Construction

Technical Advisory

Incentive/Disincentive (I/D) for Early Completion

T 5080.10

February 8, 1989

Par.

1. Purpose
2. Definitions
3. Background
4. Guidance
5. Project Selection
6. Project Development
7. Determination of Incentive/Disincentive (I/D) Amount
8. Incentive/Disincentive Time Determination
9. Contract Administration
10. Road user cost in low-bid determination

1. PURPOSE. To provide guidance for the development and administration of incentive/disincentive (I/D) provisions for early completion on highway construction projects or designated phase(s).
2. DEFINITIONS
   1. Incentive/disincentive for early completion - a contract provision which compensates the contractor a certain amount of money for each day identified critical work is completed ahead of schedule and assesses a deduction for each day the contractor overruns the I/D time. Its use is primarily intended for those critical projects where traffic inconvenience and delays are to be held to a minimum. The amounts are based upon estimates of such items as traffic safety, traffic maintenance, and road user delay costs.
   2. Liquidated damages - the daily amount set forth in the contract to be deducted from the contract price to cover additional costs incurred by a State highway agency (SHA) because of the contractor's failure to complete all the contract work within the number of calendar days or workdays specified or by the completion date specified.
   3. Contract time - the total time (calendar days or completion date) established to complete the project.
   4. Incentive/disincentive time - the time (calendar days or completion date) established for the contractor to complete critical work on identified roadway(s) and/or structure(s). This time begins when traffic is impacted by the project and normally ends when unrestricted traffic is permitted on the identified roadway(s) and/or structure(s). This is the time upon which the I/D payment will be based. The I/D time and contract time may be the same in situations where traffic impact exists for the full duration of the project or I/D time may be for a shorter period when traffic is impacted only during a certain phase or phases of contract work.
3. BACKGROUND
   1. The FHWA policy which prohibited participation in bonus payments for early completion was rescinded effective July 13, 1984. The policy prohibiting bonus payments goes back to a 1927 interpretation of a statute that limited the Government's share of project costs to the value of labor and materials. In the 1970's the policy was based on the belief that FHWA should not have to pay "extra" just to have a project completed early. The present FHWA policy on bonus payments is based in part on the evaluation of National Experimental and Evalua tion Program (NEEP) Project #24 which showed that I/D provisions are a valuable cost-effective construction tool.
   2. Present FHWA policy allows for approval of I/D provisions which are in compliance with the intent of the FHWA Program. This may include, but is not limited to: (1) provisions for early completion of critical improvements which result in significant savings and/or positive benefits to the traveling public and (2) provisions which allow for product acceptance with pay adjustments. This Technical Advisory will only address I/D for early completion on highway construction projects. In accordance with Mr. Willetts' memorandumof January 22, 1988, to Mr. Leon Larson, I/D provisions are not to be used in Federal-aid participating consultant service contracts.
   3. In discussing I/D, a clear distinction needs to be made between the intent of I/D provisions and liquidated damages. Although they have similar mechanisms, the purpose or function of each is different. The liquidated damages policy has as a prime function the recovery of construction engineering (CE) and/or additional costs associated with the contractor's failure to complete the project on time. The I/D provision is intended to motivate the contractor so that work will be completed on or ahead of schedule. Liquidated damages provisions apply to all projects; however, I/D provisions apply only to special projects.
   4. The regulation change to 23 CFR Part 630 of August 20, 1987, concerning the assessment of liquidated damages allowed the SHA's to include costs of project-related delays or inconveniences to them or the public, in addition to CE costs, in their liquidated damages provisions. If an SHA includes delay related costs in its liquidated damage rate, those delay costs should be excluded from the disincentive amount on an I/D project so a contractor is not subjected to a double assessment for the same costs.
4. GUIDANCE
   1. The approval of I/D provisions will be reserved only for critical projects or phases of projects where traffic inconveniences and delays must be minimized. Statesshould develop guidelines for selection of projects.
   2. The determination of I/D amount and time should be documented and retained in the project records. The I/D amount and time determination with supporting data should be submitted and concurred in by the FHWA Division Administrator prior to the State's request for approval of the plans, specifications, and estimate and authorization to advertise.
   3. Project time should be established on either a calendar day or completion date basis. Contractors should have an approved critical path method (CPM) schedule prior to starting work on the project.
   4. For those States with an approved Certification Acceptance Plan, the procedure for developing I/D projects should be covered under the State's plan, or the projects should be handled as an exception and developed with the Division Administrator's approval.
5. PROJECT SELECTION. I/D provisions provide an effective method to motivate the contractor to complete projects or portions of projects faster than normal. However, it is recommended that I/D provisions not be used routinely. Generally, I/D provisions should be limited to those projects whose construction would severely disrupt highway traffic or highway services, significantly increase road users' costs, have a significant impact on adjacent neighborhoods or businesses, or close a gap thereby providing a major improvement in the highway system.
   1. The selection of projects during the early stages of project development is essential. This will allow for full deployment of resources needed to properly design and coordinate the project.
   2. The development of criteria for possible projects will aid in early identification of projects. The following characteristics have been associated with projects appropriate for I/D provisions:
      1. High-traffic volumes generally found in urban areas.
      2. Work that will complete a gap in the highway system.
      3. Major reconstruction or rehabilitation on an existing facility that will severely disrupt traffic.
      4. Major bridges out of service.
      5. Lengthy detours.
   3. The project should be such that the I/D phase(s) can be completed in one construction season or less.
6. PROJECT DEVELOPMENT
