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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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· 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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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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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
