Trends in Contracting Out Pose Challenges for State
* [16]FHWA Focuses Much of Its Oversight Efforts on Ensuring That
* [17]FHWA Has a Limited Role in Determining How Consultants and C
* [18]Some FHWA Oversight Activities Are Associated with the Use o
* [19]FHWA Has Identified Risks Associated with the Use of Consult
* [20]Conclusions
* [21]Recommendations for Executive Action
* [22]Agency Comments
* [23]Findings on Costs
* [24]Methodological Issues and Other Limitations
* [25]GAO Contact
* [26]Staff Acknowledgments
* [27]GAO's Mission
* [28]Obtaining Copies of GAO Reports and Testimony
* [29]Order by Mail or Phone
* [30]To Report Fraud, Waste, and Abuse in Federal Programs
* [31]Congressional Relations
* [32]Public Affairs
Report to the Chairman, Committee on Transportation and Infrastructure,
House of Representatives
United States Government Accountability Office
GAO
January 2008
FEDERAL-AID HIGHWAYS
Increased Reliance on Contractors Can Pose Oversight Challenges for
Federal and State Officials
GAO-08-198
Contents
Letter 1
Results in Brief 4
Background 7
States Have Increased the Contracting Out of Highway Activities, and
Consultants and Contractors Increasingly Have Substantial Responsibility
for Ensuring Quality and Delivery of Highway Projects 12
State DOTs Indicate That Lack of In-house Staff and Expertise Are the Most
Important Drivers in States' Contracting Decisions 22
State DOTs Use Various Controls to Protect the Public Interest, but They
Face Additional Challenges Arising from Current Contracting Trends 32
FHWA Focuses Much of Its Oversight Efforts on Ensuring That State DOTs
Comply with Laws and Regulations 36
Conclusions 41
Recommendations for Executive Action 43
Agency Comments 43
Appendix I Objectives, Scope, and Methodology 45
Appendix II Summary of the Cost Comparison Studies That We Reviewed 52
Appendix III Summary Tables of Our Survey Results 55
Appendix IV GAO Contact and Staff Acknowledgments 75
Tables
Table 1: Rules and Regulations That Pertain to States' Contracting
Practices 9
Table 2: Number of State DOTs That Reported Factors as "Important" or
"Very Important" in Decisions to Contract Out Activities 23
Table 3: Number of State DOTs That Reported Changes in Professional Staff
over the past 5 Years 24
Table 4: Number of State DOTs Reporting Factors as "Of Little Importance"
or "Of No Importance" in Decisions to Contract Out Activities 27
Table 5: Number of State DOTs Reporting Factors as "Important" or "Very
important" in Decisions to Use Department Staff to Perform an Activity 28
Table 6: Correlation Coefficients 49
Table 7: Number of State DOTs That Reported Changes in Professional Staff
over the past 5 Years 56
Table 8: Number of State DOTs That Reported Contracting Out Highway
Activities in the Most Recently Completed Fiscal Year (Percentage of Total
Expenditures for That Activity) 57
Table 9: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Preliminary Engineering
Activities 58
Table 10: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Preliminary Engineering Activities 59
Table 11: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Design Activities 60
Table 12: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All Design
Activities 61
Table 13: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Construction Engineering and
Inspection 62
Table 14: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Construction Engineering and Inspection Activities 63
Table 15: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Federal-Aid Eligible
Preventive Maintenance Activities 64
Table 16: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Federal-Aid Eligible Preventive Maintenance Activities 65
Table 17: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Routine Maintenance
Activities 66
Table 18: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All Routine
Maintenance Activities 67
Table 19: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Ongoing Operations
Activities 68
Table 20: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All Ongoing
Operations Activities 69
Table 21: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Right-of-Way Activities 70
Table 22: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Right-of-Way Activities 71
Table 23: Number of State DOTs Reporting Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out for Highway Activities over
the past 5 Years 72
Table 24: Number of State DOTs Anticipating Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out over the Next 5 Years 73
Table 25: Number of State DOTs Using Broader Types of Contracting over the
past 5 Years 74
Table 26: Number of State DOTs Using Alternative Bid Types and Techniques
over the past 5 Years 74
Figures
Figure 1: Total Capital Spending on Highways, by Level of Government,
Fiscal Year 2005 2
Figure 2: Number of State DOTs That Reported Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out over the past 5 Years 14
Figure 3: Number of State DOTs at Various Levels of Contracting Out 15
Figure 4: Number of State DOTs Using Different Types of Contracts over the
past 5 Years 17
Figure 5: States' Use of Various Contracting Techniques 19
Figure 6: Number of States Anticipating Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out over the Next 5 Years 21
Abbreviations
AASHTO American Association of State Highway and Transportation Officials
C.F.R. Code of Federal Regulations
FHWA Federal Highway Administration
state DOT state department of transportation
U.S.C. United States Code
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United States Government Accountability Office
Washington, DC 20548
January 8, 2008
The Honorable James L. Oberstar
Chairman
Committee on Transportation and Infrastructure
House of Representatives
Dear Mr. Chairman:
The nation's economic vitality and the quality of life of its citizens
depend significantly on an efficient transportation network. For the past
several decades, population, income levels, and economic activity have
risen considerably, and with the increases in these areas have come
considerable increases in travel demand. Transportation infrastructure has
not kept pace with these increases. According to the Department of
Transportation, investment by all levels of government remains well below
the estimated amount needed to maintain the condition of the nation's
transportation infrastructure, and to fund improvements to the performance
of the network. In 2005, of the over $75 billion expended for capital
outlays and maintenance for highways, the federal government accounted for
about 40 percent and state and local governments accounted for about 60
percent (see fig. 1).
As demands on the transportation system grow, states and localities are
looking for alternatives to direct government provision of transportation
infrastructure and services. Consistent with longer-term trends in
privatization of public services, states and localities have looked to
increased private sector participation in delivering highway
infrastructure and services. A 2003 survey by the National Cooperative
Highway Research Program found that the use of contractors and consultants
had continued to increase and had also expanded into activities previously
done principally by public agencies, such as activities related to
inspection and quality assurance of highway facilities and activities
related to obtaining right-of-way for highway infrastructure projects.^1
^1Thomas R. Warne, NCHRP Synthesis 313: State DOT Outsourcing and
Private-Sector Utilization, A Synthesis of Highway Practice (Washington,
D.C.: National Cooperative Highway Research Program, 2003), for the
Transportation Research Board of the National Academies.
Figure 1: Total Capital Spending on Highways, by Level of Government,
Fiscal Year 2005
Proponents of privatization have long suggested that using private sector,
market-based incentives offers the potential advantages of obtaining
infrastructure or services faster than if provided solely by the public
sector, at a potentially lower cost. However, some critics have raised
concerns that the increased use of consultants and contractors contributes
to a loss of accountability, a decline in the skill levels and experience
of public sector staff, lower quality projects, and the inefficient use of
public funds.
To assist Congress as it assesses the future of the federal surface
transportation and highway programs, we studied the extent of contracting
by state departments of transportation (state DOT). This report addresses
(1) the recent trends in the contracting of state highway activities; (2)
the factors that influence state DOTs in deciding whether to contract out
activities and the extent to which state DOTs assess costs and benefits
when making such decisions; (3) how state DOTs protect the public interest
when work is contracted out, particularly when consultants and contractors
are given substantial responsibility for project and service quality and
delivery; and (4) the Federal Highway Administration's (FHWA) role in
ensuring that states protect the public interest.
To address these issues, we reviewed relevant literature and survey data
to identify general trends in contracting and to establish a general
baseline for comparison with current levels of contracting. We also
reviewed the literature to identify available information regarding the
costs and benefits of contracting out highway activities versus performing
them with in-house staff. We sent an inquiry to state auditing agencies
and received and reviewed state auditor reports from 11 states that
addressed issues relating to state DOTs' use of consultants and
contractors. We also conducted a Web-based survey of all 50 state DOTs to
determine the extent to which state DOTs contract for services across 7
categories of highway activities.^2 We surveyed state DOTs to determine
(1) the factors they say are leading them to contract out activities or to
keep work in-house and (2) information about potential future trends in
contracting. The survey also gathered data on state DOTs' use of a variety
of different contract types and techniques, such as design-build
contracts.^3 We received a 100 percent response to our survey. Appendix
III contains tables summarizing the state DOTs' responses. We conducted a
correlation analysis to identify factors--such as state economic and
demographic measures--that may be associated with the level of contracting
reported in the survey. We also interviewed state DOT officials in 10
different states to gather information on their perceptions of the costs
and benefits of contracting, on the ways in which state DOTs define and
seek to protect the public interest, and on how state DOTs' use of
consultants and contractors is evolving. In selecting state DOTs to
interview, we used a nongeneralizable sample, rather than performing
random sampling. We chose this approach to ensure that the sample set
included state DOTs with a range of outsourcing experiences and practices.
We interviewed industry stakeholders from 6 different organizations
knowledgeable about the outsourcing of highway activities to obtain
additional perspectives on the costs and benefits of contracting and on
how state DOTs seek to protect the public interest. Finally, we
interviewed FHWA officials at the national level, as well as at 10
division offices^4 corresponding to the state DOTs selected for
interviews, to obtain information on FHWA's policies, guidance, and
oversight of state contracting practices and on the role FHWA plays in
ensuring that states protect the public interest. We reviewed program and
process reviews from FHWA's national and division offices to identify key
areas of oversight focus and key findings that have been reached in such
reviews regarding states' contracting and quality assurance procedures.
^2The highway activities included preliminary engineering, design,
construction engineering and inspection, federal-aid eligible preventive
maintenance, routine maintenance activities not eligible for federal-aid
program funding, ongoing operations, and right-of-way.
^3A design-build contract is a method of project delivery where the
design-builder forges a single contract with the state transportation
agency to provide for architectural and engineering design and
construction services.
^4FHWA has 52 division offices--1 in each state, the District of Columbia,
and Puerto Rico.
For this report, we limited the scope of our review to contracts where
consultants or contractors are paid to provide a service related to
highway infrastructure. Although essentially contractual relationships, we
did not include public-private partnerships--where a private firm takes
effective ownership of a facility and assumes control over it, usually for
an extended period of time--in the scope of our work. Another GAO review
focusing specifically on public-private partnerships related to highway
infrastructure was under way concurrently with this review, and a final
report will be issued later in January 2008.^5 We conducted this
performance audit from November 2006 through January 2008 in accordance
with generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives. Appendix I contains more information on our
objectives, scope, and methodology.
Results in Brief
State DOTs have increased the amount of highway activities they contract
out to consultants and contractors. More than half of the 50 departments
we surveyed reported that they had increased the amount of preliminary
engineering, design, right-of-way, and construction engineering and
inspection activities they had contracted out over the past 5 years. Fewer
departments responded that they had increased the contracting out of
operations and maintenance activities in this period. We also found from
our survey and interviews that many departments are increasingly giving
consultants and contractors more responsibility in ensuring the quality
and delivery of highway infrastructure and services. For example,
departments have increased the use of consultants to perform inspection
activities, and the use of consultants as project managers to oversee and
manage day-to-day activities on highway projects. Our survey also
indicated that some states have broadened the types of contracts and
contracting techniques they use, such as using design-build or lane rental
contracts,^6 although the use of these techniques does not appear to be
widespread across the states. The majority of departments reported in our
survey that they expect the amount of contracted highway activities to
level off over the next 5 years for all of the activities included in our
study. State highway department officials attributed this leveling off to
uncertainty about whether funding and staffing levels would change in the
near future.
^5GAO, Highway Public-Private Partnerships: Potential Benefits and Risks
Suggest Actions Are Needed to Protect Public and National Interests,
[33]GAO-08-44 (Washington, D.C.: Jan. 18, 2008).
State DOT officials indicated that the most important factor in their
decision to contract out highway activities is the need to access the
manpower and expertise necessary to ensure the timely delivery of highway
infrastructure and services, given in-house resource constraints. In our
survey, state DOTs listed "lack of in-house staff" as "very important" or
"important" in their decision to contract out work more than any other
factor for all 7 of the highway activities included in the study. Over the
last several years, demand for highway infrastructure and services has
continued to grow, while at the same time, the majority of the departments
have experienced constant or declining staffing levels. In our survey, 38
of the 50 departments indicated that they employ either the same or fewer
staff than they did 5 years ago. While officials we interviewed said that
costs are considered in contracting decisions, our survey results show
that for almost all of the state DOTs, "to obtain cost savings" was not a
key driver in the trend toward the increased use of contracting. In fact,
our interviews with state DOT officials indicated that contracting out
work is perceived to be somewhat more expensive than performing work
in-house, particularly for engineering services. Several studies have
tried to formally compare the costs of in-house performed work with
consultant and contractor performed work. Methodological issues and other
limitations make it difficult to conclude that the use of consultants and
contractors is more or less expensive than using public employees over the
long term. In addition to staffing and cost issues, other considerations,
such as the desire to maintain in-house expertise, can play a role in a
state DOT's decision of whether to contract out highway activities or
perform the work with in-house staff.
^6Under the lane rental concept, a provision for a rental fee assessment
is included in the contract. The lane rental fee is based on the estimated
cost of delay or inconvenience to the road user during the rental period.
The fee is assessed for the time that the contractor occupies or obstructs
part of the roadway and is deducted from the monthly progress payments.
