Florida Department of Transportation

OFFICE OF INSPECTOR GENERAL

Alternative Contracting Methods

REPORT 04B-0001 SEPTEMBER 2000

Florida Department of Transportation
JEB BUSH GOVERNOR

605 Suwannee Street Tallahassee, Florida 32399-0450

THOMAS F. BARRY, JR. SECRETARY

September 29, 2000 Mr. Thomas F. Barry, Jr., P.E., Secretary Florida Department of Transportation 605 Suwannee Street, MS 59 Tallahassee, Florida 32399-0450 Re: Alternative Contracting Methods, Report 04B-0001 Dear Secretary Barry: Attached is our report on alternative contracting methods. Evidence obtained in this audit suggests alternative contracting methods offer distinct time and cost advantages over conventional contracting methods. An analysis of 51 centrally let completed alternative contracts showed the alternative contracts were completed in less time and with fewer cost overruns than the other 357 completed construction contracts for Fiscal Year 1998-1999. CEI costs for contracts in the sample were 4.5 percentage points lower than the average CEI costs for all contracts in FY 1998-1999. The Department could improve the alternative contracting program by 1) developing standardized formulas for Bonuses and Incentives/Disincentives; 2) establishing more consistency in criteria used to select projects for alternative contracting; and 3) pursuing adoption of proposed revisions to eliminate the step guidelines in Section 14-93.003, F.A.C. In January 2000, the Office of Quality Initiatives issued a report entitled, Alternative Contracting Program Preliminary Evaluation for July 1, 1996 - June 30, 1999, which evaluated alternative contracts by technique and compared actual construction contract time and cost data with Department estimates. We tested selected data and concluded the data were substantially accurate. Management concurred with our findings and recommendations. Their complete response is included in Attachment A of our report. If we can be of further assistance, please let me know. Sincerely, [Original signed by] Cecil T. Bragg, Jr., C.P.A. Inspector General

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ALTERNATIVE CONTRACTING METHODS AUDIT REPORT NUMBER 04B-0001 SEPTEMBER 2000 OFFICE OF INSPECTOR GENERAL .

Office of Inspector General Audit Team Members Audit Manager Audit Team Jack Rendahl Judy M. Florida Statutes.055 and 20. as we considered necessary under the circumstances. Goodman. CPA Loretta Cooper Frank Trombino Sections 20.23. We included such tests and other auditing procedures. procedures and other operations of the Department and recommend improvements. 2 • Report No. 04B-0001 . The Department conducted this audit to assist management in the effective implementation of transportation programs. evaluate and report on policies. require the Florida Department of Transportation's Inspector General to review. plans. Our audit was conducted in accordance with applicable Government Auditing Standards issued by the Comptroller General of the United States and Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors.

Alternative Contracting Methods ATTACHMENTS A.Office of Inspector General TABLE OF CONTENTS Page EXECUTIVE SUMMARY BACKGROUND AND INTRODUCTION OBJECTIVES. SCOPE AND METHODOLOGY FINDINGS AND RECOMMENDATIONS APPENDICES I. 04B-0001 • 3 . B. Statutes II. Management Response Distribution 7 4 5 9 15 17 22 24 Report No.

