Construction contract incentive alternatives

William H. Sewell, Jr., P.E.
Deputy Director
Department of Public Works
City of New Orleans, Louisiana

Thomas A. Fromherz, P.E.
Senior Civil Engineer
Department of Public Works
City of New Orleans, Louisiana

In this day of high construction costs, limited funding options, and the desire to limit the impact of construction on the user and general citizenry, public agencies and other project owners are searching for additional bidding alternatives to the traditional "low-bidder" method historically used for awarding construction contracts. In Louisiana, the Department of Transportation and Development and several parishes (counties) are using alternative methods for bidding and contract award for selected projects. The following is a description of four alternative contract options available to public agencies. Also, following this article is the story of a successful project recently completed in the New Orleans area that was bid and constructed as an alternative contracting project.

The four alternative bidding options include:

  • Bid plus Time (A+B)
  • Design/Build (A+B/C)-Design/Build With Warranty
  • Lane Rental (A+B+L)
  • Incentive/Disincentive
Bid plus Time (A+B)
Bid plus Time or A+B bidding is an alternate that factors in the time necessary to complete the project as a consideration of the contractor's bid. The monetary amount of the lump sum bid or the contract bid items (A) is combined with the value of the time needed to complete the project (B) to determine the low bidder.

In a highway or street paving project, the owner determines a commuter user fee for the project. This dollar amount is the value of the use of that highway to a driver, the economy, and the public. It is expressed as a per-day amount that is multiplied by the number of days for project construction as determined by each bidder, and added to the respective contractor's monetary bid. The resulting total amount is compared to the total submitted by all bidders, in order to determine the lowest aggregate price for the project. However, the contract amount is only the amount of the contract bid items or lump sum (A).

A+B bidding allows the contractor to determine the length of the project, often resulting in a shorter contract schedule than the specifications would have allowed. It is a practical method to use when the owner is seeking to minimize contract time on high priority and high usage projects. A+B bidding often results in a better contractor being awarded the project, as innovative approaches and contractor resources are significant factors in determining the length of the project. This contracting method also can create a better working relationship between the owner and contractor because timely resolution of possible issues are paramount to the overall success of the project.

Design/Build (A+B)/C-Design/Build With Warranty
Design/Build is a method of contracting that allows the owner to select or "short-list" an interested contractor/design team based upon their history, capabilities, and experience record. This method also allows a contractor and an engineer/architect, if "short-listed," to work together to design and determine the cost of a project. The submitted bid prices include all design, permitting and extended warranty fees as well as the project construction costs. As in Bid plus Time contracting, the monetary amount of the lump sum bid or the contract bid items (A) is combined with the value of the time needed to complete the project (B). To determine the low bidder, the owner utilizes a scoring method which takes into consideration a technical score (C) for the design as well as the price of construction. The sum of A+B is divided by the technical score (C) to determine the lowest aggregate score or price. Again the construction contract amount is only the amount of the contract item or the lump sum price (A).

There are several advantages of using this method of contracting. Design/Build results in a quicker delivery of the finished project. Construction begins while design is still in progress, causing overlap of events that are usually done in sequence. By allowing the owner to appropriate design and construction money at the same time and before design and permitting are complete, Design/Build can be a useful option when budget constraints mandate that funds be spent in a specific fiscal period.

Design/Build also enables a bid team to design a structure that is suited to the contractor's abilities and resources. For example, a piling contractor would work with the engineer to design a pile supported structure rather than a structure supported by drilled shafts. Design/Build contracting also minimizes the number of claims because the contractor and designer are working as a team, thus eliminating the design issues that sometimes arise during construction. This method of contracting also may eliminate claim-oriented contractors from bidding because the owner can choose not to invite contractors with a poor claims history to bid the project.

Design/Build with Warranty offers further protection to the owner in the form of a guarantee which exceeds that of a one-year construction warranty. This form of bidding places a higher responsibility on the contractor to build a quality project because that contractor will be responsible for maintaining the project for a specified extended length of time following completion. One disadvantage is that this method of contracting may preclude bidders who are unable to secure the additional bonding necessary to guarantee the project.

Lane Rental (A+L) or (A+B+L)
When Lane Rental is included in the bidding, the owner assigns a cost per hour to each lane of traffic. The bidding contractors estimate the number of hours of lane closures and multiply that figure by the hourly cost. The construction cost (A) is added to the resulting lane amount (L) to determine the total bid amount. This is sometimes added to the value of project time (B) to determine the total bid. The primary advantage of this method of contracting on highway projects is minimizing the impact to the traveling public in highly traveled areas. When using Lane Rental contracting, the contract time and costs for the project may actually be increased because this method limits constructibility options. Contractors may choose construction methods that may take longer but minimize the number of lane closures.

Incentive/Disincentive
In addition to the above alternative methods, Incentive/Disincentive is used to encourage the contractor to devote additional or complete resources to the project. The Incentive/Disincentive contracting method often can produce a shorter delivery time for a project, accomplished by offering monetary bonuses for early completion and assessing penalties for late completion. The contract time is determined either by the owner or submitted by the contractor as part of his A+B bid. As in the A+B method, the Incentive/Disincentive contracting method requires the establishment of a user fee (the value of the use of that highway to the public) for the project. This dollar amount is used as a basis to determine a bonus and penalty amount. The incentive for early completion of the project is a reward, determined by the number of days that the contractor finishes the project early multiplied by the predetermined amount of the user fee. Conversely, if the contractor finishes after the contract time, he would be responsible for paying a penalty of the user fee multiplied by every day that the project lasts beyond the scheduled completion. This penalty is imposed in addition to any liquidated damage provisions in the specifications. Often, the amount of incentive is limited while the disincentive is unlimited. Contractors working on Incentive/Disincentive projects monitor the construction schedule and activities very closely and, if impacted by factors beyond their control, may often request time extensions since the time considerations of the project are of such importance.

