Work Zone Road User Costs - Concepts and Applications
Chapter 4. Application of WZ RUC Analysis in Contracting/Project Delivery Methods
Time delay has been a chronic problem in the delivery of highway construction projects. In 2002, the General Accounting Office (GAO) observed that it typically takes about 9 to 19 years to plan, gain approval for, and construct a new, major Federally funded highway project that has significant environmental impacts. (Siggerud, Highway Infrastructure: Preliminary Information on the Timely Completion of Highway Construction Projects, Report No. GAO-02-1067T, United States General Accounting Office, Washington, DC, 2002.) Construction delays not only result in cost overruns but also cause adverse economic impacts and disruption to traveling public and local neighborhood. These impacts are more significant in urban areas with high traffic volumes.
Highway agencies increasingly are interested in shortening project delivery to manage the overall impacts of construction delays and associated road user costs. The benefits of shorter construction time are obvious: minimizes inconvenience and disruption of the traveling public, improves the safety performance of both construction crew and traffic, minimizes the adverse economic impacts on local businesses, provides savings in direct agency costs, and minimizes the social costs of traffic delays and additional travel.
Highway agencies use schedule-focused contracting methods and accelerated construction techniques to shorten construction time and minimize WZ RUC. (Fick, G., E. T. Cackler, S. Trost, and L. Vanzler, Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts, Final Report, NCHRP Report No. 652, National Cooperative Highway Research Program, Transportation Research Board, Washington, D.C., 2010. Ellis, R., J. Pyeon, Z. Herbsman, E. Minchin, and K. Molenaar, Evaluation of Alternative Contracting Techniques on Florida DOT Construction Projects, Final Report, Contract No. FDOT BDC51, Submitted to the Florida Department of Transportation, Gainesville, 2007. Anderson, S. D., and I. Damnjanovic, Selection and Evaluation of Alternative Contracting Methods to Accelerate Project Completion, NCHRP Synthesis 379, National Cooperative Highway Research Program, Transportation Research Board, Washington, D.C., 2008.) The schedule-focused methods focus on reducing the number of calendar days of construction, completing the critical project milestones within the intended timeframe, stipulating the hours and days the contractor is allowed to close the roadway lanes for work, and incentivizing the contractor to complete the project ahead of schedule. These contracting methods can be pursued through any project delivery method: traditional, design-build, or construction manager/general contracting (CMGC). Accelerated construction uses various innovative planning, design, materials, and construction methods to reduce the installation time.
Both schedule-focused contracting methods and accelerated construction techniques focus on reducing the onsite construction time, which in turn, minimizes the work zone exposure time and associated costs. The deployment of non-traditional contracting methods or accelerated construction techniques to achieve shorter construction time often carries additional costs associated with innovations. This cost premium generally is offset partially or fully with WZ RUC savings gained from shorter work zone time. The computation of WZ RUC thus plays an important role in evaluating the economic efficiency of deploying non-traditional contracting/ construction strategies.
Furthermore, the computation of WZ RUC forms the basis for calculating contractor incentives/disincentives (I/D) set by an agency for early and late project completion. In the Milton Construction Company vs. Alabama case, the Alabama Supreme Court ruled that State of Alabama failed to adequately demonstrate that the disincentive amount was set based on the work zone road user costs. Though the outcome of this case did not set legal precedence for I/D provisions, the ruling emphasizes the primary role of road user costs in establishing I/D provisions.
This chapter presents an overview of schedule-focused alternative contracting strategies, identifying the need for their application, selecting an appropriate strategy based on project needs, determining I/D amounts, and identifying a balance between construction costs and the level of schedule acceleration required for early completion.
Traditionally, the owners of highway facilities have focused on acquiring construction services through low bid contracts—maximum value at minimum cost. (Thomas, H. R., R. D. Ellis, and S.K. Sinha, Improving the Time Performance of Highway Construction Contracts, Final Report, NCHRP Project No. 20-24(12)A, National Cooperative Highway Research Program, Transportation Research Board, Washington, D.C., 2006.) To ensure construction completion on time, owners have used liquidated damages clauses in their contracts. Liquidated damages are imposed to recover the additional construction oversight costs incurred by the owners if the contractor fails to complete the construction on time. Though these penalty mechanisms were put in place to enforce mandatory completion, nearly half of projects were not completed on time. On-schedule performance was worse for larger projects over 5 million dollars, as nearly two-thirds of these projects were not completed on time. (Crossett, J., and Hines, Comparing State Dots’ Construction Project Cost & Schedule Performance – 28 Best Practices from 9 States, Final Report, NCHRP Project 20-24, Task 37A, National Cooperative Highway Research Program, Transportation Research Board, Washington, D.C., 2007.) These findings suggest that the liquidated damages were only partially effective in enforcing project completion time.
With increasing pressures to complete construction on time, owner agencies have turned to non-traditional, schedule-focused contracting methods for use in conjunction with liquidated damages. These methods include:
- I/D for early/late completion.
- Lane rental.
- Cost (A) + time (B) bidding with I/D.
- Interim milestones.
- No-excuse bonus (otherwise called locked incentives).
- Liquidated savings.
- Accelerated construction techniques. (Although an accelerated construction technique is not considered as a contracting strategy, it is often used to shorten project completion time and minimize road user impacts.)
Except for accelerated construction techniques, all these contracting methods have been evaluated on select Federal-aid projects since the 1990s under the FHWA’s SEP-14 program. Of these strategies, A+B bidding and lane rental were declared operational (no longer considered experimental) after a period of evaluation, while the others are under evaluation. These strategies, including accelerated construction techniques, were put in practice in several highway projects under the FHWA’s HfL program.
Schedule-focused methods augment the traditional design-bid-build delivery method by focusing on improving its schedule performance. In addition, design-build and CMGC have been found effective in shortening the construction completion time. The use of CMGC in Federal-aid projects is under SEP-14 evaluation, while the design-build method is no longer considered experimental. Though CMGC and design-build primarily focus on improving the overall project delivery time (i.e., preliminary engineering through construction), the early involvement of the contractor in the pre-construction phases has helped the owner agencies manage work zone impacts and achieve early completion through increased coordination and better planning.
Note: In this guide, the term “contracting strategy” refers to both the contracting method and the project delivery method.
This section presents an overview of the schedule-focused contracting methods and alternative delivery methods.
22.214.171.124 Incentive/Disincentive for Early Completion
FHWA’s Contract Administration Core Curriculum (CACC) Manual defines I/D for early completion as “a contract provision which compensates the contractor for each day that identified critical work is completed ahead of schedule and assesses a deduction for each day that completion of the critical work is delayed.” (FHWA, Contract Administration Core Curriculum Participant’s Manual and Reference Guide, Office of Program Administration, Federal Highway Administration, Washington, D.C., 2006.) In this approach, the contractor is required to complete the project by the engineer’s estimate of the contract time specified in the bid documents. Upon completion, the contractor is rewarded with bonus payments for completing the project ahead of schedule and penalized with disincentive charges for late completion. The owner agency determines both the maximum allowable time and the I/D structure.
The I/D structure and the engineer’s estimate of the contract time should be well justified and determined on a project-by-project basis. The incentive payments should be adequate enough to motivate the contractor to complete the work on or ahead of schedule; in other words, the incentives paid to the contractor should be higher than the additional costs incurred by the contractor for accelerating the work. On the other hand, the disincentive charges for delivery delay should compensate the additional costs incurred by the owner agency and road users.
Note: When both liquidated damages and disincentives are applied in a project, care should be taken not to double count the cost items.
The I/D structure should be established using the road user costs, traffic control and maintenance costs, and construction engineering inspection costs. FHWA recommends a cap of 5 percent of the total contract amount for the maximum incentive payment, while no such cap is recommended on the maximum disincentive amount.
Similarly, the maximum time for completion allowed in the contract (engineer’s estimate) should be well balanced and effective. An unreasonable completion date may attract unbalanced bids, while an incentive payment to contractors is unjustified for little or no effort. Project scheduling using the critical path method (CPM) can help determine an optimal completion time.