1996 – June 30.C. Bonus. by controlling time and cost overruns within the transportation corridor. 1999.5 percentage points lower than the average CEI costs for all contracts. There were definition problems regarding Lane Rental which have been resolved. We noted no material exceptions in the reports issued. 2) establishing more consistency in the criteria used to select projects for alternative contracting methods. 4 • Report No. which evaluated alternative contracts by technique and compared actual construction contract time and cost data with Department estimates. the Office of Quality Initiatives issued a report entitled Alternative Contracting Program Preliminary Evaluation for July 1.003. As shown in Exhibit Two. The objectives of the audit were to determine: • • Whether alternative contracting methods were working. These problems were resolved. and Lane Rental were not fully realized due to problems unique to the respective method. The Department could increase benefits derived by 1) developing standardized formulas for bonuses and incentives. The goal of the program was to minimize the inconvenience and disruption to motorists. adjacent businesses and homeowners. The bonus method had problems regarding acceptance date used to determine when a bonus was earned and problems with contractors beginning work near the completion date which would preclude them from earning a bonus.A. the potential benefits of BAM. the Florida Legislature authorized the Department of Transportation to establish a program to demonstrate the use of alternative techniques of highway construction and finance that control time and cost increases on construction projects. Materials testing frequencies have been reduced which dealt with Design-build and Lump Sum contracts and earlier administrative problems. and Whether alternative contracting program results were accurate. CEI costs for contracts in the sample were 4. In January 2000.Office of Inspector General EXECUTIVE SUMMARY In 1996. and why. Although some alternative contracts offer advantages over conventional methods. our analysis of 51 centrally let completed alternative contracts were completed in less time and with fewer cost overruns than the other 357 completed construction contracts. F. Evidence obtained in this audit indicates alternative contracting methods offer distinct time and cost advantages over conventional contracting methods. and 3) pursuing adoption of proposed revisions to eliminate the step guidelines in Section 14-93. 04B-0001 . We validated selected data and concluded the data were substantially accurate. and how the program could be improved.

Liquidated Savings.Office of Inspector General BACKGROUND AND INTRODUCTION In 1996. or in any way prohibit the Department from using innovative techniques. Based on reports issued by the Office of Quality Initiatives. limits the innovative contracting program to $120 million annually. The Department is not required to adhere to any other provisions of Florida law that would prevent.3 million in incentives through the fiscal year ending June 30. Most alternative contracting methods involve financial incentives to expedite work with the exception of Lump Sum.S. Incentive/Disincentive. F. No Excuse Bonus. the Department paid $7. These methods are allowed under Section 337. which addresses time plus money contracts [A+B or Lane Rental].11(4). Florida Statutes (F. 1999.S. Lump Sum.000 per day with the exception of revenue-producing projects where the amounts and periods of incentive may be greater if an analysis indicates that additional revenues projected to be received upon completion of the project will exceed the cost of the incentive payments [Section 337.18 (4) (a) F. Section 337. 04B-0001 • 5 . or a rail corridor are combined.025. by controlling time and cost overruns within the transportation corridor. 1 The Federal Highway Administration does not authorize BAM projects for Federal Aid Funding. adjacent businesses and homeowners. and Design Build Major contracts where the design and construction phases of a major bridge.1 The Department also uses alternative contracting methods. The goal of the program was to minimize the inconvenience and disruption to motorists. and A + B are other examples of alternative contracting methods in use in Florida. preclude. the Florida Legislature authorized the Department to establish a program to demonstrate the use of innovative techniques of highway construction and finance that control time and cost increases on construction projects. and BAM. The Bid Averaging Method (BAM) and Design-Build Minor method are two examples of innovative contracting methods.]. Report No. Design-Build. Financial incentives are limited to $10.S.).

2 Alternative Contracting Draft User’s Guide. Provide an incentive for achieving a milestone or total project completion. March 1997. Conditions Best Used Urban reconstruction. Milling and resurfacing. Can be applied to wide variety of projects when a specific completion date needs to be met. Incentive/ Disincentive Lane Rental Provide incentive for early projection completion or milestones and to increase the penalty for failure to complete work on time. bridge widening. 6-13 6 • Report No. Simple projects such as bike paths. Not enough experience to determine best conditions for use. No Excuse Bonus Liquidated Savings Lump Sum Design-Build BAM Ample competition needed for success. Achieve bids closer to a true and reasonable cost. Variety. Reduce the length of time of project from concept to completion. Provide an incentive for early completion. p. bridge projects. 04B-0001 . box-culvert extensions and resurfacing. Milling and Resurfacing.Office of Inspector General The following excerpt from Appendix 2 specifies the purpose and conditions under which alternative contracting methods are best used. Urban reconstruction…could be applied to a wide variety of projects when a specific completion date needs to be met. and high traffic areas… could be applied to a wide variety of projects when a specific completion date needs to be met. and box-culvert extensions. Shorten the time in which a contractor closes lanes to traffic.2 Type A+B Purpose Provide an incentive for early project completion and reduce inconvenience to public. Reduce quantity overruns and design/contract administration.

