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Contract Administration Core Curriculum
Participant's Manual and Reference Guide 2006
III. State Procedures
A. Pre Award Procedures
1. Standard Specifications and Standard Plans
- 23 CFR 630 Subpart B
Applies to Federal-aid highway construction projects on the NHS
Plans and specifications must describe the location and design features and the construction requirements in sufficient detail to allow for accurate bids, to facilitate the construction and to enable the STA to control the contract. FHWA regulations do not require that the STAs have standard plans or standard specifications. However, the regulations require that, on projects with FHWA oversight, the plans, specifications and estimate (PS&E) for each project must be approved by FHWA prior to advertisement of the project. In the absence of pre-approved standard specifications and standard plans, all of the required specifications and plan information would have to be included and approved as part of the PS&E package for each project. Therefore, FHWA approval of standard specifications and standard plans simplifies the PS&E review process. Once approved, the standard specifications and standard plans may be used on Federal aid projects in the State without further review.
Approval of the standard specifications and standard plans has been delegated to the Division Administrator.
Some considerations in developing standard specifications are:
- Use clear, concise and complete language;
- Use imperative mood, active imperative voice (Instead of the passive voice - "All bolts shall be countersunk"; use the imperative mood, active voice - "Countersink all bolts.");
- Use short words, phrases, and sentences for clarity;
- Remove redundancies;
- Organize instructions sequentially;
- Separate instructions for the contractor and the agency;
- Write for acceptance, rather than rejection;
- Avoid escape clauses, and unnecessary approvals;
- Eliminate ambiguity by using specific rather than general words; and
- Seek peer review for clarity and content.
Through the National Highway Institute (NHI), FHWA offers a training course on specification writing, Course No. 13401, "Principles of Writing Highway Construction Specifications." This course may be requested through the Division Office. The objectives of this course are to study the legal ramifications of highway construction specifications, and to identify and describe specific elements of specifications that result in contractor claims. Case studies are used to identify ways to avoid or minimize such claims.
An additional resource for specification writers is the National Specification Website maintained by FHWA. On the website are searchable versions of the standard specification manuals from STAs, AASHTO and FHWA. Also available from some STAs are their "emerging" specifications - these are the special provisions being used for newer or innovative contracting and/or construction techniques. The website address is: http://specs.fhwa.dot.gov/nhswp/.
2. Engineer's Estimate
- 23 USC 106
- 23 CFR 630 Subpart B
- Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation
Applies to Federal-aid highway construction projects on the NHS
The engineer's estimate is an essential element in project approval. The estimate should reflect the anticipated cost of the project in sufficient detail to permit an effective review and comparison of the bids received. In addition, the estimate serves as a guide for analyzing bids.
There are basically three approaches to estimating:
- The use of historical data from recently awarded contracts is the most common approach. Under this approach, bid data are summarized and adjusted for project conditions (i.e., project location, size, quantities, etc.) and the general market conditions. This approach requires the least amount of time and personnel to develop and produces a good estimate, as long as noncompetitive bid prices are excluded from the database and then appropriately adjusted current data is used to build the estimate. However, this method is the most susceptible to outside factors such as inflated bid prices from contracts with little or no competition;
- The actual cost approach takes into consideration factors related to actual performance of the work (i.e., the cost of labor, equipment, and materials; sequence of operations; production rates; and a reasonable value for overhead and profit). This approach requires the estimator to have a good working knowledge of construction methods and equipment. While adjustments for current market conditions may be required, this approach typically produces an accurate estimate and is useful in estimating unique items of work where there is insufficient bid history; and
- The third approach combines the use of historical bid data with actual cost development. Most projects contain a small number of items that together comprise a significant portion (e.g., 70 percent) of the total cost. These major contract items may include Portland cement concrete pavement, structural concrete, structural steel, asphalt concrete pavement, embankment, or other specialty items. Prices for these items are estimated from actual costs and adjusted for specific project conditions. The remaining items are estimated based on historical prices and adjusted as appropriate for the specific project.
Regardless of the approach used to estimate the cost of unit items, the impact of the allowable contract time, construction staging and other unique project requirements need to be considered when preparing the engineer's estimate.
Although FHWA discourages disclosure of the estimate, FHWA policy does not require that the engineer's estimate be kept confidential. If a STA does publicize the estimate, the information must be made available to all bidders.
As a result of the bid rigging scandal during the early 1980's, the AASHTO supports estimate confidentiality in its 1981 guidance, "Suggested Guidelines for Strengthening Bidding and Contract Procedures." The DOT and DOJ also address this issue in their joint 1983 guidance, "Suggestions for the Detection and Prevention of Construction Contract Bid Rigging."
Among the STAs, the policies and procedures regarding confidentiality of the estimate range from including the estimated cost in the bid proposal, to not disclosing the estimate, even after the award is made. Publicizing the estimate minimizes any advantage a bidder might gain by procuring the estimate secretly, and removes possible pressure on STA employees to secretly release the estimate. A significant disadvantage of releasing the estimate is that firms may be able to use the information to manipulate their bids.
Although keeping the estimate confidential will not by itself deter collusion among bidders, it will prevent bidders from knowing the approximate amount that the contracting agency is willing to pay for the project. In those States where confidentiality of the estimate is not possible, FHWA recommends that a value range for the estimate be developed and included in the bid proposal. In addition, for bid bond purposes, several STAs specify a range rather than specifying an actual dollar amount.
In July 2001, 33 FHWA Division Offices responded to a questionnaire regarding the disclosure of the engineer's estimate. Four States indicated that they disclose the engineer's estimate with the project advertisement (LA, MA, PR, TX). Six States publish an estimated cost range with the advertisement (AL, HI, NE, OR, PA, WA). Twelve States never disclose the engineer's estimate (AR, DC, FL, GA, IA, KY, ME, MO, NH, NJ, NY, WV). Eleven States disclose the estimate upon award of the contract (AK, CO, DE, ID, IN, MT, NM, NC, ND, UT, WA, WY).
Regardless of the method used to prepare the estimate or its confidentiality, the estimate must be credible to be effective. The preparation and accuracy of the engineer's estimate should be reviewed if estimates are consistently higher or lower than the bids received, or if other anomalies consistently recur. The FHWA's 2004 "Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation" suggest that the engineer's estimates should be within ±10 percent of the low bids more than 50 percent of the time.
In 1983, the Office of the Inspector General performed a review of the State DOT's preparation of the engineer's estimate. They found the following:
- estimates were overstated and unreliable for bid evaluation, and
- the FHWA had not adequately reviewed the STA's estimating procedures to assure that contracts were awarded at the lowest reasonable rates.
The OIG recommended that FHWA:
- monitor accuracy of estimates,
- emphasize its effort to support and assist STAs to improve their estimating procedures,
- require STAs to explain wide variations when estimates are significantly above the low bid, and
- issue guidance on estimating.
Shortly after the OIG review, the FHWA released recommended procedures to monitor the accuracy of estimates in Technical Advisory TA T 5080.4. In addition, the divisions were advised to review their STA's procedures and to take appropriate action if these criteria are not met. On January 20, 2004, the Office of Program Administration issued revised guide titled "Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation" to replace TA 50.80.4 and 5080.6.
3. Method of Construction
- 23 U.S.C. 112(a)
- 23 U.S.C. 112(b)
- 23 CFR 635.114
- 23 CFR 635 Subpart B
Applies to all Federal-aid highway construction projects.
One of the most basic tenets of Federal aid contracting is that construction contracts are to be awarded competitively to the contractor which submits the lowest responsive bid. This mandate is set forth in 23 U.S.C. 112 and reinforced by 23 CFR 635.114(a) which requires that:
"Federal-aid contracts shall be awarded only on the basis of the lowest responsive bid submitted by a bidder meeting the criteria of responsibility as may have been established by the SHA..."
These principles are the basis for Federal assistance to the STA highway construction programs. The act of a contracting agency negotiating with an apparent low bidder prior to award is defined as "bid rigging in reverse," and is expressly prohibited by 23 CFR 635.113(a) which states the following:
"The State highway agencies do not have the authority under any circumstances to negotiate with a bidder before an award to reduce the price of a construction contract."
Also see Headquarters memorandum dated April 30, 1985 titled "Deviation from Competitive Bidding Requirements" (Appendix A-127 to A-128)
Exceptions to Competitive Bidding. Competitive bidding is the principal means to award Federal-aid contracts. However, there may be situations that support the use of a contracting method other than competitive bidding. Prior to the STURAA, Title 23 allowed the competitive bidding requirement to be waived only if the alternate method was shown to be more cost effective. However, Section 111(a) of the STURAA amended the provisions of 23 U.S.C. 112(b) to permit noncompetitive construction contracting under emergency conditions. Therefore, noncompetitive construction contracting or other unusual methods of construction may be approved under one of two conditions:
- the option is proven to be more cost effective, or
- an emergency exists and time is a critical factor.
Title 23 CFR 635 Subpart B allows that "rare" circumstances may justify the use of force account, negotiated contract, or other unusual method of construction. The regulations clearly indicate that, in the absence of an emergency situation, circumstances are unlikely to justify the use of other methods of construction. Therefore, the consideration of any noncompetitive construction contract method requires a cost effectiveness determination as well as an evaluation that demonstrates circumstances are unusual and unlikely to recur.
A cost effectiveness finding is required for the FHWA / STA approval of any proposal to use a noncompetitive method of contracting. Title 23 CFR 635.205 cites the following situations as possible reasons for the use of noncompetitive construction contracting:
- when the rights or responsibilities of the community are so affected as to require a special course of action, including situations where there is a lack of competition or unreasonable bids, it may be determined to be cost effective to use force account, and
- when by reason of the inherent nature of the operation, it is deemed cost effective to do minor adjustments of railroad and utility facilities (major work still to be accomplished by competitive bidding) by force account.
Under the first circumstance the use of force account may be found cost effective when properly documented. Under the second circumstance, FHWA has determined that the use of force account is always cost effective, and therefore, no additional documentation is required.
Force account work using State or other public forces is discussed in 23 CFR 635 Subpart B and is defined as "the direct performance of highway construction work by a State highway agency, a county, a railroad, or a public utility company by use of labor, equipment, materials, and supplies furnished by them and used under their direct control." Force account contracts with a private contractor are an exception to normal construction contracting procedures and should rarely be approved.
Circumstances that justify a negotiated construction contract should be even more of an exception, making approvals of such contract methods extremely rare.
In an emergency, the competitive bidding requirements may be waived. An emergency is a situation that requires repair work, as provided for under the Emergency Relief (ER) program (23 CFR 668.105(i)), or when a major element or segment of the highway system has failed and the situation is such that competitive bidding is not possible or is impractical. Competitive bidding under such circumstances may not be possible or may be impractical because immediate action is necessary to:
- minimize the extent of the damage,
- protect remaining facilities, or
- restore essential travel.
Therefore, the temporary work necessary to restore the traffic flow on the facility may be performed by either force account or negotiated contract. The regulation clarifies that this definition of emergency is only for the purpose of determining the applicability of the provisions and is not intended to define an "emergency" under 23 CFR 668.105(i) and 23 CFR 635 Subpart B.
The guidance for carrying out emergency repair work under the ER Program is contained in 23 CFR 668 and the Emergency Relief Manual. Due to the urgency and nature of emergency repairs performed under the ER Program, the regulations allow the STA to select the method of construction contracting based on the immediate need to protect public health and safety. This policy only applies to emergency repairs as defined in 23 CFR 668. Reconstruction and permanent repair work is subject to the competitive bidding policy of 23 CFR 635.
Under certain conditions, transportation enhancement projects may be procured using State or LPA small purchasing procedures. See Section V.D for additional information.
Projects that do not fully comply with the provisions of 23 CFR 635 should be pursued under Special Experimental Projects No. 14 - Innovative Contracting (see Section V.A).
4. Value Engineering
- 23 U.S.C. 106(e) and 106(g)
- 23 CFR 627
- FAPG NS G 6011.9, Chapter 6, Value Engineering
- OMB Circular A-131, Value Engineering, May 21, 1993
SAFETEA-LU Section 1904(a)(1) modified 23 USC 106 by revising several program requirements for value engineering. The revised statute requires a value engineering analysis for: 1) all projects on the Federal-aid system with an estimated total cost of $25,000,000 or more; 2) a bridge project with an estimated total cost of $20,000,000 or more; and 3) any other Federal-aid project the FHWA determines to be appropriate. The law also allows the FHWA to require more than one analysis for major projects with an estimated total cost of $500,000,000 or more. To determine whether or not a project meets the $25 million threshold for a project on the Federal-aid system for the purposes of FHWA's VE program, the overall project cost should include the costs associated with environmental studies, preliminary engineering, final design, ROW, and construction.
Value engineering (VE) is a systematic review process that:
- analyzes a project's design, and
- develops recommendations to improve design and/or reduce cost.
The FHWA recognizes that VE, when used during the development of highway projects, is an effective and proven technique for improving quality, fostering innovation, reducing project costs, and eliminating unnecessary and costly design elements. An FHWA study has confirmed the effectiveness of VE in States with active VE programs and concluded that a significant improvement in program effectiveness would result if all States had active programs. As a result of this study, the FHWA published a NPRM on November 16, 1994, seeking comments on a proposal to require all States to apply VE to selected Federal aid highway projects. The Final Rule was issued February 14, 1997, and became effective March 17, 1997.
While the FHWA was analyzing the comments on the NPRM, the NHS Act was enacted on November 28, 1995. Section 303(b) of the NHS Act directs the Secretary of Transportation to establish a program to require States to carry out a VE analysis for all NHS projects with an estimated total cost of $25 million or more. The Conference Report accompanying the NHS Act explains that this provision prohibits the Secretary from requiring VE on other projects, though a State may choose to undertake such analyses on other projects at the State's discretion. The report also prohibits DOT from being prescriptive about the form of VE analysis a State must undertake to satisfy the requirement. H.R. Conf. Rep. No. 345, 104th Cong., 1st Sess. 80 (1995).
Based on this mandate and the public comments received, the final rule was revised substantially from the NPRM. The statutory definition of VE was clarified. The final rule focuses on minimum programmatic needs to ensure proper VE studies are conducted and utilized by the States on qualifying projects. Beyond these minimum needs, the goal is to provide maximum flexibility to the States to conduct VE programs consistent with the rest of their transportation programs.
The end product of the VE study is described in greater detail in the rule's definition of value engineering and in 23 CFR 627.5(a)(2). Examples of the components of a multi disciplined team are provided. Both of these additions are based on the widely recognized VE study process.
As discussed in the applicability section, SAFETEA-LU, §1904(a)(1) substantially modifies 23 USC 106.
The FHWA's Division Offices have general program oversight responsibility for value engineering. The regulation does not require FHWA oversight of each VE study. Instead, FHWA's efforts are focused on State implementation of VE programs. Because the general method of conducting a VE study has become standardized and widely recognized in the field, a review of each study is unnecessary. The regulation, however, refers to the widely recognized process of VE studies.
