General Material Requirements; Warranty Clauses

DEPARTMENT OF TRANSPORTATION

Federal Highway Administration

23 CFR Part 635

[FHWA Docket 95-21]

RIN 2125-AD61

General Material Requirements; Warranty Clauses

AGENCY: Federal Highway Administration (FHWA), DOT.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The FHWA is adopting, as final, a current interim final rule

that revises the use of guaranty and warranty clauses on Federal-aid

highway construction contracts. This final rule permits greater use of

warranties in Federal-aid highway construction contracts within

prescribed limits.

EFFECTIVE DATE: August 25, 1995.

FOR FURTHER INFORMATION CONTACT: Mr. James Daves, Office of

Engineering, (202) 366-0355 or Mr. Wilbert Baccus, Office of the Chief

Counsel, (202) 366-0780, Federal Highway Administration, 400 Seventh

Street, SW., Washington, DC 20590.

SUPPLEMENTARY INFORMATION: On August 25, 1995, the FHWA published in

the Federal Register (60 FR 44271) an interim final rule along with a

request for comments, revising its regulation regarding warranty

clauses on Federal-aid highway construction contracts. That action

permitted the greater use of warranties in Federal-aid highway

construction contracts within prescribed limits.

Discussion of Comments

The public comment period for the interim final rule closed on

October 24, 1995. The FHWA received 20 written responses from 19

organizations including 11 associations, six State Departments of

Transportation (DOTs), and two private companies. The responses

concerning this interim final rule are available for review at the

Federal Highway Administration, Public Docket Room 4232, Office of the

Chief Counsel, 400 Seventh Street, SW., Washington, DC 20590.

Of the 20 responses received, 13 comments did not support the

interim final rule and seven did support the interim final rule. The

significant comments are summarized in the following discussion.

Requiring Warranties

An association responding to the interim final rule stated that by

revising its regulation the FHWA was requiring

[[Page 17244]]

the use of warranty clauses on Federal-aid highway construction

contracts. This statement, however, is inaccurate. The FHWA removed its

regulation prohibiting the use of warranty clauses, but left it to the

State DOTs to decide when or if they will use warranty clauses. If

warranty clauses are used on Federal-aid highway construction

contracts, it will be because the State DOT chooses to use them, with

FHWA concurrence.

Bonding Capacity

Four associations, two private companies and one DOT commented on

the effect of warranty provisions on bonding capacity, particularly on

smaller contractors. They noted that requiring warranties of several

years typically requires the contractor to provide a performance bond

for that period of time. The size of the performance bond could be

quite large and, particularly in the case of smaller contractors, the

effect on their overall bonding capacity could affect their ability to

obtain work. The seven commenters argue that this would effectively

stifle competition for contracts and ultimately increase the cost to

the taxpayers. One commenter felt that the effect on smaller

contractors violates the Regulatory Flexibility Act. Discussion of that

comment is included in the following paragraphs, and later under the

heading ``Regulatory Flexibility Act.''

The FHWA believes that removing the restriction on warranty clauses

will not stifle competition or negatively affect smaller contractors'

overall bonding capacity and ability to obtain work. In the first

place, experience to date has shown no negative effect on the bonding

capacity of small businesses. State DOTs have been following their own

procedures regarding the inclusion of warranties in non-NHS Federal-aid

contracts since the passage of the Intermodal Surface Transportation

Efficiency Act of 1991 (Pub. L. 102-240, 105 Stat. 1914). These non-NHS

projects constitute approximately one-third of the FHWA's Federal-aid

highway program, and have amounted to several billions of dollars worth

of construction each fiscal year. The FHWA has not observed any problem

with the bonding capacity of smaller contractors who perform work

eligible for such warranties. This regulation allows the FHWA simply to

extend the option to use such warranty clauses by the State DOTs on the

remaining two-thirds of the program, and the FHWA does not believe that

this added flexibility will be used to an extent or in such a way as to

negatively impact the bonding capacity of small businesses.

