Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts (2010)

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TRANSPORTAT ION RESEARCH BOARD WASHINGTON, D.C. 2010 www.TRB.org N A T I O N A L C O O P E R A T I V E H I G H W A Y R E S E A R C H P R O G R A M NCHRP REPORT 652 Subscriber Categories Administration and Management • Construction • Economics • Finance • Highways • Planning and Forecasting Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts Gary Fick TRINITY CONSTRUCTION MANAGEMENT SERVICES, INC. Edmond, OK Ells Tom Cackler Ames, IA Steve Trost STRATEGIC SOLUTIONS INTERNATIONAL, LLC Sillwater, OK Lee Vanzler Blacksburg, VA Research sponsored by the American Association of State Highway and Transportation Officials in cooperation with the Federal Highway Administration

NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM Systematic, well-designed research provides the most effective approach to the solution of many problems facing highway administrators and engineers. Often, highway problems are of local interest and can best be studied by highway departments individually or in cooperation with their state universities and others. However, the accelerating growth of highway transportation develops increasingly complex problems of wide interest to highway authorities. These problems are best studied through a coordinated program of cooperative research. In recognition of these needs, the highway administrators of the American Association of State Highway and Transportation Officials initiated in 1962 an objective national highway research program employing modern scientific techniques. This program is supported on a continuing basis by funds from participating member states of the Association and it receives the full cooperation and support of the Federal Highway Administration, United States Department of Transportation. The Transportation Research Board of the National Academies was requested by the Association to administer the research program because of the Board’s recognized objectivity and understanding of modern research practices. 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Published reports of the NATIONAL COOPERATIVE HIGHWAY RESEARCH PROGRAM are available from: Transportation Research Board Business Office 500 Fifth Street, NW Washington, DC 20001 and can be ordered through the Internet at: http://www.national-academies.org/trb/bookstore Printed in the United States of America NCHRP REPORT 652 Project 10-58(01) ISSN 0077-5614 ISBN 978-0-309-15478-9 Library of Congress Control Number 2010929164 © 2010 National Academy of Sciences. All rights reserved. COPYRIGHT INFORMATION Authors herein are responsible for the authenticity of their materials and for obtaining written permissions from publishers or persons who own the copyright to any previously published or copyrighted material used herein. Cooperative Research Programs (CRP) grants permission to reproduce material in this publication for classroom and not-for-profit purposes. Permission is given with the understanding that none of the material will be used to imply TRB, AASHTO, FAA, FHWA, FMCSA, FTA, or Transit Development Corporation endorsement of a particular product, method, or practice. It is expected that those reproducing the material in this document for educational and not-for-profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission from CRP. NOTICE The project that is the subject of this report was a part of the National Cooperative Highway Research Program, conducted by the Transportation Research Board with the approval of the Governing Board of the National Research Council. The members of the technical panel selected to monitor this project and to review this report were chosen for their special competencies and with regard for appropriate balance. The report was reviewed by the technical panel and accepted for publication according to procedures established and overseen by the Transportation Research Board and approved by the Governing Board of the National Research Council. The opinions and conclusions expressed or implied in this report are those of the researchers who performed the research and are not necessarily those of the Transportation Research Board, the National Research Council, or the program sponsors. The Transportation Research Board of the National Academies, the National Research Council, and the sponsors of the National Cooperative Highway Research Program do not endorse products or manufacturers. Trade or manufacturers’ names appear herein solely because they are considered essential to the object of the report.