States may establish or modify their VE programs to comply with these requirements without delaying project approvals and letting schedules.
A State's VE program may include a value engineering change proposal (VECP) VE or cost reduction incentive clause as part of the standard specifications to encourage construction contractors to submit VE proposals and share the resulting cost savings with the STA. A summary report for the Federal-aid fiscal year 2004 VE program is available at http://www.fhwa.dot.gov/ve/vesum04.htm.
Any State choosing to use the design-build concept to expedite the completion of an applicable project must still comply with the requirement to perform a VE analysis on the project. In most cases, the VE analysis should be performed prior to the release of the Request for Proposals.
The cost of performing a VE study is project-related and, therefore, eligible for reimbursement with Federal-aid highway funds.
In 2001, AASHTO published its Guidelines for Value Engineering, 2nd Edition.
5. Life-Cycle Cost Analysis
- 23 U.S.C. 106(f)
Life-cycle cost analysis is an economic evaluation of all current and future costs associated with investment alternatives. It is a valuable economic analysis technique for evaluating highway and other transportation programs and projects that require long term capital and maintenance expenditures over the extended lives of facilities. Future costs are discounted using an appropriate discount rate to compare costs incurred at different points in time.
TEA-21 Section 1305(c) requires FHWA to develop recommendations for States to conduct life-cycle cost analyses (LCCA). The recommendations are to be based on Executive Order 12893 and be developed in consultation with AASHTO. However, there is no mandate to use life cycle cost analysis on Federal-aid projects and the analysis is voluntary.
The FHWA policy on LCCA is reflected in our interim policy statement published in the July 11, 1994 Federal Register. Other sources of technical guidance on "good/best practice" include but are not limited to:
- NCHRP Synthesis Report 122, "Life Cycle Cost Analysis of Pavements" (1985);
- NCHRP Synthesis Report 142, "Methods of Cost Effectiveness Analysis for Highway Projects" (1988);
- "AASHTO Guide for Design of Pavement Structures," 1993;
- FHWA-SA-98-079 "Life-Cycle Cost Analysis in Pavement Design"; and
- FHWA-IF-02-047 "Life-Cycle Cost Analysis Primer".
Starting in 1998, FHWA provided guidance and training under Demonstration Project 115 (DP-115) on "good/best" LCCA practice including risk analysis of life cycle cost projections for pavement design. DP-115 covered the basic LCCA components and analysis structures, including both traditional and probabilistic-based approaches, while discussing the issues associated with input values.
DP-115 was replaced by a two-day workshop titled, "Life-Cycle Cost Analysis in Pavement Design." For more information on life-cycle cost analysis, contact the Office of Asset Management's Evaluation and Economic Investment team (HIAM-30).
6. Contract Time
- 23 CFR 635.121
- TA T 5080.15
Applies to Federal-aid highway construction projects on the NHS
Contract time is defined as the maximum time allowed in the contract for completion of all work contained in the contract documents. Contract time becomes a public relations issue when the traveling public is inconvenienced for no apparent reason. While a project may be dormant for a variety of reasons, the cause can be frequently traced to excessive contract time or poor contractor scheduling.
Insufficient contract time may result in higher bid prices, safety problems, increased time overruns, and claims. On the other hand, excessive contract time may result in increased inefficiencies, equating to increased costs, to the STA and contractor as well as increased user costs to the public. In addition, delay and inconvenience to the public and the hazard of driving through a work zone may be unnecessarily extended.
The STA should periodically review its procedures for determining contract time, which should include a comparison of the actual construction time against the estimated completion time for several projects to ascertain whether its procedures result in appropriate contract times. There are several different techniques being used to determine contract time. The FHWA TA T 5080.15, Construction Contract Time Determination Procedures, describes time determination techniques in detail.
The FHWA, working with the STA, should strive for the least practical number and duration of traffic interruptions during highway construction. The STA should submit, for the Division Administrator's approval, adequate written procedures for determining contract time.
7. Road User Cost
- Contract Management Techniques for Improving Construction Quality, FHWA-RD-97-067, July 1997, Attachment C-1: Guide for Calculation of Road User Costs
The calculation of road user costs is necessary for any highway construction project using an incentive/disincentive clause, lane rental fees, or a liquidated damage charge that includes road user fees.
The calculation of road user costs (RUC) is one measurement of the impact a transportation facility has on the traveling public. Road user costs may include the costs associated with travel time, vehicle operation, accidents, and air quality. Therefore, RUC become an important element in determining the benefit associated with a proposed highway improvement.
Beyond the planning phase, RUC can be applied to project development. The average motorist may experience some delay due to any project. The delay may be minimal or extreme and depends on traffic volumes, project location, type of work underway, and time of day. For example, a bridge replacement project in an urban setting may cause only minor delays if there are several other suitable structures for detours. On the other hand, the replacement of a critical interchange structure may back up traffic for miles during peak travel times, resulting in unacceptable delays and a very high RUC. Similarly, an off-system bridge replacement in an isolated location may cause a 30 km (19 mi) detour; however, due to low traffic volumes on the route, the aggregate RUC may be relatively small.
RUC calculations are increasingly important because the costs should be a consideration in developing phasing schemes, assessing the need for an incentive/disincentive clause, or increasing the liquidated damages schedule for the project. Recent court cases have made clear the need for defensible incentive / disincentive (I/D) provisions which are based on reasonable estimates of RUC. To be defensible, the I/D rate must be based on RUC estimates and not merely a means of punishing the contractor for causing construction delays.
The credibility of any given RUC method will depend on the validity of the assigned unit costs, the repeatability of its results, its sensitivity to slight changes in the assumptions, and its appropriateness for the project.
Among the references that may be used for estimating road user costs are:
- FHWA-RD-97-067, Attachment C-1: Guide for Calculation of Road User Costs, Contract Management Techniques for Improving Construction Quality, July 1997;
- Life Cycle Cost Analysis in Pavement Design, Chapter 3 - Work Zone User Costs, FHWA-SA-98-079, August 1998;
- "User Benefit Analysis of Highway and Bus Transit Improvements," AASHTO, Washington, D.C., 1977; (note: this was superceded by the 2003 AASHTO "A Manual of User Benefit Analysis for Highways");
- "Traffic Control for Streets and Highway Construction and Maintenance Operations," Participant Notebook, FHWA, 1978; or
- "Planning and Scheduling Work Zone Traffic Control," FHWA-IP 81 6, October 1981.
In addition, several computer programs have been developed for RUC. Among them are QUEWZ, MicroBENCOST, and Alternat. Each program will require some customization to fit conditions within the State.
Quickzone Software - In cooperation with Mitretek Systems, the FHWA Operations and Intelligent Transportation Systems Research Team has initiated an effort to develop a new work zone delay estimation software called "Quickzone". The primary functions of "Quickzone" are:
- Quantification of corridor delay resulting from capacity decreases in work zones;
- Identification of delay impacts of alternative project phasing plans;
- Supporting tradeoff analyses between construction costs and delay costs;
- Examination of impacts of construction staging, by: location along mainline, time of day (peak vs. off peak), season (summer vs. winter);
- Assessment of travel demand measures and other delay mitigation strategies; and
- Allowing the establishment of work completion incentives.
A beta-version of the software is available at the following site: http://www.tfhrc.gov/its/quickzon.htm.
Additional information can also be obtained at: http://xtrip.mitretek.org/quickzone/.
8. Time-Related Incentive/Disincentive (I/D) Provisions
- 23 CFR 635.127(d)
- FHWA TA T 5080.10, "Incentive/Disincentive (I/D) for Early Completion," February 8, 1989
Applies to all Federal-aid highway construction projects on the NHS
The FHWA's long standing policy prohibiting bonus payments which was stated in 23 CFR 635.118, was rescinded on June 13, 1984. Although the prohibition was first made regulatory in 1968, the policy apparently existed as early as 1927, and was based on an interpretation of a 1921 statute that limited the Federal Government's share of project costs to the value of labor and materials. However, the 1968 regulatory action was based on administrative interpretation rather than on specific statutory authority. In the late 1970's, the policy withstood attacks from the highway construction industry with FHWA arguing that the agency should not have to pay "extra" just to have a project completed early.
However, the National Experimental and Evaluation Program 24 (NEEP-24), conducted in the early 1980's, demonstrated that the use of early completion incentive payments could be used beneficially and without abuse.
In discussing incentive/disincentive (I/D) provisions, a clear distinction needs to be made between the intent of I/D provisions and the purpose of liquidated damages. Although they have similar mechanisms, the function of each is different. The primary function of liquidated damages is to recover the STA's construction oversight costs associated with the contractor's failure to complete the project on time. On the other hand, an I/D provision is intended to:
- motivate the contractor to complete the work on, or ahead of, schedule, and
- recover damages to the traveling public for late completion.
Therefore, an I/D rate must be based on the estimated road user costs.
An I/D provision for early completion is defined 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. The use of I/D provisions should be restricted to critical projects where it is essential that traffic inconvenience and delays be held to a minimum.
A project's suitability for I/D provisions must be identified during the early stages of project development in order that resources may be fully deployed on the design and coordination of the project. Generally, the use of I/D provisions should be limited to those projects that would severely disrupt highway traffic. I/D provisions should not be used routinely.
To keep from using I/D routinely, each STA should develop specific criteria to facilitate selection of I/D projects as early as possible within the project development cycle. The following characteristics have been associated with projects appropriate for I/D provisions:
- projects on high traffic volume facilities, generally in urban areas,
- projects that will complete a gap in a significant highway system,
- major reconstruction or rehabilitation on an existing facility that will severely disrupt traffic,
- major bridges out of service, or
- projects with lengthy detours.
The use of I/D provisions has generally proven to be very successful, with contractors usually completing projects ahead of schedule.
A 1988 study by FHWA's Office of Program Review study of eight States, 50 percent of the projects with I/D provisions paid the maximum incentive and 35 percent paid a partial incentive.
A 1991 Iowa DOT survey of 35 States found that typically, contractors finished I/D projects early, with incentive payments (often the maximum incentive allowed) being more typical than disincentive assessments.
In February 2000, the Michigan DOT (MDOT) completed an evaluation of the use of I/D clauses on 26 projects let and completed in 1998 and 1999. MDOT reported that 65% of I/D projects were completed early, 12% were completed on time and 23% were completed late. MDOT found that the average net reduction in contract days was 19% in comparison with similar projects that were let with an expedited schedule clause requiring the contractor to work a six calendar-day workweek but without the use of an I/D provision. The average I/D rate for these 26 projects was $18,500 and the average project user delay savings was $610,500. MDOT indicated that I/D provisions will result in an average expenditure of 1.5% of the contract amount.
This high rate of success is attributable not only to the monetary reward, but also to the contractors' response to a challenge.
During the development of I/D projects, extra effort should be made to ensure that the design, specifications, schedule, etc., are compatible and appropriate for the project. A field change to correct plan errors, especially those related to the I/D phase work items, will be very costly in both time and money on an I/D project. The plans and specifications should indicate any unusual condition or any restriction under which the contractor may be required to work, such as prohibiting jack hammering or pile driving during the night due to noise problems, or work restrictions related to environmental issues.
The contract must clearly define the start and the completion of the I/D phase since both may differ from the start or completion of the project. For example, the I/D time might not begin until traffic is impacted, thus allowing the contractor time to fabricate steel, obtain mix design approval, etc. However, it is necessary to define in detail what is expected of the contractor. This can be done through the plans or by detailed description in the special provisions.
During the preconstruction phase of the project, all parties (e.g., local officials, police, local traffic engineers, construction engineers, etc.) should be involved in the project development.
Pre-design field reviews are essential since "as-built" plans or old construction plans may not be reliable. Maintenance operations, utility work, modifications on adjacent properties, or field changes done during the original construction but not recorded on the plans, may result in substantial differences between the as-built plans and field conditions.
A pre-bid meeting should be held to discuss the I/D phase and any unusual features of the project.
Determination of I/D Amounts. To effectively accomplish the objectives of I/D provisions, the I/D amount must be large enough to encourage the contractor to be innovative, and compensate the contractor for the additional expense of accelerating the work. If the incentive payment is not sufficient to cover the contractor's extra costs (additional crews, overtime, additional equipment, etc.), then there is no incentive to accelerate production, and the I/D provisions will not produce the intended results.
The daily I/D amount should be 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. The calculation of the I/D amount must be well justified and documented for each project. 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 to a final daily I/D amount that provides a favorable benefit/cost ratio to the traveling public, and still motivates the contractor.
A total incentive payment cap of 5 percent of the total contract amount has been used by a number of STAs. The cap on the incentive payment puts an upper limit on the funding required if the estimated I/D time was longer than necessary. Eventually, with experience, the STAs may feel comfortable in not setting a cap. No cap should be placed on the maximum disincentive amount.
EXAMPLE: Milton v. Alabama
To FHWA's knowledge, the only adverse decision regarding the use of I/D contract provisions has occurred in Alabama. On September 14, 1990, the Supreme Court of Alabama issued an opinion striking down Alabama's use of an I/D clause on two Alabama DOT Federal-aid projects. In the suit, Milton Construction Company (Milton) asked the court to declare the disincentive clauses used in the two contracts void and unenforceable as a penalty. Although the Alabama Supreme Court decided in Milton's favor, the case did not set precedent for I/D provisions but merely ruled on Alabama's use of these provisions on these two projects.
The Court ruled that Alabama's use of the I/D provision was a penalty, against public policy, and therefore unenforceable. The Court concluded that the following evidence supported Milton's case:
- The daily amount for the disincentive assessment was arbitrarily set by the owner (it was not based on road user costs). The court did not consider the daily I/D rate to be a reasonable estimate of probable losses to the traveling public;
- The stated purpose of the clause was to encourage early completion. There was no mention of the recovery of costs for the road users; and
- The contract set a maximum amount of disincentive payment that could be assessed. Thus, even though road user costs could continue to accumulate after the critical contract date, the disincentive charge would remain the same. The court saw this as further evidence of Milton's claim that the I/D provision was a penalty and not a vehicle to recover reasonable losses.
The Alabama Supreme Court overturned the disincentive assessment, concluding that, as applied it was a penalty. The State did not adequately demonstrate how the contract time was established nor how the daily I/D rate was related to road user costs. FHWA recommends that I/D daily rate be based on a reasonable estimate of road user costs. The I/D daily rate can be less than or equal to the estimate of road user costs, but in no case should the I/D rate exceed the estimate. For further guidance see FHWA Technical Advisory TA T 5080.10.
Determination of I/D Time. When determining I/D time, the STA must consider to what extent, and at what cost, construction can be compressed from a normal construction schedule. If the completion date is unreasonable, the bid prices will be excessively high. In fact, unreasonable completion dates may discourage potential bidders from bidding. On the other hand, the use of a nominally compressed contract time may allow the contractor to earn the maximum amount without making an increased effort. This penalizes the public since the I/D phase would not be completed in less time than under a non-I/D contract but will cost more due to the incentive payment.
