U.S. Department of Transportation
Federal Highway Administration
TECHNICAL ADVISORY
INCENTIVE/DISINCENTIVE (I/D) FOR EARLY COMPLETION
T 5080.10
February 8, 1989
Par.
- Purpose
- Definitions
- Background
- Guidance
- Project Selection
- Project Development
- Determination of Incentive/Disincentive (I/D) Amount
- Incentive/Disincentive Time Determination
- Contract Administration
- ROAD user cost in low-bid determination
- PURPOSE. To provide guidance for the development and administration
of incentive/disincentive (I/D) provisions for early completion on highway
construction projects or designated phase(s).
- DEFINITIONS
- Incentive/disincentive for early completion - a contract provision
which compensates the contractor a certain amount of money for each day
identified critical work is completed ahead of schedule and assesses a
deduction for each day the contractor overruns the I/D time. Its use is
primarily intended for those critical projects where traffic inconvenience
and delays are to be held to a minimum. The amounts are based upon estimates
of such items as traffic safety, traffic maintenance, and road user delay
costs.
- Liquidated damages - the daily amount set forth in the contract
to be deducted from the contract price to cover additional costs incurred
by a State highway agency (SHA) because of the contractor's failure to
complete all the contract work within the number of calendar days or workdays
specified or by the completion date specified.
- Contract time - the total time (calendar days or completion date)
established to complete the project.
- Incentive/disincentive time - the time (calendar days or completion
date) established for the contractor to complete critical work on identified
roadway(s) and/or structure(s). This time begins when traffic is impacted
by the project and normally ends when unrestricted traffic is permitted
on the identified roadway(s) and/or structure(s). This is the time upon
which the I/D payment will be based. The I/D time and contract time may
be the same in situations where traffic impact exists for the full duration
of the project or I/D time may be for a shorter period when traffic is
impacted only during a certain phase or phases of contract work.
- BACKGROUND
- The FHWA policy which prohibited participation in bonus payments for
early completion was rescinded effective July 13, 1984. The policy prohibiting
bonus payments goes back to a 1927 interpretation of a statute that limited
the Government's share of project costs to the value of labor and materials.
In the 1970's the policy was based on the belief that FHWA should not
have to pay "extra" just to have a project completed early.
The present FHWA policy on bonus payments is based in part on the evaluation
of National Experimental and Evalua tion Program (NEEP) Project #24 which
showed that I/D provisions are a valuable cost-effective construction
tool.
- Present FHWA policy allows for approval of I/D provisions which are
in compliance with the intent of the FHWA Program. This may include, but
is not limited to: (1) provisions for early completion of critical improvements
which result in significant savings and/or positive benefits to the traveling
public and (2) provisions which allow for product acceptance with pay
adjustments. This Technical Advisory will only address I/D for early completion
on highway construction projects. In accordance with Mr. Willetts' memorandumof
January 22, 1988, to Mr. Leon Larson, I/D provisions are not to be used
in Federal-aid participating consultant service contracts.
- In discussing I/D, a clear distinction needs to be made between the
intent of I/D provisions and liquidated damages. Although they have similar
mechanisms, the purpose or function of each is different. The liquidated
damages policy has as a prime function the recovery of construction engineering
(CE) and/or additional costs associated with the contractor's failure
to complete the project on time. The I/D provision is intended to motivate
the contractor so that work will be completed on or ahead of schedule.
Liquidated damages provisions apply to all projects; however, I/D provisions
apply only to special projects.
- The regulation change to 23 CFR Part 630 of August 20, 1987, concerning
the assessment of liquidated damages allowed the SHA's to include costs
of project-related delays or inconveniences to them or the public, in
addition to CE costs, in their liquidated damages provisions. If an SHA
includes delay related costs in its liquidated damage rate, those delay
costs should be excluded from the disincentive amount on an I/D project
so a contractor is not subjected to a double assessment for the same costs.
- GUIDANCE
- The approval of I/D provisions will be reserved only for critical projects
or phases of projects where traffic inconveniences and delays must be
minimized. Statesshould develop guidelines for selection of projects.
- The determination of I/D amount and time should be documented and retained
in the project records. The I/D amount and time determination with supporting
data should be submitted and concurred in by the FHWA Division Administrator
prior to the State's request for approval of the plans, specifications,
and estimate and authorization to advertise.
- Project time should be established on either a calendar day or completion
date basis. Contractors should have an approved critical path method (CPM)
schedule prior to starting work on the project.
- For those States with an approved Certification Acceptance Plan, the
procedure for developing I/D projects should be covered under the State's
plan, or the projects should be handled as an exception and developed
with the Division Administrator's approval.