The use of I/D provisions is suitable for virtually all types of projects, but especially those with high-traffic volumes in urban areas. Typical projects include new/reconstruction, rehabilitation projects, detour projects, intersection upgrades, and bridge rehabilitation projects. However, I/D generally is not used on non-critical, low WZ RUC projects that create little disruption to traffic, such as signal systems, landscaping, and signing projects.
The advantages and disadvantages of using I/D provisions are summarized in Table 44.
Note: Incentive/disincentive provisions are effective when the agency goal is to minimize work zone impacts and associated road user costs through early completion.
126.96.36.199 A+B Bidding (with I/D)
A+B bidding allows an owner agency to solicit bids for the cost of work items and the time to complete the work and procure them in a single contract. This method involves two components:
- Cost (A): The dollar amount of contract items (equipment, materials, and manpower) for all work to be performed under the traditional low-bid contract.
- Time (B): The dollar amount for the time component of a contract, estimated by multiplying the number of calendar days to complete the work by the daily road user cost.
The cost and time components are combined to arrive at a bid value:
Bid value = (A) + (B x Daily Road User Cost)
The contract is then award to the lowest bid value for contract award. This formula is not used in determining the payment to the contractor. The contractor receives incentives for early completion and is required to pay disincentives (and liquidated damages) for delaying beyond the completion date agreed in the contract.
A+B bidding generally is suitable for time-critical projects such as high-traffic volume roadways, business, tourist, and environmentally sensitive areas. Typical projects include new/reconstruction, rehabilitation projects, simple bridge replacement projects, detour projects, intersection upgrades, and bridge rehabilitation projects. A+B bidding is not required for non-critical, low impact projects such as signal systems, landscaping, and signing projects.
Example 4.1: Illustration of A+B bidding
RUC specified by the agency = $2,000/day
|Bidder||Cost||Number of Calendar Days||Total Bid Amount|
|A||$ 195,000||23||=$ 195,000 + 23 * $ 2,000 =$ 241,000|
|B||$ 198,000||22||=$ 198,000 + 22 * $ 2,000 =$ 242,000|
|C||$ 210,000||17||=$ 210,000 + 17 * $ 2,000 =$ 244,000|
|D||$ 200,000||20||=$ 200,000 + 20 * $ 2,000 =$ 240,000|
|E||$ 205,000||19||=$ 205,000 + 19 * $ 2,000 =$ 243,000|
Winning Bidder: D
The advantages and disadvantages of this method are summarized in Table 45.
Note: A+B bidding allows the market to determine the required contract time to complete the project. It is effective when the owner agency is not certain of its completion time estimates. It is not recommended when few bids are expected. Suitable for time-sensitive projects when combined with I/D.
188.8.131.52 Lane Rental
In lane rental, the contractor pays a rental fee for the time period a lane is closed to through traffic for construction activities. This provision is intended to minimize the disruption of the work zone traffic and to encourage minimal use of lanes for construction activities.
In this approach, the owner agency determines the number and duration of lane closures. The lane rental fee is estimated using the WZ RUC of the closure period. Closures may be continuous or intermittent, restricted to off-peak hours, night work, weekend, or during the execution of specific tasks, such as blasting. (Caputo, F., and S. Scott, Criteria and Guidelines for Innovative Contracting, Final Report, Study No. SD95-07, Submitted to the South Dakota Department of Transportation, Pierre, SD, 1996.) The owner must estimate the closure time accurately, and the methodology for determining closure time should be defined clearly in the specifications. In some cases, the contractor may be allowed to propose the required amount of closure time and number of closures in their bid submissions.4TP 99P4T Lane rental fee can be combined with an I/D provision or may apply only for the period of schedule overrun. Lane rental also can be combined with the A+B bidding method.
Lane rental generally is suitable when detours are long, unavailable, or impractical, or when peak hour traffic is impacted adversely. It is well suited for multiple lane roads with high traffic volumes where there is flexibility for intermittent or temporary lane closures to keep at least one lane open to traffic through the work zone. Typical projects include mill and overlay, temporary widening, patching, diamond grinding, dowel retrofitting, reclamation and recycling, guardrails, striping, signing, bridge painting, crack sealing, signal systems, and traffic management projects. Lane rental is not suitable for projects where long-term permanent lane closures are required, such as bridge re-deck or concrete rehabilitation projects.
The advantages and disadvantages of this method are summarized in Table 46.
Note: Lane rental is effective for projects where the owner wants to encourage the work to done during non-peak hour periods. It is not suitable when full closure is inevitable. For long-term projects, combine lane rental with A+B bidding.
184.108.40.206 No-Excuse Incentives
In this method, the contractor is given a “firm completion date” with no excuses for delay. The contractor receives incentives for completing by or before the specified date but there are no disincentives applied for failure to meet the target date (liquidated damages may apply). This method is also referred to as locked incentive dates.
No-excuse incentive clauses have been successful in encouraging early completion for projects that must be open by an event date, such as a sporting event. However, if construction is not completed by that date, appropriate disincentive or liquidated damage provisions may be used to recover public and agency costs.
No-excuse incentives are suitable for time-critical and full closure projects such as in urban, business, tourist, or environmentally sensitive areas. They are well suited for larger projects with multiple phases where the pace of work progress needs to be controlled.
Note: No-excuse incentives are effective when the owner agency is confident of the contract time estimates. They are suitable for time-critical projects and when few bids are anticipated.
The advantages and disadvantages of this method are summarized in Table 47.
220.127.116.11 Interim Completion Dates (with or without I/D)
In this method, the contractor is required to complete one or more specific portions of a project within a set duration or by a firm completion date. Schedule-related incentives and disincentives may apply.
Note: Interim completion date is effective when the completion of one or more intermediate phases of a project is critical.
18.104.22.168 Liquidated Savings
Under this provision, the contractor receives an incentive amount equal to the savings in the owner agency’s construction oversight costs for completing the project ahead of schedule. The same approach is used for calculating both liquidated savings and liquidated damages.
22.214.171.124 Accelerated Construction Techniques
Accelerated construction uses various techniques and technologies to help reduce construction time while enhancing/maintaining safety and quality. Accelerated construction techniques offer significant advantages over the traditional construction techniques:
- Reduces the on-site construction time.
- Minimizes inconvenience to traveling public.
- Makes the construction process efficient.
- Improves the work zone safety (with reduced exposure time).
- Reduces environmental impacts by minimizing the site access footprint.
- Reduces the associated road user costs.
Acceleration construction techniques include:
- Prefabricated Bridge Elements and Systems (PBES): These prefabricated elements are manufactured at an off-site location under controlled conditions, assembled as structural systems, transported to the construction site, and installed on a prepared foundation. Prefabricated elements include individual structural elements such as partial-depth or full-depth deck panels, pre-cast beams, pier cap, abutment wall, wingwall, and/or footing column, and/or footing. Prefabricated elements include superstructure, substructure, or the entire bridge system itself.
- Heavy Cranes/Transporters for Bridges: Self Propelled Modular Transporters (SPMT) facilitate quick removal of demolished bridge structures and rapid installation of a new superstructure. The SPMT technology reduces the sequential processes of conventional on-site bridge superstructure construction into one step: move prefabricated bridge superstructure to its final position. SPMTs can move the new bridge superstructure or the entire bridge into place in minutes, with construction inspection completed and traffic flow restored within several hours. (FHWA Manual on Use of Self-Propelled Modular Transporters to Move Bridges, Publication No. FHWA-HIF-07-022, Federal Highway Administration, 2007.)
- Pre-cast Concrete Pavement Construction: Prefabricated concrete panels facilitate rapid repair, rehabilitation, and construction of pavements in high-volume-traffic roadways. These panels can be used for single lane replacements, full-depth repairs or full-width construction. These panels can be made thinner than cast-in-place panels, making them ideal for installation under overpasses with limited height clearances. (FHWA, Modular systems reduce traffic congestion and speed project completion.)
- Material Innovations: Use of non-conventional materials, such as rapid strength concrete and polymer modified concrete, minimizes the lane closure time required for constructability reasons and facilitates the early opening of lanes to traffic.
- Non-destructive Testing: Use of non-destructive test devices, such as the light weight falling weight deflectometer and intelligent compaction, provides real-time monitoring of construction quality and saves construction time.
Note: Accelerated construction techniques are effective in high traffic volume areas. They also are effective in areas where detours are long and full closure is inevitable. They are suitable for both emergency and as-planned projects.