The determination of I/D contract time based on past performance requires engineering judgment to determine to what extent the time can be compressed. Normal construction time is generally based on a competent contractor working 5 days a week, eight hours a day, while an accelerated time should be based on the performance of a good contractor working extended or extra shifts with additional workers for six or seven days a week. Continuous 7-day workweeks should be avoided since extended periods of work without days off can result in high turnover rates for contractor and inspection personnel.
The season of the year in which the project will be constructed should be considered in determining the I/D time. Finally, the project should be such that an I/D phase can be completed in one construction season.
The use of calendar day or completion date contracts has proven very effective in controlling contract times. Working days should not be used for I/D contracts for the following reasons:
- the use of working days has not been effective in getting projects completed by a specific date, and
- project engineers come under additional pressure when determining whether to charge the contractor a working day. This increases the conflict between the contractor and the project engineer in general and about working days specifically.
Cooperation and coordination between the contractor and the STA are essential since any delay in approval of change orders can be costly. Decision-making and approval must be promptly provided to the contractor at all times that I/D work is in progress. As appropriate, projects should be set up with periodic meetings to discuss project development during design and construction. These discussions should consider future critical operations and potential problems.
To facilitate the project engineer's ability to make prompt decisions, the contractor should be required to submit a CPM schedule for review and approval prior to starting work. In addition, since the schedule will be used to gauge and analyze the contractor's progress, determine time adjustments, and evaluate claims, the contractor should be required to update the CPM on a regular basis, which might be in conjunction with the regularly scheduled job site progress meetings. Regular meetings to update the CPM serve as a valuable contract administration tool, especially if any changes occur.
During the life of the contract, the contractor must meet all milestones and completion dates. 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 STA should consider all alternatives, including additional CE costs, to keep the project on schedule.
The I/D time adjustments shall be limited to major work items that affect 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 resulting percentage of underrun or overrun should be substantial to warrant contract time changes.
Additional work should be expected by both the contractor and the STA. Additional work which does not affect the critical path is to be absorbed within the current CPM schedule without any adjustment in the I/D time. However, extra work which impacts the critical path may result in an equitable adjustment for both cost and contract time.
Dependent on the use of I/D provisions by a given STA, it is best to maintain more oversight on contracts with early completion clauses in order to more closely monitor payment, time extensions, and delays.
9. Quality - Price Adjustment Clauses
- Headquarters memorandum - "Technical Guidance on Price Adjustment Clauses for Quality," January 24, 1992
Applies to all Federal-aid highway construction projects on the NHS
Price adjustment clauses and schedules are an important and effective component of quality assurance specifications. "Quality Assurance" specifications generally include statistically based acceptance plans, require contractor process control testing, and have provisions for pay adjustments based on the degree of compliance with specified requirements. Quality assurance specifications and programs may lead to better contractor control of the quality of the specified product, however, they do not diminish the need for effective construction inspection.
Incentive/Disincentive provisions have been referred to as "bonus" and "penalty" provisions. Some conclude that neither "bonus" nor "penalty" accurately describes these provisions. "Bonus" implies that additional payment is made for no added value. Price adjustment clauses can provide incentives for achieving higher quality in those physical properties that significantly improve performance. "Penalty" implies an administrative fine rather than a reduction in payment for future service loss.
In the past there was some sentiment that price adjustments were punitive in nature. However, negative price adjustments can provide a basis for accepting and paying for work that does not fully meet specifications and removal and replacement is not justified. They are not to penalize a contractor, but rather to pay an equitable amount for the value of the product delivered. Both incentives and disincentives should rationally relate to the gain or loss in service life or performance of the product. The FHWA has research underway on performance related specifications with the goal of developing pay adjustment clauses that are more rational and equitable than those currently employed. The following definition has been offered by a TRB synthesis:
" 'Performance-Related Specifications' (PRS) are materials and construction specifications that utilize a system of sampling, testing, and inspection procedures that have been found to significantly correlate with performance of the end product."
Although the terms "bonus" and "penalty" may not accurately describe the intent of these provisions, legally the label does not matter if reasonable amounts are specified in the contract and both parties agree. The legal principle of stipulating, at the time of contracting, an amount payable as damages should a party break the contract is known as "liquidated damages." Legal opinions have upheld the use of liquidated damages provisions regardless of the label placed on them provided they are reasonable and based on a rational cost analysis. A legal opinion should be sought in each State when considering the application of price adjustment clauses because some States have had legal restrictions which did not allow such provisions in State construction contracts.
The FHWA has traditionally endorsed the use of incentive provisions up to five percent of the unit bid price for improved quality provided they are based on readily measured physical properties that reflect improved performance. Incentives greater than five percent can be considered on a case-by-case basis following an analysis of performance data.
In developing price adjustment provisions, responses to the following questions should be obtained and analyzed:
- What physical properties are considered to be critical?
- How are these physical properties tested/measured?
- To what degree does each physical property influence performance?
- What price adjustment, if any, should be applied to these physical properties?
The following are some physical properties for which STAs include price adjustments based on quality of construction.
|Asphalt Concrete||Portland Cement Concrete|
|asphalt content||strength (compressive and flexural)|
|aggregate gradation||aggregate gradation|
|compaction (in-place density)||air content|
|Marshall air voids||ride quality (pavement)|
An acceptance plan must be developed for each property. Acceptance plans are an agreed upon method of taking and evaluating measurements for determining the degree of acceptability of material or construction. An acceptance plan defines the lot size (i.e., the portion of work to be accepted at a time), sample size, sampling procedure, testing method, process for judging the acceptability of the test results, and payment provisions.
A price adjustment provision usually includes a pay schedule. There are two basic types of pay schedules. Continuous pay schedules use an equation, while stepped pay schedules incorporate a table in the specifications. The table may be easier to understand, but the equation is probably more equitable because it avoids large differences in pay for minor changes in quality at the pay break points. The difficult part in applying either of these schedules is determining the appropriate pay factor for a given quality level. This again goes back to the need for performance information. The following are examples of both types of pay schedules.
|Step||Percent Defective||Pay Factor|
|1||0.00 - 5.00||1.05 (e.g. 105% of bid price)|
|2||5.01 - 15.00||1.00|
|3||15.01 - 25.00||0.96|
|4||25.01 - 35.00||0.90|
|5||35.01 - 50.00||0.80|
|6||50.00 -100.00||Remove and replace, 0.50 if allowed to remain in place|
|Pay Factor = 1.05 - (0.005 * Percent Defective)|
Price adjustments can be based on an individual physical property or a combination of properties. When a contracting agency determines that there are a number of physical properties that will be included in the price adjustment provisions, pay factors for these physical properties must be combined to determine the final price adjustment. Some agencies use the lowest of the pay factors, while others use a Combined Pay Factor (CPF). The CPF may be developed by multiplying the factors or by using a straight average. One caution on multiplying pay factors is that this potentially can assess an inordinate negative pay adjustment.
A more common approach is to simply combine pay factors by using a weighted average based on a predetermined weighing factor for each property. By using this approach, more importance can be given to certain properties. The following is a sample CPF formula using this method.
|Final Combined Pay Factor =||Σ ( P Fn × W tn )|
|Σ ( W tn )|
(where PFn = pay factor for item n, Wtn = weighting factor for item n, the Greek symbol Sigma, Σ = summation)
When using price adjustment provisions for quality it is important to ensure, from a performance standpoint, that specifying a positive pay factor on one physical property does not detract from achieving sufficient quality of another physical property, or more importantly, the product as a whole. Some STAs specify that incentives will not be paid for a given lot on one property if negative price adjustments are assessed on another property.
Another approach that has been proposed for highway pavements makes use of a concept called the "load ratio." This involves determining the interrelationships of all properties deemed performance indicators.
This is done through an analysis of anticipated service life using a mathematical model, such as the AASHTO Pavement Design equation, coupled with an engineering economics analysis. This is a complex method, but may more nearly relate pay factors to anticipated performance which is the goal of price adjustments.
Implementing pay adjustment provisions should follow the same logic followed for implementing any other aspect of a quality assurance specification. There should be a transition period during which adjustments are calculated on trial projects but not actually applied. This will allow evaluation of the price adjustment amounts and procedures. Following this phase, price adjustments might be applied at a rate of 50% for a given time period (e.g., such as one construction season). Most importantly, price adjustment provisions should be developed cooperatively with industry following the overall premise that the adjustments rationally relate to performance.
CPF Example: Asphalt Concrete Pavement
The contracting agency has determined that four physical properties for asphalt pavement that significantly affect performance are RIDE QUALITY, COMPACTION, ASPHALT CONTENT, and GRADATION. The contracting agency has also decided the relative importance of each property (weight) on pavement performance. An acceptance plan has been developed to define the quantity to be represented by an analysis (i.e., lot size), number of samples, quantity represented by each test, random sampling provisions, method of evaluation (typically a statistical analysis), etc. Based on an analysis of the testing results against the defined specification, the respective pay factors for each property in a given lot have been determined. These are listed in the "PF" column. Pay factors greater than 1.00 (i.e., incentive) indicate the quality was better than specified and those less than 1.00 (i.e., disincentive) indicate quality was less than specified.
|PFn||Physical Property||PF||Weight||PF × Wt|
|Final CPF =||12.17||= 1.014 (i.e., 1.4% Incentive Payment)|
The final payment for the lot to the contractor is determined by:
Lot Payment = Bid Price × Quantity in Lot × 1.014
As shown below, when other techniques for determining the CPF are used, the result can be significantly different.
|Method||Resulting Lot Pay Factor|
|Weighted Avg. (from above)||1.014 (+1.4% price adjustment)|
|Multiplication of factors||1.009 (+0.9% price adjustment)|
|Straight Average||1.002 (+0.2% price adjustment)|
|No incentives if negative factors||1.000 (no price adjustment)|
|Lowest Pay Factor||0.97 (-3.0% price adjustment)|
Multiplying pay factors can potentially result in an inordinate negative pay adjustment. For example, if a material had five pay factors and they computed to be 0.97, or slightly less than that specified, the resulting computation would be:
Final Pay Factor = 0.97 × 0.97 × 0.97 × 0.97 × 0.97 = 0.859
(-14.1% price adjustment)
If the lowest pay factors were used, the resulting CPF would be 0.97 (i.e., merely a -3.0% price adjustment).
No method is currently considered more correct that another because the true way that various physical characteristics interact is not fully understood. An STA should use performance studies coupled with testing data to determine the method that most closely matches its experience.
10. Commodity Price Adjustment Clauses
- TA 5083.3 "Development and Use of Price Adjustment Contract Provisions," December 10,1980
- Headquarters memorandum - "Price Adjustment Contract Provisions," August 21, 1990
- Headquarters memorandum - "Price Adjustment of Existing Contracts," November 30, 1990
Applies to all Federal-aid highway construction projects.
The material from this section was extracted from TA T 5080.3, "Development and Use of Price Adjustment Contract Provisions" (Appendix A-70 to A-86). Although TA T 5080.3 expired in 1990, its information remains valid.
Price adjustment clauses were developed in response to the Organization of Petroleum Exporting Countries (OPEC) oil embargo of 1973. A price adjustment clause establishes a method within the contract to adjust the contract unit prices of specific materials and supplies under certain economic conditions. In the past, price adjustment clauses have been invoked during periods when asphalt, fuel, and cement were in short supply nationally; but the clauses may be written more generically and not limited to these materials. Price adjustments may also be justified for regional shortages.
The price adjustment clauses are incorporated into contracts to reduce the contractor's risk of bidding which results in speculative prices. By keeping that risk with the STA, inflated bid prices and overall project costs are reduced. More recent information regarding FHWA's price adjustment policy can be found in Headquarters memoranda dated August 21, 1990 (Appendix A-121 to A-122) and November 30, 1990 (Appendix A-123 to A-124).
Price adjustment clauses should be applied only to materials with uncontrollable price volatility which may greatly affect contract prices. In general, price adjustment clauses may be invoked if:
- the price trend is extremely volatile,
- suppliers are unable to provide a price quotation for the usual term of the typical contract,
- the price quote may be based on date of delivery or spot market conditions, or
- shortages may be expected.
The standard, upon which price adjustments are to be based, should be real, quantifiable, and identified in the contract specifications. This standard should represent a price, or base index, which is not susceptible to manipulation by contractors or suppliers. The STA may develop its own price index or adopt any of the published commonly available data. The Consumer Price Index is an example of a commonly used published index.
In developing its own price index, the STA could use:
- actual price quotations taken from a fixed set of suppliers serving a specific area, or
- actual bid prices.
- The STA should compute this price index at specified intervals, not as price changes occur. Monthly computations are suggested.
Published price data may be found in the following sources:
- Bureau of Labor Statistics: "Producer Price Indexes" (monthly),
- Engineering News Record (weekly): construction prices listed approximately monthly, or
- any of a number of oil related publications (e.g., The Oil Daily, Platt's Oilgram Price Service) with price data for specific oil products.
With the valid price index in hand, the STA must then develop workable provisions. Some general principles for the development and use of price adjustment clauses are:
- The price adjustment provision need not be a standard specification. If the price adjustment is included as a standard specification, the provision should indicate that it is only applicable when specified in the bidding proposal;
- The price adjustments should provide for both upward and downward movement of prices;
- There should be upper and lower limits on the adjusted compensation;
- The price adjustment should be "triggered" by a significant change in the index rather than minor fluctuations in price (AASHTO has suggested a 5 percent "trigger", although 10 percent has become the norm);
- The basis of payment clause should clearly indicate the coverage of price adjustment clauses;
- The contractor should not be allowed any option whether to accept or reject any price adjustment compensation;
- The price adjustment compensation should be automatically incorporated in progress and partial payment computations;
- The compensation should not be based on actual invoiced receipts; and
- Upward price adjustments should not be permitted after the contract time (including extensions) allowed for completion of the project has elapsed.
Currently no materials have been identified with uncontrollable price volatility at the national level; however, there may be some which show enough price variations on the regional level to warrant the application of price adjustment clauses. The STA should consider the following principles when trying to determine whether regional/local conditions warrant the use of price adjustment clauses:
- Price adjustments should be considered for projects which are expected to exceed 9 months in duration from bid opening to completion;
- For single season contracts, price adjustment clauses should be provided for all price volatile materials which significantly affect the unit costs of the major items of work; and
- For multiple season contracts, price adjustment clauses should be provided for all price volatile materials and supplies.
As noted, fuel prices may also be volatile. When the contract work is fuel-intensive (e.g. earth moving), price adjustment provisions may be appropriate. The application of fuel price adjustment clauses is discussed in TA T 5080.3. Excavation and embankment, aggregate hauling, and paving are the most fuel intensive types of work.
Price adjustment provisions should be continuously monitored and evaluated for need, effectiveness, and fairness. Input from the industry should be encouraged.