In general, the state DOT officials we interviewed believe that they have
sufficient tools and procedures to select, monitor, and oversee
contractors to ensure that the public interest is protected, but that they
face additional challenges in protecting the public interest, given
current contracting trends. These officials highlighted various controls
they employ throughout the consultant and contractor procurement process,
including such things as prequalifying consultants, regularly monitoring
the work of consultants and contractors, and including assessments of
consultants and contractors in determinations for future contracts. States
also have highway design standards, materials standards, and quality
control and assurance guidelines that are applicable on all projects,
regardless of who performs the work. However, implementation of these
mechanisms is not consistent across states. Several state auditor reports
we reviewed found weaknesses in state DOTs' procurement and oversight
practices, such as the absence of aggressive price negotiations, failure
to consistently assess the quality of consultant and contractor work, and
failure to fully comply with quality assurance procedures. Such weaknesses
can lead to lower-quality highway construction and the inefficient use of
public funds. Other trends in contracting pose additional challenges to
state DOTs in conducting adequate oversight and monitoring. While state
employees are always ultimately responsible for highway project
acceptance, they are increasingly further removed from the day-to-day
oversight of the project and are more frequently overseeing a number of
highway projects simultaneously, instead of just one project. Also, while
officials from state DOTs we interviewed believe that their departments
were equipped to adequately oversee consultants and contractors, all of
the officials indicated that the decreasing number of experienced staff,
combined with their departments' increased reliance on contractors and
consultants, may erode in-house expertise at their departments, which
could affect their ability to adequately oversee the work of contractors
and consultants over the long term. Finally, with consultants and
contractors involved in almost all highway activities, from design to
final inspection, FHWA has found that more potential exists for conflicts
of interest and for independence issues to arise.
Given that state DOTs are primarily responsible for delivering highway
infrastructure and services, FHWA has a limited role in determining how
consultants and contractors should be used on highway projects. Generally,
FHWA's role is to ensure that state DOTs have used consultants and
contractors in compliance with applicable federal laws and regulations.
FHWA primarily performs oversight of states' use of consultants through
direct oversight over a limited number of projects and through its risk
assessment process in which division offices work with their state DOTs to
identify and address systematic vulnerabilities in the DOTs' processes and
programs. Through such risk assessments, several division offices have
identified issues related to the use of consultants and contractors and
conducted process reviews in response. In addition to these reviews of
individual states, FHWA has also conducted national reviews that involve
issues related to the use of consultants and contractors that have also
found areas of risk to the federal-aid highway program. In particular, one
review found that the trend toward using more consultants in quality
assurance creates additional possibilities for conflicts of interest, and
that state DOTs' quality assurance programs are often not in full
compliance with federal regulations. FHWA is developing a plan to address
the issues found in this review. While FHWA has identified risks
associated with the use of consultants and contractors, the agency has not
comprehensively assessed how, if at all, it needs to adjust its oversight
efforts to protect the public interest, given current trends in the use of
consultants and contractors.
To address the risk factors and oversight challenges associated with the
increasing use of consultants and contractors, we are recommending that
the Secretary of Transportation direct the Administrator of the Federal
Highway Administration, in the context of its ongoing activities related
to quality assurance programs and risk management, to work with the
division offices to (1) give appropriate consideration to the identified
areas of risk related to the increased use of consultants and contractors
as division offices work to target their oversight activities and (2)
develop and implement performance measures to better assess the
effectiveness of state DOTs' controls related to the use of consultants
and contractors to better ensure that the public interest is protected.
We provided the Department of Transportation, including FHWA, with a draft
of this report. DOT officials provided technical clarifications, which we
incorporated as appropriate.
Background
FHWA assists states' efforts in building and maintaining highways through
the federal-aid highway program. The agency distributes highway funds to
the states through annual apportionments established by statutory formulas
and by allocating discretionary grants. The states may obligate funds for
construction, reconstruction, and improvement of highways and bridges on
eligible federal-aid highway routes and for other purposes authorized in
law once FHWA has apportioned the funds to the states. About 1 million of
the nation's 4 million miles of roads are eligible for federal aid.
As a condition of receiving federal funds, states must adhere to federal
laws and regulations. In particular, states must ensure that their highway
program activities comply with title 23 of the United States Code (U.S.C.)
and title 23 of the Code of Federal Regulations (C.F.R.), which contain
provisions relating to the federal-aid highway program. FHWA has issued a
number of regulations to implement and carry out these provisions. These
provisions in title 23 relate specifically to states' use of consultants
and contractors. For example, states must comply with the Disadvantaged
Business Enterprise Program requirements of 49 C.F.R. Part 26, which
requires that a certain percentage of contracts be awarded to small
businesses owned and controlled by socially and economically disadvantaged
individuals, including minority and women-owned businesses. Contracts for
engineering and design services that are directly related to a
construction project and use federal-aid highway funding must be awarded
in the same manner as a contract for engineering and design services under
certain provisions of the Brooks Architect-Engineers Act,^7 which
establishes a qualifications-based selection process in which contracts
for architects and engineers are negotiated on the basis of demonstrated
competence and qualification for the type of professional services
required at a fair and reasonable price. While state DOTs are subject to
many federal laws and regulations regarding contracting, they are not
required to follow the Federal Acquisition Regulation when contracting for
federally funded highway activities, except for the cost principles in 48
C.F.R. Part 31. Other specific federal provisions relating to state DOTs'
contracting practices are summarized in table 1.
^7The Brooks Architect-Engineers Act (Pub. L. No. 92-582) established the
procurement process by which the federal government selects architects and
engineers for design contracts.
Table 1: Rules and Regulations That Pertain to States' Contracting
Practices
Provision Source Detail
Bidding requirements 23 U.S.C. S 112 In all cases where the construction
for letting of is to be performed by the state
contracts transportation department or under
its supervision, a request for
submission of bids shall be made by
advertisement unless some other
method is approved by the Secretary.
The Secretary shall require such
plans and specifications and such
methods of bidding as shall be
effective in securing competition.
Construction of each project shall
be performed by contract awarded by
competitive bidding, unless the
State transportation department
demonstrates, to the satisfaction of
the Secretary, that some other
method is more cost effective or
that an emergency exists. Contracts
for the construction of each project
shall be awarded only on the basis
of the lowest responsive bid
submitted by a bidder meeting
established criteria of
responsibility. Each contract for
program management, construction
management, feasibility studies,
preliminary engineering, design,
engineering, surveying, mapping, or
architectural related services shall
be awarded in the same manner as a
contract for architectural and
engineering services is negotiated
under chapter 11 of title 40 or
equivalent State
qualifications-based requirements.
Suitably equipped 23 U.S.C. S Any State desiring to avail itself
and organized 302(a) of the provisions of title 23 U.S.C.
transportation shall have a State transportation
department department which shall have adequate
powers, and be suitably equipped and
organized to discharge to the
satisfaction of the Secretary the
duties required by this title. In
meeting the provisions of this
subsection, a State may engage to
the extent necessary or desirable,
the services of private engineering
firms. FHWA expects the State to
provide full-time State
representatives to be in responsible
charge of "core functions" or
"inherently governmental functions"
of the State government that
directly relate to the Title 23
duties for administering a
Federal-aid project or program.
Conflict of interest 23 C.F.R. S 1.33 No official or employee of a State
or any other governmental
instrumentality who is authorized in
his official capacity to negotiate,
make, accept or approve, or to take
part in negotiating, making,
accepting or approving any contract
or subcontract in connection with a
project shall have, directly or
indirectly, any financial or other
personal interest in any such
contract or subcontract. No
engineer, attorney, appraiser,
inspector or other person performing
services for a State or a
governmental instrumentality in
connection with a project shall
have, directly or indirectly, a
financial or other personal
interest, other than his employment
or retention by a State or other
governmental instrumentality, in any
contract or subcontract in
connection with such project. No
officer or employee of such person
retained by a State or other
governmental instrumentality shall
have, directly or indirectly, any
financial or other personal interest
in any real property acquired for a
project unless such interest is
openly disclosed upon the public
records of the State DOT and of such
other governmental instrumentality,
and such officer, employee or person
has not participated in such
acquisition for and in behalf of the
State. It shall be the
responsibility of the State to
enforce the requirements of this
section.
Administration of 23 C.F.R. Part This part prescribes policies and
design and 172 procedures for the administration of
engineering services engineering and design related
contracts related to service contracts intended to ensure
highway construction that a qualified consultant is
obtained through an equitable
selection process, that prescribed
work is properly accomplished in a
timely manner, and at fair and
reasonable cost. Recipients of
federal funds shall ensure that
their subrecipients comply with this
part. Also contains provision that
state DOTs must receive permission
from FHWA before hiring a consultant
to act in a management capacity on
behalf of the department.
State oversight of 23 C.F.R. Although the state may employ a
highway construction 635.105(b) consultant to provide construction
engineering services, such as
inspection or survey work on a
project, the state shall provide a
full-time employed state engineer to
be in responsible charge of the
project.
Design-build 23 C.F.R. Part This part covers FHWA's policies and
contracting 636 procedures for approving
design-build projects financed with
federal-aid highway funds.
Quality assurance 23 C.F.R. Part This part prescribes policies,
procedures for 637 procedures, and guidelines to assure
construction the quality of materials and
construction in all Federal-aid
highway projects on the National
Highway System. Contractor test
results are allowed to be used in
the project acceptance decision of
the state; independent verification
testing is required to ensure that
contractor testing conforms to
applicable standards.
Sources: United States Code and Code of Federal Regulations.
For projects using federal-aid funding, FHWA has also promulgated
regulations that establish design, construction, and materials standards
for highway projects that are on the National Highway System.^8 In
general, states' laws, regulations, directives, safety standards, design
standards, and construction standards apply to highway projects that are
off of the National Highway System.
FHWA has authority to oversee any project that receives federal-aid
highway funds. However, the agency has increasingly delegated
responsibility for oversight to state DOTs since the passage of the
Intermodal Surface Transportation Equity Act in 1991. Oversight roles and
responsibilities are outlined in stewardship agreements that each FHWA
division office executes with its respective state DOT. These stewardship
agreements outline when FHWA will have project-level oversight, or what is
known as "full oversight" over a project, and when that responsibility
will be delegated to states. Stewardship agreements vary in how full
oversight is determined. A stewardship agreement may indicate that full
oversight occurs on only "high-profile" projects, which will be agreed
upon by the state and the division office, or there may be a specific
dollar threshold, such as all interstate projects that are over $1
million. Generally speaking, FHWA has project-level oversight for a
relatively limited number of federal-aid projects. Recently, FHWA
developed guidance on the development of stewardship agreements and
encouraged its division offices to revise their agreements on the basis of
this guidance to achieve more consistency throughout the agency. Among
other things, the guidance encourages the division offices to use risk
management principles to determine where to focus their stewardship
activities. The guidance also recommends that division offices develop
performance measures to better track the health of the federal-aid highway
program in their states. However, the guidance gives state DOTs and
division offices broad flexibility in determining how risks should be
assessed and how performance should be measured.
^8On projects that are not located on the interstate system but are part
of the National Highway System, the states may assume responsibility for
overseeing the design and construction of projects, unless the state or
FHWA determines that this responsibility is not appropriate.
In addition to having oversight over some specific projects, FHWA division
offices oversee state DOTs through reviews of the departments' programs
and processes. Some of these reviews occur annually, and others are
undertaken at the discretion of the division office on the basis of areas
where there may be increasing risk to the highway program. These reviews
are meant to ensure that states have adequate controls in place to
effectively manage federally assisted projects and will generally result
in recommendations and corrective actions for the state DOTs.
Over the past several years, GAO has expressed concerns about FHWA's
oversight role. For example, we reported in 2005 that FHWA lacked a
comprehensive approach in its oversight efforts.^9 We found that even
though FHWA had made progress in improving its oversight efforts, such as
establishing performance goals and outcome measures to limit cost growth
and schedule slippage on projects, FHWA had not linked these efforts to
its day-to-day activities and was not using them to identify problems and
target oversight. More generally, we have also raised concerns about
federal transportation policy. For example, we have reported that federal
transportation funding is not linked to system performance; that the
federal government does not have direct control over the vast majority of
the activities that it funds; and that highway grant funds are apportioned
to state and local governments by formula, without regard to the needs,
performance, quality, or level of effort of recipients.^10 Transportation
and other experts recently told us that the nation's transportation policy
has lost focus, and that the nation's overall transportation goals need to
be better defined and linked to performance measures that evaluate what
the respective policies and programs actually accomplish.^11
^9GAO, Federal-Aid Highways: FHWA Needs a Comprehensive Approach to
Improving Project Oversight, [34]GAO-05-173 (Washington, D.C.: Jan. 31,
2005).
States Have Increased the Contracting Out of Highway Activities, and Consultants
and Contractors Increasingly Have Substantial Responsibility for Ensuring
Quality and Delivery of Highway Projects
State DOTs have increased the amount and type of highway activities that
they have contracted out to consultants and contractors over the past 5
years. In particular, state DOTs have increasingly contracted out
preliminary engineering, design, right-of-way, and construction
engineering and inspection activities. We also found that state DOTs have
increasingly given consultants and contractors more responsibility for
project quality through a growing trend to contract out construction
inspection and engineering activities. Some state DOTs have used broader
contracting types and techniques that give additional responsibility to
consultants and contractors. For example, some state DOTs have used
consultants to serve on their behalf as project managers or program
managers to oversee and manage day-to-day activities on highway projects.
^10GAO, Highlights of a Forum Convened by the Comptroller General of the
United States: Transforming Transportation Policy for the 21st Century,
[35]GAO-07-1210SP (Washington, D.C.: Sept. 19, 2007).
^11 [36]GAO-07-1210SP .
States Have Increasingly Contracted Out Highway Activities
On the basis of our survey (see sidebar) and discussions with state
officials, we found that states have increased the extent to which they
contract out some types of highway activities to consultants and
contractors (see fig. 2). Our survey results indicated that over the past
5 years, more than half the states have increased the amount of
preliminary engineering, design, and right-of-way activities as well as
construction engineering and inspection activities they have contracted
out to third parties. A fewer number of states have increased contracting
out of maintenance and operations activities.