Accelerated construction techniques are appropriate for projects that require the least possible lane closure times. Installation of prefabricated bridge elements, systems, or concrete panels requires fewer hours of lane closure, thus limiting traffic disruption to shorter periods during non-peak hours, nights, or weekends. These techniques are suitable for high volume roadways, emergency bridge replacement, evacuation routes, over a railroad or navigable waterway, and locations where detours are long or impractical. These techniques also are suitable for bridges or concrete pavements that impact the critical path duration of the project. (FHWA, Decision-Making Framework for Prefabricated Bridge Elements and Systems (PBES), Publication Number FHWA-HIF-06-030, Federal Highway Administration, May 2006.)
126.96.36.199 Design-Build Projects
Design-build is a project delivery method in which an owner combines procurement for both design and construction services into a single contract from a single private sector entity. In design-build contracting, the owner is responsible for defining the scope and requirements of the project, performing initial design and design oversight, soliciting proposals from bidders to procure services for both final design and construction, and evaluating those proposals for selection, while the responsibilities for final design is shifted to the design-builder.
In the design-build approach, the performance criteria for the project include schedule, project management, and technical and cost factors. Schedule is particularly important because owners typically select design-build as a means to compress the project delivery method. (Molenaar, K. R., and A. D. Songer, “Model for Public Sector Design-Build Project Selection,” Journal of Construction Engineering and Management, American Society of Civil Engineering, Vol. 24, Issue 6, 1998.) The owner agency may require potential contractors to propose a time schedule for project completion in their bid submittal that may include interim milestones to control the pace of the project and a final completion date. The owner agency also may specify criteria for schedule restrictions in the proposal solicitation that include lane closure hours, forbidding certain types of work during specified periods of time, mandating holidays, and implementing security precautions. The contractor-proposed time schedule will then be evaluated (along with other criteria) for award. For low-bid awards, the owner agency can propose the schedule for project completion.
From the WZ RUC perspective, the direct involvement of the design-builder in the pre-construction phases helps to identify appropriate strategies for reducing work zone impacts and overall project delivery time; however, it is imperative that the responsibilities of the design-builder are defined clearly in the proposal solicitation.
Note: Design-build is effective when the owner agency is certain of the design scope. It is suitable for large, innovative, and more complex projects.
The advantages and disadvantages of the design-build contracting are summarized in Table 48.
Construction Manager/General Contractor
CMGC is a two-phase project delivery method where a construction manager, selected by an owner based on qualifications for both preconstruction and construction services of a project, will be at risk for the final cost and time of construction. As W. Strang puts it, “the construction manager is an agent of the Owner in managing the design process, but takes the role of a vendor when a total cost guarantee is given.” (Strang, W., “The Risk in CM at-Risk,” CM eJournal, Construction Management Association of America, McLean, Va., 2004.)
In the first phase, the selected contractor collaborates with the owner and designer in the pre-construction phases to provide inputs particularly on constructability, budgeting, schedule, and materials ; assist in developing a complete contract package; and establish a guaranteed maximum price (GMP), delivery schedule, and construction quality when the design is nearly complete.
In the second phase, the contractor builds the project for a GMP acceptable to the owner. Upon failure to reach an acceptable price, the construction manager is entitled to payment for the pre-construction services, while the owner may put out the project as a low bid design-bid-build project in the market. Upon acceptance, the construction manager is at risk for any expenditure exceeding the GMP. Any cost savings realized in the project may be shared between the owner and the construction manager.
In the pre-construction phase, the construction manager’s services may be utilized in all phases of the project, including but not limited to not limited to planning, design, third-party coordination, constructability reviews, budgeting, cost estimating, scheduling, value engineering, material selection, construction logistics plan, market surveys of construction materials and equipment, contract package development, and other services required in the contract.
The advantages and disadvantages of the CMGC are summarized in Table 49. Note that the advantages listed in this table of are basically linked to the cost, schedule, quality performance of the project, while the disadvantages are mostly related to the contract administration.
In the context of WZ RUC, CMGC allows for the collaboration between the owner and the construction manager in developing a construction phasing and delivery schedule for the project. This approach may be advantageous in expediting project completion time and minimizing the work zone impacts on traffic and the local community, thus reducing road user costs.
In this method, at the time GMP is established, the construction manager establishes construction completion dates for final or substantial completion and any intermediate phases and milestones. The completion dates typically are established in terms of calendar days following the commencement date of the construction phase. In the event the construction manager fails to complete the project or any intermediate phases by the completion dates agreed upon, the construction manager may attract disincentives for late completion. Similarly, depending on the contract agreements, the construction manager may attract incentive bonus for early completion.
Another advantage of CMGC is the ability to incorporate the construction manager’s perspective and inputs in developing MOT strategies. The construction manager either collaborates with the designer in preparing better MOT plans or improves on a prepared plan.
Note: CMGC allows for early participation of the contractor in the planning and design process. It is effective when the owner agency is uncertain of the design scope and is suitable for large, innovative, and more complex projects.
Though suitable for projects of all sizes and complexity, CMGC typically is used for larger, more complex projects with high road user costs. CMGC is appropriate when the owner has difficulties in identifying reasonable schedules and cost estimates for a project and when there is a need for optimizing design and improve constructability.
An owner agency decides on the contracting strategy to be used in the initiation and preliminary phase of a project. The process involves the selection of an appropriate project delivery method followed by a schedule-focused contracting strategy for early completion. The decision making process is influenced by the agency goals, project objectives, and the need to accelerate the project in particular.
In the earlier phases of the project, the owner agency typically establishes the preliminary cost estimates, a tentative time schedule, and milestones, and conducts public meetings and work zone traffic analyses to assess the impact the project will have on the public. Based on the preliminary estimates and impact assessment, the owner agency then establishes the need to accelerate the project, evaluates the project criteria for effective use of schedule-focused contracting methods, and selects an appropriate strategy for early completion. Estimates of key contract parameters, such as daily WZ RUC, I/D structure, accelerated schedule, and associated costs are refined as the design phase progresses. The process typically extends until all the pertinent design details are finalized.
Figure 14 presents a sample process proposed by Sillars (2007) for implementing schedule-focused contracting methods. (Sillars, S. N. Establishing Guidelines for Incentive/Disincentive Contracting at Oregon DOT, Report No. FHWA-OR-RD-07-07, Oregon Department of Transportation, Salem OR, 2007.)
For practitioners, the following references provide a more in-depth review of schedule-focused contracting methods:
- NCHRP Synthesis No. 379: Selection and Evaluation of Alternative Contracting Methods to Accelerate Project Completion — This report summarizes the state of practice of selecting schedule-focused contracting methods to accelerate project completion and to identify driving factors for selecting one method over another.101
- NCHRP Report No. 652: Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts — This report provides recommendations for the effective use of time-related I/D provisions in highway construction contracts.99
The key steps involved in selecting a contracting strategy to expedite project completion are listed as follows:
- Identifying the need for project acceleration
- Selecting a project delivery method
- Selecting a schedule-focused contracting strategy
The first step of the process is to establish the need for using a schedule-focused contracting strategy and shortening the duration of the project. The owner agency may choose to accelerate the project completion to reduce work zone impacts and associated road user costs, in the larger interests of local community and political interests, to complete the project on or before an intended date or to close a gap in the local highway network. The impact assessment also helps in identifying the work zone needs by characterizing the travel and safety impacts on commuter and freight traffic, the economic effects on local business and inconvenience on neighborhood, and associated road user costs.
The agency can develop minimum guidelines to identify the need for project acceleration in the earlier phases of project development based on project characteristics, duration, and threshold levels of traffic delay time and road user costs. If a project meets such minimum guidelines for using schedule-focused contracting methods, the project team can further establish the potential benefits for its use.
FHWA’s Technical Advisory T 5080.10 states that time-related I/D provisions are appropriate for projects identified with selective characteristics and not for routine use. (Willett, T. O., Incentive/Disincentive (I/D) for Early Completion, Technical Advisory T 5080.10, Federal Highway Administration, dated February 8, 1989.) The advisory identifies projects with the following characteristics appropriate for its application:
- High-traffic volumes generally found in urban areas.