Retroactive price adjustments for increased material costs or tax increases
The FHWA does not have the legal authority to participate in retroactive contract modifications related to material price increases. Mr. Capka's April 8, 2004 memorandum indicated that FHWA is legally prohibited from making such payments. In the absence of a price escalation clause for steel, the contractor should have provided for this contingency in its bid. However, the FHWA would not object to the State DOTs using 100% state funds for such payments.
For new contracts, States may use steel price adjustment clauses in new contracts just as they would for asphalt cement or fuel.
Unanticipated state sales tax increase
Unless the State DOT has a related contract clause, there is no basis for additional compensation. This is similar in concept to the steel price issue noted above. In the absence of a price escalation clause for increased taxes, the contractor should have provided for an appropriate amount in its bid to cover the risk of increased taxes.
11. Bonding and Prequalification
- 23 U.S.C. 112
- 23 CFR 635.110
Applies to all Federal-aid highway construction projects.
Bonding. Bonding is grouped into four basic classifications. They are defined as follows:
- Bid Bond, or proposal guaranty, is a bond, certified check, cashier's check or other negotiable instrument which is submitted with the bid as assurance that the bidder will, upon acceptance of his bid, execute such contractual documents as may be required within the time specified;
- Performance Bond is a bond executed in connection with a contract to assure fulfillment of all the contractor's obligations under the contract;
- Payment Bond is a bond executed in connection with a contract to assure payment, as required by law, to all persons supplying labor and material in the execution of the work provided for in the contract; and
- Warranty Bond is a bond executed in connection with a contract to assure that a warranted item survives the warranty period in the prescribed condition.
Prequalification. The AASHTO defines prequalification as a means of predetermining job experience and work capacity and to identify individuals and organizations from whom the agency may accept a bid. The AASHTO also has encouraged the use of prequalification procedures in its 1981 Suggested Guidelines for Strengthening Bidding and Contract Procedures.
Generally, prequalification consists of an evaluation of the contractor's experience, personnel, equipment, financial resources, and performance record. The evaluation is normally performed annually. The information required for prequalification may be extensive, however, the prequalification process should be relatively short so that it may be completed during the project advertising period. A State's prequalification process should not be used to limit competition or discourage the submission of a bid by an otherwise responsible contractor.
AASHTO recommends the following information be required for prequalification:
- detailed financial statement,
- resident agent,
- capacity and control classification,
- experience and performance,
- ownership or control,
- equipment, and
- updated information when there is corporate or affiliate change or reduction of 10 percent or more of the firm's assets.
Once deemed "prequalified", a contractor may be "rated" for contract value in a specific classification, such as general highway construction, grading and minor structures, grading and paving, or miscellaneous. In 1994, NCHRP Synthesis 190, Criteria for Qualifying Contractors for Bidding Purposes, found that prequalification was required in all but fifteen States. Of these fifteen States, five generally undertake some form of post-bid qualification evaluation, which may not be as formalized as prequalification.
The FHWA does not require the STAs to implement procedures or requirements for prequalification, qualification, bonding, or licensing, on Federal-aid projects. However, if an STA has these procedures or requirements, they must conform to the FHWA competitive bidding policy, in other words, the requirements cannot restrict competition as set forth in 23 CFR 635.110(a) which reads:
"The procedures and requirements a SHA proposes to use for qualifying and licensing contractors, who may bid for, be awarded, or perform Federal aid contracts, shall be submitted to the Division Administrator for advance approval. Only those procedures and requirements so approved shall be effective with respect to Federal-aid highway projects. Any changes in approved procedures and requirements shall likewise be subject to approval by the Division Administrator."
The regulations expand in 23 CFR 635.110(b) to require that:
"No procedure or requirement for bonding, insurance, prequalification, qualification, or licensing of contractors, shall be approved which, in the judgment of the Administrator, may operate to restrict competition, to prevent submission of a bid by, or to prohibit consideration of a bid submitted by, any responsible contractor, whether resident or nonresident of the State wherein the work is to be performed."
The regulation in 23 CFR 635.110(c) specifically states:
"No contractor shall be required by law, regulation, or practice to obtain a license before a submission of a bid or before the bid may be considered for award of a contract... Prequalification of contractors may be required as a condition for submission of a bid or award of contract only if the period between the date of issuing a call for bids and the date of opening of bids affords sufficient time to enable a bidder to obtain the required prequalification rating."
However, an STA may require licensing of contractors after the bids are opened if the requirement is consistent with competitive bidding principles. In other words, the requirement must be applied uniformly to all contractors.
The FHWA regulations on licensing do not specifically address subcontractor licensing issues.
Although an STA may have a compelling reason (e.g., State law) to utilize a procedure that differs from acceptable Federal aid practice, the procedure may not be applied to a Federal-aid project. In fact, 23 CFR 635.112(d) specifically requires that for a Federal-aid project, the State must inform bidders of contract provisions which do not apply. This information must be included in the advertisement, specifications, special provisions or other governing documents as appropriate.
An example of an inappropriate provision would be a State preference clause in the standard specifications. Since the clause provides some competitive advantage for in-state contractors, the clause violates the Federal open competition requirements and therefore, could not be applied to a Federal-aid project. Other examples would be a restriction on products or services from specific foreign countries; a requirement to provide insurance for domestic partners; or small business set-asides.
12. Advertising for Bids
- 23 U.S.C. 112
- 23 C.F.R. 635.112
Applies to all Federal-aid highway construction projects; however, on "delegated" projects, the STA acts on behalf of FHWA for:
- the Division Administrator's authorization to advertise (23 C.F.R. 635.112(a)), and
- the Division Administrator's approval of addenda (23 C.F.R. 635.112(c)).
The AASHTO definition of advertisement is:
"the public announcement to invite bids for work to be performed or materials to be furnished."
Advertisement of a contract proposal can legally take the form of a classified ad in a newspaper or any other form that is permitted by State law or practice that is acceptable to the FHWA. Other forms to announce upcoming projects, which are deemed acceptable, can include advertisements in trade journals, bulletins, and mailed notices to potential bidders (i.e., from a mailing list). These other forms of advertisement can attract greater attention and, thereby, enhance competition.
The Internet has created another forum for advertising projects. Several States have now created a single website which posts project notices for all State agencies. Provided that the STA notifies all interested bidders about the website and the website is readily accessible to all interested bidders, Internet advertising is acceptable for Federal-aid projects as a supplement to traditional means.
A project may be advertised following PS&E approval by the Division Administrator, as established in 23 CFR 635.112. Authorization must be based on the assurances prescribed in 23 CFR 635.309 which include:
- PS&E approval,
- assurances that all right-of-way (ROW) clearances, utility, and railroad work have been completed, or that arrangements have been made for coordination during construction with proper notice provided in the bid proposal,
- assurances for relocation of individuals and families when such circumstances exist,
- assurances that the public hearing process and that the location and design approval requirements have been met, and
- assurances, where applicable, that required area-wide agency reviews have been accomplished.
The FHWA's policy requires that the advertising policies and practices of the STA must assure free and open competition. This policy includes issues concerning licensing, bonding, prequalification, and bidding, as well as, the announcement itself in relation to Title VI Nondiscrimination, with regard to age, race, religion, color, sex, national origin, disability, etc.
The minimum advertisement period is three weeks. With approval by the Division Administrator, exceptions are permitted where circumstances warrant. For large or complex projects, the advertisement period should be greater than three weeks (six weeks or more may not be excessive) to permit prospective bidders adequate time to prepare a responsive bid proposal. For major or specialty work, consideration should be given to advertising regionally to attract a larger number of qualified bidders. Also, for more complex projects, scheduling a pre-bid meeting to address prospective contractors concerns and questions is considered good industry practice.
Mandatory Pre-Bid Meetings. The FHWA does not prohibit the use of pre-bid meetings; however, if attendance at a pre-bid meeting is made a condition of bid responsiveness, the project advertisement and all bidding documents must reflect this requirement. The contracting community must be given adequate notice to comply with such a requirement.
Addenda. All bidders must bid the project on the same or comparable basis, so that no particular advantage or disadvantage accrues to any potential bidder or to the contracting agency. Since an addendum issued during an advertisement period could have a profound impact, not just on bid prices, but also on the basis for bid comparisons, all prospective bidders must be made aware of any addendum, as expeditiously as possible.
The definition of "expeditious," in terms of an adequate time frame to get an addendum out to all prospective bidders prior to the bid opening, is subjective. However, some state standard specifications include a definition of the minimum addenda review time. Each case should be judged on the complexity of the addendum. A common practice is to apply the same minimum time frame criteria for all addenda as has been established by the "10-day Rule" for US DOL wage rate decisions. Under the 10-day Rule, all addenda must be issued 10 days or more prior to bid opening and must be sent to all prospective bidders.
Since an addendum constitutes a deviation from the approved PS&E, the obligation of Federal aid funds may be impacted by the change. Therefore, an addendum must be approved by the Division Administrator prior to release to the prospective bidders. Any approval or concurrences will be based on the STA's assurance that all potential bidders will receive the approved addendum.
13. Bid Opening and Tabulation
- 23 CFR 635.113
- FAPG NS G6011.10, "Bid Price Statistics, Form FHWA-45"
Applies to all Federal-aid highway construction projects except that it is not necessary to forward bid tabulations on non-NHS projects to FHWA.
The bid opening is a public forum for the announcement of all bids, and is that point in time where the paper bids are opened and read aloud. In general, the time given in the advertisement period is the last moment that bids can be accepted. However, some larger states have set their final bid acceptance at a time prior to bid opening; this allows all bids to be delivered to a single location for opening. For the bidder, the reading of the bids confirms whether his/her bid is successful. For the STA and the general public, this forum establishes the cost to build the project.
Bid opening. The FHWA policy requires all paper bids to be opened publicly and read aloud either item by item, or by total amount. If a bid is not read, the bidder is to be identified and the reason for not reading the bid announced.
While FHWA does not have specific policies on how a bid opening should be conducted, our competitive bidding policy relies on the phrase in 23 CFR 635.113 that "... [a]ll bids ... shall be publicly opened and announced ..." In common terms, "publicly opened" means being opened in front of the "public" particularly those people who are stakeholders in the letting. The specific details of the advertisement and bid opening procedures are governed by State statute.
Reasons for not reading a bid include the bid itself being non-responsive, often called "irregular," or the bidder is determined to be not responsible. The difference between a responsive bid and responsible bidder is that:
- A responsive bid is one that meets all the requirements of the advertisement and proposal; while
- A responsible bidder is one who is physically organized and equipped with the financial wherewithal to undertake and complete the contract.
Some reasons for not reading a bid due to bidding irregularities may include:
- failure to sign the bid,
- failure to furnish the required bid bond,
- failure to include a unit bid price for each item,
- failure to include a total amount for the bid,
- failure to prepare the bid in ink,
- failure to submit a non-collusion affidavit,
- failure to commit to the achievement of the DBE contract goals or demonstrate good faith efforts to do so, or
- inclusion of conditions or qualifications not provided for in the specifications.
The above examples do not include all possible bidding irregularities. The STA's standard specifications will govern regarding what constitutes a bidding irregularity. Therefore, the STA's bidding documents should clearly identify those requirements with which the bidder must comply to have a responsive bid.
Just as the bid may be rejected for being irregular or unresponsive, an apparent low bid may also be rejected on the grounds that the bidder is not a responsible bidder. A bidder may be deemed not responsible because of past unsatisfactory performance, as evidenced by failure to meet the STA's qualification requirements, or because of State or Federal suspension/debarment action. A determination of non-responsibility by the contracting agency should be documented in writing and the contractor should be given a "due process" to respond to such charges. A determination of non-responsibility should be done prior to the receipt of bids. While 49 CFR 29.510(b)(2) indicates that participants may not be required to check the non-procurement list, the STA is highly encouraged to develop a procedure for verifying the eligibility of participants prior to the award of the contract.
In summary, a successful bid opening should identify the responsible bidder submitting the lowest, responsive bid.
In response to a field inquiry, FHWA's Contract Administration Group conducted a survey of STA bid revision acceptance policy. Of the seventeen States responding, seven allowed telephone or fax bid revisions up to the time of bid opening. The remainder did not. In fact, most of the remaining States allowed bid revisions only in person by a contractor representative showing proper identification. Three STAs required that a contractor withdraw the original proposal and then submit a revised bid.
Combined Certifications/Signature Sheets
Frequently, bids are rejected as non-responsive because the contractor inadvertently failed to sign one of the many certifications required. In an effort to maximize competition, some States use either a combined certification sheet or include in the bid proposal packet a detailed listing of the certifications that are required and their location within the packet.
As a basis for tracking current construction costs and forecasting future construction costs, bid tabs (FHWA 810) are required for all Federal-aid highway construction contracts for projects on the NHS, regardless of the contract amount or Federal-aid funding type. Bid tabs should be sent to the Office of Program Administration (HIPA-10) within 2 weeks of the award of contract. Software for submitting the data electronically in available on the FHWA website. This data is used to produce a bi-annual report entitled the Bid Opening Report.
Bid Price Data
In addition to the bid tabs, the FHWA-45, Bid Price Data, form should be submitted to FHWA Headquarters (Federal-Aid Program Administration Division, HIPA) for all NHS projects except those projects with a contract value less than $500,000, or highway safety or beautification projects. The form should be sent to Headquarters within two weeks of contract award. Software for submitting the data electronically in available on the FHWA website. See FAPG, non-regulatory Supplement G 6011.10, Bid Price Statistics, Form FHWA-45, for additional information.
Electronic Media in the Contracting Process
As of October 1999, most STAs have web pages that provide data on the contracting process. Some list proposed bid letting dates, plan holders lists, bid tabs from past lettings, average bid unit prices, and other award data. Such systems promise potential savings in time and cost to both the agency and contractors. However, FHWA cautions STAs from making information available that could aid collusion. FHWA discourages the publication of plan-holder lists. These lists identify potential bidders, and where competition is limited, they may support fraudulent bidding practices. For additional information, see the discussion on bidder's lists in Section No. 3.d. in FHWA's Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation (Appendix A-87).
Electronic bidding is the transfer of proposal bid data between the contracting agency and contractors. Electronic bidding can either supplement or replace traditional paper bid documents. There are currently two methods of electronic bidding:
- One-Way Electronic Bidding. The contractor submits the bid information to the contracting agency on a CD or floppy disk. In many cases, this electronic bid must be supplemented with a paper proposal. The contracting agency must include language in its contract declaring which bid will govern in instances where the electronic and paper versions don't match. As of March 2006, there were 25 STAs that used this method.
- Two-Way Electronic Bidding. This is also known as Internet bidding. The contractor submits the bid to the STA over the Internet. As of March 2006, there were 26 STAs that either permit or require electronic bidding.
- Bid Preparation Software.
There are a number of bid preparation software packages available. The majority of the STAs (33) use Trns•port's Expedite® bid preparation software; this software is a part of the AASHTO Trns•port Suite of products. Contractors can often download the software from the STA web site. Contractors are able to download bid quantities from the STA web site and then use Expedite to fill in the unit prices and calculate a total bid price. This avoids costly computation errors on the contractor's part and simplifies bid tabulation by the STAs. Expedite also has an audit feature that alerts contractors when to errors and omissions found in the bid preparation.
