Construction

Current Design-Build Practices for Transportation Projects

7. Payment

The following is an overview of each agency's payment procedures based on responses to the questions in Section 6 of Appendix 3.

7.1. Contract Price

Almost all of the agencies originally surveyed use fixed price contracts. A number of contracts include allowances for specific items, or provide for certain work to be paid on a unit priced basis. Greenville County is the exception, using unit-priced contracts subject to a not-to-exceed fixed amount. Typically, payments are based on monthly progress and are tied to the CPM schedule for the project, although one agency (UTA) pays based on achievement of milestones in predetermined "price centers."

LADOTD (May 2009)

LADOTD uses a fixed price lump sum contract. Like UTA, LADOTD makes payment based on the achievement of milestones in predetermined "price centers."

7.2. Contingency

Two of the projects in the original survey included a contingency amount that was specifically made available to the contractor for certain types of changes. The Atlantic City/Brigantine Connector had a $28 million contingency pool that was available to pay for many different types of costs incurred by the contractor - which had a powerful incentive to avoid incurring such expenses since it was entitled to a significant share of any amounts remaining in the fund at the end of the job. UTA's contract included a similar concept ("Provisional Sum" for dry utilities - defined by the contract as all utilities except water, sanitary sewer and storm sewer), but with a much smaller contingency.

LADOTD (May 2009)

LADOTD has no budgeted contingency amounts in its design-build contracts.

7.3. Mobilization

Most of the agencies surveyed pay for mobilization. The amount payable varies from project to project, as does the time of payment. In some cases mobilization is spread into multiple payments as different work efforts commence. The overriding concern is to avoid "too much front end loading."

LADOTD (May 2009)

LADOTD does pay for mobilization and shares other DOTs' concerns as to "too much front end loading."

7.4. Retainage

Retainage policies in the original survey varied from one agency to another. The differences appear to be based more on the agency's policies, or state law, than on any particular concerns relating to design-build.

LADOTD (May 2009)

LADOTD withholds 5% for retainage. A retainage bond may be substituted for withholding.

7.5. Incentive Payments

Incentive fees (including award fees - a type of incentive fee paid on a periodic basis throughout the project, not just at the end) are payments to the contractor in addition to the contract price for performance that exceeds predetermined levels of performance that are set in the contract requirements. The criteria are usually established for performance above expected contract compliance requirements.

A number of agencies in the original survey provided incentive payments for early completion, including the TCA, UT DOT and UTA. UT DOT and UTA also provided award fee payments at 3-month intervals throughout their projects for progress exceeding that shown on the contract schedules.

In addition to schedule incentives, several agencies, including AZ DOT, FDOT, UT DOT, and UTA, implemented award fee programs that provided for periodic, supplemental payments to contractors during the course of projects for performance in other areas of work that the agencies judged to exceed contract requirements. The intent of the award fees was to encourage superior performance in areas of greatest interest or concern to the agencies. UT DOT had award fees related to quality, project management, maintenance of traffic and access (MOTA), and community relations. UTA had a significant award fee program related to MOTA and community relations where community representatives rated the contractor's performance and recommended the amount of award fee payment to the agency. AZ DOT instituted an award fee to reward the contractor for providing public travel through the project at a rate in excess of minimum requirements, with the performance measured by an intelligent transportation system designed and implemented by the contractor.

LADOTD (May 2009)

LADOTD has not utilized incentive payments.

7.6. Limitation on Payment

For projects extending over several years, some agencies have evaluated the proposed contract price using a present value calculation. In order to determine the present value, the proposal must include information regarding the projected cash flow. That cash flow is then the basis for a "maximum payment curve" that limits the total amount payable to the contractor at any point in time. Some agencies will agree to pay for accelerated work notwithstanding the payment curve; others require the contractor to reimburse the additional interest expense associated with accelerated payment.

LADOTD (May 2009)

LADOTD does not use a formal payment curve. However, the use of "price centers" requires the design-builder to submit a payment chart with the schedule. This approach does allow the design-builder to accelerate payment up to a point by meeting milestones ahead of the anticipated schedule as long as the overall values for each price centers do not change.

7.7. Price Adjustments for Material Inflation (New)

Some contracting agencies use price adjustment clauses for certain construction materials when there is the potential for significant increases or decreases in the price of materials during the life of the contract. This is especially important for long term contracts. Sharing the risk of material inflation through a price adjustment clause reduces the potential for contingencies. See the FHWA's guidance for price adjustment clauses for details.

Typically, a contracting agency may adjust payments to the contractor based on unit prices and an adjustment factor based on a change in a material price index. The lump sum payment method for design-build presents a challenge for contracting agencies as neither contract quantities nor unit prices are typically used. For design-build, some contracting agencies have developed special provisions that provide base quantities and prices for all contract work and this is used as a basis for payment adjustment. A change in the material index would result in an adjusted contract payment based on the initial quantity and prices. See the Maryland SHA special provision in Appendix C.

LADOTD (May 2009)

LADOTD has not used cost escalation/de-escalation clauses.