Secondly, the warranties allowed by this regulation are limited to

a specific construction product or feature. This regulation does not

apply to design engineering or full project warranties. The FHWA

believes that this fact will limit the warranties given and, in turn,

the contractor's exposure.

Thirdly, the FHWA anticipates these warranties will be primarily

applied to small specialty or experimental item contracts. As a result,

some small businesses may benefit from the ability to offer warranties

on specialty or experimental items, either included as one element of

the contract or as the main element of the contract. When warranties

are prohibited, such items are often limited to experimental item

contracts because the contracting agent (State DOT) has no assurance of

the item's effectiveness. By removing the restriction on such

warranties, the FHWA believes the smaller contractors may in fact have

greater opportunity to enter the market with their experimental items

because they can be guaranteed by a warranty.

Finally, the FHWA believes that the concern over this regulation's

effect on the bonding capacity of smaller contractors is overstated.

These warranties are expected to be relatively short term--five years

or less. Given the type of contracts involved (relatively short term

and for a specific product or item), the FHWA expects that the bonding

capacity of smaller contractors will not be adversely affected.

Since publication of the interim final rule, one State DOT has

proposed a warranty contract provision which eliminates the need for a

long term bond and, in turn, the criticism that warranties affect

bonding capacity. In this State's proposal, a portion of the

contractor's bid amount is retained and paid to the contractor on an

annual cycle based on satisfactory performance of the item which has

been warranted. Using such an approach, no long term bond is required

by the contractor. The FHWA sees this as a possible alternative to

bonding warranties, which deserves monitoring to determine if it is

effective.

Increased Flexibility

Six State DOTs (one DOT responded twice) responding to the interim

final rule commented on the increased flexibility afforded to

contracting agencies by the revision of the FHWA regulation. These

commenters saw this as a positive change, and generally supported

allowing contracting agencies to decide when to use warranty clauses

within the framework of the revised regulation, with concurrence by the

FHWA.

Design Liability

Four associations and one private company stated that they opposed

the contractor being liable for the design of a project under the

umbrella of a warranty. They felt that such design exposure was outside

the control of the construction contractor and, therefore,

inappropriate. The warranty regulation as revised by the FHWA states

that the warranty provision shall be for a specific construction

product or feature. There is no mention in the regulation of design

being warranted, as these commenters assert. Furthermore, the warranty

regulation states that the construction contractor will not be

obligated for items over which the contractor has no control. A

construction contractor does not typically have any control over the

design of a project, therefore a warranty provision could not bind them

to the project design.

Administrative Procedure Act

One association commenting on the interim final rule discussed the

publication of an interim final rule as it relates to the

Administrative Procedure Act (APA). That commenter criticized the

FHWA's decision to waive the notice and comment requirements of the

APA, 5 U.S.C. 553, and proceed directly to an interim final rule. The

commenter stated that the interim final rule imposes ``significant new

obligations on the States by granting the government the authority to

mandate greater use of warranties on Federal-aid highway projects.'' In

fact, the interim final rule relieves a restriction and imposes no new

obligation or requirement on the States. It merely enables the States

to include warranty clauses in Federal-aid highway construction

contracts if they find such clauses would be beneficial. Warranty

clauses have been found to enhance the quality of highway construction

projects, so proceeding to an interim final rule in this instance was

in the public interest. Moreover, the FHWA did solicit comments on this

rulemaking and is considering and responding to those comments to the

same extent it would be in the case of a notice of proposed rulemaking.

Semiannual Regulatory Agenda

One association commenting on the interim final rule noted its

objection to the FHWA's failure to publish this rulemaking in the DOT's

Semiannual Regulatory Agenda (Agenda) prior to publication of the

interim final rule. (The current rulemaking was published

[[Page 17245]]

in the DOT's Semiannual Regulatory Agenda on November 28, 1995.) While

the commenter is correct in noting that Executive Order 12866 and the

Regulatory Flexibility Act (RFA) (5 U.S.C. 601-612) require the DOT to

prepare a semiannual regulations agenda for publication in the Federal

Register, neither the Executive Order nor the RFA prevent the FHWA from

publishing a rulemaking document which has not previously been listed

in the Agenda. Section 602(d) explicitly provides that the requirement

to publish such an agenda does not preclude the agency from considering

or acting on any matter not listed in such agenda.