- PROJECT SELECTION. I/D provisions provide an effective method to
motivate the contractor to complete projects or portions of projects faster
than normal. However, it is recommended that I/D provisions not be
used routinely. Generally, I/D provisions should be limited to those projects
whose construction would severely disrupt highway traffic or highway services,
significantly increase road users' costs, have a significant impact on adjacent
neighborhoods or businesses, or close a gap thereby providing a major improvement
in the highway system.
- The selection of projects during the early stages of project development
is essential. This will allow for full deployment of resources needed
to properly design and coordinate the project.
- The development of criteria for possible projects will aid in early
identification of projects. The following characteristics have been associated
with projects appropriate for I/D provisions:
(1) High-traffic volumes generally found in urban areas.
(2) Work that will complete a gap in the highway system.
(3) Major reconstruction or rehabilitation on an existing facility
that will severely disrupt traffic.
(4) Major bridges out of service.
(5) Lengthy detours.
- The project should be such that the I/D phase(s) can be completed in
one construction season or less.
- PROJECT DEVELOPMENT
- Experience has shown that engineering time spent during project development
pays dividends during construction and in obtaining a successful project.
A field change to correct mistakes in plans can be very costly in time
and money on an I/D project. The plans and specifications must be complete
and accurate to permit a common and clear understanding of what is to
be constructed.
- During the development of I/D projects, extra effort should be made
to ensure that the design, specifications, schedule, etc., are compatible
since all must be modified to fit the project. Any omission or error in
the plans and specifications may result in a claim from the contractor.
The plans and specifications should indicate any unusual condition or
any restriction the contractor may be required to work under, such as
restrictions prohibiting jack hammering or pile driving during the night
due to noise problems.
(1) Available right-of-way and utility relocation work are two variables
that play a very important role in I/D projects. If the right-of-way
is not clear, then I/D provisions should not be used on the project.
Utility work by other than the contractor should be limited to only
work that will not interfere with the I/D phase(s) of the contract.
(2) The contract must clearly define what constitutes the start and
the completion of the I/D phase(s). Either or both may differ from
the start or completion of the project. The I/D time may be delayed
until traffic is impacted, thus allowing the contractor time to fabricate
steel, obtain mix design, etc. However, it is necessary to define
in detail what is expected of the contractor. This can be done through
the plans for stage construction or detailed description in the special
provisions. Bid items to be completed should be referenced. Completion
of items such as signing, lighting, signals, striping, curb, shoulder,
and cleanup should be addressed. Liquidated damages can be assigned
for completion of work after the I/D phase has been accomplished.
- During the preconstruction phase of the project, all parties (local
officials, police, local traffic engineers, and construction engineers)
should become involved in the project development. A prebid meeting may
be necessary to cover the I/D phase(s) and any unusual features of the
project.
- Predesign field reviews are essential since "as-built" plans
or old construction plans have not proven reliable due to maintenance
operations or field changes not being recorded on the plans.
- The development of I/D provisions must be related to each State's specifications.
To assist in preparing I/D provisions, a checklist (formulated by Region
7) of items to consider when preparing contract provisions is included
as Attachment 1.
- DETERMINATION OF INCENTIVE/DISINCENTIVE AMOUNT. The major area of
concern expressed on the use of I/D provisions is determination of the appropriate
dollar amount per day for I/D provisions for early completion of projects.
To be effective and accomplish the objectives of I/D provisions, the dollar
amount must be of sufficient benefit to the contractor to encourage his/her
interest, stimulateinnovative ideas, and increase the profitability of meeting
tight schedules. If the incentive payment is not sufficient to cover the contractor's
cost for the extra work, then there is little incentive to accelerate production,
and the I/D provisions will not produce the intended results.
- A daily I/D amount is calculated on a project-by-project basis using
established construction engineering inspection costs, State related traffic
control and maintenance costs, detour costs, and road user costs. Costs
attributed to disruption of adjacent businesses should not be included
in the daily I/D amount. Engineering judgment may be used to adjust the
calculated daily amount downward (not upward) to a final daily I/D amount
that:
(1) provides a favorable benefit/cost ratio to the traveling public
where the cost is the daily I/D amount and the benefit is the calculated
daily savings in road user and SHA costs.
(2) is large enough to motivate the contractor. If a favorable benefit/cost
ratio cannot be realized and/or the resulting daily amount is not
high enough to motivate a contractor, the project should not be further
developed as an I/D project.
- Currently, accepted SHA procedures for estimating road user costs may
be used, or one of the following references may be used for estimating
road user costs.