   1. Experience has shown that engineering time spent during project development pays dividends during construction and in obtaining a successful project. A field change to correct mistakes in plans can be very costly in time and money on an I/D project. The plans and specifications must be complete and accurate to permit a common and clear understanding of what is to be constructed.
   2. During the development of I/D projects, extra effort should be made to ensure that the design, specifications, schedule, etc., are compatible since all must be modified to fit the project. Any omission or error in the plans and specifications may result in a claim from the contractor. The plans and specifications should indicate any unusual condition or any restriction the contractor may be required to work under, such as restrictions prohibiting jack hammering or pile driving during the night due to noise problems.
      1. Available right-of-way and utility relocation work are two variables that play a very important role in I/D projects. If the right-of-way is not clear, then I/D provisions should not be used on the project. Utility work by other than the contractor should be limited to only work that will not interfere with the I/D phase(s) of the contract.
      2. The contract must clearly define what constitutes the start and the completion of the I/D phase(s). Either or both may differ from the start or completion of the project. The I/D time may be delayed until traffic is impacted, thus allowing the contractor time to fabricate steel, obtain mix design, etc. However, it is necessary to define in detail what is expected of the contractor. This can be done through the plans for stage construction or detailed description in the special provisions. Bid items to be completed should be referenced. Completion of items such as signing, lighting, signals, striping, curb, shoulder, and cleanup should be addressed. Liquidated damages can be assigned for completion of work after the I/D phase has been accomplished.
   3. During the preconstruction phase of the project, all parties (local officials, police, local traffic engineers, and construction engineers) should become involved in the project development. A prebid meeting may be necessary to cover the I/D phase(s) and any unusual features of the project.
   4. Predesign field reviews are essential since "as-built" plans or old construction plans have not proven reliable due to maintenance operations or field changes not being recorded on the plans.
   5. The development of I/D provisions must be related to each State's specifications. To assist in preparing I/D provisions, a checklist (formulated by Region 7) of items to consider when preparing contract provisions is included as Attachment 1.
7. DETERMINATION OF INCENTIVE/DISINCENTIVE AMOUNT. The major area of concern expressed on the use of I/D provisions is determination of the appropriate dollar amount per day for I/D provisions for early completion of projects. To be effective and accomplish the objectives of I/D provisions, the dollar amount must be of sufficient benefit to the contractor to encourage his/her interest, stimulateinnovative ideas, and increase the profitability of meeting tight schedules. If the incentive payment is not sufficient to cover the contractor's cost for the extra work, then there is little incentive to accelerate production, and the I/D provisions will not produce the intended results.
   1. A daily I/D amount is calculated on a project-by-project basis using established construction engineering inspection costs, State related traffic control and maintenance costs, detour costs, and road user costs. Costs attributed to disruption of adjacent businesses should not be included in the daily I/D amount. Engineering judgment may be used to adjust the calculated daily amount downward (not upward) to a final daily I/D amount that:
      1. provides a favorable benefit/cost ratio to the traveling public where the cost is the daily I/D amount and the benefit is the calculated daily savings in road user and SHA costs.
      2. is large enough to motivate the contractor. If a favorable benefit/cost ratio cannot be realized and/or the resulting daily amount is not high enough to motivate a contractor, the project should not be further developed as an I/D project.
   2. Currently, accepted SHA procedures for estimating road user costs may be used, or one of the following references may be used for estimating road user costs.
      1. A manual entitled "User Benefit Analysis of Highway and Bus--Transit Improvements," 1977, AASHTO, Washington, D.C.
      2. Participant Notebook: "Traffic Control for Streets and Highway Construction and Maintenance Operations," FHWA, 1978.
      3. "Planning and Scheduling Work Zone Traffic Control," Report #FHWA IP-81-6, FHWA, October 1981.
   3. The vehicle operating costs should be based on the most recent information available. The 1982 FHWA study titled "Vehicle Operating Costs, Fuel Consumption and Pavement Type and Condition Factors" (NTS PB 82-238676) may be used to supplement costs for the methodologies listed above. Caution should be exercised in using the data as some items included may not be applicable to costs incurred due to the construction activity, i.e., insurance, parking, tolls, taxes, etc.
   4. 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.
   5. A cap of 5 percent of the total contract amount has been recommended as the maximum incentive payment. The 5 percent was based on the NEEP study average of incentive payments made on experimental I/D projects. In a survey by the Office of Program Review, "50 percent of the completed projects paid the maximum incentive." The placement of a cap on the incentive payment limits the funding requirements that may result if the time analysis was not realistic for an accelerated project time. With experience, the SHA may feel comfortable in not setting any maximum on the number of days for which an incentive can be earned. No cap should be placed on the maximum disincentive amount.
8. INCENTIVE/DISINCENTIVE TIME DETERMINATION. The determination of I/D time is one of the major problems facing an SHA when developing an I/D project. It must answer the question: to what extent and at what cost can construction be compressed from a normal construction time to an accelerated time? If the contractor feels that the completion date is impossible to meet, he/she will not even try. In fact, unreasonable completion dates may well discourage potential bidders. However, the use of a normal computed time may allow the contractor to earn the maximumamount without making an increased effort. This would also penalize the public since the I/D phase(s) would not be completed as soon as possible. Most highway agencies will normally use either past performance or a CPM schedule to determine time.
   1. Determination of I/D time based on past performance will require engineering judgment in determining to what extent the time can be compressed from normal construction time. Normal construction time is generally based on an average contractor working 5 days a week, 8 hours a day. To convert this to I/D time, the time should be based on the performance of a good contractor working extended shifts with extra workers for 6 or 7 days a week.