Rulemaking Analyses and Notices

Executive Order 12866 (Regulatory Policies and Procedures) and DOT

Regulatory Policies and Procedures

The FHWA has determined that this action is not a significant

regulatory action within the meaning of Executive Order 12866 or

significant within the meaning of Department of Transportation

regulatory policies and procedures. The revisions would merely

accommodate expanded use of warranty clauses on Federal-aid

construction contracts. Therefore, it is anticipated that the economic

impact of this rulemaking will be minimal and a full regulatory

evaluation is not required.

This final rule makes no changes to the interim final rule and

merely informs the public that the interim final rule remains

unchanged. Therefore, the FHWA finds that good cause exists to dispense

with the 30-day delayed effective date requirement under 5 U.S.C.

553(d).

Regulatory Flexibility Act

In compliance with the Regulatory Flexibility Act (Pub. L. 96-345,

5 U.S.C. 601-612), the FHWA has evaluated the effects of this rule on

small entities. Based on the evaluation, the FHWA hereby certifies that

this action will not have a significant economic impact on a

substantial number of small entities. As stated above, the FHWA made

this determination based on the fact that: (1) experience to date with

non-NHS Federal-aid projects that allow the use of warranties has shown

no negative effect on the bonding capacity of small businesses for non-

NHS Federal-aid projects; (2) some small businesses may benefit from

the ability to enter the market with specialty or experimental items,

either included as one element of the contract or as the main element

of the contract; and (3) given the type of contracts involved

(relatively short term and for a specific product or item), the FHWA

expects that the bonding capacity of smaller contractors will not

experience any significant adverse effect.

Executive Order 12612 (Federalism Assessment)

This action has been analyzed in accordance with the principles and

criteria contained in Executive Order 12612 and it has been determined

that this interim final rule does not have sufficient federalism

implications to warrant the preparation of a separate Federalism

assessment. Nothing in this document preempts any State law or

regulation, and no new requirements or obligations are imposed on

States or local governments by this action. Instead, this interim final

rule provides States with additional discretion to determine for

themselves whether to include warranty clauses in Federal-aid highway

construction contracts for projects on the National Highway System.

Executive Order 12372 (Intergovernmental Review)

Catalog of Federal Domestic Assistance Program Number 20.205,

Highway Planning and Construction. The regulations implementing

Executive Order 12372 regarding intergovernmental consultation on

Federal programs and activities apply to this program.

Paperwork Reduction Act

This action does not contain a collection of information

requirement for purposes of the Paperwork Reduction Act of 1980, 44

U.S.C. 3501-3520.

National Environmental Policy Act

This rulemaking does not have any effect on the environment. It

does not constitute a major action having a significant effect on the

environment, and therefore does not require the preparation of an

environmental impact statement pursuant to the National Environmental

Policy Act of 1969 (42 U.S.C. 4321 et seq.)

Regulation Identification Number

A regulation identification number (RIN) is assigned to each

regulatory action listed in the Unified Agenda of Federal Regulations.

The Regulatory Information Service Center publishes the Unified Agenda

in April and October of each year. The RIN contained in the heading of

this document can be used to cross reference this action with the

Unified Agenda.

List of Subjects in 23 CFR Part 635

Government contracts, Grant programs--transportation, Highways and

roads.

In consideration of the foregoing and under the authority of 23

U.S.C. 315, the interim final rule amending the authority for 23 CFR

part 635 and revising Sec. 635.413 which was published at 60 FR 44271,

August 25, 1995 is adopted as final without change.

Issued on: April 3, 1996.

Rodney E. Slater,

Federal Highway Administrator.

[FR Doc. 96-9558 Filed 4-18-96; 8:45 am]

BILLING CODE 4910-22-P