3
Contract Administration

INTRODUCTION

The 20-year span of the CA/T project covers a period of change in the administration of public-works projects in the United States. During that time, the previous and long-standing approach of adversarial contracting evolved into what has been described as “modern contracting practices,” which are now being used by an increasing number of public owners (Hancher, 1999; Smith, 1993). These practices include explicit consideration of risk allocation; partnering among owner, designers, and construction professionals; alternative dispute resolution; alternative contracting methods such as Design/Build and contracts including charges for closing roadways (commonly called “A+B” contracting); emphasis on quality, safety, and scheduling; and value-engineering change proposals. Altogether, the evolved practices include sophisticated processes for management and administration of design and construction as well as for cost and schedule reporting systems. Consequently, the public owner needs to provide a highly educated and experienced staff to manage and administer the projects and to protect the public interest.

CONTRACTING AND MANAGEMENT PRACTICES

The CA/T project has employed a number of modern contracting practices, including alternative dispute resolution, that successfully resolved more than two-thirds of the project’s 9,163 contract modifications. For example, the committee was informed that construction contracts with a value greater than $20 million utilize dispute-review boards, and that mediation was being used on several contracts. A review of Massachusetts’s Boilerplate Construction Contract Document showed provisions for differing site conditions; value-engineering change proposals (VECPs); voluntary partnering and dispute-resolution boards; and provision of geotechnical information. State regulations preclude the CA/T project from using alternative contracting practices such as Design/Build and A+B.

The CA/T project also has incorporated a wide variety of procedures to support the administration of the project contracts. The committee reviewed a number of these, including those documented in the Project Engineers Manual; Design Policy Memorandum List and Cross References; Partnering Manual; CA/T Project Procedures; and CA/T Construction Contract Administration Manual (MTA; MTA, 2002a; MTA, 1998; MTA, 2002b; MTA, 2002c). Additionally, over the course of the study, information about additional techniques being used for contract administration—including meetings, reports, audits, and oversight—was presented to the committee.



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3 Contract Administration INTRODUCTION The 20-year span of the CA/T project covers a period of change in the administration of public-works projects in the United States. During that time, the previous and long-standing approach of adversarial contracting evolved into what has been described as “modern contracting practices,” which are now being used by an increasing number of public owners (Hancher, 1999; Smith, 1993). These practices include explicit consideration of risk allocation; partnering among owner, designers, and construction professionals; alternative dispute resolution; alternative contracting methods such as Design/Build and contracts including charges for closing roadways (commonly called “A+B” contracting); emphasis on quality, safety, and scheduling; and value-engineering change proposals. Altogether, the evolved practices include sophisticated processes for management and administration of design and construction as well as for cost and schedule reporting systems. Consequently, the public owner needs to provide a highly educated and experienced staff to manage and administer the projects and to protect the public interest. CONTRACTING AND MANAGEMENT PRACTICES The CA/T project has employed a number of modern contracting practices, including alternative dispute resolution, that successfully resolved more than two-thirds of the project’s 9,163 contract modifications. For example, the committee was informed that construction contracts with a value greater than $20 million utilize dispute-review boards, and that mediation was being used on several contracts. A review of Massachusetts’s Boilerplate Construction Contract Document showed provisions for differing site conditions; value-engineering change proposals (VECPs); voluntary partnering and dispute-resolution boards; and provision of geotechnical information. State regulations preclude the CA/T project from using alternative contracting practices such as Design/Build and A+B. The CA/T project also has incorporated a wide variety of procedures to support the administration of the project contracts. The committee reviewed a number of these, including those documented in the Project Engineers Manual; Design Policy Memorandum List and Cross References; Partnering Manual; CA/T Project Procedures; and CA/T Construction Contract Administration Manual (MTA; MTA, 2002a; MTA, 1998; MTA, 2002b; MTA, 2002c). Additionally, over the course of the study, information about additional techniques being used for contract administration—including meetings, reports, audits, and oversight—was presented to the committee.