      However, the use of a continuous 7-day workweek is cautioned against unless provisions can be made through shift assignments for days off. Extended periods of work with no days of rest has resulted in high turnover rates with contractor and inspection personnel.

   2. The use of a CPM schedule is based on breaking down the project into the separate operations or processes necessary for its completion. These separate operations can then, through a network analysis, determine a completion time for the project. By supplying additional incremental resources of manpower and equipment, a further evaluation can be made as to the effects of accelerating the project.
   3. The use of calendar days or completion date has proven to be most effective in controlling contract times. Thedates for beginning and completion of the I/D work are then readily understood. The use of working days has not been effective in having projects completed by a specific date. The use of working days has placed the project engineer under undue pressure in determining whether the contractor should be charged a working day. In addition, it has created unnecessary conflict between the contractor and the project engineer.
   4. The season of the year in which the project will be constructed should also be considered in determining the I/D time for calendar day projects. Weather days and legal holidays should be included for calendar day projects.
9. CONTRACT ADMINISTRATION. Cooperation and coordination between the contractor and the SHA is essential. The delay in approval of a field change or working drawings can be costly in time. Decisionmaking and approval authority should be promptly provided at all times that I/D work is in progress. If nighttime or weekend work is allowed, all offices that have decisionmaking and approval authority should designate a contact person with authority to make decisions for the agency represented. Several projects have been set up with periodic meetings of all decisionmaking personnel to discuss project development during design and construction. These discussions should consider future critical operations and potential problems.
   1. The contractor should be required to submit a CPM schedule for review and approval prior to commencement of work. This schedule will be the basic document to gauge and analyze the contractor's progress, determine time adjustments, and evaluate claims. Regularly scheduled job site progress meetings should be held for the purpose of updating the CPM schedule. Attachment 2 is a sample specification that is included in the "Construction Contract Claims" training manual. The reference to the Associated General Contractors of America CPM may be replaced by any other CPM the SHA has approved.
   2. Extension of time on an I/D date should not be given unless extraordinary circumstances occur. The burden of proof to extend the I/D date must be on the contractor. The contractor must fully justify why concurrent operations, additional manpower, additional shifts, overtime, 24-hour workdays, 7-day workweeks, etc., cannot be used to keep the project on schedule. The SHA should consider all alternatives, including additional CE cost, to keep the project on schedule.
   3. The I/D time adjustments shall be limited to only major work items affecting completion of items on the critical path and should be so identified in the contract. The effect of field changes and how field changes will be evaluated for time adjustments must be clearly spelled out in the project documents. The percentage of underrun or overrun should be substantial enough to warrant contract time changes.
      1. Extra and additional work should be expected by both the contractor and the SHA when establishing the I/D dates. Both parties should fully understand that the SHA is willing to pay for extra work, but it is to be absorbed within the current CPM schedule without any adjustment in the I/D dates.
      2. Because I/D projects are normally limited to one construction season, extensions of time will often extend into periods of adverse weather, resulting in further delays and cost to both the contractor and the traveling public. Moving an I/D date should only be done when all other avenues have failed.
      3. Time limits for certain actions should be included in the contract - for example, 7 days for review and approval of shop drawings and 3 days for review and approval of unforeseen problems, etc., after notification by the contractor to the engineer.
   4. Flow charts have proven very beneficial in establishing lines of communication and ensuring that all parties that have involvement in reviewing plans and shop drawings are contacted. Flow charts may include number of copies needed for submission, distribution of approved copies, and method of transmittal. Shop drawings may require handcarrying between contractor, reviewers, and approval authorities. However, the mail may be sufficient for transmitting copies for information or for files.
10. ROAD USER COSTS IN LOW-BID DETERMINATION
    1. The use of road user costs in low-bid determination was approved for use on an experimental basis by the Federal Highway Administrator's memorandum dated May 20, 1985. This procedure allows the State to award a project to the low bidder based on a combination of the aggregate bid of individual contract items and a "bid" for the total time the contractor will use on the project. Each bid submitted shall consist of two parts:
       1. The dollar amount for all work to be performed under the contract.
       2. The total number of calendar days required to complete the work.
    2. The lowest and best bid is then determined by the State according to the following formula:(A) + [(B) X road user cost per day].