The scope encompassed a judgmental sample of 64 alternative contracts meeting the definition of alternative contracting which were undertaken in seven districts during Fiscal Years 1996-1997 through 1998-1999. Our audit objectives were to determine: • • Whether alternative contracting methods were working. SCOPE AND METHODOLOGY Objectives Alternative contracting methods were intended to reduce impacts to the public by minimizing time and cost increases on construction projects and to provide a more efficient way to procure services for all types of highway contracts. In January 2000. the Office of Quality Initiatives issued a report entitled Alternative Contracting Program Preliminary Evaluation for July 1. Exhibit 1 identifies the total number of alternative projects awarded by contract method.Office of Inspector General OBJECTIVES.June 30. Exhibit 2 compares alternative contracts to all contracts on the basis of time and cost. 1999. and regulations. We reviewed the alternative contracting contract terms and evaluated. which evaluated alternative contracts by technique and compared actual construction contract time and cost data with Department estimates. laws. where possible. Appendix 2 contains a brief description of alternative contracting methods. 04B-0001 • 7 . and Whether alternative contracting reported results were accurate. 3 Turnpike projects were not reviewed because of the limited number of alternative contracts. procedures. Scope and Methodology We visited seven of the Department’s eight districts3 and interviewed appropriate staff to determine the criteria for selecting alternative contract projects. We also reviewed the adequacy of procedures and key controls in place to ensure compliance with policies. We also verified the days reported in the Construction Reporting System for contracts that included incentives. 1996 . We evaluated whether selected data were valid and accurately reported. and how the program could be improved. We reviewed district management's criteria for evaluating alternative contracting methods. Report No. if the incentives or bonuses in contracts were merited. and why. Appendix 1 summarizes the relevant statutes.

Office of Inspector General Exhibit One: Contracting Methods by Fiscal Year Contract Type A+B A + B/Bonus BAM Design-Build-Minor Design-Build-Major Incentive/Disincentive Lane Rental Liquidated Savings Lump Sum No Excuse Bonus Warranty Total 1996-1997 1997-1998 1998-1999 1999-2000 7 12 17 10 1 1 5 2 3 1 0 0 2 2 5 2 0 1 2 0 8 7 8 3 18 1 58 16 7 17 9 24 2 92 14 3 9 33 15 2 105 8 5 9 17 2 0 55 1999-2000 (to be let) 19 9 2 0 1 15 0 9 9 8 0 72 Total 65 18 6 11 4 61 22 52 71 67 5 382 Source of Data: Office of Quality Initiatives 8 • Report No. 04B-0001 .

The Department could increase benefits derived by 1) developing standardized formulas for bonuses and incentives. our analysis of 51 centrally let completed alternative contracts were completed in less time and with fewer cost overruns than the other 357 completed construction contracts. row 1. 04B-0001 • 9 . As shown in Exhibit Two. CEI costs average from Work Program Administration database and Program and Resource Summary Although some alternative contracts offer advantages over conventional methods. and Lump Sum contracts whereas they had difficulties with Bonus. Lane Rental.003. The bonus method had problems regarding the acceptance date used to determine when a bonus was earned and problems with contractors beginning work near the completion date which would preclude them from earning a bonus.5 percentage points lower than the average CEI costs for all contracts. Lane Rental. row 2.3% 14. Districts preferred A+B.1% 28. and Performance & Production Review of the Department of Transportation Year End 1998/1999.9% Cost 5. some performed better than others. 4 Florida Statute did not allow for BAM to be used on maintenance projects. 2) establishing more consistency in the criteria used to select projects for alternative contracting methods. the potential benefits of Bonus. Lump Sum and BAM4 contracts.7% 14.A. Design-build. during our audit the law was changed. Report No. These findings are discussed in more detail below. Incentive/Disincentive. These problems were resolved.C.Office of Inspector General FINDINGS AND RECOMMENDATIONS Overall Conclusion While all alternative contracting methods worked. Evidence obtained in this audit suggests alternative contracting methods offer distinct time and cost advantages over conventional contracting methods. F. and BAM were not fully realized due to problems unique to the respective method. Exhibit Two: Comparison of Time and Cost Adjustments and CEI Costs FY 1998-99 Adjustments Contract Type Alternative Contracts All Construction Contracts. Materials testing frequencies have been reduced which dealt with Design-build and Lump Sum contracts and earlier administrative problems.2% CEI 10. including Alternative Contracts Time 5.8% Source of Data: OIG analysis. CEI costs for contracts in the sample were 4. There were definition problems regarding Lane Rental which have also been resolved. and 3) pursuing adoption of proposed revisions to eliminate the step guidelines in Section 14-93.