Figure 2: Number of State DOTs That Reported Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out over the past 5 Years
Several state DOT officials told us during our discussions that their
departments had increased their use of consultants in different areas. For
example, Illinois highway department officials told us that the state has
contracted out preliminary engineering and design activities at various
levels for 30 years, but that the state has only recently begun to
increase its use of consultants to perform right-of-way activities. In
addition, according to Georgia highway department officials, they now
contract out 65 to 75 percent of their design work compared with very
little design work being contracted out only a few years ago.
The level of contracting varies considerably across the activities we
surveyed (see fig. 3). For example, 23 highway departments reported that
they were contracting out more than 75 percent of federal-aid eligible
preventive maintenance activities, while the amount of routine maintenance
activities that state DOTs contract out is still relatively low--nearly
half of the states reported that they contracted out less than 25 percent
of these activities.
Figure 3: Number of State DOTs at Various Levels of Contracting Out
Many States Have Increased the Use of Consultants and Contractors for Inspection
Activities
Officials from 27 of the 50 states responding to our survey indicated that
their states had increased the contracting out of construction engineering
and inspection activities over the past 5 years, although half the states
report contracting out 25 percent or less of this work. In our interviews,
several states indicated that they have recently had to increase their use
of consultants for construction inspection activities. For example, the
South Carolina DOT began to increase its use of consultants to perform
construction engineering and inspection work in 2000. Department officials
estimated that they will contract out about 10 percent of construction
engineering and inspection work next year. Prior to 2000, the South
Carolina DOT only contracted out construction inspection and engineering
work on certain large, complex projects. Maryland State Highway
Administration officials also said that they have been giving what have
been traditionally in-house construction engineering and inspection
activities to consultants, contracting out about 60 percent of these
activities.
Officials from at least 3 state DOTs we interviewed indicated that they
would prefer to keep construction inspection and engineering activities
in-house to retain greater control over the quality of contracted work.
For example, Illinois highway department officials said that they always
assign an Illinois highway department engineer to oversee the consultant
because they do not like to have consultants oversee other contractors and
consultants, but that they need to contract out inspection activity for
projects that require expertise they do not have in-house. The Maryland
State Highway Administration officials also said that they would prefer to
retain the construction engineering and inspection activities in-house,
but they have been unable to hire a sufficient number of staff. According
to Utah DOT officials, the agency has been able to avoid contracting out
any construction engineering and inspection activities so far, but they
would likely contract out such activities in the future if workload
burdens on in-house highway department staff continue to increase.
Some State DOTs Have Broadened the Types of Contracts and Contracting Techniques
That They Use
Some state DOTs have used certain types of contracts where contractors
assume more responsibility and risk for project delivery and day-to-day
highway project oversight. For example, design-build contracts allow
contractors to be involved in both the design and the construction of a
highway project, and project management contracts (1) can assign
additional oversight responsibilities to contractors or consultants and
(2) can result in contractors overseeing other contractors. Figure 4 shows
the number of states using these types of contracts and the frequency with
which they use them.
Figure 4: Number of State DOTs Using Different Types of Contracts over the
past 5 Years
As figure 4 shows, more than half of the state DOTs have used a
design-build approach at least once, and 20 state DOTs have not let any
design-build contracts over the past 5 years. Our survey also indicates
that many state DOTs still have constraints on their ability to use
design-build contracting. Fifteen state DOTs reported that they do not
have authority to enter into design-build contracts, and an additional 10
state DOTs reported that they have only limited design-build authority.
Few states have experience with other contracting methods asked about in
our survey. Five states reported that they had used project managers for
more than 10 contracts, and 3 states reported having used construction
managers/general contractors more than 10 times to oversee and manage the
day-to-day activities of a project.
Our survey also asked about a variety of other contracting techniques that
state DOTs may use in an effort to help minimize construction time and
cost, such as cost plus time bidding (A+B),^12 incentive and disincentive
contracts,^13 and lane rental contracts. Almost two thirds of the states
indicated that they used more than one of these contracting techniques at
least occasionally. Of the contracting techniques included in the survey,
states reported using incentives and disincentives and cost plus time
bidding most often over the past 5 years (see fig. 5).
^12The contract award is based on a combination of the traditional bid for
the contract items (the "A" component) and the bidder's estimated total
number of calendar days required for project completion (the "B"
component).
^13State highway departments may use incentive/disincentive provisions to
motivate the contractor to complete the work on or ahead of schedule.
Figure 5: States' Use of Various Contracting Techniques
While some states have used these contracting techniques in their highway
projects, many states reported that they did not use them very often. For
example, only 10 states reported using more than 1 technique frequently.
Of these states, only 4 reported using more than 3 of these techniques
frequently. Two states reported using these tools either rarely or not at
all.
While our survey results do not indicate widespread use of these different
types of contracts and contracting techniques, these results do not
indicate that the use of these contracts is not an important or growing
trend in state contracting. State officials we interviewed told us that
many of these types of contracts, which are relatively new to some state
DOTs, are actively being considered and their use is likely to grow in the
future. In addition, some techniques are more suited to projects in
congested areas--such as lane rental contracts--and some states may have
fewer such projects than others. Other contract types, such as
design-build contracts, are often used for projects that are large and
complex in scope, which may be relatively rare in some states.
Most States Do Not Expect the Level of Contracting to Increase over the Next 5
Years
While many state DOTs have increased their contracting out of various
activities over the past 5 years, officials at many highway departments
anticipate a slowing of this trend. As figure 6 shows, most state DOTs
reported that they expect to maintain their current level of contracting
over the next 5 years. For some activities, a number of states even expect
to see declines in their level of contracting. For example, 15 state DOTs
reported that they expect their contracting of design activities to
decrease over the next 5 years. State DOT officials responded in the
survey that their expectations for their contracting levels over the next
5 years are based on their expectations for highway program funding
levels, legislative considerations, anticipated workload, and staffing
levels. For example, the Oregon DOT officials stated in our survey that
they expect their funding levels for highway projects to greatly decline
by 2010, thereby reducing their need for consultants. However, the
department noted that if they are able to secure new funding, they
anticipate continuing at their current level of consultant use, which is
at a historical peak for the department.
Figure 6: Number of States Anticipating Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out over the Next 5 Years
Some states anticipated growth in their contracting for certain
activities. For example, Pennsylvania and Utah DOT officials responded
that they believe their state will increase contracting out work to
consultants and contractors for all seven categories of highway
activities. In addition, another state official indicated that its state
DOT expects to increase its contracting out of federal-aid eligible
preventive maintenance work in the next 5 years due to an anticipated
shift in its program to focus on system preservation, rather than capital
projects.
State DOTs Indicate That Lack of In-house Staff and Expertise Are the Most
Important Drivers in States' Contracting Decisions
State DOTs indicate that the most important factor in state DOTs' decision
to contract out highway activities is the need to access the manpower and
expertise necessary to ensure the timely delivery of their highway
program, given in-house resource constraints. While state DOTs consider
cost issues when making contracting decisions, cost savings are rarely the
deciding factor in contracting decisions, and no state we interviewed
regularly performs formal assessments of costs and benefits before
deciding whether to contract out work. Several studies have attempted to
compare the costs of in-house and contracted work, although limitations in
the studies' methodology make it difficult to conclude that the use of
consultants and contractors is more or less expensive than using public
employees over the long term. In addition to staffing and cost issues,
there are other considerations, such as the desire to maintain in-house
expertise that can play a role in a state DOT's decision of whether to
contract out highway activities.
Need to Supplement In-house Staff and Access Expertise Are the Major Drivers in
the Decision to Contract Out Work
In our survey, state DOTs listed "lack of in-house staff" as "very
important" or "important" in their decision to contract out work more than
any other factor for all seven of the highway activities included in the
study, as shown in table 2. Furthermore, all of the highway department
officials that we interviewed said that they do not have the in-house
staff resources available to deliver their program in a timely manner, so
they must contract out work to deliver projects and services. For example,
Illinois DOT officials said that at this point, they rely on consultants
to fulfill the department's work demands.
Table 2: Number of State DOTs That Reported Factors as "Important" or
"Very Important" in Decisions to Contract Out Activities
Number of state DOTs, by highway activity
Construction Federal-aid
engineering eligible
Preliminary and preventive Routine Ongoing Right-of-way
Factor engineering Design inspection maintenance maintenance operations activities
Lack of
in-house
staff 45 44 39 34 35 31 44
To maintain
flexibility
or manage
variations in
department
workload 36 36 32 19 25 17 38
To access
specialized
skills or
equipment 31 30 19 27 23 25 26
To increase
speed of
completion or
to meet
specific time
frames 35 32 12 21 19 14 39
To meet
federal or
state
legislative
mandates,
legal
requirements,
or policy
initiatives 20 18 20 17 9 13 15
To identify
innovative
approaches or
new
techniques 10 14 4 11 4 11 5
To obtain
cost savings 3 3 1 10 9 3 3
Source: GAO survey results.
In recent years, state DOTs have experienced a substantial growth in
funding for their highway programs, without a commensurate increase in
staffing levels. Results from our survey show that the majority of state
DOTs have experienced constant or declining in-house staffing levels.
State DOTs indicated that staff reductions occurred most frequently in the
areas of design, construction engineering and inspection, and maintenance,
as shown in table 3.
Table 3: Number of State DOTs That Reported Changes in Professional Staff
over the past 5 Years
Number of state DOTs, by staff change
Type of professional and technical Stayed the No basis
staff Increased Decreased same to judge
Planning and environment 16 13 18 1
Design (roadway, bridges, and
traffic engineering) 4 28 17 0
Construction engineering and
inspections (inspections,
materials testing, and scheduling) 9 20 20 0
Operations (ongoing Intelligent
Transportation Systems, toll
collection, and signal and sign
systems) 11 8 23 6
Maintenance 6 20 20 1
Right-of-way and utilities 7 15 24 2
Other nonadministrative 2 10 23 12
Overall professional and technical
staff 12 21 17 0
Source: GAO survey results.
Of the 50 states that completed the survey, only 12 highway departments
stated that they employ more professional and technical highway staff than
they did in the past 5 years. The remainder of the highway departments
said that their workforces have either stayed the same or decreased over
the last 5 years.
Analysis of Census of Governments data also illustrated these trends in
staffing at state DOTs. From 1992 to 2005, employment at state DOTs across
the country declined by a little over 0.5 percent annually.^14 At the same
time, state spending on highways increased by 0.2 percent annually, in
real (inflation-adjusted) terms. These trends have resulted in an increase
in the amount of highway spending per employee at state DOTs, with each
state DOT employee on average having to "manage" a larger amount of his or
her state's program. Overall, across the country, state DOT
inflation-adjusted expenditures per employee have grown by 0.75 percent
annually from 1992 to 2005.
Officials at every state DOT we interviewed also acknowledged challenges
in delivering highway infrastructure and services demanded, given their
in-house staffing situations. Several of the officials cited budgetary
issues and political pressure to reduce the size of government as
constraints on their ability to hire additional in-house staff. For
example, Illinois DOT officials, whose staff has been cut nearly in half
since the 1970s, stated that these staff reductions have been primarily
linked to budget issues, such as those associated with the state's public
employee pensions. In South Carolina, the legislature has not
substantially changed the highway department's staffing levels despite the
department's increased program size. Consequently, department officials
stated that there is more work to do than the department can handle with
its in-house staff alone.
^14There was no Census of Governments employee survey in 1996; therefore,
there are no employment data for that year.
Officials from several state DOTs also mentioned that market conditions,
including a lack of qualified engineers and the higher salaries paid in
the private sector, limit their ability to hire and retain qualified
personnel, even when they have the budget authority to do so. In Georgia,
DOT officials said that the department is often engaged in bidding wars
with private firms for prospective employees, and that they simply do not
have the ability to offer equivalent compensation.
In addition to supplementing ongoing shortages of in-house staff, many
state DOTs viewed contracting as a valuable strategy for managing
short-term workload fluctuations. For example, Louisiana Department of
Transportation and Development officials said that contracting is
beneficial because it provides them with added flexibility and allows them
to respond more rapidly to spikes in their highway program than if they
had to bring new in-house staff on board. Once work slows, contracting
also allows the state DOTs to draw down their workforce without having to
lay off in-house employees. In our survey, state DOTs listed the desire to
"maintain flexibility or manage variations in department workload" as
"very important" or "important" more frequently overall than any other
factor except "lack of in-house staff" in their decision to contract out
work.
In addition to increasing their overall level of manpower, state DOTs also
frequently contract out work to access specialized skills or expertise
they may not have in-house, according to our survey results and interviews
with state highway officials. For example, the Pennsylvania DOT does not
always have the specialized skills in-house to do certain geotechnical
analyses and environmental impact assessments, so this work is contracted
out. Several state DOTs also indicated that they tend to use consultants
on complex projects that require more specific expertise. For example,
Illinois DOT officials told us that they typically use consultants for
larger, more complex projects that generally will have a higher associated
dollar amount due to the need for specialized expertise. In addition,
Louisiana Department of Transportation and Development officials said that
they usually hire consultants to design the more complex and larger
projects due to a decrease in design staff as well as in-house expertise.
Maryland State Highway Administration officials also indicated that staff
reductions in their agency have had a disproportionate effect on positions
requiring more experience and has led to the agency using a greater
proportion of consultants on large projects.
Cost Savings Are Not a Major Driver in Decisions to Contract Out Work
Cost savings do not appear to be an important driver in the trend toward
the increased contracting out of highway activities. Of the seven factors
listed in the survey that might potentially lead a state DOT to decide to
contract out an activity, "to obtain cost savings" was listed as "very
important" or "important" the least number of times of any of the factors,
across six of the seven highway activities studied. Furthermore, "to
obtain cost savings" was listed by states as "of little importance" or "of
no importance" the most times of any factor for five of the seven highway
activities studied, as table 4 shows. During our interviews, no state DOT
official cited cost savings as a primary reason for their departments'
increased use of consultants and contractors in delivering their highway
program. The Georgia DOT initially attempted to perform some cost-benefit
analyses when the department was going through a surge in its contracting
out work; however, the department abandoned these efforts after it became
apparent that the results of the analyses did not matter since the
department needed to contract out the work regardless.