       This formula shall only be used to determine the lowest and best bidder and shall not be used to determine payments to the contractor.

    3. Approval for the use of road user costs in low-bid determination should be given on an experimental project basis in accordance with Mr. Rex Leathers' memorandum of May 30, 1985. As a minimum, both an interim report and final report shall be submitted to the Washington Headquarters Contract Administration Branch (HHO-32). The interim report of bid information and problems encountered by the contractors in the development of bids, if any, should be submitted after concurrence in award of the contract.

Thomas O. Willett
Acting Associate Administrator
for Engineering and Program Development

INCENTIVES/DISINCENTIVES (I/D)CHECKLIST ITEMS

When using I/D for early completion to minimize public inconvenience, maximize public safety, and reduce total costs to the traveling public, the following items should be considered when preparing contract special provisions.

1. Clearly define the beginning and ending dates for the critical work elements that are to be accomplished.
2. The use of calendar day or completion date contracts have proven most effective in controlling contract times. The dates for beginning and completing the I/D work are fully understood.
3. State the time the contractor is permitted to work, such as multiple shifts, weekends, holidays, etc., or conversely, when work should not be permitted.
4. Describe what working operations the contractor may or may not perform during nighttime hours.
5. Include the pay schedule for I/D:
   1. The pay schedule should relate money and time.
   2. Incentive payments should have a specified maximum time.
   3. Disincentive payments should be charged continuously until the critical elements have been completed.
6. List approved staging areas the contractor may use if this is a critical item.
7. Address underruns and overruns:
   1. Contractor time adjustments should be limited to only major work items and should be so identified in the contract.
   2. The percent underrun or overrun should be substantial enough to warrant contract time changes.
   3. Values and formulas can be specified that advise the contractor of the relationship between underruns and overruns and time extensions or time deletions.
8. The subject of strikes should be addressed as it relates to approving time extensions.
9. The contractor should be encouraged to stockpile materials, and the contract should specify which materials will be paid for as stockpiled materials.
10. All I/D projects shall require that the contractor have an approved critical path method (CPM) prior to starting work on the project.

    Regularly scheduled job site progress meetings should be held for the purpose of keeping the CPM on schedule. If the contractor should fall behind the CPM schedule, extra work measures should be prescribed until the contractor is back on schedule.