10 • Report No.8 percent to 22. In addition.9 percent to 13. the Office of Quality Initiatives issued a report entitled Alternative Contracting Program Preliminary Evaluation for July 1.1 percent of the awarded contract amount. We validated selected data and concluded the data were substantially accurate. 5) based on road user costs + CEI costs. or from 2. 3) 2-10 percent of construction costs. 5 Alternative Contracting Draft User’s Guide. the following were given as responses: 1) ad hoc process. which evaluated alternative contracts by technique and compared actual construction contract time and cost data with Department estimates. March 1997 provides guidelines for incentives/disincentives based on road user costs. Bonus We found a wide range of bonuses being applied to the contracts. contract completion time was not reduced on all incentive contracts. Non-standardization may have been needed initially when the alternative contracting program was a pilot program and districts were still experimenting with these methods. p 38. 4) set to avoid seasonal dates and other considerations such as CEI costs. The Department did not have standard formulas for calculating Bonus.000. but guidelines established by the Office of Quality Initiatives provided that bonuses should range from 2 percent to 10 percent of the project cost. road user costs. and construction time.June 30.000 to $475.Office of Inspector General In January 2000.1 percent of the awarded contract amount. Without consistent standards for determining bonus amounts. The various methods reported by district staff were 1) an ad hoc process but generally 2-5 percent of construction costs. 4) based on gut feelings. we did not identify any standard formula available for use by the districts in calculating incentives. and 6) set after considering CEI costs. or from 2. or Lane Rental amounts. 2) liquidated damages multiplied by number of estimated early completion days. 2) 5-10 percent of construction costs. There were no statutory limitations on bonuses at the time of our review. 5) within 5 percent of the total contract. lane user costs. Our sample of bonuses ranged from $25. A key provision of alternative contracting is awarding bonuses and incentives or assessing disincentives to contractors. lane rentals. 6) within 5 percent of the construction costs some as much as 7 percent. 04B-0001 . We noted no material exceptions in the reports issued. incentive amounts.000. When the districts were questioned regarding how incentives were set. During our fieldwork. I. Our sample of incentive amounts ranged from $8. 1999. generally 2-5 percent of construction costs.5 Incentive/Disincentive Although the Alternative Contracting Draft User’s Guide. March 1997. incentives. 1996 . and 7) they had nothing in writing regarding formulas. Incentive/Disincentive.000 to $400. 3) based on CEI and user delay costs. it is difficult for the Department to evaluate particular alternative contracting methods from district to district. we interviewed districts construction staff to determine how they calculated bonus amounts.