Table 4: Number of State DOTs Reporting Factors as "Of Little Importance"
or "Of No Importance" in Decisions to Contract Out Activities
Number of state DOTs, by highway activity
Construction Federal-aid
engineering eligible
Preliminary and preventive Routine Ongoing Right-of-way
Factor engineering Design inspection maintenance maintenance operations activities
To obtain
cost savings 32 37 36 24 20 22 31
To identify
innovative
approaches or
new
techniques 21 23 34 15 20 14 32
To meet
federal or
state
legislative
mandates,
legal
requirements,
or policy
initiatives 17 24 16 15 21 16 26
To increase
speed of
completion or
to meet
specific time
frames 5 6 22 5 9 8 2
To access
specialized
skills or
equipment 4 10 16 3 7 4 10
To maintain
flexibility
or manage
variations in
department
workload 0 2 6 5 3 9 3
Lack of
in-house
staff 1 1 1 4 2 2 3
Source: GAO survey results.
While cost savings are rarely the driver in the decision to contract out
highway activities, the perception of higher contracting costs may
influence states to continue to perform activities in-house, rather than
contracting out the activities. In our survey, state DOTs listed the
higher costs of consultants and contractors as a "very important" or
"important" factor in the decision to use in-house staff to perform an
activity more times overall than all but one factor, as shown in table 5.
As an example, officials at the Pennsylvania DOT conducted an evaluation
and found that it would be more expensive to contract out for highway line
painting and decided to continue to do the majority of this work with
in-house staff.
Table 5: Number of State DOTs Reporting Factors as "Important" or "Very
important" in Decisions to Use Department Staff to Perform an Activity
Number of state DOTs, by highway activity
Construction Federal-aid
engineering eligible
Preliminary and preventive Routine Ongoing Right-of-way
Factor engineering Design inspection maintenance maintenance operations activities
The need to
retain key
skills and
expertise
in-house 33 37 34 18 28 30 33
Costs of
consultants/
contractors
are greater
than using
in-house staff 24 25 30 19 24 23 24
Belief that
work will be
of higher
quality if
performed by
in-house staff 25 28 24 12 18 13 21
Belief that
work can be
performed more
quickly using
in-house staff 16 20 12 13 24 17 27
Legal
restrictions
or policy
initiatives
regarding the
use of
consultants or
contractors 11 11 13 7 9 10 11
Required
skills or
expertise are
not available
in the private
sector 4 3 7 2 6 7 9
Concerns with
liability or
accountability
for contracted
work 3 3 10 4 11 7 10
Lack of
competition/
insufficient
number of
bidders 3 3 3 4 4 3 3
Source: GAO survey results.
State DOTs Do Not Formally Assess Costs and Benefits before Contracting Out Work
Although state DOTs consider cost issues and estimate the costs of
performing certain activities, none of the 10 departments from which we
interviewed officials had a formal process in place to systematically or
regularly assess the costs and benefits of contracting out activities
before entering into contracts. State officials we interviewed
acknowledged difficulties in accurately comparing costs of work performed
in-house and work performed by contractors and consultants. For example,
Minnesota DOT officials stated that they have difficulties in determining
how to properly calculate overhead rates for in-house staff. Reports from
state auditors in several states also acknowledged difficulties in
comparing the costs of using consultants versus using in-house staff. Some
reports also found that the highway departments in their states did not
thoroughly or adequately study costs associated with the use of
consultants compared with in-house staff to effectively manage the use of
consultants, or actively negotiate with consultants to ensure that
contract prices were fair and reasonable.
While formal assessments are not undertaken, officials from several state
DOTs we interviewed generally perceived contracting out to be more
expensive than using in-house staff, particularly for engineering
services. In fact, no state DOT official we interviewed perceived
engineering work to be cheaper on an hourly basis when contracted out.
However, some officials indicated that they found opportunities for cost
savings in some circumstances for specific activities. For example, the
Utah DOT found that it was cheaper to contract out its pavement management
data collection work because it allowed the department to avoid having to
invest in the expensive equipment required, which tends to become rapidly
outdated. Officials from another state DOT acknowledged that there were
potential cost efficiencies through contracting if contract employees were
laid off during periods of reduced activity, such as during the winter
months. This department conducted an analysis that found that if the
agency laid off consultant construction inspectors for at least 3 months
out of the year, the agency's cost for the inspectors would equal that of
in-house employees. However, officials stated that the department has not
laid off consultant inspectors consistently due to concerns that the
department would not be able rehire them once their services were needed
again.
A number of studies have attempted to compare the costs of contracting out
and using in-house staff for highway activities. In our review of these
studies, we identified a series of methodological issues and other
limitations that make it difficult to make any conclusions about whether
consultants and contractors are more or less expensive than public
employees over the long term.^15 In addition, we reviewed other studies
that have attempted to synthesize the results of existing cost comparisons
and have raised many of these same issues. First, numerous challenges
exist in obtaining accurate and reliable data to make comparisons. Such
challenges include difficulties in properly assigning in-house overhead
costs to specific projects and activities, finding "like" projects to
compare, and using state DOT systems and records that have incomplete and
unreliable data. Second, very few of the studies we reviewed sought to
systematically determine the benefits resulting from contracted work or
in-house work, thus providing an incomplete picture as to the extent to
which contracting out highway activities might or might not be desirable.
For example, additional costs of using consultants or contractors could be
offset by benefits in completing the project more quickly than it would
have been done by in-house staff, or the quality of the work may be worth
the premium paid for the service. Finally, the studies did not adequately
consider the long-term implications of contracting out work or performing
it in-house, such as long-term pension obligations associated with
in-house employees that are not incurred when work is directly contracted
out.
Additional Factors Can Also Play a Role in Contracting Decisions
In addition to the factors that we have previously discussed, other
considerations can play a role in a state DOT's decision of whether to
contract out certain activities. Next to the staffing issues that we have
previously discussed, state DOTs most frequently reported using
consultants to meet specific time frames or to increase the speed of
completion of a task as an "important" or "very important" factor.
State-level legislative requirements and policy mandates are also
sometimes factors in state DOTs' decisions to contract out work. For
instance, the South Carolina Legislature enacted a budget provision in
1996, encouraging the highway department to use private contractors for
bridge replacements; surface treatments; thermo-plastic striping; traffic
signals; fencing; and guardrails, whenever possible. In our survey, the
Alaska DOT responded that one of the reasons it contracts out preliminary
engineering work is to satisfy direction that it has received from the
state government on using consultants. Conversely some states may also
have legislative limitations on their ability to contract out work. For
example, the California DOT, until recently, had only limited authority to
contract out engineering services under the California constitution.
^15See appendix II for a more detailed discussion of the cost comparison
studies that we reviewed.
Regarding the decision to keep work in-house, the most commonly cited
factor in both our interviews and our survey was the desire to retain key
skills and expertise. State DOTs recognize that they need to maintain a
core of employees with sufficient experience and expertise to be able to
effectively oversee and manage consultants and contractors and to also
develop the expertise of more junior highway department employees. In both
our interviews and our survey, State DOT officials stated that they often
consciously keep certain activities in-house so that employees can improve
their skills.
The results from our survey indicated that state DOTs' perceptions
regarding differences in quality between work performed in-house and work
contracted out may at times be an important factor in decisions to keep
work in-house. For preconstruction activities in particular, "belief that
work will be of a higher quality if performed by in-house staff" was one
of the factors most frequently listed as being "very important" or
important" in the decision to perform work with in-house staff.
Furthermore, one state DOT noted in the survey that the consultants they
have used to perform construction engineering and inspection work did not
have adequate experience to effectively do the job. In our interviews, few
state officials expressed strong beliefs about differences in quality
between in-house and contracted out work, although some departments
acknowledged that the quality of work varies, depending on the firm being
used, and that there have been issues regarding the performance of
specific firms.
We also performed a correlation analysis to determine whether the amount
of work that state DOTs contract out is associated with certain
demographic or economic conditions in the state.^16 The level of
correlation between most of the economic and demographic variables
selected for the analysis and the percentage of work that state DOTs
contract out was relatively weak or nonexistent. However, among the
variables that we considered, the percentage of a state's population
living in urban areas had the strongest positive correlation with the
amount of work that states contract out in preliminary engineering,
design, and construction engineering and inspection activities.^17 This
correlation may occur because, as state DOT officials told us, they are
more likely to contract out larger and more complicated projects, and
there may be more of these types of projects in those states that are more
urbanized. Also, for the majority of activities studied, there appears to
be a moderate positive correlation between the amount of work contracted
out and the pace at which states' populations have grown. This correlation
is consistent with the possibility that more rapidly growing states
contract out greater amounts of work to help meet surges in their workload
spurred by the increased demand for highways that growing populations
foster, but may also be due to other factors.
^16Although all 50 states completed the survey, some states did not
provide values for all activities. The number of states that provided
values ranges from 39 to 46, depending on the activity.
^17The correlation coefficient for population in urban areas ranged from
0.41 to 0.45 across the activities.
State DOTs Use Various Controls to Protect the Public Interest, but They Face
Additional Challenges Arising from Current Contracting Trends
State officials we interviewed told us that they have sufficient tools and
procedures in place to monitor and oversee contractors to ensure that the
public interest is protected. These tools and procedures include such
things as prequalification of contractors and consultants, regular
monitoring procedures, assessments of work performed, and standards and
requirements for certain types of work. However, 10 of the 11 state
auditor reports we reviewed found weaknesses in state DOTs' contracting
and oversight practices. With current trends in contracting state DOTs
face additional challenges in conducting adequate oversight and
monitoring. In particular, states' oversight has generally become further
removed from the day-to-day work on a project, and state officials
expressed long-term concerns in retaining adequate expertise and staff
needed to adequately oversee a growing contractor and consultant
workforce.
State DOTs Use a Variety of Tools and Processes to Protect the Public Interest,
Although Such Controls Are Inconsistently Applied
State DOTs' contracts with consultants and contractors include a variety
of mechanisms and controls that are intended to address potential project
risks and protect the public interest, and the state officials with whom
we spoke believe that the controls they have in place are adequate to
protect the public interest. For example, state DOTs may prequalify
consulting firms and contractors to ensure that those bidding on projects
will be able to successfully perform contracted activities. A previous
survey on state contracting practices found that state DOTs use a
prequalification process for about two thirds of the activities they
contract out. The survey found that prequalification processes were most
common for design, right-of-way, and operations activities, while
prequalification processes where less common when contracting out for
maintenance and construction work. A majority of state DOT officials we
interviewed also stated that they have prequalification processes for at
least some activities. As part of their prequalification requirements,
state DOTs examine consultants' and contractors' previous job experience
and work capacity to identify individuals and organizations from which the
agency may accept a bid. In addition, for engineering services, state DOTs
are required to use a qualification-based selection process to identify
best-qualified bidders. It is only once these best-qualified bidders have
been identified that the highway department enters into price negotiations
to determine a "fair and reasonable" price for the contracted services.^18
States also report that they have policies to regularly monitor and assess
consultants and contractors during the project and upon project completion
and may include these assessments into prequalification determinations for
future projects. State officials indicate that a state employee is always
ultimately responsible for any particular project or service and,
therefore, are responsible for ensuring that consultants and contractors
are performing the work according to contract provisions and other
applicable standards and specifications. State DOTs may address poor
performance on an ongoing project by requesting that the contractor or
consultant replace a particular employee or by requesting that the
contractor or consultant address any construction mistakes. In extreme
circumstances, state DOTs can also withhold payment to consultants or
contractors. A poor performance rating at the end of a highway project may
result in a reduced chance of securing future contracts.
All state DOTs have policies and rules governing consultant and contractor
independence. For projects on the National Highway System, state DOTs
require consultants and contractors to certify that they do not have any
potential or perceived conflicts of interest. Some state DOTs have
prohibitions against performing both design and construction inspection
activities.
State DOTs have also developed various standards, specifications, and
policies to help ensure that the public interest is protected on highway
projects. State DOTs require that standards and specifications be followed
whether work is performed by department staff or contracted out. When work
is contracted out, state DOTs outline all relevant standards and
specifications--such as design and construction standards, and
specifications regarding materials acquisitions--in the terms of the
contract after a winning bidder has been selected.
^18States are required to use the qualification procedures adopted by the
Brooks Architect-Engineers Act (Pub. L. No. 92-582) when using federal-aid
funds to procure contractors to provide architectural and engineering
services (23 U.S.C. S 112). State and local agencies are also required to
use the indirect cost rates established by a cognizant agency audit (23
C.F.R. S 172.7).
Finally, federal regulations require each state agency to have an approved
quality assurance program for materials used in and the construction of
federal-aid highway construction projects.^19 Quality assurance programs
identify contractors' materials sampling, testing, and inspection
requirements as well as specific quality characteristics to be measured
for project acceptance. The regulations also include requirements that
each state DOT's quality assurance program provides for an acceptance
program and an independent assurance program. In 1995, FHWA revised its
regulations to allow state DOTs to use contractor material testing data in
their acceptance decisions if accompanied by validation and verification
procedures. However, state employees must always make the final acceptance
decision. On full oversight projects, the state's FHWA division office is
responsible for providing final acceptance of projects at the completion
of construction, but the state is still responsible for providing
project-level acceptance of construction and materials quality during
construction.
State auditors in 10 of the 11 states that responded to our inquiry found
numerous weaknesses in state DOTs' contracting and oversight practices.
