Outdated procurement concepts hinder cost saving benefits
SKOKIE, Ill. — Until recently, asphaltenjoyed a lower “initial bid” and, according to some, a “life cycle” paving cost advantage compared to concrete. Even though since 2005 liquid asphalt prices have increased annually 12 percent and concrete only four percent.
A recent report by the Portland Cement Association (PCA) shows that some states’ department of transportation (DOT) procurement practices hinder “free market” dynamics economics. These practices could be costing states and taxpayers billions of dollars in unnecessary paving initiatives.
The report, “Paving, The New Realities,” by PCA chief economist Ed Sullivan, details the world economic growth dynamics that have resulted in the elimination of asphalt’s paving cost advantage, both on initial bid and life-cycle costs.
Unfortunately, states are not taking full advantage of the cost-savings concrete affords. State DOT procurement practices that include escalators, non-use of alternative material bidding, flawed life-cycle cost advantage (LCCA) calculations and the lack of equivalent paving design are slowing concrete’s penetration of the paving market and costing taxpayers billions of dollars.
Asphalt cost escalator clauses are a price adjustment provision that allow asphalt paving contractors to adjust their construction price based on a fluctuation in liquid asphalt cost. This practice can result in DOTs choosing a more expensive paving option and significant cost overruns.
“While escalators, for example, may have been a prudent policy for the 1970s, they have no place in the context of the new paving realities. Today they mask unneeded cost overruns caused by asphalt’s price volatility. PCA estimates that escalators have cost states roughly $70 million annually in cost overruns since 2008,” said Sullivan. “The new realities in the road construction materials markets will force DOTs to make huge changes to how they evaluate road-paving projects.”
During 2010-2011 concrete’s initial cost advantage over asphalt increased to $78,500 in 2010 and $192,700 in 2011 per one-mile standard two-lane roadway. Using Wisconsin DOT software, PCA estimates by 2015 concrete paved roads will enjoy a $266,185 initial bid cost for the same road - roughly a 30 percent savings and the savings will grow to 44 percent by 2025.
Currently concrete roads have a $372,466 LCCA over asphalt for a one-mile standard two-lane roadway – or roughly a 37 percent savings. By 2015, this will increase to a 42 percent savings, and to 53 percent by 2025.
“A financial portfolio approach that disperses risk and returns is typically recommended. America, however, has bet heavily on asphalt roads. They represent 94 percent of all paved roadways. These roadways are highly vulnerable to high maintenance cost risks in the future due to volatile asphalt prices and relatively short life span before a major repaving is required,” remarked Sullivan. He continued, “DOTs can hedge against the risk of future increases in paving materials by minimizing their portfolio of non-durable roadways. Quite simply, increased reliance on more durable concrete paved roads with less reliance on future maintenance costs equates to a paving material price hedging strategy for DOTs.”
Based in Skokie, Ill., the Portland Cement Association represents cement companies in the United States and Canada. It conducts market development, engineering, research, education, and public affairs programs.More information on PCA programs is available at www.cement.org.
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Note to editors: To obtain a copy of PCA’s report contact Patti Flesher at firstname.lastname@example.org.