Lane rental charges should be a function of road user costs and should vary based on road usage.. and other relevant factors.e. has begun standardization of the Alternative Contracting Program. The Quality Initiatives Office. the formula for bonus amounts is recommended in the Guidelines to be 2%-10% of project costs. guidelines and methods for determining bonus/incentive amounts have been provided to the Districts. which is used to establish lane rental fees. 04B-0001 • 11 . We also found no standard for determining the number of lane rental days used as the ‘B’(or time) portion of the A+B bidding method. an objective of the teams assessing and standardizing each technique will be to develop improved guidelines and bonus/incentive formulas. with the appropriate functional offices. Standardization will include developing a work process for calculating bonuses. The Alternative Contracting Guidelines framework for determining incentives and bonus amounts is: A+B. We found no standard for establishing road user costs. importance to the public. “B” portion) for each technique. the Department did not have written guidance for defining lane user costs or rules for calculating time on alternative contracts. the following method for calculating the “B” portion of A+B and lane rental days was disseminated to the Districts by Central Office Estimates. However. In compliance with your recommendation. Task teams are in the process of standardizing Lump Sum and Design-Build. CEI. Regarding the comments concerning formulas for lane rental days and A+B days. and lane rental fees. The pilot has not restricted this flexibility. However. § A+B: Multiply Maintenance of Traffic (MOT) days by 80%. such as business impacts. the task teams will review and develop the most effective method of determining the number of days (i.Office of Inspector General Lane Rental Likewise. However. as exemplified below. incentives/disincentives. Incentive/Disincentive.. We agree that the Districts have taken varied approaches to this process. factoring in adjustments based on business impacts. § Lane Rental: Multiply Maintenance of Traffic (MOT) days by 60%. The mathematical formula for road user costs can be calculated through a software program that has been provided to the Districts by Central Office Construction. Recommendation 1: We recommend the State Highway Engineer ask the Office of Construction and the Office of Quality Initiatives to develop standardized formulas for incentives/bonuses/lane rental amounts/road-user costs and guidelines for use by the districts. Report No. and Lane Rental are determined by road user cost. Teams to standardize the remaining techniques will proceed in the upcoming year. etc. Allowable time should be compressed for incentive or bonus contracts. and other reasons is not an exact science. importance to the public. Management Response: We agree that the program can be improved and will initiate process improvement through standardization task teams.

Each project is unique in location and desired outcome. It was not clear when No Excuse Bonus projects were considered complete. and extra work was added. which could preclude a contractor from qualifying for a bonus. For example. therefore. we identified problems with the following: No Excuse Bonus In one No Excuse Bonus contract. Design-build and Lump Sum contracts are not paid based on quantities. though contract time limitations were exceeded. which at the time of our review. Department staff were proactive in identifying and resolving problems. the testing frequencies were not addressed in these contracts. Since the completion of our fieldwork. This problem most often occurred during a project’s burn-in phase for signalization. The Department currently discourages adding work towards the end of a contract.Office of Inspector General Although many of the Districts may be compressing time by applying a formula of increased resources and longer work weeks to accelerate construction time for bonuses and incentives. Based on our sample.S. 04B-0001 . The original date by which the work must be completed does not change for additional work on no excuse bonus contracts. therefore. the significance of this problem was mitigated when the State Materials Office decreased testing requirements. is automatically compressed by the removal of weather days and time adjustments. Dummy supplemental agreements were created to facilitate testing of materials at the proper intervals. there is no requirement to do so. the contract provided that the bonus was contingent on final acceptance date. II. there is not a standard formula for bonus/incentive time that can be applied to all projects. contractors did not consider access roads as lanes. a $75.025. Lane Rental Lane Rental language was unclear causing problems in determining what constituted a lane. Contract specifications were changed to base the final acceptance date as the date required for achieving a bonus rather than conditional acceptance date. The bonus contract was amended through supplemental agreement. The contractor completed the original work by the bonus date but did not complete the additional work in the originally allowed time. contract specifications were enhanced to better address lane definitions. Design-build and Lump Sum Design-build contracts and Lump Sum contracts were intended to ease administrative burden. Materials testing frequencies are based on quantities.000 bonus was paid. Construction time. Another mechanism had to be used to incorporate testing. The contract defines the terms by which the project is to be completed. Generally. Contractors believed the conditional acceptance date should be used in determining when work was completed. tied to the achievement of bonuses and incentives. They did not address materials testing guidelines and the certification process. After the completion of our fieldwork. the statute 12 • Report No. However. the detail of the alternative contracting methods was spelled out in the special provisions portion of the contract. BAM Our sample included two maintenance contracts. Contract language should be as clear as possible to avoid disputes or misinterpretations of alternative contracting terms and stipulations. 337. During our audit. This extended work could have been covered by an additional contract. were not addressed in F.