There is a variety of options when choosing a contracting method. When deciding whether to utilize traditional low-bid methods or to employ one of the alternative methods, the owner must give serious consideration to which method suits the project's specific needs and the advantages to the public.

Lapalco Boulevard Reconstruction, Jefferson Parish, Louisiana
Greater New Orleans, Louisiana is composed of portions of five parishes that surround the core. Jefferson Parish is the second largest parish, after Orleans Parish, in size and population. Jefferson Parish recently undertook a five-phase reconstruction of Lapalco Boulevard which is a major street located on the west bank of the Mississippi River. Barriere Construction Company LLC performed the reconstruction of Phase II of Lapalco Boulevard.

In order to expedite the reconstruction of Lapalco Boulevard, Phase II was bid as an A+B project (incentive/disincentive). An A+B project allows the contractor to select the number of days required to build the project as well as a total cost to build the project. A value of $8,000 per day was assigned by the Parish to the number of days chosen to complete the project, and that value was added to the cost to build the project. The summation of these costs became the bid price. An incentive/penalty was added to the contract with the incentive at $8,000 per day for every day that the contractor completed the project ahead of schedule with a maximum of 50 days, and an $8,000 per day penalty for each day the contractor exceeded the contract days with no maximum days established. The Parish estimated it would take 630 days to build this project. The contractor estimated 226 days, which was approximately 64 percent lower than the Parish estimate and 54 percent lower than the next bidder. The project was completed on the 156th day, April 5, 2002, 71 days ahead of schedule. This means that the contractor will receive the maximum bonus of $400,000.

The original bid amount for the project was $9.7 million, but with additions to the scope of work the final contract price was $11.6 million. The project scope of work was to widen the 2.1 miles of roadway to three lanes in both directions, widen the Ames Canal bridge to three lanes, install 35,000 linear feet of concrete curb and gutter, upgrade 19,000 linear feet of existing drainage system, install 12,000 square yards of sidewalks and driveways, perform 27,000 square yards of new concrete paving and concrete patching in the concrete section, mill and overlay 1.1 miles of existing asphalt roadway in the asphalt section, and upgrade the traffic signal system at five intersections along the project length.

With approximately 28,000 cars per day traveling the roadway, how was this project fast-tracked? The contractor had a superb project team with a deep commitment from their crews, subcontractors and the engineers working tirelessly together. The project was bid by Jefferson Parish in May 2001, and the contractor started construction in October 2001, working seven days a week with day and night shifts. Due to heavy traffic and lane restrictions during the daytime hours, they performed the drainage, median lane excavation and concrete paving at night. They installed approximately 6,000 feet of drainage, ranging from15-inch RCP up to 48-inch RCPA, and excavated 24,000 cubic yards of subgrade and installed 12,000 cubic yards of sand for the new median lane at night. Once the median lane base was installed, their concrete paving crew slipformed approximately 12,000 square yards of 14- to16-foot-wide, 10-inch thick concrete pavement. While these crews were working during the night, they also had crews working during the day installing 14,000 tons of base course, concrete curb and concrete pavement tie-ins to successfully complete the median lane.

An added benefit of working a day and night shift was being able to increase utilization on core pieces of equipment, which saved the project over $15,000 in equipment costs. Utilizing the equipment 24 hours a day required a great deal of support from the maintenance division, which ensured that they had very little downtime on the equipment.

Working at night posed several challenges. The drainage crew's work areas and supplies had to be laid out and organized during the day, and estimates of materials and trucking for the base crews had to be calculated so that the work flowed correctly. Field engineers performed these tasks and kept quantities in order for seven working crews.

Once the median lane was constructed, the nighttime work was reduced to only drainage work, which was completed in January 2002. Their crews continued to perform excavation, base installation, pavement patching, and sidewalk preparation in both the asphalt and concrete sections. At the same time they were installing concrete curb and gutter, pavement patching, sidewalks, driveways, and slope paving on the project.

While supervising their own crews, the project team also had subcontractors' crews to coordinate. They coordinated a subcontractor's drainage work in the asphalt section, the electrical contractor's equipment and conduit installation for the traffic signal systems, and the bridge widening subcontractor. Organizing the work areas for both contractor and subcontractor crews was no easy task. There were many instances where two crews had scheduled to set up high- and low-lane closures in the same direction, which would have shut down Lapalco. After a few weeks the project team was able to minimize these conflicts by closely monitoring contractor and subcontractor work areas in advance.

With 28,000 cars traveling daily through the work area, the contractor was very serious about safety. Their Safety Division did an outstanding job of assisting with work area closures as well as responding to the few citizen complaints that were received.

This is an example of a successful incentive/disincentive project, which required incredible dedication by everyone involved. To complete an $11.6 million project estimated by the parish to take 630 days in only 156 days was a real accomplishment and worthy of the maximum bonus established by the owner.

To reach William H. Sewell, Jr., call (504) 565-6850 or send e-mail to WILLIAMS@new-orleans.la.us; to reach Thomas A. Fromherz, call (504) 254-2101.

Acknowledgment: Ms. Leslie Trahant, Boh Bros. Construction Co. LLC, New Orleans, Louisiana; and Mr. Bart Breland, Barriere Construction Co. LLC, New Orleans, Louisiana