- Work that will complete a gap in the highway system.
- Major reconstruction or rehabilitation on an existing facility that will severely disrupt traffic.
- Major bridges out of service.
- Significant impacts to local business and adjacent neighborhood.
- Lengthy detours.
- Significant increase in road user costs.
In addition, an agency may consider the following factors:
- Significant safety issues of workers and traffic are anticipated during construction.
- Where political and local community interests are needed to be accommodated.
- Time-sensitive projects.
- To encourage innovative construction processes.
Table 50 presents a list of questions that can help to identify the need for accelerating project completion. If the answer to several of these questions is YES, choosing a schedule-focused contracting strategy may help achieve the project goals. Guidance on selecting an appropriate contracting strategy is presented in section 4.3.2.
However, the effectiveness of schedule-focused strategy would be lost if the project development process fails to provide complete and well-defined set of plans, specifications, and estimate (PS&E). Schedule-focused methods can be very costly in time as well as money with change orders, design omissions and errors and conflicts, and finally, may lose its effectiveness. These strategies are not recommended for use until the following complications are resolved:
- Right-of-way not secured before the letting date or such issues hinders the sequencing and overall progress of work.
- Third-party conflicts such as permits, municipal agreements, utilities, railroad agreements, hazardous materials environmental/archaeological issues.
- Design is either incomplete; change orders or plan additions are anticipated.
- Field review does not guarantee against restrictions any unfavorable site conditions such as geotechnical and environmental issues.
- Design uncertainties or incomplete design.
- Agency-wide activities that may restrict available resources (staffing, labor, equipment, and material shortages) typically demanded by an accelerated schedule.
Therefore, the owner agency should make sure to resolve these issues before the commencement of construction schedule. The PS&E submittal should be complete before the letting date.
This section provides guidance on selecting a particular contracting strategy for a project to achieve schedule-related objectives. This guidance is intended to support the decision making process of an owner agency and should be used in conjunction with agency goals and any applicable State laws.
188.8.131.52 Selecting a Project Delivery Method
Project Size, Scope, and Complexity
- For small, medium sized, and routine projects, the design-bid-build method will be more appropriate for project delivery. The owner agency will have knowledge, experience, and control over planning, design details, and cost of the project.
- For medium to large, innovative, and more complex projects, alternative project delivery methods (design-build and CMGC) are recommended. Early involvement of the contractor in the design or pre-construction phases will help in better coordination, planning, and sequencing.
- When the owner agency is less certain over the design scope of the project, CMGC will be a more pragmatic choice over design-build. Bringing the contractor into the pre-construction process helps refining the design scope through direct contractor inputs and feedback over design and costs, thereby reducing related risks. Design-build is more appropriate when the owner agency has a clearer vision of the design scope.
- CMGC is a good choice for introducing innovations and new technologies, as the process allows collaboration and control with the contractor. CMGC encourages out-of box innovations that the contractors would not have chosen independently. With the agency’s willingness to share risks and costs, CMGC makes this choice possible by involving the contractor early in the process and thereby providing more time and options to identify the appropriate strategies for risk reduction. (Alder, R. "UDOT Construction Manager General Contract (CMGC) Annual Report," Utah Department of Transportation Project Development Group, Engineering Services and Bridge Design Section, Salt Lake City Utah, 2007, 39pp.) CMGC is preferable to design-build for introducing innovations, as owners sometimes have questions concerning life cycle decisions made by design-builders. Design-build is more appropriate when the owner has knowledge and confidence over the innovations.
Table 51 presents a simple matrix to select an appropriate project delivery method based on road user costs and project completion factors only.
Note: The actual selection of an appropriate project delivery method requires a comprehensive evaluation of a broader range of factors not mentioned herein. For selection of an appropriate project delivery method, practitioners are referred to the following publications:
- State DOT design-build guidelines.
- FHWA’s Design-Build Web Page
- AASHTO Joint Task Force on Design-Build Web Page
- Construction Manager-at-Risk Contracting for Highway Projects (Gransberg, D. and J. S. Shane, Construction Manager-at-Risk Project Delivery for Highway Programs, NCHRP Synthesis 402, National Cooperative Highway Research Program, Transportation Research Board, Washington DC, 2010.
184.108.40.206 Selecting a Schedule-Focused Contracting Strategy
Early Completion Required
- I/D will be more appropriate if the project goal is early completion. Incentives provide motivation to the contractor to complete the project early, whereas disincentives discourage schedule delays.
- Liquidated damages will be more appropriate to ensure completion on time if early completion is not a priority.
- For time-sensitive projects, A+B bidding, no-excuse incentives, and interim milestones are more appropriate. These methods can be used when the project is required to be completed by a specific date. These methods also are appropriate where early completion is preferred, such as in urban, tourist, and environmentally sensitive areas.
- When the project is not time-sensitive, lane rental can help achieve the desired level of work zone performance.
- Generally, for short-term projects, lane rental and no-excuse incentives are suggested.
- For long-term projects, A+B bidding and no-excuse incentives are preferable.
Intermediate or Multiple Phases
- If the completion of one or more intermediate phases of a project is critical, A+B bidding, no-excuse incentives, and interim milestones are recommended. For non-critical phases, lane rental can help achieve the desired level of work zone performance.
- If the goal is to control the pace of a large, multi-phase project, A+B bidding, no-excuse incentives, and interim milestones will be more appropriate.
Detours are Long, Impractical, or Unavailable
- Use of lane rental is recommended when detour alternatives are not feasible and full closure is not required. To be effective, lane rental requires at least one lane should be available for through traffic at all times. Accelerated techniques can be considered for use on case-by-case basis when cost-effective.
- When detour alternatives are not feasible and full closure is inevitable, accelerated construction techniques will be effective. Installation of prefabricated elements and systems requires fewer hours of lane closure and can be scheduled during non-peak hours, nighttime, or weekends, in one or more stages.
Urban Commuter Traffic
- Use of lane rental during non-peak hours is recommended for urban commuter traffic when full closure is not required. Accelerated techniques can be considered for use on case-by-case basis when cost-effective.
- When full closure is inevitable, accelerated construction techniques will be effective. Use of accelerated techniques is recommended in emergency projects.
Owner’s Confidence on Estimated Duration
- When the owner agency is not confident about the estimated project duration, A+B bidding allows the market to determine the number of days of completion. It also provides flexibility to reject bids with unreasonably high or unjustified completion time.
- When the owner agency is confident about the estimated project duration, both A+B bidding and no-excuse incentives can be used.
Table 52 provides a matrix for selecting an appropriate contracting strategy based on the decision rules discussed above.
Note: Schedule-focused contracting strategies typically are used in traditional design-bid-build projects. When design-build and CMGC delivery methods are used, the time-related provisions of schedule-focused contracting methods, such as the number of calendar days for completion of A+B bidding, lane closure restrictions of lane rental method, or interim milestones can be incorporated in the contract provisions of a project utilizing design-build or CMGC methods.
Example 4.2: HfL demonstration project, “Improvements to the 24th Street–I-29/80 Interchange in Council Bluffs”
This example illustrates the selection for appropriate schedule-focused strategy for the 24PthP Street Intersection project in Iowa, an HfL demonstration project, using Tables 52 and 53.
The Iowa DOT, Nebraska Department of Roads, and FHWA, in coordination with the City of Council Bluffs and the Metropolitan Area Planning Agency, proposed improvements to the Council Bluffs Interstate System (CBIS) around Council Bluffs, IA, with improvements extending across the Missouri River on I–80 into Omaha, NE. The proposed improvements were intended to upgrade mobility through the I–80, I–29, and I–480 corridors. The 24th Street interchange reconstruction was selected as a part of the proposed improvements to the CBIS. The primary component of this project was to replace the existing four-span concrete bridge with a wider and longer two-span steel girder bridge. The owner, Iowa DOT, has used partial–depth panels for low–volume bridges, but full–depth panels are still a new concept for high–volume corridors.
24th Street carried AADT of 12,400 vehicles per day (vpd) in 2004 with 14 percent truck volume, while I-29/80 carried an AADT was 81,900 vpd in 2004 with 11 percent truck volume. The 24th Street interchange provides vital access to major businesses and regional attractions in the area that includes a large outdoor retailer, a convention and event center, and several casinos, hotels, and semitruck service centers. Access to these businesses and attractions was a major concern when access from the interstate to 24th Street was restricted. Both the City and the State made a commitment to provide access to these businesses during construction.