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CLAIMS AND CHANGES Claims Management Settling changes and claims on the project have constituted a significant effort. The term “claim” is used by CA/T management to include all change requests submitted by contractors, including those that are resolved and not contested. The term also covers matters that have not yet been agreed to and could be disputed. The committee was told that as of December 2002, there were approximately 3,200 unresolved construction claims and 350 unresolved engineering claims, with a combined value of $230 million and an average age of over 600 days. The number or cumulative value of the claims that will require actions beyond negotiations and the degree to which mediation or litigation will be necessary to resolve them are not known. It is clear that the exposure of the project to those claims that have been pending for long periods of time is especially significant if interest is included. This is compounded by the increasing difficulty of finding documentation and recollecting details as the issues age, as well as by loss of institutional memory through staffing reductions as the project nears completion. This is already occurring, as a key project staff member currently involved in changes and claims management is leaving. In May 2000, the MTA chairman assigned responsibility for claims and changes of over $250,000 to the MTA legal staff. In the committee’s collective experience, it is the nature and culture of legal staff to favor litigation for resolution of issues—an approach that is not typical of the modern construction industry and not inclusive of the field people who have technical construction backgrounds and knowledge of the issues (TRB, 1998). Therefore this current MTA approach runs the risk of focusing primarily on litigation and may obstruct the use of such standard industry practices as alternative dispute resolution. The project also uses dispute resolution boards (DRBs) to deal with claims on larger issues and contracts. These DRBs issue nonbinding rulings, consistent with the recommendations of the Dispute Review Board Foundation, so neither party is forced to accept the judgment. Some contractors who participated in the committee’s roundtable discussion suggested that the nonbinding nature of the process serves only to benefit the owner. Modifications Historically, changes and claims for the CA/T have been settled for approximately 50 percent of the contractor’s original claimed cost. The IPO estimates that payments for changes and claims have totaled $1.6 billion—9,163 modifications with an average value of $175,000— worth approximately 20 percent of the construction commitments as of October 2002. The committee found it difficult to benchmark these numbers, however, considering the uniqueness of the project from the standpoints of total cost and complexity. There is additional exposure on the $2 billion in construction yet to be completed, and contingency amounts are budgeted to cover these costs. The committee was provided with a breakdown of the categories of contract modifications. Figure 3.1 illustrates that “Schedule Adjustment” and “Scope Transfer & Change” accounted for some 29 percent, or $473 million, of the $1.6 billion in modifications to date. “Design Development” accounted for 16 percent, or $260 million. These costs reflect the

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difficulties encountered in managing the issues associated with incomplete design, schedule issues, and contract interfaces. The committee notes, for example, that scope modification bears a cost—the price of a negotiated change for additional work is greater than the credit that can be negotiated for deleted work. The degree to which contingency has funded scope additions was not specifically identified, although there are categories such as “Other” (28 percent, or $460 million), where it may have been included. FIGURE 3.1 Modification Cause by Dollar (Thousands) (Source: J.Gorman, “Construction Claims and Changes,” Presentation to the Committee on November 11, 2002) The MTA presented to the committee an extensive process now in place for managing claims and changes. The foundation for this is a set of goals and objectives from which procedures and methodologies have been developed and implemented. Cost Recovery The design of the CA/T is largely complete, and project managers are now working to recover costs under the project’s error and omission review program. This also involves contractor backcharges. If a design-engineering firm were liable, it would be required to reimburse the project under its professional liability coverage. But because the project has an owner-controlled insurance program (OCIP), it is possible that this effort could result merely in moving funds from one account to another within the project; making it a symbolic rather than a true cost saving. CONTINGENCY Contingency funds are now budgeted for claims and changes in three categories: construction contracts, management contingency, and MTA CEO contingency. The last two

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categories are funded at $294 million and $40.9 million, respectively. The CEO contingency is controlled exclusively by the MTA chair and is used specifically to offset the added project cost of MHD staff and to expand the claims and changes administration. Within the construction contracts category there are allocations for quantity overruns and underruns, issues and claims, and future allowance. The committee was not presented with specific amounts for these line items. However, their total amount (including two others—police details and unawarded) totals $955.5 million. It would thus appear that the total contingency available is in excess of $900 million for claims and other issues. The most recent audit of the project, in September 2002, indicated that this amount of contingency was sufficient (Deloitte and Touche, 2002). Industry guidelines exist for the development of contingency budgets and their use. For example, the Project Management Institute has extensive information on contingency development and management (PMI, 2001). In general, the process begins with a risk analysis to develop issues that will enable the quantification of a project-contingency allowance. As the project moves through planning, predesign, design, and construction, the contingency percentages are refined because more is known about the project. Industry practices recognize that contingency funds might be required for such things as “items omitted” because of factors such as lack of definition, abnormal conditions, underestimated quantities, changes in regulations and codes, and environmental requirements. A risk analysis is typically used to quantify each of these types of items. Contingency funds are not intended to be used for scope additions or other project enhancements, which should be justified and funded through a separate budget process and receive approvals from top management or a policy board. The challenge for the CA/T project managers will be to use the contingency funds for their intended purpose and at a level that is appropriate for the remaining work. The objective should not be to spend all contingency funds but rather to use them prudently, perhaps reducing the total project cost. The committee is not aware of any inappropriate uses of the contingency funds, but it wishes to state clearly that the availability of contingency funds should not be viewed as an opportunity to fund enhancements or add scope to the project. FINDINGS AND RECOMMENDATIONS Claims Management Finding 5a: The project’s exposure for the unsettled claims and changes is significant. Both the number of claims and their average age have been growing steadily for the past 4 years. As of December 2002 there are more than 3200 open construction issues and 350 engineering issues, with an average age of more than 600 days. This large number of unsettled changes and claims also significantly affects the contractors, as many have substantially completed work for which they have not yet been paid. No documented plan was presented for dealing with this backlog.