Office of Inspector General was changed to include highway maintenance projects in the innovative projects program. 04B-0001 • 13 . establishes the following dollar limitations on incentives based on the estimated total cost of construction: Report No. tourism or other seasonal impacted projects. public perception projects. The Florida Administrative Code (F. IV. Other criteria included time-sensitive projects. substantial projects.C. the choice of different alternative contract methods was in some cases experimental. Recommendation 2: We recommend the State Construction Engineer should develop specific project selection criteria. the Department must document in writing the need for the exception and identify what benefits the traveling public and the affected community is anticipated to receive. The Quality Initiatives Office is currently developing a work process flow chart and selection criteria form to provide guidance to the Districts and ensure that justification for using alternative contracting has been adequately documented. As would be expected in a pilot program. businesses and homeowners within the affected transportation corridor. Each technique task team in the standardization process will also address this recommendation. Incentive/Disincentive Procedure. Incentive and bonus projects should be selected using criteria affecting the best use of public funds.003. Florida Administrative Code incentive guidelines were not followed in all cases. The most frequently used selection criterion for alternative contracts was projects having a high impact on the traveling public or adjacent businesses. and sensitive projects. Management Response: We concur that specific project selection criteria and a method for documenting the reasons and benefits of using an alternative contracting technique should be established. The goal of this program is to reduce time and cost overruns and thereby reduce the impacts of construction on motorists. Utility relocation projects were avoided by most of the districts in selecting alternative contracts.A. Prior to using an innovative method that is inconsistent with another provision of law. III.) at 14-93. document the reasons for the alternative contracting method selected. A wide range of criteria was used in project selection. and identify the benefits the traveling public and the affected community should expect to receive.

000.).500 Maximum Calendar Days 60 60 60 60 60 Estimated Cost of Construction $20.000..000 $3. This step was initiated prior to the finalization of the audit.000 $5. to the Joint Administrative Procedures Committee for approval in the final phase of the rule development and adoption procedure. further limits the incentives to 60 days.000. or ensure adherence to the current guidelines.000. None of the incentives in our sample exceeded the $10. F.S.18 (4) (a). We have submitted the revised Incentive/Disincentive Rule.000.000 per day statutory limitation.001 to $20.000 Florida Statutes6 limit incentive/disincentive provisions to a maximum of $10. and the incentives either exceeded the step amounts or the time limit as shown in Exhibit Three. However.001 to $15.C.001 or greater $15.000. 04B-0001 . F.000 to $5. revenues will exceed the cost of the incentive payments.000 $8. F. in five instances the incentives were not in compliance with the code limitations..000 $6.A. Chapter 14-93.000 per calendar day except for revenue-producing projects whereby upon completion of the project.C.Office of Inspector General Exhibit Three: Limitations on Incentive/Disincentive Incentive/Disincentive (Per Calendar Day) $10. 6 338.000 $50.C. we concur.000.000.000 maximum incentive in place. Recommendation 3: The Manager of Quality Initiatives Office should propose revisions to the Florida Administrative Code.003. 14 • Report No. The Office of Quality Initiatives was in the process of recommending elimination of the step guidelines.A. Management Response: In response to your recommendation to revise the Florida Administrative Code (F.000 $5.A. leaving only the $10. Section 14-93.000 $10.001 to $10.

[The Bold font has been added for emphasis to excerpts of the statutes relevant to this audit]. emergency repairs. innovative bidding and financing techniques.Office of Inspector General APPENDIX 1 Pertinent Florida Statutes Section 337. the department must use the existing process to award and administer construction contracts.025. accelerated construction procedures.S. Such techniques may include. the department is not required to adhere to those provisions of law that would prevent. and other aspects of highway construction. the lowest evaluated responsible bidder. and those techniques that have the potential to reduce project life cycle costs. defaults.S. Surety bonds. Section 337. and cost increases on construction projects. or welfare. or it may reject all bids and proceed to rebid the work in accordance with subsection (2) or otherwise perform the work. bids. the contract for such project may provide for an incentive payment payable to the contractor for early completion of the project or critical phases of Report No. safety. However. 04B-0001 • 15 . When specific innovative techniques are to be used. will limit the disruptive effect of construction on the community. damage assessments. [The Bold font has been added for emphasis to excerpts of the statutes relevant to this audit]. including design plans. Surety bonds. progress payments. Section 337. a major bridge. accurate. The department is authorized to establish a program for highway projects demonstrating innovative techniques of highway construction and finance.18. prior to using an innovative technique that is inconsistent with another provision of law. but are not limited to. supplemental agreements. combined design and construction contracts. The department may enter into no more than $120 million in contracts annually for the purposes authorized by this section. preclude.S.11. or in any way prohibit the department from using the innovative technique. safety. or is cost beneficial on a revenue-producing project. damage assessments (4) (a) If the department determines and adequately documents that the timely completion of any project will provide a substantial benefit to the public health. requirements of vehicle registration. which have the intended effect of controlling time. or a rail corridor project into a single contract. F. (4) The department may award the proposed construction and maintenance work to the lowest responsible bidder. department to establish program [The Bold font has been added for emphasis to excerpts of the statutes relevant to this audit]. F. the department may combine the design and construction phases of a building. Innovative highway projects. Such contract is referred to as a design-build contract. and up to date prior to the advertisement for bids on such projects. requirement with respect to contract award. (7) (a) If the head of the department determines that it is in the best interests of the public. Contracting authority of department. F. state-of-the-art technology for pavement. To the maximum extent practical. defaults. and change orders. records. requirement with respect to contract award. or in the instance of a time -plus-money contract. the department must document in writing the need for the exception and identify what benefits the traveling public and the affected community is anticipated to receive. (2) The department shall ensure that all project descriptions. are complete.