Using a conventional cast-in-place construction for bridge replacement would have extended the construction duration over 2 seasons (16 months), and thus resulting in negative mobility and safety impacts on the 24th Street and I-29/80 traffic, and economic implications on local businesses. Therefore, the owner examined the possibility of using accelerated construction methods to reduce construction duration and minimize work zone impacts. The owner convened a constructability review meeting with local contractors to discuss the feasibility of accelerated methods for the project. The contractors were found to favor of a staged construction for one full construction season. Completely closing the bridge to 24th Street traffic and reconstructing the entire bridge would have been the least expensive option in terms of construction costs, but it would have been unacceptable to the surrounding businesses that rely heavily on the interchange. The MOT alternative analysis indicated that it was possible to maintain at least one lane of traffic in each direction and left-turn lanes at all times on 24th Street with the use of phased construction.
Using the information presented above, the 24PthP Street Intersection project was evaluated to identify appropriate contracting strategies for schedule acceleration and project delivery. The selection factors and evaluation results are presented below:
Project Delivery Method:
- Project size = Medium to large.
- Is project routine or innovative? = Innovative.
- Certain over design scope? = Yes.
- In-house design? = Information unavailable. Assumed to be Yes.
- Early cost certainty? = Information unavailable. Assumed to be Yes.
- Certain over constructability? = Partially No. Partial–depth panels for low–volume bridges were used in the past, but full–depth panels in high-volume corridors were for Iowa DOT.
Suggested project delivery strategy (from Table 51) = Design-bid-build. May hire consultants or seek constructability advice from local contractors and trade associations.
Schedule-Focused Contracting Strategy:
- Baseline project duration = Long.
- Time sensitivity? = No.
- Complete early? = Yes.
- Intermediate phases? = No.
- Detours impractical? = No.
- Urban commuter traffic = Yes
- Full closure required? = No.
- Owners confidence on estimated duration? = Low.
Suggested schedule-focused contracting strategy (from Table 52) = A+B bidding with incentive and disincentive, lane rental and/or accelerated construction techniques.
Actual contracting strategies used in the 24PthP Street Intersection project were:
- Convened constructability review from local contractors.
- A+B bidding with I/D.
- Accelerated construction techniques.
Upon the selection of an appropriate contracting strategy for the project, key cost and schedule parameters must be determined in the design stage. These parameters are paramount for the successful execution of the selected strategy and include:
- Daily WZ RUC.
- I/D amount.
- Baseline and accelerated schedule.
- Costs of acceleration.
Figure 15 presents a theoretical construct to illustrate the relationships among these key parameters. Combining the concepts of “time-cost tradeoff” and “time is money,” this model is based on the following rationale:
- Project acceleration requires additional labor, materials, and equipment and therefore costs more money.
- Delaying the project beyond the normal completion time results in increased costs due to inefficient allocation and utilization of resources.
- The longer construction takes, the greater the road user costs and agency overhead costs will be.
Proposed by McFarland et al. (1994), this model can be used to determine the optimum construction completion time at which the direct agency costs and road user costs are balanced. (McFarland, W. F., R. J. Kabat, and R. A. Krammes, Comparison of Contracting Strategies for Reducing Project Completion Time, Report No. FHWA/TX-94/1310-F, Texas Department of Transportation, Austin, TX, 1994.) This model presents at least three cost curves: construction costs, road user costs and construction engineering costs (combined for the presentation purposes), and total project costs.
The construction cost curve represents the contractor’s cost for completing the project (assumed to include a normal profit). For every construction project, the construction cost is the lowest at the baseline duration (point CRLR). Any deviation from this baseline schedule will result in increased construction costs. Expediting completion requires additional contractor effort through tighter schedules and overtime, additional resource mobilization and deployment and/or innovation, and incurs additional costs to the contractor. Extending the completion beyond the baseline duration results in penalty and misallocation and underutilization of resources, and hence incurs additional costs to the contractor. In other words, the construction costs increase with each additional day saved or delayed from the standard schedule.
On the other hand, the agency’s construction oversight cost and WZ RUC increase linearly with project duration. When these indirect costs are combined with the construction costs, the resulting cost curve shifts to the left. In other words, the combined costs are lowest at an optimal duration (point TRLR) shorter than the normal expected duration. Any further acceleration will no longer be justifiable, as the difference between benefits and costs would be negative.
Any difference between the total costs and the construction costs will be used in calculating incentives and disincentives. While the disincentives will be based on the differential road user and construction engineering costs, the incentives should be lower than the disincentives, as the incentive calculation will take the additional amount paid by the agency toward the contractor’s costs of acceleration. However, for practical purposes, both incentives and disincentives are generally kept the same.
These curves can be used as a basis for establishing the key parameters of schedule-focused contracting strategies. However, it should be noted that the cost curves are merely the theoretical constructs of “real world” scenarios. There are several key assumptions behind the development of these curves:
- The owner agency has adequate projects (for sample size) and detailed cost data for developing statistically valid models.
- The agency costs, road user costs, and duration data are estimated accurately.
- There is effective competition among contractors with no collusion.
- The cost curves are deterministic, as opposed to a stochastic model.
Practitioners can use one of the following methods in developing construction cost curves:
- Generic cost vs. duration models can be developed using regression analysis of multiple project data utilizing alternative contracting projects. Such models generally are less sensitive to project specifics and may provide less accurate cost estimates. Therefore, these models should be limited to cursory estimations in the early stages for project delivery. To cite an example, Shr et al. developed polynomial cost models for Florida DOT to estimate project acceleration costs. Cost and duration data from 15 construction projects were used in developing this model. Schedule-focused (alternative) contracting projects were used on all of these projects that included I/D, no-excuse bonus, and A+B bidding. (Shr, J-F., B. P. Thompson, J. S. Russell, B. Ran, and H. P. Tserng, “Determining Minimum Contract Time for Highway Projects,” Transportation Research Record No. 1742, Journal of the Transportation Research Board, Transportation Research Board, Washington, D.C., 2000.)
The polynomial cost model developed to estimate the construction costs is presented as follows:
CC= actual project cost
CRoR = contractor bid price
D = actual days used by the contractor
DRoR = contract time specified in the bid
- More accurate, project-specific cost vs. duration models can be developed using detailed time-cost tradeoff analysis. These models can be developed for project-level applications by computing cost and duration estimates for activities (interchangeably used with work items) on the critical path schedule at various levels of acceleration (by applying different production rates). Developing these models can be cumbersome and computation-intensive, as real-world projects involve hundreds of activities. Furthermore, detailed cost and productivity data are required for each activity.
Example 4.3: Illustration of cost vs. duration relationship
The following example illustrates the relationship between construction costs, road user costs, and duration for a hypothetical highway construction project. Assume that the contract time specified in the bid is same as the normal construction time at which the contractor’s construction costs would be lowest. For sake of illustration, the construction cost model developed by Shr et al. (2000) was used in this example.
1. Using the construction cost model presented in Eq. 1, develop cost vs. duration curve similar to the one shown in Figure 15. Assume that the actual duration used by contractor would vary from the bid duration by +/- 10 days. Identify the optimum duration for project acceleration at which the total project cost will be minimum. The inputs are as follows:
- Road user costs (RUC) = $3,500/day
- Agency’s construction engineering costs (AGCEC) = $500/day
- Contract time specified in the bid (DRoR) = 60 days
- Contractor’s bid price (CRoR) = $3,000,000
The following table presents the information required for constructing the curve:
- Actual duration (D) = DRoR +/- 10 days
- Construction cost CC = use Eq. 1 (proposed by Shr et al., 2000)
- RUC+CC =(Daily WZ RUC + AGCEC) * D
- Total project costs (TCP) = CC + (Daily WZ RUC + AGCEC) * D (i.e. Columns 2+3)
|Actual Duration D (days)||Construction Cost CC
|Total Project Cost ($,000)|
The cost vs. duration curve developed using the information presented in the above table is shown below:
The optimum number of days for project acceleration is 55 days.