Other software used is CBID (essentially an Excel Spreadsheet with the Unit price and quantity information) (IL), HwyBid (KY), EBID (MS), ECMS (PA), Quest (RI), SDEBS (SD), UEBS (UT), and Ebids (WA)
- Estimate Preparation Software
There are several commercially-developed software packages that contractors may use to develop their unit bid prices. These packages are also capable of uploading unit price information into many of the bid preparation software packages listed above. A partial list includes BID2WIN (http://www.bid2win.com/), Estimating Link (http://www.tcli.com/EstimatingLink/), Hard Dollar (http://www.harddollar.com/), HCSS (http://www.hcss.com/), and SharpeSoft (http://www.sharpesoft.com/).
- Bid Submittal Software
Bid Express® is the only commercial product used by STAs to submit bids over the Internet. This product was developed by InfoTech, which was also the developer of Expedite® as well as the other packages in the AASHTO Trns•port® Suite of products. Bid Express® is a subscription service. It allows access to a web site that provides historical as well as current letting information. In addition to bid tabulations and advertisements, the web site provides a schedule of prices, plan-holder lists, eligible bidders, addenda and electronic bidding software. As of March 2005, Bid Express listed 22 STAs that use its software in its Internet Bidding Program (AL, AZ, FL, GA, IA, LA, ME, MI, MN, MT, NM, NE, NJ, NC, ND, OH, OK, SC, TN, VT, VA, WI), with one other (KS) that is currently evaluating the software. Contractors pay a monthly fee to InfoTech to use this service. For additional information, see the Bid Express web site at http://www.bidx.com/.
The STA-owned systems in PA, SD, and UT are all capable of accepting bids over the Internet.
Other STAs (CA, IL, KY, MS, TX, WY) are developing their own Internet bidding systems.
- Bid Opening in States where all bids are received over the Internet.
While FHWA's regulations in 23 CFR Part 635 were written prior to the advent of Internet bidding, the FHWA encourages the use of electronic procedures to advertise, open bids, and award projects in the most efficient manner possible. A STA may use its own policies and procedures when using electronic means to advertise, receive bids, and award contracts as long as the process are competitive, open, and fair.
The relevant text of 23 CFR 635.113 states: "All bids received in accordance with the terms of the advertisement shall be publicly opened and announced either item by item or by total amount. If any bid received is not read aloud, the name of the bidder and the reason for not reading the bid aloud shall be publicly announced at the letting." The intent of this regulation is to maintain a transparent bidding process.
With paper bids, bidders would often attend the letting and would benefit from the bids being read aloud. When bids are received exclusively over the Internet, some bidders, especially those from remote locations, have opted not to attend the bid opening. At times, the STA has announced these bids aloud to an empty room. Since the announcement does not have to be made verbally, it could instead be posted in a timely manner at a location accessible to the general public. In our review of this issue, we have noted the following methods that some STAs have used to announce the bids:
- Live video Webcast of the bid opening (North Dakota).
- Live audio Webcast of the bid opening (Arkansas, Mississippi, Oklahoma)
- "Real Time" posting of bid opening results via Bid Express web site (Michigan, Minnesota, Virginia)
- Bid Preparation Software.
Generally speaking, the contracting community has been very supportive of electronic bidding as it reduces their administrative effort in preparing and submitting bid packages.
The FHWA document titled "Internet Bidding for Highway Construction Projects" provides guidance on this subject.
14. Bid Analysis and Award of Contract
- 23 U.S.C. 112
- 23 C.F.R. 635.114
- Headquarters memorandum - "Bid Analysis and Unbalanced Bidding," May 16, 1988. (Appendix A-112 to A-116)
- Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation, Appendix A-87
Title 23 CFR 635.114(a) requires Federal-aid contracts to be awarded only on the basis of the lowest responsive bid submitted by a bidder meeting the criteria of responsibility. This requirement applies to all Federal-aid highway construction projects. For Federal-aid projects which are determined to be "delegated projects," the STA may act for FHWA in the bid analysis and award process, but must follow the justification and documentation procedures of 23 CFR 635.114 (b - j) by documenting the project files.
Bid Analysis Process:
In previous sections, Engineer's Estimating and Advertising for Bids, it was stressed that estimates should be accurate and credible, based on realistic current data, and kept confidential. Further, the STA should have written procedures for justifying the award of a contract, or rejection of the bids, when the low bid appears excessive or rejection is being considered for other reasons.
Bid analysis is the basis for justifying contract award or rejection of the bids. A proper bid analysis helps to ensure that funds are being used in the most effective manner. The FHWA review of the bids should parallel the STA review. Together, both agencies should be assured that good competition and the lowest possible price were received. The FHWA concurrence in award is a step in the obligation and expenditure of Federal funds.
The bid analysis process, pursuant to 23 CFR 635.114(c), is an examination of the unit bid prices for reasonable conformance with the engineer's estimated prices. Beyond the comparison of prices, other factors that a bid analysis may consider include:
- number of bids,
- distribution or range of the bids,
- unbalancing of bids,
- identity and geographic location of the bidders,
- urgency of the project,
- current market conditions and workloads,
- comparison of bid prices with similar projects in the letting,
- justification for significant bid price differences,
- potential for savings if the project is re-advertised, and
- other factors as warranted.
Not all of these factors need to be considered for bids that indicate reasonable prices or show good competition. However, when the low bid differs from the engineer's estimate by an unreasonable amount, a thorough analysis of all bids should be undertaken to justify award of the contract. In order to justify award of a contract under these circumstances, the following questions should be considered (See: Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation, Appendix A-87):
- Was competition good?
- Is the timing of the project award critical?
- Would deferral be contrary to the public interest?
- Would re-advertisement result in higher or lower bids?
- Was there an error in the engineer's estimate?
The issue of how to assess whether competition for a specific project was "good" is addressed in the FHWA's guidelines which also notes that some projects may be so essential that deferral, even for 60 days, would not be in the public's interest. Examples of such projects might include:
- safety projects to correct an extremely hazardous condition which endangers the traveling public,
- emergency repairs or replacement of damaged facilities,
- projects to close substantial gaps in otherwise completed facilities, or
- projects that are critical to staged or phased construction such that delaying this element will adversely impact the completion of the whole project.
Unbalanced Bids. Unbalanced bids were noted earlier as one of the review factors in a bid analysis. As defined in 23 CFR 635.102, the two types of unbalanced bids are:
- A mathematically unbalanced bid is a bid that contains lump sum or unit bid items that do not reasonably reflect the actual costs (plus reasonable profit, overhead costs, and other indirect costs) to construct the item;
- A materially unbalanced bid is a bid that generates reasonable doubt that award to that bidder would result in the lowest ultimate cost to the Government.
To detect mathematical unbalancing, the unit bid items should be evaluated for reasonable conformance with the engineer's estimate and compared with the other bids received. There are no definitive parameters (e.g., an amount or percent of variance from the engineer's estimate) that constitute an unbalanced bid. The degree of unbalancing of a bid may depend on the reason for the unbalancing. Mathematically unbalanced bids, although not desirable, may be acceptable. Headquarters' May 16, 1988, memorandum, "Bid Analysis and Unbalanced Bids" (Appendix A-112 to A-116) discusses bid unbalancing.
In August 2001, 29 FHWA Division Offices responded to a question regarding procedures for determining when a bid is materially unbalanced. Many states indicated that the determination of a materially unbalanced bid is done on a case by case basis. Five of the states indicated that they had a procedure for determining when a materially unbalanced bids exists. However, for the most part, these procedures provide bid review criteria but do not provide criteria for determining whether a bid is materially unbalanced. The Texas DOT has a unique procedure for determining whether a bid is front loaded to the point where it would be potentially materially unbalanced. This involves an estimate of the monthly payout based on the contractor's assumed schedule versus the TXDOT's payout schedule.
Thirty-four STAs have a license for the use of the "Trns•port's BAMS/DSS" software program which provides support in bid monitoring and evaluation. While this program can identify potentially materially unbalanced bids, the final decision must be based on engineering judgment. Among the items to review are:
- the amount bid for the mobilization item does not mask unbalancing, and
- "token bids" (i.e., bids with large variations from the engineer's estimate) should be considered as mathematically unbalanced bids and further evaluation and other appropriate steps should be taken to protect the government's interest.
There may be situations where the quantity of an item could vary due to inaccuracies in the original quantity or cost estimating, errors in the plans, changes in site conditions or design, etc. In these situations, the bids should be further evaluated to determine if the low bidder would ultimately yield the lowest cost. If unbalancing creates reasonable doubt that award would result in the lowest ultimate cost, the bid is materially unbalanced and should be rejected or other steps should be taken to protect the government's interest.
Concurrence in Award Policy:
The FHWA concurrence in contract award is not just a formality; rather, it is the authorization to proceed with construction. The FHWA's policy is that the STA must formally request concurrence by the Division Administrator in the award of Federal aid contracts for which FHWA has approval authority. The basic policy is explained in 23 CFR 635.114(a):
"Federal-aid contracts shall be awarded only on the basis of the lowest responsive bid submitted by a bidder meeting the criteria of responsibility as may have been established by the SHA in accordance with 23 CFR 635.110. Award shall be within the time established by the SHA and subject to the prior concurrence of the Division Administrator."
The regulations, 23 CFR 635.114(b), further state that:
"Concurrence in award ... is a prerequisite to Federal participation in construction costs and is considered as authority to proceed with construction, unless specifically stated otherwise."
The Division Administrator's concurrence shall be formally documented in writing and shall include any qualifying statements concerning the concurrence. Verbal concurrences in award should be avoided and should only be used in unusual circumstances. Verbal concurrences should be documented and should be followed by a written concurrence in award that reflects the date of verbal concurrence.
Oversight agreements between the STA and the division should include the procedures for documenting concurrence in award for different oversight levels, including the procedure that local agencies will need to follow for locally administered projects.
When the STA determines that the lowest bidder is not qualified, 23 CFR 635.114(f) requires that:
"If the SHA determines that the lowest bidder is not responsive or the bidder is not responsible, it shall so notify and obtain the Division Administrator's concurrence before making an award to the next lowest responsible bidder."
Finally, 23 CFR 635.114(h) covers the situation when the STA makes a decision to reject all bids:
"Any proposal by the STA to reject all bids received for a Federal aid contract shall be submitted to the Division Administrator for concurrence, accompanied by adequate justification."
B. Post-Award Procedures
1. Bid Rigging and Post Award Reviews
- Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation (Appendix A-87)
- Suggested Guidelines for Strengthening Bidding and Contract Procedures, AASHTO, 1981 (Appendix A-34)
- Suggestions for the Detection and Prevention of Construction Contract Bid Rigging, DOT/DOJ, 1983 (Appendix A-46)
Applies to all Federal-aid highway construction projects.
The 1981 AASHTO Suggested Guidelines for Strengthening Bidding and Contract Procedures and the 1983 Justice/Transportation interdepartmental guidance, Suggestions for the Detection and Prevention of Construction Contract Bid Rigging, are key reference documents for bid rigging detection. However, the GAO advises that agencies should assume that this information has filtered into the "wrong" hands. Consequently, there is a continual need to improve and develop new ways to combat bidder collusion. Additional information on bid analysis and review can be found in the Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation (Appendix A-87).
More information about general antitrust issues can be found at the following Internet websites:
- The Antitrust Policy site (http://www.antitrust.org/) contains on-going case studies, economic research, law and policy; and
- The Federal Trade Commission (http://www.ftc.gov/) contains information about the agency, its current initiatives, and a calendar of conferences, hearings and workshops. The information is directed toward consumers and businesses.
The STAs are encouraged to continually improve their bid analysis procedures. The use of computers to analyze bids and to detect bidder collusion has become very prevalent. While many STAs have their own bid analysis system, approximately 34 STAs are using the Bid Analysis and Management System / Decision Support System (BAMS/DSS), a module within the AASHTO Trns•port® software package. The BAMS is a comprehensive system comprising five modules, which includes the Decision Support System containing the collusion detection capabilities. The other BAMS modules available are the Proposal and Estimates System, Letting and Award System, Cost Estimation System, and Contract Administration System.
Bid rigging, also referred to as bid collusion, is a conspiracy to disrupt or circumvent the competitive bidding environment by establishing a competitive advantage for certain bidders. Among the most common bid collusion activities are:
- Complementary Bids - A pattern of consistently high bids, or non-response of bidders (e.g., unqualified bidders or incorrectly submitted bids) made to give the "appearance" of competition in order to influence the decision award the project to a predetermined bidder.
- Territorial Allocation - A pattern of consistent wins by a bidder within a specific area (e.g., county or multi-county area).
- Joint Ventures - Submission of a "complementary bid" or other noncompetitive behavior by an eventual partner (i.e., subcontractors, suppliers, etc.) to the successful bidder.
- Bid Rotation - A coordinated pattern of win and lose bid responses to assure that a predetermined bidder submits the lowest bid.
A conscientious effort to detect bid rigging should be made through a post-award bid evaluation. An adequate number of projects awarded over a sufficient time period should be evaluated. A period of approximately 5 years should be selected for an initial evaluation to determine if any abnormal competitive bid patterns exist. The following information should be considered in a post-award review for abnormal bid patterns:
- number of contract awards to a specific firm,
- project bid tabulations,
- firms that submitted a bid and later become a subcontractor on the same project,
- rotation of firms being the successful bidder,
- consistent percentage differential in the bids,
- consistent percentage of the available work in a geographic area to one firm or to several firms over a period of time,
- consistent percentage differential between the successful bid and the engineer's estimate,
- location of the successful bidder's plant versus location of the other bidders' plants,
- variations in unit bid prices submitted by a bidder on different projects in the same letting,
- type of work involved,
- number of plans and proposals taken out versus the number of bids submitted,
- any other items that indicate noncompetitive bidding, and
- on re-advertised projects, if the eventual successful bidder was also low bidder on the first letting.
If for any reason, a person feels that bid rigging or fraud has occurred, they should contact the nearest USDOT/OIG office. This may be based on a suspicion or actual evidence of fraud, waste, and abuse in any project funded by FHWA. Appendix A1 to A4 includes a list of USDOT/OIG Regional Office locations.
2. Project Supervision and Staffing
- 23 U.S.C. 114
- 23 U.S.C. 302
- 23 CFR 635.105
Applies to all Federal-aid highway construction projects.
Section 302 of Title 23 requires STAs to be suitably equipped and organized to carry out the Federal-aid program. Therefore, the STAs are responsible for design, contract administration and construction inspection of all Federal-aid construction projects. This responsibility is formalized by the project agreement that is executed for each Federal aid project.