11. Identify what work is considered preparation, fabrication, and cleanup that may be outside the critical time path for fully opening a project to traffic.
12. Consider having legal counsel review the "language" of the contract provisions to avoid possible future claims.
13. Contracts involving bridge construction should take into account the time factor associated with shop drawing and erection procedure reviews and approvals. These two items can be an important factor in measuring and assessing contract time.
14. Incentive/Disincentive can be considered for specialty items within a contract (for example, erecting steel over another roadway that carries high traffic volumes and would require lane closure).

SUGGESTED STATE HIGHWAY ADMINISTRATION SCHEDULING SPECIFICATION

The construction of this project will be planned and recorded with a conventional critical path method (CPM) schedule based on the principles defined by the 1976 issue of "The Use of CPM in Construction" published by the Association of General Contractors. The schedule shall be used for coordination and monitoring of all work under the contract including all activity of subcontractors, vendors, and suppliers.

CONTRACTOR is responsible for preparing the initial schedule in the form of an activity on arrow diagram. All costs incurred by the CONTRACTOR in preparing the schedule shall be borne by the CONTRACTOR as part of its responsibility under this contract.

A. Preparation of Initial Schedule

Within 30 calendar days after the issuance of "Contract Award" prior to the "Notice to Proceed," CONTRACTOR will complete development of its initial schedule and present to the OWNER two copies of an activity on arrow diagram, an I node-J node computer sort and a Total Float Computer sort.

Following review of the initial submission and within 15 calendar days of its submission prior to "Notice to Proceed," OWNER and CONTRACTOR shall meet for joint review, correction, and adjustment of the schedule if required. The construction time, as determined by the schedule, for the entire project or any milestone shall not exceed the specified contract time. In the event that any milestone date or contract completion date is exceeded in the schedule, logic and/or time estimates will be revised.

After this meeting but within 15 calendar days after any changes in the logic and/or time estimates have been agreed upon, another submission of the schedule, including five copies of an activity on arrow diagram, an I node-J node computer sort, and a Total Float Computer sort, will be transmitted to the OWNER. If necessary, this process will be repeated; however, the schedule must be finalized within 30 days after "Notice to Proceed." Failure to finalize the schedule by that date will result in withholding all contract payments until the schedule is approved. Note that time charges shall begin no later than the time stipulated in the "Notice to Proceed."

No contract work may be pursued at the site without an approved CPM schedule.

B. Schedule Requirements

All activity on arrow diagrams provided by CONTRACTOR shall include:

1. activity nodes,

2. activity description, and

3. activity duration.

The activity on arrow diagram shall show the sequence and interdependence of all activities required for complete performance of all items of work under this contract, including shop drawing submittals, approvals, fabrication, and delivery activities. All network "dummies" are to be shown on the diagram.

No activity duration shall be longer than 20 workdays without OWNER'S approval.

OWNER reserves the right to limit the number of activities on the schedule to between 50-500 activities.

The activities are to be described so that the work is readily identifiable and the progress on each activity can be readily measured. For each activity, CONTRACTOR shall identify the trade or subcontractor performing the work, the duration of the activity in workdays and the location of the work.

CONTRACTOR shall also provide the following information: workdays per week, holidays, number of shifts per day, number of hours per shift, and major equipment to be used.

C. Schedule Updates and Progress Payments

Job site progress meetings will be held monthly by OWNER and CONTRACTOR for the purpose of updating the project work schedule. Progress will be reviewed to verify finish dates of completed activities, remaining duration of uncompleted activities, and any proposed logic and/or time estimate revisions. It is CONTRACTOR'S responsibility to provide OWNER with the status of activities at this progress meeting and with the process schedule updates based on this information once it has been verified.

Each month of the project, the CONTRACTOR will submit five copies of an updated I node-J node and Total Float Computer sort illustrating verified progress. Included shall be a written narrative describing the critical path and logic revisions or modifications to the schedule, including, but not limited to, changes in the method or manner of the work, changes in specifications, extra work, changes in duration, etc.

CONTRACTOR will further submit two copies of revised activity on arrow diagrams for the following: delay in completion of any critical activity; actual prosecution of the work which is, as determined by OWNER, significantly different than that represented on the schedule; the addition, deletion, or revision of activities required by contract modification; or any logic revisions. The contract completion time will be adjusted only for causes specified in this contract.

As determined by CPM analysis, only delays in activities which affect milestone dates or contract completion dates will be considered for a time extension.

If CONTRACTOR does seek a time extension of any milestone or contract completion date, it shall furnish documentation as required by OWNER to enable OWNER to determine whether a time extension is appropriate under the terms of the contract.

It is understood by OWNER and CONTRACTOR that float is a shared commodity.