Each schedule-focused contracting strategy discussed herein is based on the concept that the owner agency would reimburse a portion of the delay costs to the contractor for shortening the construction delivery time, while the contractor is penalized for delaying the project delivery beyond the allowable time. (Herbsman, Z. J., W. T. Chen, and W. C. Epstein, “Time is Money: Innovative Contracting Methods in Highway Construction,” Journal of Construction Engineering and Management, American Society of Civil Engineering, Vol. 121, No. 3, 1995.) To accomplish the objectives of shorter delivery time, the incentive amount must be sufficient to motivate the contractor to accelerate the project.
If the acceleration costs are equal to or greater than the incentive amount, then there is no real incentive to accelerate production, and the use of I/D provisions will not produce the intended results. If the incentive amount exceeds the costs of delay, the agency cannot justify the use of incentives based on road user cost savings.
The contractor’s costs of acceleration (CA) and road user costs form the lower and upper limits for the incentive/disincentive amount. Therefore, a balance must be struck between the two bounds in determining an appropriate incentive/disincentive amount for the project. (Jaraiedi, M., R. W. Plummer, and M. S. Aber, “Incentive/Disincentive Guidelines for Highway Construction Contracts,” Journal of Construction Engineering and Management, American Society of Civil Engineering, Vol.121, No. 1, 1995. Sillars, D. N., and J. Riedl, “Framework Model for Determining Incentive and Disincentive Amounts,” Transportation Research Record No. 2040, Journal of the Transportation Research Board, Transportation Research Board, Washington, D.C., 2007.) The following equation illustrates the relationship among the I/D amount, WZ RUC, and CA:
CA ≤ I /D ≤ WZ RUC
While most owner agencies can estimate daily road user costs, there is no standardized approach for determining CA. Furthermore, this information generally is not available to agencies. However, individual highway contractors regularly determine this value for their firms. (Sillars, S. N. Establishing Guidelines for Incentive/Disincentive Contracting at Oregon DOT, Report No. FHWA-OR-RD-07-07, Oregon Department of Transportation, Salem OR, 2007.) In such cases, the owner agencies may use a discount factor (DF) to convert WZ RUC to I/D values as illustrated as follows: (Pyeon, J. H., and E. B. Lee, CA4PRS Application for Determination of Incentive/Disincentive Dollar Amount, Presented at the CA4PRS Peer Exchange Workshop, St. Louis, MO, 2010. NJDOT, Road User Cost Manual, New Jersey Department of Transportation, Trenton, NJ, 2001.)
I/D = DF * WZ RUC
In either case, the maximum incentive and disincentive amounts should follow the guidelines of the FHWA’s Technical Advisory T 5080.10.113 The advisory stipulates the maximum incentive payment at 5 percent of the total contract amount, while no cap should be placed on the maximum disincentive amount. Generally, the incentive daily rate should equal the disincentive daily rate. If different rates are selected, the incentive daily rate should not exceed the disincentive daily rate.
At the end of the design stage (i.e., 90 percent design), the daily WZ RUC estimates should be finalized for use in the bidding documents. At this stage, the agency should have finalized the MOT strategy that will be implemented in the construction phase.
Example 4.4: Computing incentives
As a continuation of Example 4.3, assume that the contractor took 58 days to complete the work (2 days earlier than the contract time specified in the bid). Calculate the incentive amount paid the contractor. Assume that the agency paid 40 percent of the total savings to the contractor.
Contractor’s bid price (C) = $3,000,000 (from Example 4.3)
Contract time specified in the bid (D) = 60 days
Actual days used = 58 days
Step 1. Determine the contractor’s CA.
Actual construction cost (for 58 days) = $3,001,600 (from Example 4.3)
Contractor’s CA = $1,600
Step 2. Calculate the agency savings through WZ RUC and AGCEC.
Bid WZ RUC+AGCEC (for 60 days) = $240,000 (from Example 4.3)
Actual WZ RUC+AGCEC (for 58 days) = $232,000 (from Example 4.3)
Savings through WZ RUC and AGCEC = $8,000
Step 3.Compute the I/D paid by the agency to the contractor.
Total savings = $8,000
Discount factor = 40 %
Incentives paid to the contractor = 40% of $8,000 = $3,200
The owner agency should establish a final baseline and accelerated schedule at the end of the design stage. FHWA Technical Advisory 1TTA 5080.15 (FHWA Guide for Construction Contract Time Determination Procedures, Technical Advisory TA 5080.15, Office of Program Administration, Federal Highway Administration, Washington, DC, 2002.) provides procedures for determining contract time, baseline or accelerated, for construction projects. The use of calendar days or completion date is recommended, as it has proven to be most effective in controlling contract times.
1TThe baseline schedule typically is developed using standard production rates, which in turn are based on the agency’s historical productivity rates of 1Tan average contractor working 5 days a week, 8 hours a day. The accelerated schedule can be developed by compressing the baseline schedule using the performance of a good typical contractor working extended shifts with extra workers for 6 or 7 days a week. However, such extended periods of work will result in declining productivity. (Mubarak, S. Construction Project Scheduling and Control, Second Edition, John Wiley & Sons, Inc., 2010.)
Several highway agencies use the CPM (More detailed information of CPM scheduling can be found in text books on construction project scheduling and control) to determine and control project scheduling. The prerequisite for using CPM or other techniques to analyze project schedules is to create a work breakdown structure (WBS). (The work breakdown structure is defined as the decomposition of the total project work into discrete work items or activities in a way that helps to accomplish the work in an organized and detailed manner.) The WBS activities are then mapped to determine the duration of the critical path, which is same as the minimum time required to complete the entire project.
The accelerated project schedule can be established first by identifying the WBS activities on the critical path and then exploring the feasibility of shortening the duration of those activities. As a rule of thumb, the work item with the least acceleration cost is selected first. For example, the baseline schedule may assume that an activity C cannot start until activity B is complete. Reviewing these finish-to-start relationships can help to identify if activity C can be started before activity B is complete.
Another common approach is to shorten the activity duration by achieving higher production rates through efforts such as extended work hours, multiple crews, additional equipment accelerated construction techniques etc. The production rate required to achieve the desired level of acceleration is ascertained. For example, if the baseline duration of an activity is 3 calendar weeks (15 working days), it takes 120 hours to complete that activity. With the same crew size and assuming no productivity loss, extending the work shifts to 10-hr, 6-day weeks means the same activity can be completed in 2 calendar weeks (10 working days).
The level of acceleration that can be achieved depends on the number of critical work items selected for acceleration and the production rates. (To compute the accelerated duration of critical work items, refer to standard text books on construction project scheduling and control.) This iterative process is continued until a satisfactory level is achieved. Some examples of different productivity rates include:
- 8-hr day, 5-day week with standard crew size.
- 10-hr day, 5-day week with standard crew size.
- 8-hr day, 5-day week with increased crew size.
- 10-hr day, 5-day week with standard crew size.
- 10-hr day, 7-day week with increased crew size.
For more guidance on establishing accelerated project schedules, refer to FHWA Technical Advisory 1TTA 5080.15, agency-specific documents, and other sources such as textbooks and training materials on project scheduling.
Achieving higher production rate often carries a cost premium; higher the production rate, shorter the activity duration, greater are the costs incurred for additional resources or innovative processes. Typically the production rate required for the desired level of acceleration is not finalized unless it is cost-feasible. Often trade-offs are to be made by the owner agency to balance between the level of acceleration and the corresponding costs. Furthermore, if the incentive plans are not adequate enough to cover the additional costs, the contractor will have no real incentive to accelerate the project. Hence there is a need to establish the costs of acceleration for determine the required level of acceleration as well as the lower bound of the incentives. This section provides some insights in computing the additional costs associated with the schedule acceleration.
Note: Direct costs typically increase non-linearly with the level and duration of project acceleration due to use of expensive materials and process methods, extended work hours, and related productivity effects, while indirect costs increase linearly with the same. The net increase in acceleration costs is non-linear.