Adequate construction personnel should be provided to ensure that quality highways are constructed. However, due to personnel caps, the fact that the engineering community that built the Interstate system is retiring and other market reasons, the States are typically operating with less staff for the size of their program than historic staffing levels. Many states are working to improve their workforce management.
Some contract administration tools that improve the effectiveness of limited State staffing are:
- provide more and better training and certification programs by both the STAs and contractors,
- use consultant personnel that have the vital technical background and adequate knowledge of operating procedures and specifications,
- use innovative contracting methods, such as design-build, which shifts responsibilities to the contractor,
- facilitate a better working relationship between the STAs and contractors which encourages initiative, innovation, and quality construction,
- develop materials testing programs that can rapidly and reliably predict the performance of the end product,
- update State contract administration procedures to recognize the use of innovative contracting mechanisms and the roles and responsibilities of the construction contractor, consultant inspection forces and the STA staff, and
- develop a systematic method of budgeting work force and money in managing construction personnel.
Field review of the actual project situation is desirable. The documented level of project staffing is essential in making a determination of the adequacy of the STA's construction staffing. Items that should be reviewed include:
- sampling and testing (i.e., quality level analysis, frequency, testing results, failing test reports, etc.),
- documentation of field control (i.e., problem situations, diaries, work orders to remove and replace, etc.),
- the engineer's candid opinions on staff, supervision, and job control, and
- the response time needed to resolve problems, plan changes or change orders.
AASHTO continues to look for better ways to address the issue. For additional information, there are two NCHRP Syntheses pertaining to construction staffing: "Staffing Considerations in Construction Engineering Management," No. 145, and "Construction Contract Staffing," No. 51.
Supervision of construction engineering consultants
Per 23 CFR 635.105(b), the STA's responsibility for contract administration and construction inspection are not terminated when construction engineering and inspection (CE&I) services are provided by a consultant. In 1985, FHWA recognized that the use of consultants for CE&I is a well-recognized method of carrying out the STA's responsibilities without having to maintain a permanent full-time staff based on the peak workload period.
While a consultant may provide daily CE&I for a project, the STA must assign a full-time engineer to be in responsible charge of the project at all times although the engineer need not be assigned solely to that project. "Responsible charge" means the publicly employed engineer is:
- aware of the day-to-day operations on the project,
- aware of, and involved in decisions about changed conditions which require change orders or supplemental agreements,
- aware of the qualifications, assignments, on-the-job performance, etc., of the consultant staff at all stages of the project, and
- visiting the project on a frequency that is commensurate with the magnitude and complexity of the project.
Locally administered projects
When a Federal aid project is to be constructed on a facility that is not under the STA's jurisdiction, the STA may arrange for the local public agency having jurisdiction to perform the work with its own forces, or by contract, provided that all of the following conditions are met:
- All Federal requirements including those prescribed in 23 CFR 635 Subpart A shall be met on work performed under a contract awarded by a local public agency;
- Force account work shall be in full compliance with 23 CFR 635 Subpart B;
- The local public agency is adequately staffed and suitably equipped to undertake and satisfactorily complete the work; and
- The local public agency shall provide a full-time employee of the agency to be in responsible charge of each Federal-aid project, including those that employ consultants for construction engineering services.
Although this arrangement is subject to the Division Administrator's concurrence, it does not relieve the STA of overall responsibility for the project. While 23 CFR 1.11(b) allows an STA to "utilize, under its supervision, the services of well-qualified and suitably equipped engineering organizations of other governmental instrumentalities for making surveys, preparing plans, specifications and estimates, and for supervising the construction of any project," 23 CFR 1.11(e) clearly states that the STA is not relieved of its responsibilities under Federal law and the regulations in 23 CFR if it chooses to use the services of other governmental engineering organizations.
3. Highway Construction Funding Source Signs
- 23 U.S.C. 114
- 23 U.S.C. 321
- 23 CFR 635.309(n) & (o)
- FAPG NS 23 CFR 635C
All Federal-aid highway construction projects within a State, if the STA routinely installs funding source signs.
The 1960 Highway Act contained a mandate that funding source signs be placed on all Federal-aid projects. This resulted in the "Your Highway Taxes at Work" signs which were erected on all projects from 1960 until 1973.
However, the 1973 Highway Act removed the mandate and additionally, specifically prohibited the erection of any signing other than official traffic control devices on Federal-aid projects.
Section 154 of the 1987 Surface Transportation and Uniform Relocation Assistance Act (STURAA) mandated that any State which routinely required funding source signs on State projects must also erect such signs on Federal-aid projects. The House Committee on Public works and Transportation included the following comments concerning the intent of the legislation in its analysis report.
Section 114 [section 154 in the final bill] requires states that erect signs on projects without direct Federal funding showing the source of funding to erect signs on all Federal-aid projects displaying the source and amounts of funds. The section is intended to require those states that have adopted innovative funding strategies using a mixture of funds to provide the public with a factual statement of the funding sources. It is not intended to require those states that do not have a practice of erecting signs at construction sites to begin such a practice.
The intent of Section 154 is to require those States that have adopted innovative funding strategies which may use a mix of funding sources to provide the traveling public with a factual statement about the project's funding. States that do not routinely erect funding source signs would not be required to start the practice (House Report 99-665, July 2, 1986, pp. 11-12).
The legislative language on funding source signs is quite clear. If a State has a policy of erecting funding source signs for its non-Federal-aid highway projects, the State must erect funding source signs on ALL Federal-aid projects without regard to the dollar value of the project.
The signs must conform to the Manual on Uniform Traffic Control Devices (MUTCD). Only essential information regarding the source and amount of funding shall be included on the sign. Promotional information such as the identification of public officials, contractors, organizational affiliations, symbols, logos or other items are prohibited.
Costs associated with erecting the signs are eligible for Federal-aid participation as part of the Federal-aid project. The cost will be reimbursed at the same pro rata share as the construction. Signs may be considered an incidental item or bid as a separate pay item.
SAFETEA-LU, Section 1901 codified STURAA Section 154 as 23 U.S.C. 321 without any modification of the language; therefore there is no change in FHWA policy.
Advertising vs. Acknowledgement
The FHWA's has a long-standing policy against the use of advertising on highway rights-of-way. However, acknowledgment signs are permitted in certain circumstances. The FHWA Office of Traffic Operations has drawn a distinction between signing intended as advertising and signing intended as an acknowledgment for services provided. See Mr. Capka's August 10, 2005 memorandum titled: "Optional Use of Acknowledgment Signs on Highway Rights-of-Way" for additional guidance concerning the use of acknowledgement signs on Federal-aid construction projects.
4. Progress Payments
- 23 U.S.C. 121
- 23 CFR 635.122
- Headquarters memorandum - "Partial Payment of Stockpiled Material-Plates and Shapes," March 29, 2000
Applies to highway construction projects on the NHS
Progress payments are compensation to the prime contractor for the value of work performed during a covered period. The AASHTO recommends that progress payments be made at least once each month as the work progresses, and many STAs now pay even more frequently. Payments should be based on estimates, prepared by the engineer, of the value of the work performed and materials delivered or stockpiled in accordance with the contract.
As a highway construction project progresses, the STA may request that FHWA reimburse the STA for the Federal share of the estimated costs for completed work. The progress payments may be monthly, semi-monthly, or even weekly. Under the Federal "prompt payment" provisions, FHWA is obligated to reimburse the STA for eligible expenditures within one business day of the agreed upon date(s). Most STAs use electronic fund transfers to expedite the reimbursement process. Additional information about how FHWA processes electronic progress payments may be found in the FAPG as NS G3015.1, Chapter 1, Electronic Progress Voucher System.
Stockpiled Materials. When the contract provisions provide for stockpiled materials, Federal participation is based on the appropriate value of approved specification materials delivered by the contractor to the project site, or other designated location in the vicinity of such construction, provided that:
- stockpiled material is stored in such manner that security and the inventory can be maintained,
- the material is supported by a paid invoice or receipt for delivery, with the contractor to furnish the paid invoice within a reasonable time after receiving payment from the STA,
- the material conforms with the requirements of the plans and specifications,
- the materials have not been delivered or stockpiled prematurely in advance of the contractor's schedule of operations, and
- the quantity of the material eligible for participation does not exceed the quantity required by the project, nor does the value exceed the appropriate portion of the contract item in which the material is to be incorporated.
- for structural steel plates and shapes, Mr. Densmore's March 29, 2000 memorandum allows partial payment prior to fabrication if specific controls are in place at the fabrication yard.
The OIG has found several instances where various STAs paid contractors for stockpiled material that did not meet specifications, which grossly exceeded the project requirements, and/or which ultimately went into several projects. Therefore, the requirements that any stockpiled material must meet the specifications and must be in a quantity that not to exceed the amount required to complete the project, are essential.
Retention for Subcontract Work. The US DOT's DBE regulation requires recipients to include a "prompt pay" clause in all Federally-funded contracts. Section 26.29 of the regulation requires:
- prime contractors to pay subs for satisfactory performance of their contracts no later than a specific number of days from receipt of each payment by the prime, and
- prompt return of retainage payments within a specific number of days after the subcontractor's work is satisfactorily completed.
Final Payment. By statute (23 U.S.C. 121(b)), FHWA cannot make final payment for a project until after approving the completion of construction. Guidance contained in the FAPG, G 6042.8, Construction Monitoring, indicates that a final inspection of the project should determine whether the actual construction conforms with the approved plans and specifications, including all approved changes. The final inspection may be an actual on-site inspection performed at or near project completion; an in-depth review of the STA's project records at or near project completion; or a finding that is based on a process review of the STA's internal project controls which demonstrates that the STA is properly exercising its internal controls. The level of effort put into the final inspection should be based on the size, complexity and importance of the project, as well as the level of previous oversight. The final inspection shall be documented on the FHWA-1446A, "Construction Inspection Report," (RCS-HHO-30-28).
The final inspection report should include any findings, items or issues that must be addressed prior to final acceptance, the agreed upon corrective measures and timetable. Any other items which must be submitted prior to final payment such as the STA's materials certification (for FHWA oversight projects); or the FHWA-47 should also be identified.
After all outstanding issues are resolved, the project's final acceptance should be documented on the FHWA-1446B, "Final Acceptance Report," (RCS-HHO-30-28), unless the Division has developed an alternate format.
The FHWA final payment to the STA starts the record retention clock.
Effect of Warranty Period. Currently the effect of a warranty on final payment and retention varies among the STAs. A few STAs have distributed the payment for the warranted product over the life of the warranty period. Most STAs require a warranty bond and, therefore, follow their normal procedures to make the final project payment.
5. Change Orders (Extra Work and Time Extensions)
- 23 CFR 635.102
- 23 CFR 635.120
- 23 CFR 635.121
Applies to all Federal-aid highway construction projects on the NHS.
Establishing a strict set of rules to govern Federal aid policy on change orders is not practicable since applying the rules would be subject to the specific circumstances that created the need for the change order.
The construction industry recognizes that it is unrealistic to expect that a construction project could be built without deviating from the project plans. Although project designers should be diligent and exercise due care in developing the plans, they are not omniscient. There are many peculiarities (e.g., unforeseen site conditions, utility conflicts, changes in the geology, etc.) that can arise during construction and virtually every project should expect changes. Only the construction engineer is in a position to judge the adequacy of the project's design and respond to needed changes.
Frequently, change orders are used to make the design a better fit for the actual field conditions. Also, a change order may result in a better product at no substantial increase in cost or time, or an equivalent product with savings in cost, time, or both. Generally, change orders are classified by purpose:
- plan changes,
- specification changes,
- change in cost (+/ ), and
- change in time (+/ ).
Federal aid policy requires that proposed major extra work or major changes in the contract plans and provisions be formally approved in advance by the Division Administrator. However, when emergency or unusual conditions justify, the Division Administrator may give advance verbal approval and ratify such approval with formal approval, as soon as practicable. This procedure is consistent with the Federal need to preserve and protect the expenditure of Federal funds.
Non-major changes and non-major extra work also require formal approval; however, at the discretion of the Division Administrator, such approval may be given retroactively. Form FHWA-1365 (Appendix A-117) should be used to document verbal approvals; the form can then be attached to the formal change order request.
The STA, with the Division Administrator's concurrence, should establish and document specific parameters for non-major change and non-major extra work. The definition of a major change or major extra work, as included in 23 CFR 635.102, is as follows:
Major change or major extra work means a change which will significantly affect the cost of the project to the Federal government or alter the termini, character or scope of work.
Early coordination between the STA and the FHWA is essential in the review of change orders. There are four basic components that FHWA will consider during its review of change orders. These considerations are:
- Federal aid eligibility,
- impact on the original "scope of the work,"
- basis of payment, and
- time adjustments.
Federal-aid Eligibility. Typically, if the proposed change is eligible for Federal aid reimbursement, then full participation logically follows. However, there may be situations where only parts of the change order are eligible. Generally speaking, the FHWA is prohibited from participating in costs related to routine or recurring maintenance (snow removal, graffiti removal, litter pickup, mowing, roadside vegetation control, etc.), however, the FHWA may participate in preventive maintenance work that is shown to be cost effective (such as pavement joint repair, crack sealing, drainage clean out work, etc.). Mr. Gee's October 8, 2004 memorandum on Preventive Maintenance Eligibility provides guidance on this subject.
The FHWA is often asked to approve change orders to correct work because of a design or construction engineering error. The FHWA policy on the participation in design or construction engineering errors was established by Mr. Williams' memorandum of July 12, 1963 (Appendix A-118). In general, this policy states that each case should be considered on its own merits. Federal-aid participation in errors that may reasonably be expected to occasionally occur (despite the exercise of normal diligence) may be justified, as long as the STA's carelessness, negligence, incompetence, or under-staffing were not contributing factors.
The FHWA's policy regarding participation in consultant design errors is that the consultant should pay for the cost of the new design, but is generally not held responsible for additional construction costs resulting from such errors, as long as the errors are not a result of gross negligence or carelessness. In addition to Mr. Williams' memorandum referred to above, Mr. LaHue's memorandum of September 8, 1978 (Appendix A-119) provides additional guidance on this subject.
Impact on the Original "Scope of the Work". Typically, if the proposed change falls within the previously authorized scope of work, then FHWA participation follows.
There may be circumstances in which participation in the full scope of the change order work is precluded. For example, a change order on a pavement rehabilitation project may provide for the installation of additional edge drains at and beyond the project limits. A change of the project limits and modification of the project agreement would be needed in order for the cost of edge drains outside the project limits to be eligible. Otherwise, Federal-aid participation would be limited to the cost of edge drains up to the original project limits.
There may be other circumstances where major contract modifications are proposed which are beyond the original scope of work. In these cases, the Division Office must determine whether the additional work is a modification of the original scope or a significant change that would benefit from competitive bidding. The individual circumstances associated with the magnitude and quality of the change as well as the cumulative impact upon the whole project should be reviewed. Among the considerations are:
- Have the contract work elements changed?
- How does the additional work impact quantities and cost?
- Does the proposed change impact the complexity of the work?