(1) A manual entitled "User Benefit Analysis of Highway and
Bus--Transit Improvements," 1977, AASHTO, Washington, D.C.
(2) Participant Notebook: "Traffic Control for Streets and Highway
Construction and Maintenance Operations," FHWA, 1978.
(3) "Planning and Scheduling Work Zone Traffic Control,"
Report #FHWA IP-81-6, FHWA, October 1981.
- The vehicle operating costs should be based on the most recent information
available. The 1982 FHWA study titled "Vehicle Operating Costs, Fuel
Consumption and Pavement Type and Condition Factors" (NTS PB 82-238676)
may be used to supplement costs for the methodologies listed above. Caution
should be exercised in using the data as some items included may not be
applicable to costs incurred due to the construction activity, i.e., insurance,
parking, tolls, taxes, etc.
- Generally, the incentive daily rate should equal the disincentive daily
rate. If different rates are selected, the incentive daily rate should
not exceed the disincentive daily rate.
- A cap of 5 percent of the total contract amount has been recommended
as the maximum incentive payment. The 5 percent was based on the NEEP
study average of incentive payments made on experimental I/D projects.
In a survey by the Office of Program Review, "50 percent of the completed
projects paid the maximum incentive." The placement of a cap on the
incentive payment limits the funding requirements that may result if the
time analysis was not realistic for an accelerated project time. With
experience, the SHA may feel comfortable in not setting any maximum on
the number of days for which an incentive can be earned. No cap should
be placed on the maximum disincentive amount.
- INCENTIVE/DISINCENTIVE TIME DETERMINATION. The determination of I/D
time is one of the major problems facing an SHA when developing an I/D project.
It must answer the question: to what extent and at what cost can construction
be compressed from a normal construction time to an accelerated time? If the
contractor feels that the completion date is impossible to meet, he/she will
not even try. In fact, unreasonable completion dates may well discourage potential
bidders. However, the use of a normal computed time may allow the contractor
to earn the maximumamount without making an increased effort. This would also
penalize the public since the I/D phase(s) would not be completed as soon
as possible. Most highway agencies will normally use either past performance
or a CPM schedule to determine time.
- Determination of I/D time based on past performance will require engineering
judgment in determining to what extent the time can be compressed from
normal construction time. Normal construction time is generally based
on an average contractor working 5 days a week, 8 hours a day. To convert
this to I/D time, the time should be based on the performance of a good
contractor working extended shifts with extra workers for 6 or 7 days
a week.
However, the use of a continuous 7-day workweek is cautioned against
unless provisions can be made through shift assignments for days off.
Extended periods of work with no days of rest has resulted in high turnover
rates with contractor and inspection personnel.
- The use of a CPM schedule is based on breaking down the project into
the separate operations or processes necessary for its completion. These
separate operations can then, through a network analysis, determine a
completion time for the project. By supplying additional incremental resources
of manpower and equipment, a further evaluation can be made as to the
effects of accelerating the project.
- The use of calendar days or completion date has proven to be most effective
in controlling contract times. Thedates for beginning and completion of
the I/D work are then readily understood. The use of working days has
not been effective in having projects completed by a specific date. The
use of working days has placed the project engineer under undue pressure
in determining whether the contractor should be charged a working day.
In addition, it has created unnecessary conflict between the contractor
and the project engineer.
- The season of the year in which the project will be constructed should
also be considered in determining the I/D time for calendar day projects.
Weather days and legal holidays should be included for calendar day projects.
- CONTRACT ADMINISTRATION. Cooperation and coordination between the
contractor and the SHA is essential. The delay in approval of a field change
or working drawings can be costly in time. Decisionmaking and approval authority
should be promptly provided at all times that I/D work is in progress. If
nighttime or weekend work is allowed, all offices that have decisionmaking
and approval authority should designate a contact person with authority to
make decisions for the agency represented. Several projects have been set
up with periodic meetings of all decisionmaking personnel to discuss project
development during design and construction. These discussions should consider
future critical operations and potential problems.
- The contractor should be required to submit a CPM schedule for review
and approval prior to commencement of work. This schedule will be the
basic document to gauge and analyze the contractor's progress, determine
time adjustments, and evaluate claims. Regularly scheduled job site progress
meetings should be held for the purpose of updating the CPM schedule.
Attachment 2 is a sample specification that is included in the "Construction
Contract Claims" training manual. The reference to the Associated
General Contractors of America CPM may be replaced by any other CPM the
SHA has approved.
- Extension of time on an I/D date should not be given unless extraordinary
circumstances occur. The burden of proof to extend the I/D date must be
on the contractor. The contractor must fully justify why concurrent operations,
additional manpower, additional shifts, overtime, 24-hour workdays, 7-day
workweeks, etc., cannot be used to keep the project on schedule. The SHA
should consider all alternatives, including additional CE cost, to keep
the project on schedule.