Owner agencies are well equipped to estimate the construction costs for a normal schedule within an acceptable level of tolerance. Most highway agencies develop cost estimates for a project using unit cost data extracted from historical bids with appropriate adjustments for project characteristics, market conditions, and prevailing prices. Though less frequent, some agencies use production rates and cost associated with equipment, labor, materials, and overhead (i.e., cost-based estimation in developing cost estimates for a project. (Cost-Based Estimates contain six basic elements: Material, Equipment, Labor, Time, Overhead and Profit. Each item of work on a project can be broken up into tasks that it takes to complete the item of work. Each of these tasks contains the six basic elements that result in the cost for the project.)
While historical cost data may be adequate for developing project cost estimates at standard production rates, these data may not represent the conditions typically encountered in schedule acceleration, such as the change in construction techniques, crew size and productivity, daily and weekly working patterns, and overtime policy. If an agency has historical cost data for projects constructed under schedule acceleration, the agency can develop parametric models using statistical regression to develop preliminary cost estimates for use in early stages of project delivery only.
On the other hand, the owner agencies can use the cost-based estimation method to estimate the contractor’s costs of schedule acceleration. This method allows the agencies to develop more detailed and accurate cost estimates using the accelerated production rates and individual cost components. It also allows the agencies to take into consideration the project-specific characteristics such as type and complexity, geographical location, market factors, and volatility of material prices. (Anderson, S., I. Damnjanovic, A. Nejat, and S. Ramesh, Synthesis on Construction Unit Cost Development: Technical Report, Report No. FHWA/TX-09/0-6023-1, Texas Department of Transportation, Austin, Texas, 2008.)
Note: Anderson et al. (2008) conducted an online survey to identify how State highway agencies develop unit prices for construction and maintenance projects. Out of the 38 respondent DOTs, 32 states use historical bid-based estimation and 10 states use cost-based estimation as their primary estimation technique. (Anderson, S., I. Damnjanovic, A. Nejat, and S. Ramesh, Synthesis on Construction Unit Cost Development: Technical Report, Report No. FHWA/TX-09/0-6023-1, Texas Department of Transportation, Austin, Texas, 2008.)
Under this method, the costs of activities defined in the project’s WBS are broken down into the following elements:
- Direct costs—these costs are attributed directly to the production activities of a project. The computation of direct costs takes into account the quantity of a WBS activity, its production rates and unit costs for the following sub-elements:
- Labor – includes mobilization, hourly wages for additional resources and overtime wages for extended shifts.
- Equipment – includes mobilization and rental costs of equipment.
- Materials – includes additional costs associated with early delivery of materials.
- Subcontractors – Includes the subcontractor’s costs for materials, labor, equipment, profit and overhead.
Some of the common sources of direct unit cost data are presented in Table 53.
- Indirect costs— these are overhead expenses related to a specific project but not directly linked to any specific work item. They include:
- Mobilization and demobilization.
- Staffing for project management and supervision.
- Office trailers and vehicles assigned to project team.
- Lighting during night work and other indirect expenses.
- Insurance and taxes.
Typically the percentage of overhead can range from 7 to 10 percent of volume of work for larger contractors to over 15 percent for smaller contractors. (AASHTO, A Practical Guide to Estimating, Prepared by AASHTO Technical Committee on Cost Estimating, American Association of State Highway and Transportation Officials, Washington, DC, 2009.)
- General overhead (For the purpose of taxonomy, the general overhead costs are sometimes listed either under the indirect costs category or the markup costs category. Therefore, to avoid any confusion, the general overhead costs are defined herein as a separate category. Nevertheless, the general overhead costs should be included in the cost estimations.) — these are company level general and administrative overhead expenses incurred by the contractor in support of the overall construction program. These costs are usually shared by all projects in proportion to their cost and duration. Examples include:
- Office maintenance (e.g., rent, utilities).
- Office personnel.
- Office equipment and vehicles.
- Office services (e.g., lawyers and accountants).
|Direct Cost Components||Common Data Sources|
|Quotes from supplies, cost information for in-stock materials
State Department of Labor
Bluebook equipment rental
Agency experience, RS Means (Reed Construction Data) Site Manager (Trns*port (AASHTOWareŽ))
- Markup costs— these include the project contingency costs as well as the contractor profit. Adjusting the cost estimates for market condition and contractor’s markup costs is highly subjective and requires engineering judgment.
- Contingency costs— these are an additional sum of money allocated for the unknown and uncertain events that are most likely occur during the life of the project such as scope changes, scope increase, high-risk elements, and unforeseen site conditions; they are directly proportional to the risk taken in the project. The contingency costs typically are 5 to 10 percent of the total project costs at the PS&E stage of the project.
- Profit margin—The contractor‘s profit margin typically includes 3 to 10 percent of the total project costs though it is likely to be outside this range (AASHTO, 2009)132. The profit margins on construction projects are highly variable and are often unknown to an agency. However, the profit margins marked by the contractor are likely to vary based on the project size and complexity, size of the contracting company, market condition and the total project costs. In proposing a I/D framework for Oregon DOT, Sillars (2007) has proposed a generic formula to estimate the contractor’s profit margin and is presented as follows: (Sillars (2007) has adopted the general form of the formula proposed by Carr and Beyor (2004) to estimate the professional compensation fees for consultants on construction projects. Refer to: Carr, P. G., and P. S. Beyor, "Design Fees, the State of the Profession, and a Time for Corrective Action,” Journal of Management in Engineering, American Society of Civil Engineering, Vol. 21, No. 3, July 1, 2005.)
P = forecasted profit at the time of bid
C = estimated total project cost
f = project type (see Table 54 )
m = market condition (see Table 54)
|Project Type||f||Market Condition||m|
Detailed information typically is required for cost-based estimation. Such level of detail may not be available to some owner agencies, and not likely in the preliminary stages of the design process. In such situations, owner agencies can apply project knowledge and engineering judgment, through common tools such as parametric estimating, to estimate the percentage increase in each of the cost elements aggregated at a project level (Sillars, 2007), until detailed analysis can be done.
Note: Minnesota DOT uses the 80/20 rule (or the Pareto principle). According to this rule, 20 percent of project work items contribute to 80 percent of the total estimated cost. DOT estimators use cost-based estimating for major items (i.e., 80 percent cost items ), while the minor items are estimated using arithmetic averages of historical bid data. (Anderson, S., I. Damnjanovic, A. Nejat, and S. Ramesh, Synthesis on Construction Unit Cost Development: Technical Report, Report No. FHWA/TX-09/0-6023-1, Texas Department of Transportation, Austin, Texas, 2008.)
The generalized proportions of direct, indirect, and markup costs, as a percentage of total project costs, are likely to vary from project to project and from one geographic location to another; however, their statistical averages based on the project type generally are robust enough for preliminary estimations. Sillars (2007) presented the generalized percentages of cost elements developed by Oregon DOT using historical costs and breakdown presented in trade guides such as RS Means and Trns*port (see Table 55).
The acceleration costs at a given production rate can be calculated by determining the direct costs for equipment, labor, and materials required for maintaining that production rate, and then adjusting the direct costs for overhead and markup costs. The acceleration costs are calculated typically for the activities on the critical duration path.
The level of schedule acceleration depends on the level to which the contractor deploys additional resources, multiple crew shifts, overtime work, and supervision. The higher the level of acceleration, the shorter the project duration and the higher the acceleration costs. Figure 16 presents the relationship among the acceleration costs, time savings, and the level of acceleration. (Fick, G., E. T. Cackler, S. Trost, and L. Vanzler, Time-Related Incentive and Disincentive Provisions in Highway Construction Contracts, Final Report, NCHRP Report No. 652, National Cooperative Highway Research Program, Transportation Research Board, Washington, D.C., 2010.)
At some point, the acceleration costs may exceed the perceived benefits of time savings (i.e., CA > WZ RUC), and the goal of expediting construction time may not prove beneficial. In other words, there is an optimum level of acceleration beyond which there are no benefits of time savings. Hence, a tradeoff is needed between the level of acceleration (or CA) and the benefits of time savings (RUC). (For more information on time-cost trade off analysis, refer to standard textbooks on construction project scheduling and control.) This can be accomplished by evaluating the cost and time impacts of various productivity rates on work items on the project’s critical duration path.
The steps involved in calculating I/D using discount factors are as follows:
- Establish baseline schedule for the project using standard production rates. See section 0 for further discussion.