- What is the cumulative impact on the project?
- Would the public benefit from competitive bidding rather than a negotiated change?
Basis of Payment. The STA must perform and suitably document the cost analysis for each negotiated work change order. The method and degree of analysis are the STA's decision, however, the process should be acceptable to the Division Administrator.
Force account procedures should only be used as a last resort when agreement cannot be reached on the price of a new work item, or when the extent of the work is unknown or of such character that a price cannot be determined to a reasonable degree of accuracy. A Headquarters memorandum of September 8, 1982 (Appendix A-120) contains FHWA policy on the use of force account procedures.
Time Extensions. The change order should also provide the time needed to accomplish the work. The FHWA policy states that contract time extensions granted by a STA that affect project costs or liquidated damages shall be subject to the concurrence of the Division Administrator and will be considered in determining the amount of Federal participation.
Most State standard specifications require the contractor to submit and maintain a project schedule that details the timing for construction operations from start to finish. Reasonably, this schedule should depict the planned operation by day or week and may take the form of a critical path. A trace of the critical path identifies the controlling operations. In the absence of a critical path or activity schedule, a determination of the controlling operation(s) is necessary.
If work covered by a change order affects a controlling operation, a change in the contract time may be warranted. If the controlling operation is unaffected, a change in the contract time is not warranted. In order to establish the time required to perform the work, an estimate of the time should be developed as the other components (i.e., labor, equipment, and materials) are estimated.
Occasionally, there are events that are beyond the control of either the STA or the contractor that affect the controlling operation. These should be enumerated in the STA's standard specifications and be acceptable to support an extension of contract time. Such events include the following:
- labor strikes (including job pickets),
- public protests (to the project),
- general riot,
- declaration of war,
- "acts of God," and
- traffic accidents (e.g., hazardous spills).
Events that are normally considered to be under the control of the contractor and, therefore, do not warrant a time extension include:
- shutdowns for maintenance,
- suspensions or stop work orders for violation of safety or pollution regulations,
- shutdowns for construction accidents, and
- material delays.
The FAPG (NS 23 CFR 635A) provides further guidance on materials delays. The contractor is responsible for the timely order and delivery of materials for the project. A delay in delivery of materials does not in itself generally support an extension of contract time. However, if an unusual market condition (i.e., an industry wide strike, natural disaster, or area-wide shortage) occurs, a time extension may be in order.
Delays due to inclement weather should be expected and should generally not be the basis for a change in contract time except in extreme cases.
The FAPG (NS 23 CFR 635A) also provides guidance on the granting of time extensions due to utility, railroad, and right-of-way (ROW) clearance delays. Because of the assurances required from the STA prior to the FHWA project authorization, the FHWA policy generally does not permit participation in time extensions for such delays. Whenever the railroad or utility is permitted to adjust its facilities coincidentally with contract operations, such activities must be clearly addressed in the contract provisions. All parties should understand that any interference by the railroad or utility to the contractor's operations generally will not constitute an allowable delay. In general, an extension of contract time due to ROW delays is very unusual and is the exception rather than the rule. For FHWA approval of an extension, it must be shown that:
- the construction work was actually delayed by the ROW, railroad, or utility difficulty,
- the contractor did everything required by the contract to minimize the delay, and
- the STA was unable to exercise effective control of the situation despite its best efforts.
Occasionally, FHWA is asked to participate in time extensions or delay claims that result from State budgetary problems. In some cases, State budgetary problems may lead to the STA's inability to pay the contractor or provide adequate inspection staff. FHWA has refused to participate in the such costs based on the assurances required in 23 USC 302 that require States to be adequately staffed to carry out the Federal-aid program.
- 23 CFR 635.124
Applies to Federal-aid highway construction projects on the NHS.
A claim can be defined as a demand for additional compensation that is formally submitted to someone in the STA outside of the normal process for change approvals. In simple terms, a continued demand for payment is termed a claim if it has been previously denied under the STA's normal procedures for change approval.
Both the STA and the contractor share in the responsibility for claims. Many claims could be avoided if reviews of the contract documents were more thorough, both in preparation of the project and in bidding the project. Problems occur most often when an STA rushes a project with incomplete or inadequate plans through the letting process. Due to public pressure, States sometimes promise to get work under construction or to open highways on some predetermined date. Similarly, shelf projects, those projects with plans that were developed several years earlier, can be especially dispute-prone because traffic patterns and other field conditions may have changed. Most States acknowledge that projects containing known errors are sometimes let for bid because the time frame does not allow for errors to be corrected. Contractors may contribute to claims through ineffective project management, scheduling practices and substandard work.
A comment made during the rulemaking process in 1985 was that FHWA's involvement in claims allowed "second guessing" of those who were more intimately involved in the claim award, and that FHWA should become involved earlier in order to make fair and objective decisions. FHWA agreed with that philosophy and supports uniformity and objectivity in our decision-making. Therefore, 23 CFR 635.124(b) contains a general statement about early coordination and involvement. The specific details of coordination and involvement are left to each FHWA Division Office and STA to finalize, allowing them the flexibility to work out an arrangement which accommodates the State's program. When developing coordination procedures, the STA should be cognizant that under the Freedom of Information Act, the contractor and other outside parties may obtain information in FHWA files.
A good generalization of FHWA's policy is the following statement:
"If the States are diligent and pursue resolution of a claim through the courts or arbitration boards (including appeals), consulting with and keeping FHWA fully informed throughout the process, FHWA will share in the results."
However, FHWA will determine on a case by case basis the Federal-aid eligibility of a contract claim awarded on the basis of an arbitration or mediation proceeding, administrative board determination, court judgment, negotiated settlement, or other contract claim settlement. Federal funds will participate to the extent that the claim can be supported by the facts and has a basis in the contract and under applicable State law. Further, the basis for the adjustment and contractor compensation should be in accord with prevailing principles of contract law (23 CFR 635.124(a)).
Similarly, for court judgments abiding with State law, the FHWA specifically reserves the right to review all matters, not just the court's decision, in the award of a claim since the claim may have been awarded under a State law which is inconsistent with Federal law.
The burden of proof to document the reasonableness of a claim remains vested in the STA. As indicated by 23 CFR 635.124(c), FHWA believes the STA is in the best position to compile and provide the information, including legal briefs where needed, to support a decision for FHWA participation in claims.
Impact of STA employee decisions on FHWA's participation in a claim: The FHWA will participate when the acts are reasonable and within the standards of the profession. FHWA will not participate in claim awards that arise from gross negligence, intentional acts or omissions, fraud, or other actions by an STA employee(s) which are not consistent with the usual State practices.
On December 16, 1992, FHWA addressed claims resolution for delegated projects. For non-Interstate NHS projects, the STA must base its determination of Federal-aid participation on the requirements of 23 CFR 635.124. For non-NHS projects, the STA may determine the level of Federal-aid participation based upon State procedures; however, the STA must comply with the allowable cost principles of OMB Circular A-87 as addressed in 49 CFR 18.22.
Interest. Federal-aid funds can participate in interest associated with a claim if three conditions are met:
- the interest must be allowable by State statute or specification,
- the interest is not the result of delays caused by dilatory action of the State or contractor, and
- the interest rate does not exceed the rate provided for by statute or specification.
Attorney's Fees. The Contractor's attorney fees are not eligible for Federal participation. The basis for this determination is that there is no statutory authority for the payment of attorney fees. However, the STA's administrative costs, including attorney fees related to the defense of claims, are reimbursable. Such costs are reimbursable at the same participation rate as the related construction project.
Anticipated Profit. The FHWA does not participate in anticipated profit because this is in the realm of the contractor's risk.
NHI Course No. 134037A, "Managing Highway Contract Claims: Analysis and Avoidance". The course is targeted at FHWA, State and local personnel involved in project development, construction, and claims management.
Other sources of information on claim avoidance are the American Society of Civil Engineers which has published Avoiding and Resolving Disputes During Construction: Successful Practices and Guidance, by the Underground Technology Research Council, 1991, and Construction Contract Claims, Changes, and Dispute Resolution, by Paul Levin, 1998; the Association for the Advancement of Cost Engineering; and the Construction Claims Monthly which is published by Business Publishers, Inc.
Alternative Dispute Resolution
Claims and disputes cannot always be avoided. Research by the Construction Industry Institute (CII) has found that construction disputes arise from three major sources: project uncertainty, process problems and people issues. If the source of the dispute is not addressed, resolving the dispute can become increasingly difficult, resource-intensive, and will usually result in a solution which satisfies no one. Dispute resolution methods range in hostility level from negotiation up to extended litigation.
The focus of alternative dispute resolution (ADR) techniques is to allow fair-minded people to resolve their differences in a manner that emphasizes reasonableness and fairness. ADR does not mean turning responsibility for project decisions over to others (i.e., lawyers) because litigation is costly and time-consuming. ADR methods vary in the level of the assistance drawn from outside sources, and the decision-making taken away from the disputing parties.
The construction industry has developed a variety of ADR methods. As CII's research shows, the most valuable techniques are those that prevent or resolve disputes as early as possible by the individuals directly involved at the project level. Commonly used methods include negotiation, mediation, non-binding arbitration, dispute review board, mini-trial, binding arbitration, private judging, and finally, litigation.
Technically, partnering is not an ADR method. Rather, partnering is a change in the attitude and the relationship between owner and contractor. Partnering is the creation of a relationship between the owner and contractor that promotes recognition and achievement of mutual and beneficial goals. Partnering occurs when trust, cooperation, teamwork and the successful attainment of mutual goals become the hallmarks for the relationship.
The key to making partnering work requires having a plan which is backed up by open communication, willing participants, senior management support, and up front commitment. Communication starts early in the process through a team-building session. All the key managers for the project are assembled for a workshop that focuses on team building, goal setting, identifying issues, and solving problems. The workshop is run by a facilitator who ensures that all issues are brought out into the open. Authority to solve problems must be delegated to the lowest level. A critical feature of partnering is to identify the dispute resolution process that will be used on the project and designate key players in the process. Follow-up meetings are held at regular intervals to evaluate goals and objectives. (The FHWA's representative to the partnering workshops should have the authority to approve change orders and claims.) The cost of the partnering sessions is typically borne equally by both the owner and the contractor. Federal funds may be used to reimburse the owner for their share of the cost at the project pro rata share rate.
In 1995, AASHTO's Construction Subcommittee's Contract Administration Task Force conducted a survey of the STAs. At that time, forty-six STAs were using partnering. Despite the fact that 28 States had been using the technique for less than two years, 34 States believed that partnering had reduced claims in their States.
Other partnering references include:
- Partnering, U.S. Army Corps of Engineers, IWR Working Paper 91-ADR-P-4, March 1990;
- In Search of Partnering Excellence, CII 17-1, July 1991;
- Partnering-A Concept for Success, Associated General Contractors of America, September 1991; and
- Partnering Manual, Central Artery/Tunnel Project, January 1998.
- AASHTO Partnering Handbook, 2005.
Negotiation occurs when parties resolve the issues themselves, usually at the project level. However, the STA's administrative processes would also be considered as negotiation in a broad sense of the term.
Mediation involves a neutral third party to depersonalize the dispute while facilitating its resolution, preferably in a "win-win" solution. The parties may jointly appoint a mediator or they may request that a mediator be appointed by an association such as the American Arbitration Association. The mediator provides assistance in resolving the dispute by narrowing and clarifying issues, however, the mediator does not decide the dispute. The mediator may meet with the parties individually or collectively but all information disclosed to the mediator is confidential. Mediation is normally non-binding since the mediator has no inherent power.
Mediation is a flexible method that can be adapted by the parties to fit their needs. While the American Arbitration Association has developed flexible rules of conduct, the parties should agree on the process to be used; how the mediator will be selected and paid; who has authority to make decisions for each party; and what happens if mediation does not result in a resolution. The cost to the owner of the mediation process is eligible for Federal-aid reimbursement.
Dispute Review Board
A dispute review board (DRB) requires the creation of a three member standing committee which meets on a regular basis to review and resolve all project disputes before they become formal claims. Drawing from the experts in the type of construction contained in the contract, each party will choose a member, and then those two members will jointly select the third member. The DRB members are considered to be "standing neutrals," independent of either party. The parties will split the cost of operating the DRB (the owners portion of the cost is eligible for Federal-aid reimbursement). In order to resolve issues at an early stage, DRB's typically keep abreast of construction progress. While the DRB will issue written decisions for the issues, the decisions are typically non-binding upon the parties.
Additional information about DRBs may be found in the 1996 Construction Dispute Review Board Manual authored by A. Mathews, Bob Matyas, Bob Smith and Joe Sperry. The CII has published Prevention and Resolution of Disputes Using Dispute Review Boards, CII 23-2, October 1995.
Many states have used DRBs on large bridge or tunnel projects. According to the Dispute Review Board Foundation, STA usage includes: Alaska (1 project), California (42), Colorado (4), Delaware (1), Florida (60), Hawaii (9), Maine (4), Massachusetts (47), Oregon (3), Utah (1) and Washington (54); and
The Dispute Review Board Foundation has compiled data on the success of DRBs in successfully minimizing construction litigation. The Foundation provided the following statistics in the May 2005 update to its "Dispute Review Board Foundation - Practices and Procedures Manual" (http://www.drb.org/manual_access.htm):
"The DRB process has been used on 976 completed projects in North America with a total construction value of over $40 billion. Considering only completed projects:
- Average project value was $41 million.
- The average number of disputes per project was 1.3.
- 60% of the projects had no disputes.
- Considering only completed projects with disputes that went to the DRB, the average number of disputes per project was 3.3.
- 98.8% of the projects were completed without arbitration or litigation. In other words, about one project in 100 had disputes that could not be settled with the help of the DRB."
On the Boston Central Artery project, 48 of 124 construction contracts had DRBs representing approximately $7.0 billion in construction. These contracts ranged from $11.0 million to $414.9 million. On these contracts, 15,150 total issues were raised, however, the vast majority of these issues were resolved informally. Only 31 issues were raised to a formal DRB. To date, one contract has gone to litigation.
Florida DOT has used DRBs extensively for projects over $10 million. The 60 projects currently using DRBs represent approximately $1.1 billion in construction. Of the 45 disputes that have been heard as of January 1999, the contractors and FDOT have each claimed an approximately equal number of victories. The disputes have ranged in size from relatively small claims up to $6 million. To date there has been no litigation regarding DRB recommendations.
Caltrans began requiring DRBs for all contracts greater than $10 million in January 1998. The use of DRBs for smaller contracts is optional but encouraged.
Mini-trials are more formal than mediation or a DRB in that the dispute is treated as a business problem. Lawyers and experts present a summary of their "best case" to an advisory panel drawn from senior officials of the owner and the contractor with an independent neutral who provides an objective viewpoint. Typically the hearing documents and negotiation discussions are considered confidential and cannot be used in later litigation.
Pennsylvania (PennDOT) used this method to settle a construction claim on the Schuylkill Expressway project.