For example, one auditor's report found that the state DOT's
prequalification procedures do not always ensure that the most qualified
bidder is selected. Furthermore, auditors' reports in at least 5 states
found that the state DOTs did not aggressively negotiate fair and
reasonable prices when using qualifications-based selections, or had not
established criteria to define what constitutes a reasonable price,
resulting in negotiated prices that are perceived to be too high compared
with national benchmarks, or compared with other states' experience. In
addition, another auditor report found examples where the state DOT failed
to consistently assess consultant and contractor performance, and examples
where quality assurance procedures were not adequately followed, which can
result in lower-quality highway construction.
^1923 C.F.R. Part 637.
Current Trends in Contracting Out Pose Challenges for State DOTs in Conducting
Adequate Oversight and Monitoring
State DOTs may encounter challenges in conducting sufficient oversight and
monitoring for highway projects, given current trends in contracting out.
For projects using federal-aid highway funds, FHWA requires that a state
highway employee always have ultimate responsibility for successful
project completion. However, when consultants and contractors have
oversight or managerial roles on a project, the state highway employee may
be further removed from the day-to-day project activities. This situation
has the potential to limit the ability of state DOT employees to identify
and resolve problems that occur during construction. For example, the
National Transportation Safety Board--in its report on an accident in
Colorado in which a car collided with a steel girder that had fallen from
an overpass--found that the state DOT did not conduct active oversight,
and that it was the department's policy to avoid telling a contractor how
to accomplish contracted work and to avoid interfering as the contractor
carried out the work.
In addition, state highway employees are increasingly moving into project
manager roles in which they may oversee several projects. Several state
DOT officials cited concerns and challenges in conducting adequate
oversight in such situations. In some states, consultants oversee multiple
projects as well. For example, the Maryland State Highway Administration
is beginning to use construction management inspection contracts. Under
these contracts, the contractor becomes responsible for managing work on
specific projects as well as a portfolio of projects.
Erosion of state DOTs' in-house expertise as a result of staff cuts and
retirements also creates additional risk in the long term and creates
challenges for state DOTs in effectively overseeing consultant and
contractor work. All of the state DOT officials with whom we spoke believe
that they currently have sufficient expertise in-house to carry out their
highway programs and to oversee consultants and contractors. However,
according to officials at several state DOTs, there is a "thinning" of
expertise in their departments and fewer knowledgeable staff are available
to oversee and monitor consultants. As we have previously stated, state
DOTs have not been able to hire a sufficient number of staff to replace
experienced staff who may soon be retiring. In addition, state DOTs
compete with private firms for what in some states is a relatively small
number of new engineers graduating from college. State highway officials
in several states also commented that, given the limitations inherent in a
state budget, college graduates often elect to either (1) go into the
private sector right away or (2) receive training at the state DOT, and
then leave for a higher paying job in the private sector.
Ensuring that consultants and contractors are independent and free from
conflicts of interest can be difficult. As we have previously discussed,
state DOTs are using consultants and contractors for a greater variety of
services, including project engineering and design, construction
inspection, and highway maintenance. Officials from several state DOTs
have expressed some concern because consultants and contractors may work
on multiple state projects where they are the lead on one project and a
subconsultant/subcontractor on another project. For example, one firm may
have an undisclosed financial relationship with another firm beyond the
work being done with the state DOT, and this situation could pose
difficulties if one of these firms is hired to inspect the other. While
some state DOT officials acknowledged that situations have arisen that
present the potential for conflicts of interest, none of the state DOT
officials with whom we spoke thought their agencies had any significant
problems with contractor and consultant independence.
FHWA Focuses Much of Its Oversight Efforts on Ensuring That State DOTs Comply
with Laws and Regulations
The federal-aid highway program provides states with broad flexibility in
deciding how to use their funds, which projects to pick, and how to
implement these projects; therefore, FHWA has a limited role in
determining how consultants and contractors should be used by state DOTs.
FHWA performs project-level oversight on only a limited number of
projects. FHWA division offices also conduct reviews of state programs and
processes that are related to the use of consultants and contractors.
These oversight activities are generally limited to ensuring compliance
with federal rules and regulations. On a national level, FHWA has recently
conducted some reviews that touch on states' use of consultants and
contractors. Through these reviews, FHWA has identified a variety of risks
associated with the use of consultants and contractors, but the agency has
not fully assessed how to respond to these risks.
FHWA Has a Limited Role in Determining How Consultants and Contractors Are Used
on Highway Projects
FHWA has only limited authority over many aspects of state DOTs' programs,
including their contracting practices. According to FHWA officials, the
agency does not have any specific policy regarding highway departments'
use of consultants and contractors beyond those requirements contained in
existing laws and regulations. Furthermore, while federal law requires
state highway departments to be "suitably equipped and organized," the law
also includes a provision that a state may engage, to the extent necessary
or desirable, the services of private engineering firms in meeting these
provisions.^20 According to FHWA, some FHWA division offices have
interpreted this regulation as providing state DOTs with broad authority
to use consultants to perform department work. FHWA has compiled relevant
legislation and regulations regarding the contracting out of highway
activities on its Web site to serve as guidance to state DOTs when
contracting out highway activities.
FHWA has also played a role in encouraging states to consider alternative
contracting techniques and methods, and to consider greater involvement
from the private sector through public-private partnerships to improve
project delivery and seek out alternative sources of funding. For example,
FHWA has encouraged contracting techniques and public-private partnerships
through Special Experimental Projects 14 and 15, with many of these
techniques allowing consultants and contractors to assume additional
responsibilities in the delivery of highway projects.
Some FHWA Oversight Activities Are Associated with the Use of Consultants and
Contractors
While state DOTs conduct project-level oversight on the majority of
highway projects, FHWA retains project-level oversight on a limited number
of projects, based on its stewardship agreement with the state DOT.
Regarding states' use of consultants and contractors, the agency's
oversight efforts are generally focused on ensuring compliance with
existing laws and regulations. For example, the division office must
concur in the award of certain contracts, and when providing concurrence
for an engineering contract, a division office will seek to ensure that
the state DOT has used an appropriate qualifications-based selection
process, as required by law.
When conducting project-level oversight, division office officials will
also do at least some on-site monitoring of the work. During these on-site
visits, FHWA will assess the project's status and verify that the project
complies with plans and specifications. As part of this process, division
office officials told us that they will often observe ongoing project
activities to ensure that materials testing and other quality control and
quality assurance procedures follow regulations. The amount of on-site
oversight varies greatly, depending on the perceived project risk, which
is generally determined according to the cost of the project, its
complexity, and its visibility to and potential impact on the public.
Division office officials told
^20 23 U.S.C. S 302(a).
us that on projects with very high visibility, they will have an engineer
on-site up to several times a week. However, for other projects, they may
not send an engineer out to the site more than once or twice over the life
of a project. According to division office officials, even when conducting
project-level oversight, they still rely on the state DOTs to properly
administer the project and that much of FHWA's role is not to perform
direct oversight, but rather to make sure that the highway department is
doing appropriate oversight. Once the project is completed, FHWA is
responsible for final inspection and project acceptance.
FHWA also conducts oversight related to the use of consultants and
contractors through reviews of state programs and processes that may
involve consultants and contractors. To identify those areas that pose the
greatest threats or opportunities to states' federal-aid programs and to
assist the division offices in allocating their limited resources in the
most effective manner, FHWA has encouraged a risk-based approach to
identifying areas for review, and given division offices flexibility in
determining which program areas to focus on in their risk assessments.
Through this risk assessment process, many division offices have
identified issues related to the use of consultants and contractors. We
have identified at least 15 states where FHWA division offices have
conducted process reviews specifically concerning the contracting out of
work over the past 5 years. We have also identified at least 2 other
states where FHWA division offices are currently conducting similar
reviews. These reviews focus on a variety of issues related to the use of
consultants and contractors, and many have recommendations for how state
DOTs can improve their processes for procuring and administering
consultants and contractors.
As a result of division offices' identification of the use of consultants
and contractors as an area of high risk, FHWA headquarters has also
conducted national reviews that involve issues related to this matter.
Under its recently created National Review Program, FHWA has completed
reports on quality assurance and oversight of local public agencies that
include discussions of issues associated with the contracting out of work.
FHWA is also currently undertaking an additional review that is looking at
the administration of consultant contracts. In addition to these reviews,
FHWA has also conducted a series of annual reviews of state DOTs' quality
assurance activities over the last several years that have highlighted
concerns related to material testing conducted by consultants.
A final way that FHWA exercises oversight relating to the use of
consultants and contractors is through its approval of various state DOT
documents. As part of their oversight responsibilities, division offices
are responsible for approving a variety of state DOT manuals, standards,
and policy documents that establish procedures for implementing the
federal-aid highway program in the state. For example, state DOTs must
develop written procedures outlining their process for procuring
consultant services, which must be approved by FHWA.^21 FHWA must also
approve other documents that may not be directly focused on the
contracting out of work, but that address work that is often performed by
consultants or contractors. For example, division offices are responsible
for approving state DOTs' quality assurance programs for materials on
construction projects.
FHWA Has Identified Risks Associated with the Use of Consultants and
Contractors, but It Has Not Fully Assessed How to Respond to These Risks
FHWA has identified many ways that the contracting out of work can pose
risks to the federal-aid highway program. For example, a series of FHWA
reviews of quality assurance activities found many critical deficiencies
in state oversight of consultants in these activities, such as the lack of
independent sampling of highway materials for verification tests;
inadequate statistical comparisons of test results; and insufficient state
control of test samples, sampling locations, and testing data. Such
shortcomings in state DOTs' quality assurance programs could potentially
have a detrimental effect. For example, in its quality assurance review,
FHWA states that pavement on highways is deteriorating faster than
expected and asserts that this is likely, at least in part, due to the
identified weaknesses in state DOTs' quality assurance programs.^22 In
addition, another national FHWA study related to the use of local public
agencies found that local agencies are often highly dependent on
consultants to deliver the projects and may not have the expertise to
adequately oversee the work of the consultants and to be sure of the
quality of the services they are getting. The study further found that
some states may not be conducting adequate oversight over these projects,
and that the states' reviews tend to be reactive, rather than proactive.
^2123 C.F.R. S 172.9.
^22U.S. Department of Transportation, Federal Highway Administration,
Office of Professional and Corporate Development, Quality Assurance in
Materials and Construction, Final Report (Washington, D.C.: June 2007), 9.
Division offices have also cited areas of risk associated with the growing
use of consultants. For example, an Illinois Division Office process
review raised concerns about the possibility that firms that had performed
design work for a project might also do construction inspection work on
the same project, which would pose the potential for conflicts of
interest. In our interviews with division office officials, many cited the
challenges that contracting out poses for state DOTs in regard to
maintaining sufficient in-house expertise. Also, several division office
officials perceived contracting out work to be more expensive than keeping
the work in-house, resulting in an inefficient use of public funds.
Division office officials we interviewed also pointed out that FHWA's
division offices have also suffered reductions in staff and an erosion of
expertise and experience, which can hamper their oversight activities.
FHWA officials stated that many division offices also identified areas of
risk related to the contracting out of work during FHWA's first national
risk management cycle. Although the use of consultants and contractors was
not one of the 49 key elements that division offices were required to
assess, many division offices still identified it as an area of risk.
According to FHWA, 23 division offices identified risks related to the use
of consultants as one of their top risks, with division offices finding
such risks present throughout various state DOT program areas, including
in construction, design, and right-of-way. These risks included concerns
that consultants do not have the necessary skills to complete tasks
according to federal regulations, consultants are not supplying sufficient
personnel or resources to complete jobs, and state DOTs have been overly
relying on consultants to select and manage contractors.
While FHWA has identified risks associated with the use of consultants and
contractors, the agency has not comprehensively assessed how, if at all,
it needs to adjust its oversight efforts to protect the public interest,
given current trends in the use of consultants and contractors. Also, FHWA
has not instructed its division offices to consider issues related to the
amount and type of work contracted out when outlining oversight
responsibilities in their stewardship agreements with state DOTs. Overall,
FHWA division offices generally described their role as ensuring
compliance with existing regulations and not assessing the performance of
state DOTs in achieving transportation goals. This has the potential to
limit the value of the agency's oversight activities. For example, FHWA
acknowledges in its report on quality assurance in materials and
construction that it is possible to have a quality assurance program for
materials that is compliant with regulations, but is not performing
effectively, and vice versa.^23 This FHWA report also finds that division
offices are often not fully aware of what components should be part of
quality assurance programs, and, as a result, the effectiveness of these
programs is not being adequately assessed.
FHWA has made progress in addressing some of the concerns related to its
oversight program and is considering additional steps to mitigate risks
associated with the use of consultants and contractors in the future. The
agency is currently developing an implementation plan in response to the
recommendations in its quality assurance report. This plan may seek to
address some of the risks associated with the involvement of consultants
and contractors in the quality assurance process. Also, FHWA is continuing
to refine its risk management approach to better identify risks throughout
the country and to more fully develop methods for addressing identified
risks. Finally, as we have previously discussed, FHWA division offices
have been working to revise their current stewardship agreements to
incorporate further considerations of risk and to also identify
performance measures that will assist in increasing accountability in the
federal-aid program, based on FHWA guidance. However, FHWA guidance gives
state DOTs and division offices broad flexibility in how they assess risks
and develop performance measures. As of October 2007, FHWA reported that
21 of the agreements had been revised, with 15 of them incorporating
considerations of risk and performance measures. Five more agreements
incorporated considerations of risk, but not performance measures.
Conclusions
State DOTs have long used contractors and consultants to augment existing
workforces. Recent trends suggest that consultants and contractors are
used more than ever before and in a multitude of different
activities--from designing projects, to appraising and acquiring
rights-of-way, to managing and inspecting projects--and, in some cases,
consultants and contractors may be responsible for projects from beginning
to end. While there is no conclusive evidence of the long-term differences
in costs and benefits between using consultants and contractors and
obtaining additional state staff, this consideration is largely
inconsequential to state DOTs because many are now dependent on
consultants and contractors to deliver their growing highway programs.