CRP STAFF FOR NCHRP REPORT 652 Christopher W. Jenks, Director, Cooperative Research Programs Crawford F. Jencks, Deputy Director, Cooperative Research Programs David A. Reynaud, Senior Program Officer Megan Chamberlain, Senior Program Assistant Eileen P. Delaney, Director of Publications Kami Cabral, Editor NCHRP PROJECT 10-58(01) PANEL Field of Materials and Construction— Area of Specifications, Procedures, and Practices Donald J. Miller, Wisconsin DOT (Chair) Jennifer Balis, Federal Highway Administration Mark Brown, Zachry Construction Corp., San Antonio, TX Kevin J. Dayton, Washington State DOT Donn E. Hancher, University of Kentucky David Kent, New York State DOT Rita B. Leahy, Asphalt Pavement Association of California Daniel Liston, Virginia DOT Eugene E. Mallette, California DOT David G. Manning, St. Catharines, Ontario Ananth Prasad, HNTB Corp., Tallahassee, FL Peter A. Kopac, FHWA Liaison Frederick Hejl, TRB Liaison AUTHOR ACKNOWLEDGMENTS This report is the product of research conducted under NCHRP Project 10-58(01) “Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts.” Gary Fick, Vice-President of Trinity Construction Management Services, Inc., served as the Principal Investigator and primary author of the report. Other individuals contributing to the research project include Tom Cackler, Consultant; Steve Trost, President, Strategic Solutions International, LLC; and Lee Vanzler, Consultant. The research team would like to acknowledge the participation and cooperation of six state departments of transportation (DOTs) that contributed greatly to the research effort. Their assistance was critical to the success of the research project: California Department of Transportation (Caltrans), Florida Depart- ment of Transportation (FDOT), New York State Department of Transportation (NYSDOT), Ohio Department of Transportation (Ohio DOT), Oklahoma Department of Transportation (Oklahoma DOT) and Utah Department of Transportation (UDOT). Along with these agencies, thanks are extended to 12 contractors who provided the research team with input and feedback regarding the impact of incentive/disincentive (I/D) provisions on their operations. The contractors were solicited to participate with the promise of anonymity to ensure unbiased feedback. Finally, the research team wishes to express gratitude to the NCHRP staff and the NCHRP Project 10- 58(01) panel. C O O P E R A T I V E R E S E A R C H P R O G R A M S

This report will be of interest to state and local highway agency construction managers and contractors with regard to learning about best practices of time-related incentive and disincentive contract provisions and their effect on staffing levels, productivity, project cost, quality, contract administration, and the contractor’s operations and innovations. The report also presents a decision process guide to use as a template for crafting the incentive/disincentive provisions. Transportation agencies are under increasing pressure to reduce the duration of highway construction projects. This pressure stems from the desire to reduce traffic delays and other inconveniences to the traveling public. To reduce the duration of construction projects, many agencies have turned to the use of time-related incentive and disincentive contract provisions. There is a need to better understand the use of these provisions in highway con- struction contracts, including the type of contract provisions, the extent to which they are used, their record of success, the criteria used to determine when they are appropriate, the most appropriate provisions to select, the methods used to determine the dollar amount of these contract provisions, and their effects on the quality of the constructed project. Under NCHRP Project 10-58(01), Trinity Construction Management Services, Inc. developed recommendations for effective use of time-related incentive and disincentive provisions in highway construction contracts. The researchers reviewed domestic and inter- national literature and collected information from highway agencies and construction con- tractors on the use and effectiveness of these provisions. After analyzing the effectiveness of these provisions, encountering both effective and ineffective applications, the researchers identified and quantified, where possible, the impacts of these provisions on both highway agencies and contractors’ staffing levels, productivity, project cost, quality, contract admin- istration, and contractor operations and innovations. The researchers created a decision process guide for determining the most suitable type of incentive or disincentive contract provision, and for determining the dollar amount to be applied to these provisions and the conditions under which they are the most appropriate. The report also identifies best prac- tices for mitigating negative impact of these contract provisions. F O R E W O R D By David A. Reynaud Staff Officer Transportation Research Board

C O N T E N T S 1 Summary 5 Chapter 1 Project Background, Objectives, and Research Approach 10 Chapter 2 Discussion of I/D Impacts on Project Factors 24 Chapter 3 Estimating Incentives and Disincentives 27 Chapter 4 Guidelines for the Effective Use of I/D Provisions 41 Chapter 5 Evaluating I/D Effectiveness 42 References 43 Appendix A Bibliography 48 Appendix B Summary of I/D Provisions 55 Appendix C Research Results