Risk-Based Model for Pricing Highway Infrastructure Warranties

Abstract

Warranties have been used by many highway agencies in response to increased demand for including quality concepts in all phases of the highway life cycle and to guard against premature infrastructure failures. Currently, warranty bid prices are often estimated subjectively due to the lack of a systematic methodology for quantifying warranty servicing costs for highway infrastructures. A risk-based model is presented here to fill this gap. The model is founded on Kaplan and Garrick’s theory of quantitative risk assessment and considers the warranted item’s probability of failure (as defined in the warranty clause) and the projected cost of repairing the failure. Probability of failure is determined using survival analysis of actual historical performance data. The model was demonstrated and tested using two hypothetical pavement construction projects in northern Illinois. The computed warranty cost is within the range of actual warranty bid prices for comparable projects, indicating the applicability of the proposed approach. Contractors and surety companies can use this model to make better informed decisions regarding the bidding and pricing of highway construction warranties.