Given this reality, effective oversight and monitoring of consultant and
contractor workforces become critical to state DOTs to ensure that work is
performed according to standards and specifications, and that materials
used meet quality and performance standards. While the state officials
that we interviewed generally believe they have sufficient controls in
place to conduct such oversight, there is some evidence from state
auditor's reports that these controls are not always implemented
effectively. Furthermore, state officials we interviewed recognize that
there will be increased risk to the highway program over the long term,
given (1) the growing potential for conflicts of interest and independence
issues and (2) the reality of a changing workforce at state DOTs and
difficulties in attracting and retaining staff with key skills.
^23Quality Assurance in Materials and Construction, 9.
We have previously reported that there is a need for a fundamental
reexamination of the highway program and a need for national
transportation goals to be better defined and linked to performance
measures to evaluate what the respective programs actually accomplish.
Regarding the growing use of consultants and contractors by state highway
departments, FHWA's oversight has generally been focused on ensuring that
state processes related to this matter are in compliance with existing
regulations, and has not sufficiently focused on the performance and
effectiveness of those processes in protecting the public interest or in
achieving national transportation goals. We recognize that FHWA has a
number of efforts under way that are geared toward refining FHWA's
approach to oversight of state DOTs, including developing a plan to
address the issues raised in its national review of quality assurance
programs, working to identify areas of vulnerability to the federal-aid
highway program through its national risk management cycle, and continuing
a national program review currently under way of consultant
administration. In addition, division offices are continuing to revise
their stewardship agreements to be more risk- and performance-oriented.
However, further efforts to assess how best FHWA could adjust its
oversight and focus its activities on consistently ensuring the
performance and effectiveness of state DOTs' programs and processes as
they relate to the management of consultants and contractors would
increase the value of FHWA oversight in this area. In addition, while
several stewardship agreements have recently been revised to incorporate a
more risk- and performance-oriented approach to conducting federal
oversight, most states have yet to revise their agreements, and some
revised agreements have not incorporated performance measures.
Recommendations for Executive Action
To more effectively and consistently ensure that state DOTs are adequately
protecting public interests in the highway program, given current trends
in the use of consultants and contractors, we recommend that the Secretary
of Transportation direct the Administrator of the Federal Highway
Administration, in the context of FHWA's ongoing activities related to
quality assurance programs and risk management, to work with FHWA division
offices to (1) give appropriate consideration to the identified areas of
risk related to the increased use of consultants and contractors as
division offices work to target their oversight activities and (2) develop
and implement performance measures to better assess the effectiveness of
state DOTs' controls related to the use of consultants and contractors to
better ensure that the public interest is protected.
Agency Comments
We provided copies of this report to the Department of Transportation,
including FHWA, for its review and comment. DOT officials provided
technical clarifications, which we incorporated as appropriate. The
department took no position on our recommendation to work with FHWA
division offices regarding state DOTs' increased use of consultants and
contractors.
We are sending copies of this report to interested congressional
committees, the Secretary of Transportation, and the Administrator of the
Federal Highway Administration. We will also make copies available to
others upon request. In addition, the report will be available at no
charge on the GAO Web site at [37]http://www.gao.gov .
If you or your staff have any questions about this report, please contact
me at (202) 512-2834 or at [38][email protected] . Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions to this
report are listed in appendix IV.
Sincerely yours,
JayEtta Z. Hecker
Director, Physical Infrastructure
Appendix I: Objectives, Scope, and Methodology
This report addresses the following objectives: (1) the recent trends in
the contracting out of state highway activities; (2) the factors that
influence state departments of transportation (state DOT) in deciding
whether to contract out activities and the extent to which state DOTs
assess costs and benefits when making such decisions; (3) how state DOTs
protect the public interest when work is contracted out, particularly when
consultants and contractors are given substantial responsibility for
project and service quality and delivery; and (4) the Federal Highway
Administration's (FHWA) role in ensuring that states protect the public
interest.
To determine the recent trends in the contracting out of state highway
activities, we performed a literature review of existing research and
survey data to identify general trends over the periods covered by those
surveys and to use as a general baseline for comparison with current
levels of contracting out. We also surveyed and received responses from
all 50 state DOTs, using a Web-based questionnaire. In developing the
survey, we consulted a representative from the American Association of
State Highway Transportation Officials (AASHTO) and also consulted a
highway expert who is a former President of AASHTO, a former head of the
Utah DOT, and an author of numerous studies on highway contracting issues.
On the basis of the information received in these consultations, we
revised our survey instrument. In addition, we conducted survey pretests
over the telephone with state DOTs in Illinois and Maryland. We also
revised our survey instrument on the basis of information we received in
these pretests. We conducted the survey from mid-June to mid-September
2007. During this period, we sent 2 rounds of follow-up e-mails to
nonrespondents in addition to the initial e-mailing. We also made
follow-up telephone calls and sent follow-up e-mails to several state DOTs
to encourage them to complete the questionnaire. We then surveyed the
state DOTs to learn about the extent to which they contract for services
across 7 categories of highway activities, including preliminary
engineering, design, construction engineering and inspection, federal-aid
eligible preventive maintenance, routine maintenance activities not
eligible for federal-aid program funding, ongoing operations, and
right-of-way appraisals. We also surveyed state DOTs to determine how the
levels of contracting for these activities have changed over the past 5
years and to gather information about potential future trends in
contracting. In addition, we used the survey to identify which factors
state DOTs said are driving them to contract out activities or to keep
work in-house. Finally, the survey gathered data on state DOTs' use of
alternative contract types and techniques and collected information on
certain contracting concerns that are specific to design-build contracts.
In developing the questionnaire and in collecting and analyzing the data,
we took steps to minimize errors that could occur during those stages of
the survey process. The detailed survey results are available in appendix
III.
Because this was not a sample survey, it has no sampling errors. However,
the practical difficulties of conducting any survey may introduce errors,
commonly referred to as "nonsampling" errors. For example, difficulties in
interpreting a particular question, making sources of information
available to respondents, entering data into a database, or analyzing
these data can introduce unwanted variability into the survey results. We
took steps in developing the questionnaire, collecting the data, and
analyzing the data to minimize such nonsampling errors. For example,
social science survey specialists designed the questionnaire in
collaboration with GAO staff who have subject matter expertise. Then, as
we have previously noted, our questionnaire was reviewed by experts in
this field and was pretested in 2 states. When we analyzed the data, an
independent analyst checked all computer programs. Since this was a
Web-based survey, respondents entered their answers directly into the
electronic questionnaire--eliminating the need to key data into a database
and further minimizing errors.
To gather further information on the recent trends in the contracting out
of state highway activities, we performed a series of in-depth interviews
with highway department officials in 10 states throughout the country:
Arizona, California, Georgia, Illinois, Louisiana, Maryland, Minnesota,
Pennsylvania, South Carolina, and Utah. These interviews allowed the team
to gather in-depth and contextual information on state DOT contracting
practices that could not be obtained through a survey. We conducted all of
the interviews using a data collection instrument that we developed.
In selecting state DOTs to interview, we used a nongeneralizable sample,
rather than performing random sampling. We chose this approach to ensure
that the sample set included state DOTs with a range of contracting
experiences and practices. When selecting which state DOTs to include in
the sample, we considered a range of criteria, including (1) the region in
which the state is located; (2) the degree to which the state DOT
contracts out highway activities; (3) the range of contracting approaches
the state uses, including nontraditional project delivery methods such as
design-build or asset management as reported in previous reports; (4) the
legal and policy requirements the state faces in regard to contracting out
highway activities; and (5) the extent to which the state has performed
analyses of the costs and benefits of contracting out highway activities.
To select the states for the sample, we reviewed relevant academic,
expert, state, and federal research and existing survey data on state
outsourcing activities to make an initial assessment of where various
state DOTs fell along the spectrum for each of the criteria and to
identify any unique features of the states' outsourcing programs that
would be particularly useful to study in greater depth. For example, we
looked for criteria such as state DOTs that had developed unique
contracting practices, state DOTs that were rapidly changing the way their
departments conducted business, and state DOTs whose outsourcing
experiences had been particularly successful or problematic. Lastly, we
generally sought to avoid selecting states that had already been studied
in great depth and whose contracting experiences are already
well-documented, such as Florida.
To determine the factors that influence state DOTs in deciding whether to
contract out activities and the extent to which state DOTs assess costs
and benefits when making such decisions, we used state DOTs' responses
from our survey regarding the importance of various factors in their
decisions to contract out various highway activities and in their
decisions to continue to perform work with in-house staff. In addition, we
relied on information gathered in our in-depth interviews to further
determine the importance of various factors in contracting decisions and
to gain important contextual information on these various factors that
could not be achieved through the survey. We also reviewed the literature
to identify existing studies that sought to consider the costs and
benefits of contracting out highway activities versus performing them with
in-house staff, and we compiled and summarized the results from various
studies. We also identified methodological limitations associated with
such studies and the potential impacts they have on the reliability of any
findings.
To determine whether states' decisions to contract out highway activities
were associated with certain demographic or economic conditions in each
state, we conducted a correlation analysis. For the analysis, we used data
from our survey on the percentage of work that state DOTs contract out for
7 types of activities. Although all 50 states completed the survey, some
states did not provide values for all activities. The number of states
that provided values ranges from 39 to 46, depending on the activity. We
then identified a series of state characteristics to test whether they are
associated with the extent to which states contract out these activities.
These variables included population, population density, population growth
over the past 5 and 10 years, the percentage of a state's population
living in urban areas, annual vehicle miles traveled in the state, annual
vehicle miles traveled per person in the state, total lane miles per
person in the state, the number of road miles with a pavement
international roughness index score greater than 170 (a measure of
pavement quality, with a score greater than 170 indicating pavement of
poor quality) per person in the state, state per capita income, state
pension fund liabilities per person, state highway capital outlays per
person, and the change in state highway capital outlays over the past 5
and 10 years. We selected these variables because we could identify
plausible reasons that states with higher values of these variables might
be either more or less likely than states with lower values to contract
out highway activities. We identified reasons that each of these variables
could impact either highway demand or supply conditions in a state, or
could impact the state's ability to conduct highway activities with an
in-house workforce. Data on these various state characteristics were
compiled from the U.S. Census, FHWA, and the Public Fund Survey.^1 We then
calculated the correlation coefficients for the 98 relationships to be
tested and analyzed the results to see if there were any clear positive or
negative associations among the variables and to assess the strength of
such associations, as shown in table 6. We did not, however, analyze the
associations among these variables in a multivariable analysis because of
the lack of a strong conceptual framework based in economic theory for
determining an appropriate model. Given this, our analysis only considered
the percentage of work contracted out singly with each economic or
demographic characteristic selected and did not control for the effects of
other characteristics on contracting levels. Multivariable analysis might
have revealed more complex relationships among the state characteristics
and between those characteristics and the level of contracting out highway
activities.
^1The Public Fund Survey is an online compendium of key characteristics of
102 public retirement systems that administer pension and other benefits
for 12.8 million active public employees and 5.9 million retirees and
other annuitants, and that hold more than $2.1 trillion in trust for these
participants. The membership and assets of systems included in the survey
represent more than 85 percent of the nation's total public retirement
system community. The survey is sponsored by the National Association of
State Retirement Administrators and the National Council on Teacher
Retirement.
Table 6: Correlation Coefficients
Construction Federal-aid
engineering eligible
Preliminary and preventive Routine Ongoing
Variables engineering Design inspection maintenance maintenance operations Right-of-way
Population
density 0.434 0.327 0.244 (0.141) 0.088 0.147 (0.101)
Annual
vehicle miles
traveled per
person (0.252) (0.226) (0.335) 0.163 0.034 (0.409) (0.047)
Total lane
miles per
person (0.251) (0.282) (0.213) (0.039) (0.289) (0.294) (0.046)
Number of
lane miles
with an
International
Roughness
Index >170
per total
lane miles 0.179 (0.053) 0.028 (0.092) (0.084) 0.111 (0.174)
Per capita
income 0.221 0.059 0.322 (0.153) (0.052) 0.082 (0.113)
Percentage of
state
population
living in
urban areas 0.409 0.411 0.452 (0.021) 0.224 0.372 0.131
State pension
fund
liability per
person 0.003 0.107 0.211 (0.006) (0.093) 0.055 (0.040)
Highway
capital
outlays per
person (0.179) (0.096) (0.174) (0.181) (0.224) (0.015) (0.119)
Population 0.030 (0.057) 0.288 0.043 0.213 0.220 0.010
Annual
vehicle miles 0.034 (0.042) 0.270 0.061 0.292 0.238 0.000
Population
growth (past
10 years) (0.003) 0.219 0.184 0.071 0.226 0.031 0.091
Population
growth (past
5 years) 0.013 0.224 0.191 0.082 0.225 0.064 0.084
Change in
capital
outlays (past
10 years) 0.157 0.051 0.050 (0.053) 0.249 0.003 0.037
Change in
capital
outlays (past
5 years) 0.051 0.124 0.184 (0.229) 0.116 0.017 (0.109)
Source: GAO survey results.
To determine how state DOTs protect the public interest when work is
contracted out, particularly when consultants and contractors are given
substantial responsibility for project and service quality and delivery,
we used information from our in-depth interviews with the state DOTs. In
our interviews with the state DOTs, we gathered information regarding the
manner in which state DOTs define and determine the key interests of the
public. We asked state DOTs about the various controls they put in place
throughout the highway delivery process to ensure that the public interest
is protected when work is contracted out. Along with this, we asked about
prequalification procedures, bidding processes, the oversight and
monitoring of consultants and contractors while work is being performed,
and quality assurance programs, among other things. We also conducted
interviews with industry stakeholders from six different organizations
knowledgeable about the outsourcing of highway activities to obtain
additional perspectives on how state DOTs seek to protect the public
interest. In addition, we used state DOT responses from our survey to
identify various alternative contract types and techniques that states use
to achieve desired outcomes, such as time or cost savings, and to
determine how frequently state DOTs use such techniques. Finally, we sent
out a request to auditing agencies in all states for any reports available
on the contracting out practices of state DOTs and reviewed additional
reports discussed in the literature. We reviewed reports from 11 states
that addressed their state DOTs' use of consultants and contractors.