- The I/D time adjustments shall be limited to only major work items affecting
completion of items on the critical path and should be so identified in
the contract. The effect of field changes and how field changes will be
evaluated for time adjustments must be clearly spelled out in the project
documents. The percentage of underrun or overrun should be substantial
enough to warrant contract time changes.
(1) Extra and additional work should be expected by both the contractor
and the SHA when establishing the I/D dates. Both parties should fully
understand that the SHA is willing to pay for extra work, but it is
to be absorbed within the current CPM schedule without any adjustment
in the I/D dates.
(2) Because I/D projects are normally limited to one construction
season, extensions of time will often extend into periods of adverse
weather, resulting in further delays and cost to both the contractor
and the traveling public. Moving an I/D date should only be done when
all other avenues have failed.
(3) Time limits for certain actions should be included in the contract
- for example, 7 days for review and approval of shop drawings and
3 days for review and approval of unforeseen problems, etc., after
notification by the contractor to the engineer.
- Flow charts have proven very beneficial in establishing lines of communication
and ensuring that all parties that have involvement in reviewing plans
and shop drawings are contacted. Flow charts may include number of copies
needed for submission, distribution of approved copies, and method of
transmittal. Shop drawings may require handcarrying between contractor,
reviewers, and approval authorities. However, the mail may be sufficient
for transmitting copies for information or for files.
- ROAD USER COSTS IN LOW-BID DETERMINATION
- The use of road user costs in low-bid determination was approved for
use on an experimental basis by the Federal Highway Administrator's memorandum
dated May 20, 1985. This procedure allows the State to award a project
to the low bidder based on a combination of the aggregate bid of individual
contract items and a "bid" for the total time the contractor
will use on the project. Each bid submitted shall consist of two parts:
(1) The dollar amount for all work to be performed under the contract.
(2) The total number of calendar days required to complete the work.
- The lowest and best bid is then determined by the State according to
the following formula:(A) + [(B) X road user cost per day].
This formula shall only be used to determine the lowest and best
bidder and shall not be used to determine payments to the contractor.
- Approval for the use of road user costs in low-bid determination should
be given on an experimental project basis in accordance with Mr. Rex Leathers'
memorandum of May 30, 1985. As a minimum, both an interim report and final
report shall be submitted to the Washington Headquarters Contract Administration
Branch (HHO-32). The interim report of bid information and problems encountered
by the contractors in the development of bids, if any, should be submitted
after concurrence in award of the contract.
Thomas O. Willett
Acting Associate Administrator
for Engineering and
Program Development
INCENTIVES/DISINCENTIVES (I/D)CHECKLIST ITEMS
When using I/D for early completion to minimize public inconvenience, maximize
public safety, and reduce total costs to the traveling public, the following
items should be considered when preparing contract special provisions.
- Clearly define the beginning and ending dates for the critical work elements
that are to be accomplished.
- The use of calendar day or completion date contracts have proven most effective
in controlling contract times. The dates for beginning and completing the
I/D work are fully understood.
- State the time the contractor is permitted to work, such as multiple shifts,
weekends, holidays, etc., or conversely, when work should not be permitted.
- Describe what working operations the contractor may or may not perform during
nighttime hours.
- Include the pay schedule for I/D:
- The pay schedule should relate money and time.
- Incentive payments should have a specified maximum time.
- Disincentive payments should be charged continuously until the critical
elements have been completed.
- List approved staging areas the contractor may use if this is a critical
item.
- Address underruns and overruns:
- Contractor time adjustments should be limited to only major work items
and should be so identified in the contract.
- The percent underrun or overrun should be substantial enough to warrant
contract time changes.
- Values and formulas can be specified that advise the contractor of the
relationship between underruns and overruns and time extensions or time
deletions.
- The subject of strikes should be addressed as it relates to approving time
extensions.
- The contractor should be encouraged to stockpile materials, and the contract
should specify which materials will be paid for as stockpiled materials.
- All I/D projects shall require that the contractor have an approved critical
path method (CPM) prior to starting work on the project.
Regularly scheduled job site progress meetings should be held for the purpose
of keeping the CPM on schedule. If the contractor should fall behind the
CPM schedule, extra work measures should be prescribed until the contractor
is back on schedule.
- Identify what work is considered preparation, fabrication, and cleanup that
may be outside the critical time path for fully opening a project to traffic.
- Consider having legal counsel review the "language" of the contract
provisions to avoid possible future claims.
