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1 SUMMARY Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts Time-related incentive and disincentive (I/D) provisions have been widely used by U.S. STAs. The vast majority of these provisions have been successful at accelerating highway construction work, resulting in reduced delays to the traveling public. This project's focus was to identify STAs that have had extensive experience with time-related I/D projects and identify best practices and lessons learned that will lead to the effective use of time-related I/D provisions. Besides reducing road user delays, time-related I/D provisions have other impacts on the STAs and contractors involved with the projects. The impacts of I/D provisions on the following project factors were investigated: · Cost · Innovation · Contract Administration · Staffing · Quality · Safety The following statements provide a concise summary of the impact of time-related I/D provisions on each of the project factors investigated: · Cost--Accelerating construction to achieve earlier completion leads to increased costs. The degree of cost increase depends on many factors. However, market influences from the low bid system used by STAs are a primary contributor to the ultimate cost of the acceleration paid by the STAs. Thus, the price paid for acceleration required by I/D provisions is highly influenced by the competitive bidding process. In most cases, this works to the STAs advantage. · Innovation--I/D provisions motivate contractors to use innovative methods and materials that result in time savings. Incentives for early completion provide the means for contractors to recoup the additional costs associated with these innovative methods and materials. · Contract Administration--Offering a monetary incentive and disincentive for early or late completion places an emphasis on how contract time is measured. Equally important is an equitable process to determine the time impact of excusable delays. The effectiveness of I/D provisions is quickly eroded by ambiguities in the time measurement process and by the occurrence of excusable delays. · Staffing--Accelerated work schedules are often accompanied by an increase in number of working hours per week. This increase affects the contractors and STAs personnel equally. Both contractors and STAs acknowledge the "burn out" impact created by I/D provisions on their human resources. However, none of the STAs and contractors investigated was able to offer any strategies to mitigate this impact.
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2 · Quality--Research results did not indicate that time-related I/Ds have a negative impact on quality. · Safety--Contractors and STAs both indicated that safety practices are unaffected by accelerated work schedules. The safety risk to the public from traveling through construction zones decreases as a result of the shortened time of exposure. Understanding the impacts of time-related I/D provisions on project factors leads to guidelines for the effective use of I/Ds. A list of these guidelines for the effective use of I/D provisions includes the following: · Projects that may be candidates for the inclusion of an I/D provision should be identified early in the project development process. Considering I/D impacts throughout the design process will result in plans and specifications that are well coordinated with I/D milestones. · When a competitive bidding market exists, STAs should consider A+B I/D provisions as the preferred method for obtaining accelerated construction at the lowest cost. · Increase the pool of available bidders by allowing flexibility between the bid award and start of construction. · Incentives should be capped as a method to reduce the STA's risk of overpaying for acceleration. · Measurement of contract time should be based on calendar days as opposed to working days or modified calendar days. · Incentive rates should use road user cost (RUC) as the basis. Estimates of RUC should be the result of a documented and uniformly applied process. Improving the state-of-practice for time-related I/D provisions through the implementa- tion of the research findings and proposed guidelines will provide the traveling public with increased value. TERMS Many different types of time-related I/D provisions are in use or have been used by state transportation agencies (STAs). At the most basic level, I/D provisions can be categorized into two groups: A+B and I/D. The primary distinction between these two types is that the contractor determines the contract duration for an A+B contract while the STA specifies the contract time for an I/D contract. There are many variations and local modifications on these two basic provisions with state and local laws often impacting the details of time-related provisions. These variations can be confusing because STAs use similar I/D provisions that have different names. One common factor shared by every STA is the use of liquidated damages. The U.S. Code of Federal Regulations (23 CFR 635.127) requires STAs to establish liquidated damages that, at a minimum, recover the STAs estimated daily construction engineering costs for overruns in contract time. All I/D provisions are used in conjunction with liquidated damages, meaning that the disincentive portion of an I/D provision consists of more than just the minimum agreed to daily engineering construction costs that will be recovered in the case of late completion of a milestone or project. RUC is the most common item included in both the incentive and disincentive rate for a highway project. Technically, there is not a difference between a disincentive and liquidated damages. They are both contractual provisions in which both parties agree to the payment of a monetary sum that is estimated fairly and would prove to be difficult or impossible to quantify after the fact (1). However, in practice, there is a considerable difference between liquidated damages and disincentives because the addition of RUC significantly increases the agreed to monetary
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3 sum that is applied for late completion. For clarity, the guidance contained in this report makes the assumption that liquidated damages are based solely on the recovery of STA daily construc- tion engineering costs and are dealt with independently of I/D provisions that include RUC. Definitions of I/D Types Because there is such a diversity of I/D provisions and names found in use at STAs, the following I/D types are defined for the purpose of establishing a common reference for users of this report. In practice, these I/D types are frequently used in combination and often modified to conform with local practices and local statutes. I/D (calendar or working day) Contractors are motivated to complete a project and critical items of work (milestones) within the number of days determined by the contracting agency through an addition to the contract amount for early completion or a deduction for late completion (2). Calculation of the final incentive or disincentive is the product of a daily rate established by the contracting agency multiplied by the number of days of early or late completion. Calendar Day. Every day listed on the calendar, regardless of whether work is accomplished or allowed by other specifications. Working Day. Any day on which work is planned and could be performed; weekends and holidays are frequently omitted from a working day contract. I/D (complete-by-date) The contracting agency establishes a fixed date for completion and a calculation of the in- centive or disincentive. Cost Plus Time Bidding (Generic A+B) Determination of the low (successful) bidder is based on the sum of cost (A) and time (B). A Portion = Traditional contract cost; the sum of unit prices multiplied by contract quan- tities (3). B Portion = Time bid; the product of number of days determined by the contractor multiplied by the daily rate determined by the contracting agency (4). A+B without I/D The bidder determines the contract duration (B). Contract award is made to the bidder that has the lowest combined total of cost (A) and time (B). However, no incentive is offered for early completion, nor is any disincentive assessed for late completion other than normally specified liquidated damages. Standard specifications are applicable for determining actual contract time used. A+B with I/D Contract duration is determined by the bidder. Award is made to the bidder that has the lowest combined total of cost (A) and time (B). Incentive is paid for early completion or
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4 disincentive is charged for late completion. Actual contract time may be determined by standard specification or by other methods according to special provision(s) of the contract. A+B1+B2+Bn Multiple time values (B1, B2, Bn) represent critical milestones for which the bidder determines the contract duration and the agency determines the daily rate that is applicable to each milestone. Individual incentives or disincentives are applied to the actual completion of milestones. Lane Rental Charges for closing a lane to traffic during construction are established by the contract- ing agency. These charges are based on a rate of dollars per day, dollars per hour or dollars per fraction of an hour (3). Bidders determine the amount of lane rental (lane closure duration x closure rate) needed for completion of the project. In the case where the cost of lane rental is included in other items of work, the contractor is paid for the estimated lane rental and then actual lane rental is deducted from contract revenues, resulting in an incentive or disincentive for completing the project within the estimated lane rental. When lane rental is included as a contract pay item, any underrun in the total lane rental incurred may or may not be paid to the contractor depending on the specification language. Glossary AADT: Average annual daily traffic Contract Item (Pay Item): A specifically described unit of work for which a price (either unit or lump sum) is provided in the contract Contract Time: The total time (calendar days, working days, or completion date) established to complete the project CPM: Critical path method of scheduling RUC (road user cost): The average daily cost to the road user