To determine FHWA's role in ensuring that states protect the public
interest, we reviewed applicable federal laws and regulations as well as
FHWA policy and guidance documents. We also interviewed FHWA officials at
the national level as well as at 10 division offices corresponding to the
10 state DOTs we selected for in-depth interviews. FHWA headquarters
offices we met with include the following: the Office of Infrastructure,
the Office of Asset Management, the Office of Professional and Corporate
Development, the Office of Program Administration, and the Office of
Planning, Environment and Realty. In addition, we reviewed program and
process reviews from FHWA's national and division offices to identify key
areas of oversight focus and key findings that have been reached in such
reviews regarding state contracting procedures and quality assurance
procedures.
For this report, we limited the scope of our review to contracts where
firms are paid to provide a service related to highway infrastructure.
Although essentially contractual relationships, we did not include
public-private partnerships--where a firm takes effective ownership of a
facility and assumes control over it, usually for an extended period--in
the scope of our work.
We conducted this performance audit from December 2006 through January
2008 in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Appendix II: Summary of the Cost Comparison Studies That We Reviewed
In our research, we identified a variety of studies that seek to compare
the costs of performing highway activities with in-house staff versus
contracting out the work. A variety of parties have conducted such
studies, including highway departments, state auditing agencies,
academics, industry groups, and employee unions. Some studies focused on
one particular state, while other studies considered a range of states'
experiences. Of the studies we identified, engineering activities (design,
construction engineering and inspection, or both) were the most common
focus, although we also reviewed several studies that examined the
contracting out of maintenance activities. A few studies examined a range
of activities within a state DOT's highway program. While some studies
sought to do their own analyses, many simply reviewed and summarized other
analyses that have been performed. In addition, several of the studies
focused on the methodological challenges faced in conducting cost
comparisons and sought to suggest ways that such studies could more
effectively be structured, rather than actually performing any of their
own cost comparison analyses.
Findings on Costs
Of the studies we reviewed, almost all that considered engineering
activities found contracting out to be more expensive. Generally, studies
attributed this extra expense to higher salaries paid by private firms,
higher overhead costs for private firms, private firms' need to earn a
profit, and highway department contract administration costs. Among those
studies that performed separate analyses for different types of
engineering work, there was some indication that cost differentials may
vary, with consultant and in-house costs being more comparable for certain
types of engineering activities. For example, one study by
PriceWaterhouseCoopers for the Texas DOT found that of the 13 design
activities it considered, consultants were more expensive for 8 of these
activities. The results were inconclusive for the other 5 activities.
Among those 8 activities where consultants were found to be more
expensive, the degree to which they were found to be more expensive varied
from 27 to 97 percent, depending on the activity. Findings as to the
degree by which consultants were more expensive than in-house staff also
varied significantly amongst studies. For example, 1 study that reviewed
16 other engineering cost studies found that of the studies that found
consultants to be more expensive, consultants were found to be anywhere
from less than 16 percent to over 100 percent more expensive.
We reviewed only two studies that found that engineering consultants were
less expensive than using in-house employees. The first study, which was
performed by the state auditing agency in Alaska, found consultants to be
on average 24 percent less costly. The second study was performed by the
Wisconsin Department of Administration and sought to rebut findings in an
earlier Wisconsin highway department study that had found consultants to
be more expensive. We also have identified one other study discussed in
the literature that found that the cost of professional engineering
services, as a percentage of total construction costs, declined as the
proportion of engineering work contracted out increased. A few studies
also found either that there were no significant differences in costs
between in-house and consultant performed engineering work, or that
existing data limitations and difficulties in developing appropriate
methodologies made the accuracy of cost results questionable.
Among those studies that examined differences in costs between in-house
and contracted out maintenance work, the picture was more mixed than for
engineering activities, with some studies indicating the potential for
cost savings through the contracting out of maintenance activities in at
least some situations. Studies cited various reasons why contracting out
maintenance work could potentially result in cost savings, including the
reduced need for state DOTs to make capital investments in expensive
equipment, added flexibility for the highway departments to reduce
staffing during slow periods (such as the winter), and the increased
competition generated by contracting out the work. Studies that identified
cost increases associated with the contracting out of maintenance work
pointed to difficulties in administering contracts and monitoring
performance, to the lack of information to effectively negotiate prices,
and to cost escalation after work is privatized.
Methodological Issues and Other Limitations
We identified a series of methodological issues and other limitations that
make accurate cost comparisons difficult and potentially impact the
reliability of these studies' findings. One of the most problematic
aspects of comparing in-house and consultant costs is establishing an
appropriate overhead rate for in-house work. State DOTs' accounting
systems are often not set up in such a manner that they accurately capture
all relevant overhead costs and appropriately apportion them amongst
individual projects or functional units in a highway department. Also,
data on in-house costs are often incomplete or unreliable. For example,
in-house staff may not accurately bill time spent on a specific project,
thereby distorting in-house costs for that project. Many studies also
leave out costs that may be relevant, such as state insurance costs. There
are also other life-cycle costs, such as the pension costs associated with
additional public employees that are difficult to quantify and not
considered in most studies. Another problem encountered, is that many
studies seek to identify "like" projects and compare the costs of those
performed by in-house employees and those performed by consultants or
contractors. No two projects are the same, however, and it is often
difficult to isolate other variables that may have impacted costs.
A final weakness with the studies that we reviewed is that very few of
them sought to systematically determine the benefits of performing work
in-house versus contracting it out, thereby providing an incomplete
picture of the extent to which contracting out highway activities might or
might not be desirable. Some of the studies did use testimonial evidence
gathered through either surveys or interviews to attempt to make some
assessments of differences in quality, depending on whether work was
performed by in-house staff or contracted out. Of those studies, the
majority found that quality did not vary significantly depending on
whether the work was contracted out or performed in-house. Some studies
also provide anecdotal information on some potential benefits or problems
with contracting out work. Only one study that we reviewed sought to
quantitatively assess differences in quality between in-house and
consultant performed work. This study, performed by the state auditing
agency in Alaska, compared the number of change orders on construction
projects that had been designed by either in-house staff or consultants
and the average costs of such change orders. Using this metric, the
auditing agency found in-house performed design work to be of a higher
quality.
Given that the majority of the state DOTs with we whom we met told us that
they tend to contract out larger, more complicated projects, or those
requiring certain types of expertise not possessed in-house, relying
simply on comparisons of cost may not be appropriate. If consultants are
working on larger, more complicated projects, it is reasonable to expect
that the costs of these activities, such as design work, may be higher.
Also, it is not unreasonable to anticipate that a premium would be paid
for specialized expertise. In addition, none of the studies sought to
systematically quantify whether there are any time savings associated with
contracting out work and what the value of such time savings would be for
road users.
Appendix III: Summary Tables of Our Survey Results
This appendix presents selected results of GAO's Web-based survey of state
DOTs (see tables 7 to 26). The purpose of this survey was to gather
information from the state DOTs about recent trends in their contracting
out of state highway activities. We surveyed the state DOTs about the
extent to which they contract for services across 7 categories of highway
activities, including preliminary engineering, design, construction
engineering and inspection, federal-aid eligible preventive maintenance,
routine maintenance not eligible for federal-aid program funding, ongoing
operations, and right-of-way. We also surveyed state DOTs to determine how
the levels of contracting for these activities have changed over the past
5 years and to gather information about potential future trends in
contracting. In addition, we used the survey to identify which factors
state DOTs said are driving them to contract out activities or to keep
work in-house. Finally, the survey gathered data on state DOTs' use of
alternative contract types and techniques and collected information on
certain contracting concerns that are specific to design-build contracts.
We sent this survey to the 50 state DOTs. We received 50 completed surveys
for a response rate of 100 percent. However, not all states responded to
every survey question. Appendix I contains a more detailed discussion of
our objectives, scope, and methodology. We administered this survey from
mid-June to mid-September 2007.
Table 7: Number of State DOTs That Reported Changes in Professional Staff
over the past 5 Years
Number of state DOTs, by staff changes
Stayed the No basis
Staff Increased Decreased same to judge
a. Planning and environmental 16 13 18 1
b. Design (roadway, bridges, and
traffic engineering) 4 28 17 0
c. Construction engineering and
inspections (inspections,
materials testing, and scheduling) 9 20 20 0
d. Operations (e.g., ongoing
Intelligent Transportation
Systems, toll collection, signal
and sign systems, etc.) 11 8 23 6
e. Maintenance 6 20 20 1
f. Right-of-Way and Utilities 7 15 24 2
g. Other nonadministrative -
Specify below. 2 10 23 12
Source: GAO survey results.
Table 8: Number of State DOTs That Reported Contracting Out Highway
Activities in the Most Recently Completed Fiscal Year (Percentage of Total
Expenditures for That Activity)
Number of state DOTs, by percentage of total
expenditures contracted out for that activity
Activity 0 1 to 25 26 to 50 51 to 75 76 to 100
a. Preliminary engineering 0 8 14 11 10
b. Design 0 5 15 20 4
c. Construction engineering
and inspection 4 25 10 3 1
d. Preventive maintenance 5 4 3 4 23
e. Routine maintenance 6 23 5 3 4
f. Ongoing operations 8 16 5 2 8
g. Right-of-way 1 20 16 6 3
Source: GAO survey results.
Table 9: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Preliminary Engineering
Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. To meet
federal or
state
legislative
mandates, legal
requirements,
or policy
initiatives 12 8 10 9 8 2
b. Lack of
in-house staff 28 17 3 1 0 0
c. To access
specialized
skills or
equipment 11 20 13 4 0 0
d. To increase
speed of
completion or
to meet
specific time
frames 12 23 9 4 1 0
e. To obtain
cost savings 0 3 10 18 14 4
f. To maintain
flexibility or
manage
variations in
department
workload 14 22 13 0 0 0
g. To identify
innovative
approaches or
new techniques 1 9 17 17 4 1
h. Other
reason(s) 1 1 2 0 2 9
Source: GAO survey results.
Table 10: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Preliminary Engineering Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. Legal restrictions or
policy initiatives
regarding the use of
consultants or
contractors 9 2 2 19 15 1
b. Costs of
consultants/contractors
are greater than using
in-house staff 5 19 13 5 5 1
c. The need to retain
key skills and expertise
in-house 14 19 14 0 0 0
d. Lack of
competition/insufficient
number of bidders 1 2 0 17 24 4
e. Required skills or
expertise are not
available in the private
sector 1 3 4 20 16 4
f. Belief that work can
be performed more
quickly using in-house
staff 5 11 20 6 5 1
g. Belief that work will
be of higher quality if
performed by in-house
staff 3 22 12 7 1 3
h. Concerns with
liability or
accountability for
contracted work 2 1 6 24 13 2
i. Other reason(s) 3 2 0 0 1 9
Source: GAO survey results.
Table 11: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Design Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. To meet
federal or
state
legislative
mandates, legal
requirements,
or policy
initiatives 11 7 6 13 11 2
b. Lack of
in-house staff 25 19 5 1 0 0
c. To access
specialized
skills or
equipment 8 22 10 9 1 0
d. To increase
speed of
completion or
to meet
specific time
frames 10 22 12 4 2 0
e. To obtain
cost savings 0 3 7 18 19 3
f. To maintain
flexibility or
manage
variations in
department
workload 13 23 12 2 0 0
g. To identify
innovative
approaches or
new techniques 1 13 13 20 3 0
h. Other
reason(s) 1 1 0 0 1 11
Source: GAO survey results.
Table 12: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All Design
Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. Legal restrictions or
policy initiatives
regarding the use of
consultants or
contractors 8 3 5 18 14 1
b. Costs of
consultants/contractors
are greater than using
in-house staff 9 16 14 5 5 0
c. The need to retain
key skills and expertise
in-house 23 14 11 1 0 0
d. Lack of
competition/insufficient
number of bidders 1 2 3 15 25 3
e. Required skills or
expertise are not
available in the private
sector 0 3 8 18 17 3
f. Belief that work can
be performed more
quickly using in-house
staff 3 17 15 7 4 3
g. Belief that work will
be of higher quality if
performed by in-house
staff 5 23 13 4 1 3
h. Concerns with
liability or
accountability for
contracted work 0 3 7 23 14 2
i. Other reason(s) 4 2 0 0 1 9
Source: GAO survey results.
Table 13: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Construction Engineering and
Inspection
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. To meet
federal or
state
legislative
mandates, legal
requirements,
or policy
initiatives 11 9 7 9 7 2
b. Lack of
in-house staff 29 10 5 1 0 0
c. To access
specialized
skills or
equipment 7 12 10 13 3 0
d. To increase
speed of
completion or
to meet
specific time
frames 1 11 11 16 6 0
e. To obtain
cost savings 0 1 4 15 21 4
f. To maintain
flexibility or
manage
variations in
department
workload 12 20 7 3 3 0
g. To identify
innovative
approaches or
new techniques 0 4 5 18 16 2
h. Other
reason(s) 0 0 3 0 1 9
Source: GAO survey results.