- Contracts involving bridge construction should take into account the time
factor associated with shop drawing and erection procedure reviews and approvals.
These two items can be an important factor in measuring and assessing contract
time.
- Incentive/Disincentive can be considered for specialty items within a contract
(for example, erecting steel over another roadway that carries high traffic
volumes and would require lane closure).
SUGGESTED STATE HIGHWAY ADMINISTRATION SCHEDULING SPECIFICATION
The construction of this project will be planned and recorded with a conventional
critical path method (CPM) schedule based on the principles defined by the 1976
issue of "The Use of CPM in Construction" published by the Association
of General Contractors. The schedule shall be used for coordination and monitoring
of all work under the contract including all activity of subcontractors, vendors,
and suppliers.
CONTRACTOR is responsible for preparing the initial schedule in the form of
an activity on arrow diagram. All costs incurred by the CONTRACTOR in preparing
the schedule shall be borne by the CONTRACTOR as part of its responsibility
under this contract.
A. Preparation of Initial Schedule
Within 30 calendar days after the issuance of "Contract Award" prior
to the "Notice to Proceed," CONTRACTOR will complete development of
its initial schedule and present to the OWNER two copies of an activity on arrow
diagram, an I node-J node computer sort and a Total Float Computer sort.
Following review of the initial submission and within 15 calendar days of its
submission prior to "Notice to Proceed," OWNER and CONTRACTOR shall
meet for joint review, correction, and adjustment of the schedule if required.
The construction time, as determined by the schedule, for the entire project
or any milestone shall not exceed the specified contract time. In the event
that any milestone date or contract completion date is exceeded in the schedule,
logic and/or time estimates will be revised.
After this meeting but within 15 calendar days after any changes in the logic
and/or time estimates have been agreed upon, another submission of the schedule,
including five copies of an activity on arrow diagram, an I node-J node computer
sort, and a Total Float Computer sort, will be transmitted to the OWNER. If
necessary, this process will be repeated; however, the schedule must be finalized
within 30 days after "Notice to Proceed." Failure to finalize the
schedule by that date will result in withholding all contract payments until
the schedule is approved. Note that time charges shall begin no later than the
time stipulated in the "Notice to Proceed."
No contract work may be pursued at the site without an approved CPM schedule.
B. Schedule Requirements
All activity on arrow diagrams provided by CONTRACTOR shall include:
1.activity nodes,
2.activity description, and
3.activity duration.
The activity on arrow diagram shall show the sequence and interdependence of
all activities required for complete performance of all items of work under
this contract, including shop drawing submittals, approvals, fabrication, and
delivery activities. All network "dummies" are to be shown on the
diagram.
No activity duration shall be longer than 20 workdays without OWNER'S approval.
OWNER reserves the right to limit the number of activities on the schedule
to between 50-500 activities.
The activities are to be described so that the work is readily identifiable
and the progress on each activity can be readily measured. For each activity,
CONTRACTOR shall identify the trade or subcontractor performing the work, the
duration of the activity in workdays and the location of the work.
CONTRACTOR shall also provide the following information: workdays per week,
holidays, number of shifts per day, number of hours per shift, and major equipment
to be used.
C. Schedule Updates and Progress Payments
Job site progress meetings will be held monthly by OWNER and CONTRACTOR for
the purpose of updating the project work schedule. Progress will be reviewed
to verify finish dates of completed activities, remaining duration of uncompleted
activities, and any proposed logic and/or time estimate revisions. It is CONTRACTOR'S
responsibility to provide OWNER with the status of activities at this progress
meeting and with the process schedule updates based on this information once
it has been verified.
Each month of the project, the CONTRACTOR will submit five copies of an updated
I node-J node and Total Float Computer sort illustrating verified progress.
Included shall be a written narrative describing the critical path and logic
revisions or modifications to the schedule, including, but not limited to, changes
in the method or manner of the work, changes in specifications, extra work,
changes in duration, etc.
CONTRACTOR will further submit two copies of revised activity on arrow diagrams
for the following: delay in completion of any critical activity; actual prosecution
of the work which is, as determined by OWNER, significantly different than that
represented on the schedule; the addition, deletion, or revision of activities
required by contract modification; or any logic revisions. The contract completion
time will be adjusted only for causes specified in this contract.
As determined by CPM analysis, only delays in activities which affect milestone
dates or contract completion dates will be considered for a time extension.
If CONTRACTOR does seek a time extension of any milestone or contract completion
date, it shall furnish documentation as required by OWNER to enable OWNER to
determine whether a time extension is appropriate under the terms of the contract.
It is understood by OWNER and CONTRACTOR that float is a shared commodity.
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