PennDOT Mini-Trial Procedures
Each party is represented by a principal participant with the authority to settle the dispute on behalf of the party he represents. The FHWA also has a representative with the authority to approve any settlement reached by the parties. A neutral advisor selected jointly by the parties chairs the mini-trial. The neutral advisor performs a mediation function, enforces time limitations, asks questions of witnesses and, if necessary, issues an advisory opinion on the merits of the dispute. The presentations at the mini-trial are informal with the rules and procedures stated in the agreement. The mini-trial is conducted within a specific time frame, typically no more than three days.
Arbitration is a method under which decisions are made by one or three arbitrators, chosen by the parties, based on fact and law. Although decisions may or may not be binding and without appeal, in almost all cases, the arbitration decision is accepted by both parties. Usually, the only cases carried on to litigation are those that involve a point of law.
The CII has identified private judging as a middle ground between arbitration and litigation. This procedure allows the parties to state their case before a mutually accepted neutral and have the decision becoming the judgment of the appropriate trial court with the right of appeal. The referees are normally retired judges. The parties may agree to simplify and expedite the process.
Escrow of bid documents
In conjunction with dispute review boards, several states have utilized an escrow of bid document special provision on large complex contracts that have the potential for litigation. Escrow bid documents address the issue of how a contractor interpreted the contract provisions and developed the bid. Escrow bid documents properly prepared and properly used are a great source of information for parties who want to resolve disputes on an equitable basis. The more accurate information each party has, the more likely litigation can be avoided. Generally, the escrow documents remain in a depository and are not used until the STA receives a notification of intention to file a claim from the contractor.
A guide specification for escrowing bid documents can be found in Section 103.08 of AASHTO's 1998 Guide Specifications for Highway Construction.
Home Office Overhead (HOO)
Home office overhead costs (HOO) are expenses that a contractor incurs for the benefit of all contracts that cannot be attributed to any individual contract. Examples of these expenses include home office estimating, personnel and administration. HOO is allocated to all of the contractor's work, usually in proportion to the value of each project to the company's total receipts.
Any suspension of work or other delay in contract performance will disrupt or reduce the contractor's direct income from the project. However, the contractor continues to incur HOO. Two types of HOO may affect delay damage claims: unabsorbed and extended. Contract case law has developed distinct definitions for these terms. Unabsorbed HOO is the increased cost that must be borne by a contractor because delays in one project have prevented the contractor from defraying those costs over other projects, as originally intended. Extended HOO are the increased overhead costs borne by the contractor after the original completion date which are caused by project delays.
Because HOO costs are indirect costs to any given project, contractors claiming HOO as an element of a delay damage claim must establish that the claimed expenses are permissible and/or justified.
FHWA has allowed participation in HOO costs only in cases when the owner agency caused the delay during which time the HOO costs could not be charged off to earnings and the contractor was prevented from doing other work which could have been allocated HOO. Otherwise FHWA's position has been to disallow HOO when an STA's standard specification for extra work and force account work provide for full compensation at either the contract unit price, or a negotiated unit price.
Eichleay formula. The appropriateness of the Eichleay formula for calculating unabsorbed HOO costs seems to depend on the circumstances of the claim. Federal and state courts vary in their acceptance and application of the formula. There are also several other formulas in use (original contract period formula, fixed overhead formula, burden fluctuation method, comparative absorption rates, etc.); however, most contractors rely on the Eichleay formula.
7. Liquidated Damages
- 23 CFR 635.127
Applies to Federal-aid highway construction projects on the NHS
Contract time is an essential element of the contract and it is important that the work be pressed vigorously to completion. The cost to the contracting agency for the administration of the contract, including engineering, inspection, and supervision, increases as the contract time increases. Likewise, the road user costs also increase as the completion date of the contemplated facility is extended. The liquidated damages contract provision provides a mechanism for the contracting agency to recover these costs associated with the contract time overrun. An STA is required to incorporate liquidated damages provisions into its Federal-aid contracts as a condition of the project agreements.
Most of the STAs use a liquidated damage rate schedule based on a range of contract amounts. However, some use a daily rate that is calculated specifically for the particular project.
During 1984, the OIG reviewed the assessment of liquidated damages in five of the nine FHWA regions during a 3 year period. The OIG found that the STAs were recovering only 41 percent of their total actual construction engineering costs. The actual engineering costs were $2.44 for each dollar of liquidated damages collected. As a result, the OIG determined that $15 million of Federal funds were lost annually. Part of the problem was that the FHWA regulation in force during the OIG review period contained the 1972 AASHTO schedule of liquidated damages.
In December 1984, the FHWA issued a memorandum on the OIG's review and recommended that each STA, in consultation with their Division Office, review their current rates. Subsequently in 1987, the FHWA revised its regulation (23 CFR 630.305) on assessment of liquidated damages. During development of the final rule on project agreements, the liquidated damages requirements were moved to 23 CFR 635.127.
Significant provisions contained in regulation 23 CFR 635.127 are:
- Each STA is required to develop and maintain its own liquidated damages rates that will cover, as a minimum, the STA's average daily construction engineering (CE) costs attributable to a contract time overrun;
- The STA rates are subject to verification and approval by the Division Administrator, and at least every two years must be reviewed and adjusted, as necessary, by the STA;
- In addition to CE costs, the STA may include the costs of project-related delays or inconveniences, to the STA or to the public, in their liquidated damages provisions if the project does not have a time-related incentive/disincentive. In such cases, costs recovered in excess of the actual CE costs should be deducted from the construction costs in proportion to the Federal participation on the project; and
- Incentive/disincentive amounts are to be shown separately from the liquidated damages amounts and are to be based on road user costs.
Business impact costs as an element of liquidated damages
It is not acceptable to include business impact costs in the calculation of liquidated damages for the following reasons:
- The contractor could challenge the clause on the basis that such costs are not costs to the State or the public as required by 23 CFR 635.127(c). "The STD may, with FHWA concurrence, include additional amounts as liquidated damages in each contract to cover other anticipated costs of project related delays or inconveniences to the STD or the public."
- The FHWA's existing guidance on Incentive / Disincentive clauses, in Technical Advisory TA 5080.10, Section 7-a prohibits the inclusion of such costs.
- There are numerous problems and issues in providing a fair, open, transparent process for estimating business damages and losses.
- The FHWA is prohibited from re-distributing such funds without Congressional approval.
8. Suspension and Debarment
- 49 CFR Part 29
- FHWA Order 2000.2A
Applies to all Federal-aid construction projects.
Suspension and debarment (S/D) are discretionary administrative actions taken to protect the Federal Government by excluding persons and / or companies from participation in the Federal assistance programs. A S/D action ensures that the Federal Government does not conduct business with a person or a company who has an unsatisfactory record of integrity and business ethics. The S/D actions are administered government-wide; consequently, a person excluded by one Federal agency is excluded from doing business with any Federal agency.
Causes for debarment are listed in 49 CFR 29.800 and include:
- Conviction of or civil judgment for:
- fraud or a criminal offense in connection with a public or private agreement or transaction,
- violation of Federal or State antitrust statutes (i.e., price fixing, bid rigging, etc.),
- embezzlement, theft, forgery, bribery, falsification or destruction of records, false statements, receiving stolen property, false claims, obstruction of justice, or
- any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a person.
- Violation of the terms of a public agreement or transaction so serious as to affect the integrity of an agency program (i.e., willful failure to perform, a history of failure or of unsatisfactory performance, or willful violation of a statutory or regulatory provision or requirement).
- Any of the following causes:
- a debarment by any Federal agency,
- knowingly doing business with a debarred, suspended, ineligible, or voluntarily excluded person, in connection with a covered transaction,
- failure to pay substantial outstanding debts, or
- violation of a voluntary exclusion agreement or of any settlement of a debarment or suspension action.
- Any other cause of so serious or compelling a nature that it affects the present responsibility of a person.
When circumstances warrant, suspension action will be taken to protect the Federal Government by excluding persons and / or companies proposed for debarment from participation in the Federal assistance programs while the debarment action is processed. Causes for suspension action (49 CFR 29.700) include adequate evidence:
- that a cause for debarment exists, or
- to suspect the commission of an offense listed above. An indictment for such offenses will constitute adequate evidence for purposes of suspension actions.
Suspension / debarment actions are prospective, meaning they do not apply to existing contracts. The actions only apply to "covered" contracts within the meaning of 49 CFR 29.200. Covered transactions include all primary transactions (i.e., any transaction between FHWA and a financial assistance recipient regardless of size, and lower tier transactions (i.e., prime contracts between STA's and contractors or consultants, subcontracts, and contracts for material supply or vendor contracts, etc.) equal to or exceeding $25,000. Lower tier transactions, regardless of size, under which a person has critical influence or substantive control over a prime contract (auditing services, construction inspection and quality assurance services, that might influence a contract) are also covered.
Only those persons (individuals, corporations, or subsidiaries) listed in the suspension / debarment notice are covered. If a parent company is debarred, this does not mean that subsidiary firms of the parent company are debarred.
FHWA will consider action against a person and / or company whenever a cause within the meaning of 49 CFR 29 has occurred. The FHWA will document the facts of the occurrences such that S/D actions imposed by the FHWA apply to procurement and nonprocurement programs (i.e., Federal-aid) under 49 CFR 29.
Processing. Every effort should be made to initiate actions as soon as there is knowledge of a cause. FHWA Order 2000.2A details the process for S/D actions. State and local officials should also contact the State and local agencies responsible for S/D actions to learn their procedures.
Length. Suspension actions are taken for a temporary period, pending the completion of a debarment decision. Generally, suspensions may not exceed 12 months, unless a legal proceeding is initiated which precludes lifting of the suspension. Debarment periods are generally in place for three years; however, if circumstances warrant, a larger period may be imposed. The final debarment period may be reduced commensurate with the seriousness of the cause and any mitigating evidence presented. The debarment period is measured, retroactively, from the effective date of the suspension.
Implementation. The General Services Administration maintains a government-wide list of excluded parties. This web-based system is titled "Excluded Parties List System" (GSA List). Prior to the award of all consultant and construction contracts, the FHWA Division Office should check the GSA List to determine if the prospective participant is excluded from Federal procurement and nonprocurement programs. On projects that do not require FHWA concurrence in award, this responsibility is assumed by the STA
The GSA List now contains three sections - procurement, nonprocurement, and reciprocal. Provisions in the Federal Acquisition Streamlining Act of 1994 ensure that suspensions, debarments, and other exclusions from Government procurement and nonprocurement programs are applied reciprocally government-wide. In short, exclusion from any procurement or nonprocurement program initiated on or after August 25, 1995, means exclusion from all Federally funded procurement - both direct Federal procurement and grant / Federal-aid "non-procurement".
To ensure that the FHWA S/D actions are administered in a timely manner, the field offices are notified of FHWA S/D actions, via E-Mail, within a few days of their occurrence. In addition, a list of persons and companies suspended and debarred by the FHWA is available at http://www.fhwa.dot.gov/programadmin/contracts/actions.cfm. The FHWA list includes actions taken by the FHWA only and therefore, cannot be used in lieu of the GSA List that contains all Federal S/D actions.
Participant Certification. All participants in the Federal-aid program are required to provide certifications as follows:
- Each STA must certify the current eligibility status of their principals. This certification is now incorporated in the project agreement certifications;
- Prime contract bidders and consultants are required to certify as to their own current eligibility status, as well as that of their principals, as a part of each Federal-aid highway contract bid proposal and consultant agreement (see Section II.A.11 for additional discussion); and
- All lower tier participants (i.e., subcontractors, material suppliers, vendors, etc.) are also required to certify as to the current eligibility status of the company and its principals.
9. Termination of Contracts
- 23 CFR 635.125
Applies to all Federal-aid highway construction projects on the NHS.
Termination is an action taken by the contracting agency to cancel a contract. There may be a number of grounds to warrant termination, including termination for cause, termination for convenience, and termination for default.
Federal aid contracts exceeding $10,000 must contain suitable provisions for termination by the STA. The provisions must identify the manner by which the termination will be effected and the basis for settlement.
Prior to termination of a Federal-aid contract for which the Division Administrator concurred in the award, the STA shall consult with and receive the concurrence of the Division Administrator. Federal-aid participation in a terminated contract is decided by the individual merits of the particular case. However, in no instance will FHWA participate in any allowance for anticipated profits on work not performed. For "delegated projects", the STA may act for FHWA in this process but it must follow the procedures in 23 CFR 635.125 for NHS projects.
If the STA awards a contract for completion of a Federal-aid contract previously terminated for default, FHWA policy limits the amount eligible for Federal participation. The amount eligible is the lesser of the original contract or the sum of the new contract plus the payments made under the original contract.
Termination for Cause or Convenience. Terminations for cause or for convenience are for circumstance beyond the contractor's control. The AASHTO lists the following conditions as grounds for termination for cause:
- executive orders of the President for war, national defense or national emergency,
- restraining orders or injunction obtained by third party action, or
- "acts of God".
Grounds for termination for convenience include circumstances for which it is in the best interest of the contracting agency to cancel the contract (e.g., construction funding has become depleted).
In terminating a contract for cause or for convenience, written notice is given to the contractor, relieving him or her from further contractual obligation. The contractor will be paid for completed work, for work necessary to preserve and protect the completed work, and for materials stockpiled for the project.
Termination for Default. Terminations for default are for circumstances that are deemed to be under the contractor's control. The AASHTO guide specifications include the following as circumstances for termination for default:
- failure to begin work under the contract within the time specified in the "Notice to Proceed,"
- failure to perform the work with sufficient workmen and equipment or sufficient materials to assure the prompt completion of the project,
- performance of the work not in conformance with the contract requirements or refusal to remove or replace rejected materials or unacceptable work,
- discontinuance of the work,
- failure to resume work which has been discontinued within a reasonable period of time after notice to resume,
- committal of any act of bankruptcy or insolvency,
- allowing any final judgment to remain unsatisfied,
- making an assignment for the benefit of creditors, or
- failure to comply with contract requirements regarding payment of minimum prevailing wages or EEO.
The STA's specifications typically require notice to the contractor and surety of default considerations by the STA. The notice gives the contractor and the surety a specified period of time, such as 10 days, to respond or to proceed with the work. If that period expires without response, the contracting agency may declare the contractor in default, and notify the contractor and surety that the contractor is in default and the contract is void. The surety is then liable under conditions of the performance bond and must provide funds to complete the project, up to the full value of the bond. To avoid paying the bond, the surety may elect to assign another contractor to complete the work. However, if the surety is unable or unwilling to assign another contractor, the funds will be transferred to the STA.
If the surety awards a second contract, no action is required of FHWA since the surety's contract is considered an extension of the original contract. However, if the STA awards a contract to complete the work covered by a defaulted Federal aid contract, normal Federal aid procedures for PS&E advertising and award must be followed, and the Federal-aid funding for the project will be limited to the lesser of the original contract value, or the amount spent under the defaulted contract plus the second contract.
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