- Establish road user cost estimates for project using baseline schedule and a preferred MOT strategy. See section 0 for more discussion.
- Determine the discount factor. The value typically ranges from 0.2 to 1.0.
- Calculate daily I/D value by multiplying daily WZ RUC by the discount factor.
Daily I/D = Discount factor * daily WZ RUC
Example 4.5: Calculation of I/D
An 8.6-mile section of Interstate 80 in the City of Sacramento will be closed for concrete pavement rehabilitation. The MOT selected for this project is 55-hour weekend closure. Work zone impact analysis using CA4PRS produced an estimate of approximately $300,000 for each 55-hour weekend closure. Determine the I/D rates for each closure using a discount factor of 0.25 and 0.20.
I/D at a discount rate of 0.25 = $300,000*0.25 =$75,000 for each closure
I/D at a discount rate of 0.20 = $300,000*0.20 =$60,000 for each closure
The discount factor is the portion of road user cost savings that an owner is willing to share with the contractor. The selection of this factor typically is an owner agency’s management decision by taking factors into account such as market conditions, confidence on the accuracy of WZ RUC estimates, work zone factors, and time sensitivity of project completion. The discount factor is selected in such a way that the value of the WZ RUC matches the agency cost (Pyeon and Lee, 2010) particularly when the total WZ RUC of the project exceeds the agency costs. As several agencies have limited the total incentive amount at 5 percent of the total contract amount, this requirement is also taken into consideration in selecting a discount factor.
While selecting a discount factor for I/D, the agency should check if the liquidated damages clause still applies in the event of a schedule overrun. In the absence of a liquidated damages clause, the discount factor may not adequately cover the agency’s construction engineering charges and a justifiable proportion of road user costs. Note that the lower discount factor has a diminishing effect on the contractor’s I/D—in other words, the contractor is paid a lower incentive amount for early completion and pays a lower disincentive amount for schedule overrun. However, the trend reverses for the owner agency (combined societal and agency costs) when the liquidated damage clause does not apply—at a lower discount factor, the agency’s savings are higher for early completion while the unrecovered losses are also higher when there is a schedule overrun.
Example 4.6: Computing disincentives
As a continuation of Example 4.3, assume that the contractor took 63 days (3 days more than the contract time specified in the bid) to complete the work. Calculate the disincentive amount to be paid. Use the same discount factor for disincentive calculation. Estimate the direct loss to the agency as well as the unrecovered road user costs, if any, assuming that the only the disincentive clause apply but not the liquidated damages. Assume a discount factor of 25%.
Contractor’s bid price (C) = $3,000,000 (from Example 4.3)
Contract time specified in the bid (D) = 60 days (from Example 4.3)
Actual days used = 63 days
Bid WZ RUC+AGCEC (for 60 days) = $240,000 (from Example 4.3)
Actual WZ RUC+AGCEC (for 63 days) = $252,000 (from Example 4.3)
Additional costs incurred through WZ RUC and AGCEC = $12,000
Discount factor = 25 %
Disincentives paid by the contractor = $3,000
Uncovered agency and user costs = $12,000-3,000 = $9,000
The agency has incurred a total loss of $12,000 through additional costs in WZ RUC and AGCEC; however, it has recovered only $3,000 through disincentives. Since the liquidated damage clause does not apply to recover the remaining amount, the combined loss incurred by the agency and road users is $9,000.
Out of the recovered disincentives of $3,000, the direct cost incurred by the agency is only the construction engineering costs (i.e. $500/day).
AGCEC = $500/day
Additional AGCEC due to project delay = 3 days * 500 = $1,500
Road user costs recovered from disincentives = $3,000 - $1,500 = $1,500
Unrecovered road user costs = $9,000 - $1,500 = $7,500
In this example, the agency was able to cover the construction engineering costs, while nearly 71 percent of the road user costs were uncovered. Note that agencies typically do not consider the dollar value of WZ RUC at par with the dollar value of I/D.
- Establish baseline schedule for the project using standard production rates. See section 0 for further discussion.
- Establish road user cost estimates for project using baseline schedule and a preferred MOT strategy. See section 0 for more discussion.
- Analyze the CPM schedule of baseline duration by using increased production rates for activities on the critical path. See section 0 for further discussion.
- Estimate the contractor’s CA for increased production rates. See section 4.4.4 for further discussion.
- Select an I/D amount that is less than or equal to unit WZ RUC costs but greater than the acceleration costs for the desired optimal duration. A discount factor can also be introduced to discount the road user costs.
Cost of Project Acceleration < I/D ≤ WZ RUC
Cost of Project Acceleration < I/D = DF* WZ RUC
The practitioners can make use of tools such as sensitivity analysis to identify an appropriate discount factor and evaluate its effectiveness. As illustrated in Example 4.7, the contractor and agency profits and losses can be estimated for various combinations of discount factors and project completion scenarios. In Example 4.7, a hypothetical project scenario was assumed and the cost model presented in Eq. 1 was utilized.
At higher discount factors, the agency pays a larger portion of WZ RUC savings to the contractor as incentives for early completion and recovers an equal portion of WZ RUC losses from the contractor as disincentives for late completion. Put briefly, the agency transfers a large portion of schedule related risks, including benefits and costs, to the contractor at higher discount factors.
At lower discount factors, the agency pays only a smaller portion of WZ RUC savings to the contractor for early completion and recovers an equal portion of the losses from the contractor for late completion. To be effective, the incentives paid to the contractor must to be adequate enough to compensate the contractor costs of acceleration, while the disincentives recovered from the contractor should commensurate with the WZ RUC losses. With increasing discount factor, the contractor receives more incentives to complete earlier as long as the costs of acceleration do not exceed the incentive amount. To summarize, the discount factor selected by the agency should be adequate enough to ensure that the agency’s early completion goals are met.
Example 4.7: Sensitivity of the I/D discount factor
As a continuation of Example 4.3, perform a sensitivity analysis to demonstrate the effect of discount factor on:
- Agency’s savings and losses (road user costs + construction engineering cost)
- Contractor’s profits and losses
The calculation steps presented in the previous example 4.2.3 was repeated over a range of discount factors and actual days of construction. Here are the results:
Case 1. Agency’s savings and losses (RUC + construction engineering cost only):
- Red (negative) and Green (positive) indicate the magnitude of agency’s losses and savings, respectively. The profit and loss magnitude increases with hue density.
- Loss to the agency is the difference between additional construction engineering and road user costs due to completion delays and the amount recovered from the contractor as disincentives.
- Savings to the agency is the difference between savings in construction engineering and road user costs due to early completion and the incentives paid to the contractor.
- At a discount factor of 1, the agency has no savings or losses since the cost differentials are either paid to or recovered from the contractor through incentives and disincentives.
- When the project is delayed, the agency recovers only a smaller portion of additional construction engineering and road user costs at lower discount factors; and hence, the agency’s losses increase with the increasing delay period.
- When the project is completed earlier than the schedule, the agency shares only a smaller portion of savings to the contractor; and hence, the agency’s savings increase with the increased number of days saved.
Case 2. Contractor’s profits and losses:
- Red (negative) and Green (positive) indicate the magnitude of losses and profits, respectively.
- Loss to the contractor is the sum of disincentive amount paid to the agency and contractor cost of delay for late completion or the negative cost differential between the incentives received from the agency and the contractor cost of acceleration for early completion.
- Profit to the contractor is the positive cost differential between the incentives received from the agency and the contractor cost of acceleration.
- As expected, the contractor’s total loss increases as the number of days exceeding the normal duration increases. This amount also increases as the discount factor increases.
- The contractor’s net profit increases with the number of days saved; however, depending on the discount factor used in incentive calculation, the amount of net profit peaks at a certain number of saved days beyond which the incentives are not adequate enough to compensate the contractor cost of acceleration.
- At lower discount factors, for instance at 0.3, the contractor realizes no savings, and hence has no incentive to complete the project in less than 58 days. At even lower discount factors, the contractor sees no incentive at all to accelerate project completion.
- At higher discount factors, for instance at 0.8, the contractor maximizes the savings through incentives when the project the complete in 56 days. Contractor incentives are not adequate enough to complete the project in less than 56 days. In other words, the contractor is encouraged to accelerate completion schedule further with increasing discount factor.
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