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Finding 5b: Responsibility for resolving claims and changes for amounts over $250,000 is currently assigned to the legal staff of the MTA, and the imminent departure of a key staff member may adversely affect staff productivity. Recommendation 5a: Resolution of unsettled changes and claims should be deemed a high priority issue, meriting immediate attention by the MTA. It constitutes a project within the project, to which project management principles should be applied. A special group should be created within the project organization to manage these issues and others related to contract closeout. The group should be located within the construction arm, with support from legal staff, headed by an experienced construction manager, and staffed with experienced closeout managers. This group should have full authority for carrying out its responsibilities, along with the ability to obtain the necessary support. Closeout managers should be recruited from within the existing project organization in order to retain institutional memory, and outside personnel with special claims experience should also be considered in order to bring a broader perspective to the closeout process. Recommendation 5b: A closeout schedule should be developed, along with identification of resources necessary to support it. A target date of July 2004 should be established for resolution of the unsettled claims and changes. Efforts should be made to resolve future issues on a timely basis so as to avoid an even greater accumulation of unresolved issues and costs. Timeliness and fairness, along with protecting the public interest, should be the overarching objectives. Recommendation 5c: Consideration should be given to paying contractors for the estimated direct costs of directed changes and recognized claims in advance of settling payment for other indirect cost that they may be entitled to so that the burden upon contractors and subcontractors carrying these costs can be relieved. MTA and the contractors should agree to a final settlement plan for dealing with other indirect costs as a condition for this earlier payment. Alternative dispute-resolution methods offer the opportunity to provide timely closeout of claims and to reduce their impact on the project and contractors alike. Contingency Management Finding 6: While individual contracts have been analyzed for exposure to changes, comprehensive risk- and contingency-management tools and processes do not appear to be in place. The project now has budgeted for contingencies in three separate categories: construction contracts, management contingency, and MTA CEO contingency. As of December 2002, it appears that the total contingency available is more than $900 million. If these funds remain unused for their intended purpose as the project nears completion, they should not be viewed as a

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funding opportunity for enhancements or added scope. Rather, they should provide an opportunity for reduction in the total project cost. Recommendation 6: The MTA should initiate contingency-management procedures that include: a continual comprehensive risk analysis to quantify and refine contract contingencies, individual contract contingency tracking, and a contingency drawdown plan that includes contingency-use forecasts. Cost Recovery Finding 7: The current cost-recovery program emphasizes legal issues prior to resolution of engineering issues. This process is reported to have replaced a partnering-style relationship with an adversarial process. The program is designed to recover costs from design engineers that could be attributed to errors and omissions in the detailed design of the project. MHD developed the program originally in 1993. The latest program revision (Revision 5) was developed in March 2002 by MTA and places authority to pursue claims with the MTA Chairman. It differs from earlier programs in that the initial evaluation of potential cost recovery has been shifted from the technical working level of the project to staff attorneys and outside legal claims-management consultants. The revised program also combines the cost-recovery processes for design and construction, which presents the risk of confusing engineers’ and contractors’ respective performance standards, levels of risk, and financial responsibilities. The first $500,000 of design-cost recovery would come from the design engineer or its insurance carrier, and the amount beyond that would come from the project OCIP. At the present time the OCIP’s level is $20 million, which is well below the intended $50-million level. This gap results from the financial problems of one of the companies underwriting the OCIP, program so the MTA is currently looking for another insurance underwriter. Meanwhile, the MTA does not expect this temporary setback to threaten the financial health of the project. Recommendation 7: The MTA should take steps to reinstate the engineering-driven process in order to resolve cost-recovery issues. An effort should be made to resolve technical issues before initiating an adversarial process. Additionally, alternate dispute-resolution techniques should be considered to help resolve these issues. The cost-recovery program for design professionals should be well communicated to the affected firms so that there is a clear understanding of the issues and their impacts on the project.

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REFERENCES PMI (Project Management Institute) 2000. “Guide to the Project Management Body of Knowledge.” Project Management Institute, Inc. Newtown Square, PA. Hancher, D.E. 1999. “Contracting Methods for Highway Construction.” TR News. Transportation Research Board. 10–15. Smith, R.J. 1993. “Using Modern Contracting Practices for No-Dig Projects.” Proceedings of North American No-Dig ‘93.NASTT. Paper A1. Massachusetts Turnpike Authority (MTA). Project Engineer’s Manual.Revision 4. Massachusetts Turnpike Authority (MTA). 2002a. Design Policy Memorandum List and Cross References.October. Massachusetts Turnpike Authority (MTA). 2002b. Central Artery/Tunnel Project Procedures. August. Massachusetts Turnpike Authority (MTA). 2002c. Construction Contract Administration Manual, updated August. Massachusetts Turnpike Authority (MTA). 1998. Partnering Manual. January. Transportation Research Board (TRB). 1998. “Managing Transit Construction Contract Claims.” TCRP Synthesis 28. Washington, DC. National Academy Press.