Table 14: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Construction Engineering and Inspection Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. Legal restrictions or
policy initiatives
regarding the use of
consultants or
contractors 12 1 9 15 9 2
b. Costs of
consultants/contractors
are greater than using
in-house staff 11 19 10 3 4 1
c. The need to retain
key skills and expertise
in-house 18 16 10 2 1 0
d. Lack of
competition/insufficient
number of bidders 1 2 6 12 24 3
e. Required skills or
expertise are not
available in the private
sector 1 6 8 17 13 3
f. Belief that work can
be performed more
quickly using in-house
staff 3 9 13 12 7 3
g. Belief that work will
be of higher quality if
performed by in-house
staff 8 16 9 9 4 2
h. Concerns with
liability or
accountability for
contracted work 3 7 6 19 11 0
i. Other reason(s) 2 4 0 1 1 5
Source: GAO survey results.
Table 15: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Federal-Aid Eligible
Preventive Maintenance Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. To meet
federal or
state
legislative
mandates, legal
requirements,
or policy
initiatives 6 11 8 9 6 0
b. Lack of
in-house staff 18 16 2 3 1 0
c. To access
specialized
skills or
equipment 12 15 9 2 1 0
d. To increase
speed of
completion or
to meet
specific time
frames 7 14 13 5 0 1
e. To obtain
cost savings 4 6 4 18 6 2
f. To maintain
flexibility or
manage
variations in
department
workload 7 12 15 4 1 1
g. To identify
innovative
approaches or
new techniques 0 11 11 12 3 3
h. Other
reason(s) 2 2 0 0 0 8
Source: GAO survey results.
Table 16: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Federal-Aid Eligible Preventive Maintenance Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. Legal restrictions or
policy initiatives
regarding the use of
consultants or
contractors 6 1 7 10 10 3
b. Costs of
consultants/contractors
are greater than using
in-house staff 7 12 9 4 3 2
c. The need to retain
key skills and expertise
in-house 7 11 9 7 1 2
d. Lack of
competition/insufficient
number of bidders 0 4 5 10 14 5
e. Required skills or
expertise are not
available in the private
sector 0 2 8 11 13 3
f. Belief that work can
be performed more
quickly using in-house
staff 6 7 9 9 4 3
g. Belief that work will
be of higher quality if
performed by in-house
staff 3 9 9 10 4 3
h. Concerns with
liability or
accountability for
contracted work 0 4 4 15 12 3
i. Other reason(s) 1 0 0 0 1 9
Source: GAO survey results.
Table 17: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Routine Maintenance
Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. To meet
federal or
state
legislative
mandates, legal
requirements,
or policy
initiatives 4 5 10 6 15 1
b. Lack of
in-house staff 20 15 4 1 1 0
c. To access
specialized
skills or
equipment 7 16 9 4 3 2
d. To increase
speed of
completion or
to meet
specific time
frames 7 12 13 5 4 0
e. To obtain
cost savings 2 7 9 14 6 1
f. To maintain
flexibility or
manage
variations in
department
workload 10 15 12 1 2 1
g. To identify
innovative
approaches or
new techniques 0 4 15 12 8 1
h. Other
reason(s) 0 2 0 0 1 8
Source: GAO survey results.
Table 18: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All Routine
Maintenance Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. Legal restrictions or
policy initiatives
regarding the use of
consultants or
contractors 6 3 6 15 14 0
b. Costs of
consultants/contractors
are greater than using
in-house staff 7 17 11 7 1 2
c. The need to retain
key skills and expertise
in-house 11 17 11 4 1 1
d. Lack of
competition/insufficient
number of bidders 1 3 10 19 9 3
e. Required skills or
expertise are not
available in the private
sector 1 5 14 14 8 3
f. Belief that work can
be performed more
quickly using in-house
staff 7 17 12 6 1 2
g. Belief that work will
be of higher quality if
performed by in-house
staff 5 13 16 7 2 2
h. Concerns with
liability or
accountability for
contracted work 3 8 7 16 9 2
i. Other reason(s) 2 0 0 0 2 5
Source: GAO survey results.
Table 19: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Ongoing Operations
Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. To meet
federal or
state
legislative
mandates, legal
requirements,
or policy
initiatives 3 10 8 10 6 0
b. Lack of
in-house staff 20 11 4 0 2 0
c. To access
specialized
skills or
equipment 13 12 8 3 1 0
d. To increase
speed of
completion or
to meet
specific time
frames 6 8 15 5 3 0
e. To obtain
cost savings 0 3 11 11 11 1
f. To maintain
flexibility or
manage
variations in
department
workload 7 10 11 6 3 0
g. To identify
innovative
approaches or
new techniques 1 10 11 9 5 1
h. Other
reason(s) 0 1 0 0 3 4
Source: GAO survey results.
Table 20: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All Ongoing
Operations Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. Legal restrictions or
policy initiatives
regarding the use of
consultants or
contractors 7 3 9 12 11 1
b. Costs of
consultants/contractors
are greater than using
in-house staff 6 17 12 6 2 0
c. The need to retain
key skills and expertise
in-house 9 21 9 3 1 0
d. Lack of
competition/insufficient
number of bidders 0 3 5 16 15 4
e. Required skills or
expertise are not
available in the private
sector 1 6 6 9 19 2
f. Belief that work can
be performed more
quickly using in-house
staff 7 10 11 11 3 1
g. Belief that work will
be of higher quality if
performed by in-house
staff 3 10 13 11 4 2
h. Concerns with
liability or
accountability for
contracted work 2 5 6 18 11 1
i. Other reason(s) 3 0 0 0 2 5
Source: GAO survey results.
Table 21: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Contract Out Some or All Right-of-Way Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. To meet
federal or
state
legislative
mandates, legal
requirements,
or policy
initiatives 8 7 7 11 15 0
b. Lack of
in-house staff 31 13 1 3 0 0
c. To access
specialized
skills or
equipment 9 17 12 6 4 0
d. To increase
speed of
completion or
to meet
specific time
frames 20 19 7 0 2 0
e. To obtain
cost savings 1 2 9 15 16 5
f. To maintain
flexibility or
manage
variations in
department
workload 20 18 7 2 1 0
g. To identify
innovative
approaches or
new techniques 3 2 8 14 18 2
h. Other
reason(s) 0 0 0 0 4 8
Source: GAO survey results.
Table 22: Number of State DOTs Reporting the Importance of Various Factors
in Their Decision to Use Department Staff to Perform Some or All
Right-of-Way Activities
Number of state DOTs, by importance of factor
No
basis
Very Moderately Of little Of no to
Factor important Important important importance importance judge
a. Legal restrictions or
policy initiatives
regarding the use of
consultants or
contractors 7 4 6 17 14 1
b. Costs of
consultants/contractors
are greater than using
in-house staff 7 17 10 9 3 3
c. The need to retain
key skills and expertise
in-house 18 15 12 1 0 3
d. Lack of
competition/insufficient
number of bidders 0 3 12 17 14 3
e. Required skills or
expertise are not
available in the private
sector 2 7 8 14 14 4
f. Belief that work can
be performed more
quickly using in-house
staff 5 22 8 9 1 4
g. Belief that work will
be of higher quality if
performed by in-house
staff 6 15 10 13 0 3
h. Concerns with
liability or
accountability for
contracted work 0 10 5 17 14 3
i. Other reason(s) 0 0 0 0 2 9
Source: GAO survey results.
Table 23: Number of State DOTs Reporting Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out for Highway Activities over
the past 5 Years
Number of state DOTs, by changes in level of
contracting out
Maintained the
Activity Increased same level Decreased Not sure
a. Preliminary engineering 26 21 3 0
b. Design 27 13 10 0
c. Construction engineering
and inspections 27 15 6 0
d. Federal-aid eligible
preventive maintenance 13 28 2 5
e. Routine maintenance
activities not eligible for
federal-aid program funding 13 32 1 2
f. Ongoing operations 15 24 4 3
g. Right-of-way - appraisals,
acquisitions, and relocation 28 18 3 0
Source: GAO survey results.
Table 24: Number of State DOTs Anticipating Increasing, Decreasing, or
Maintaining the Same Level of Contracting Out over the Next 5 Years
Number of state DOTs, by changes in level of
contracting out
Maintain the
Activity Increase same level Decrease Not sure
a. Preliminary engineering 9 30 9 2
b. Design 9 23 15 3
c. Construction engineering
and inspections 7 27 11 3
d. Federal-aid eligible
preventive maintenance 12 28 2 5
e. Routine maintenance
activities not eligible for
federal-aid program funding 10 31 5 2
f. Ongoing operations 9 30 3 3
g. Right of way - appraisals,
acquisitions, and relocation 11 29 5 4
Source: GAO survey results.
Table 25: Number of State DOTs Using Broader Types of Contracting over the
past 5 Years
Number of state DOTs, by use of broader
types of contracting
Contracts 0 1 to 10 11 and up
a. Design-build 20 20 8
b. Design-build operate-maintain 30 3 0
c. Operations and maintenance
management 30 7 8
d. Project-management 30 11 5
e. Construction manager/ general
contractor 40 6 3
Source: GAO survey results.
Table 26: Number of State DOTs Using Alternative Bid Types and Techniques
over the past 5 Years
Number of state DOTs, by use of alternative
bid types or techniques
No
Not basis
at to
Bid type or technique Frequently Occasionally Rarely all judge
a. Lane rental 4 14 13 19 0
b. Cost + time (A+B) contracts 9 26 8 7 0
c. Multiparameter bidding,
including quality (A+B+C) 1 7 8 34 0
d. Incentives/Disincentives
provisions for early contract
completion 17 29 1 2 0
e. Lump-sum bidding (no
quantities) 6 8 17 19 0
f. Warranties 3 13 21 13 0
g. Other type(s) 1 4 2 1 5
Source: GAO survey results.
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
JayEtta Hecker (202) 512-2834 or [39][email protected]
Staff Acknowledgments
In addition, Andrew Von Ah (Assistant Director), Jay Cherlow, Steve Cohen,
Greg Dybalski, Colin Fallon, Brandon Haller, Bert Japikse, Stuart Kaufman,
Bonnie Pignatiello Leer, Jennifer Mills, Josh Ormond, Minette Richardson,
and Ryan Vaughan made key contributions to this report.
(544134)
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Highlights of [47]GAO-08-198 , a report to the Chairman, Committee on
Transportation and Infrastructure, House of Representatives
January 2008
FEDERAL-AID HIGHWAYS
Increased Reliance on Contractors Can Pose Oversight Challenges for
Federal and State Officials
Pressure on state and local governments to deliver highway projects and
services, and limits on the ability of state departments of transportation
(state DOT) to increase staff levels have led those departments to
contract out a variety of highway activities to the private sector. As
requested, this report addresses (1) recent trends in the contracting of
state highway activities, (2) factors that influence state highway
departments' contracting decisions, (3) how state highway departments
ensure the protection of the public interest when work is contracted out,
and (4) the Federal Highway Administrations' (FHWA) role in ensuring that
states protect the public interest. To complete this work, GAO reviewed
federal guidelines, state auditor reports, and other relevant literature;
conducted a 50-state survey; and interviewed officials from 10 selected
state highway departments, industry officials, and FHWA officials.
[48]What GAO Recommends
GAO recommends that the Secretary of Transportation work with FHWA
division offices in targeting their oversight activities to give
appropriate consideration to identified areas of risk related to the
increased use of consultants and to develop performance measures to help
evaluate the effectiveness of state controls. The Department of
Transportation did not comment on GAO's recommendation but provided
technical clarifications, which GAO incorporated as appropriate.
State DOTs have increased the amount and type of highway activities they
contract out to consultants and contractors. State DOTs are also giving
consultants and contractors more responsibility for ensuring quality in
highway projects, including using consultants to perform construction
engineering and inspection activities as well as quality assurance
activities. Many state officials reported that they expect the amount of
contracted highway activities to level off over the next 5 years, due to
factors such as uncertain highway program funding levels.
State DOTs indicated that the most important factor in their decision to
contract out highway activities is the need to access the manpower and
expertise necessary to ensure the timely delivery of their highway
program, given in-house resource constraints. Officials said that they
must contract out work to keep up with their highway programs. Of the 50
departments that completed GAO's survey, 38 indicated that they have
experienced constant or declining staffing levels over the past 5 years.
While state DOTs consider cost issues when making contracting decisions,
cost savings are rarely the deciding factor in contracting decisions, and
none of the 10 departments that GAO interviewed had a formal process in
place for systematically assessing costs and benefits before entering into
contracts.
State DOT officials that GAO interviewed believe that they have sufficient
tools and procedures in place to select, monitor, and oversee contractors
to ensure that the public interest is protected. However, implementation
of these mechanisms is not consistent across states, and state auditors
reported weaknesses in several states. State DOTs also face additional
challenges in conducting adequate oversight and monitoring, given current
trends in the use of consultants and contractors. For example, while state
employees are always ultimately responsible for highway project
acceptance, they are increasingly further removed from the day-to-day
project oversight. Officials from all 10 state DOTs that GAO interviewed
said that current trends may lead to an erosion of in-house expertise that
could affect the state DOTs' ability to adequately oversee the work of
contractors and consultants in the long term.
Because states have broad latitude in implementing the federal-aid highway
program, FHWA has a limited role in states' use of consultants and
contractors. Typically, FHWA's focus is on ensuring that state DOTs are in
compliance with federal regulations when contracting out, such as ensuring
that federal bidding requirements are met. FHWA has conducted both local
and national reviews that have also identified various risks related to
the increased use of consultants, including weaknesses in state quality
assurance programs and an increased potential for conflicts of interest.
While FHWA has identified these risks, it has not comprehensively assessed
how, if at all, it needs to adjust its oversight efforts to protect the
public interest, given current trends in the use of consultants and
contractors.
References
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33. http://www.gao.gov/cgi-bin/getrpt?GAO-08-44
34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-173
35. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1210SP
36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1210SP
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46. http://www.gao.gov/cgi-bin/getrpt?GAO-08-198
47. http://www.gao.gov/cgi-bin/getrpt?GAO-08-198
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