In a bid to ensure cost-effective highway construction practices, highway agencies constantly seek ways to accelerate project design and delivery through implementation of innovative contracting and procurement practices. The concept of warranties, which is one of such promising practices, involves a shift of the burden of construction quality control, product performance and product maintenance from the owner to the contractor. As such, warranty projects are expected to enhance product quality and service life, and ultimately, reduced life-cycle cost. The expected benefits of warranty projects, however, could be offset by their historically higher construction costs. It is therefore necessary to evaluate the costs and benefits of warranty contracts vis-à-vis traditional contracts so that the more cost-effective practice can be identified. The present study reviewed the state of warranty practice in highway pavement construction in Indiana and elsewhere, collects data on warranty and traditional contracts, and carried out statistical analyses to evaluate the relative costs, effectiveness and cost-effectiveness of these two alternative contracting practices. Effectiveness was measured in terms of average pavement condition and pavement service life, and costs were expressed in annualized costs per lane-mile. All costs were adjusted for inflation and economy of scale. The study confirmed that the warranty contracts generally have higher agency costs than traditional contracts, but produced pavements that were superior to their traditional counterparts in terms in average pavement condition (rutting, cracking and roughness) and service life. It was determined that the typical projected treatment life of warranty contract pavement was 25 years while similar traditional contract pavements had a service life of 15 years. The study results suggest that the superiority of warranty projects over traditional projects is more discernible when both cost and effectiveness are viewed over the entire life of the pavement treatment.