Valuing the Warranty Ceiling Clause on New Mexico Highway 44 Using a Binomial Lattice Model

Abstract

In 1998 the New Mexico State Highway and Transportation Department (NMSHTD) agreed to pay $60 million for a 20-year pavement warranty on their Route 44 project (NM 44, now US 550). The warranty includes a ceiling clause that caps total expenditures at $110 million. As the first long-term highway warranty in the United States, the transaction set a controversial precedent that parties interested in innovative highway contracting, including other state department of transportations (DOTs), the USDOT, sureties, and contractors, view as a test case for evaluating pricing and cost-effectiveness. An interim audit report published by the State of New Mexico [Abbey (2004).