The results of research performed for the Kentucky Transportation Cabinet on the development of a quality-based prequalification system for contractors desiring to do work for the cabinet's Department of Highways (DOH) are reported. For many years Kentucky has had a formal contractor prequalification system that establishes both the type of work that a contractor may perform for DOH and the maximum dollar volume of work that the contractor can do, including work done for other clients, at one time. It was desired to strengthen the weight given to work quality in the prequalification analysis. A new performance evaluation was developed for highway engineers to evaluate the performance of contractors on projects. This will be done annually for all projects or at the end of the project if it is completed before the end of a year. The contractor is given a copy of the annual evaluation and can appeal the rating. A summary rating is calculated for each contractor and subcontractor and is based on the performance ratings for all projects that the contractor and subcontractor worked on for DOH during the year. This overall rating is used in the prequalification process to determine the amount of work that will be allowed in the coming year. Lower-quality work will reduce the allowable work volume, whereas high-quality work will increase the allowable work volume. There is also an appeals process for the final work volume limit set each year. A new performance evaluation was also developed to allow the contractor to evaluate the performance of DOH on a project each year. DOH will use this information to improve its processes and to develop training for its personnel.