000 per calendar day. except that for revenue -producing projects the amounts and periods of the incentive may be greater if an analysis indicates that additional revenues projected to be received upon completion of the project will exceed the cost of the incentive payments. 04B-0001 . 16 • Report No. All contracts containing such provisions shall be approved by the head of the department or his or her designee. The amount of such incentive payment or such additional damages shall be established in the contract but shall not exceed $10. Any liquidated damages provided for under subsection (2) and any additional damages provided for under this subsection shall be payable to the department because of the contractor's failure to complete the contract work within the time stipulated in the contract or within such additional time as may have been granted by the department.Office of Inspector General work and for additional damages to be assessed against the contractor for the completion of the project or critical phases of the work in excess of the time specified.

The project is awarded to the contractor with the lowest sum of A + B. a dollar value for each contract is established by the Department prior to advertising the project. and (2) Non-Linear (Escalating Incentive/Disincentive in which the failure-to-work provision applies to incentive) . Urban reconstruction projects with high average daily traffic and bridge projects are generally considered good candidates for A + B bidding.18(4). The cost-plus-time method of bidding enables the contractor to determine a reasonable contract duration required for contract completion thereby allowing the contractor to control the important element of time. if the project is completed late. The contractor will receive an incentive for each day the work is completed ahead of the contractor’s original contract time bid. Conversely. The time bid is added to the traditional contract work bid to obtain the A + B bid for award purposes.Cost plus time bidding involves time.Provides an incentive to the contractor for early completion and also increases the penalty for failure to complete a project on time.the contractor receives or is charged the same daily amount regardless of the number of days completed.S. The Incentive/Disincentive technique may be a stand-alone method or may be applied to other alternative methods including No Excuse Bonus. F. the greater the daily amount paid to or assessed against the contractor. These contracts are awarded based on the combination of the bid for the contract pay items and the associated cost of the time needed to complete the work according to the formula: A + B = Total Bid where A = Standard Bid (Cost) and B = Time Bid (days x road-user costs per day). 04B-0001 • 17 . Incentive/Disincentive . The number of days bid is multiplied by the daily road-user cost established by the Department to determine the value of the contractor’s time bid. The price portion of the bid does not become the only consideration in the award. The bid is rejected if the contractor’s time bid exceeds the Department’s maximum number of days noted in the specifications. Report No. It is assessed on a daily basis and can be used to achieve specific milestones within a project or to encourage timely completion of a total contract. Lane Rental. The work is to be completed within the contractor’s time bid. a disincentive will be assessed as well as liquidated damages in accordance with the contract. with an associated cost. This method is authorized under Section 337.Office of Inspector General APPENDIX 2 Alternative Contracting Methods: Alternative Contracting Methods A + B Bidding . The Incentive/Disincentive clause is used when a project is time critical and cost beneficial. early or late. Design Build or any combination. in the low bid determination. This technique encourages a contractor to capitalize on a particular construction method or process which would speed construction.the earlier or later a job is completed. There are two types of Incentive/Disincentive contracts: (1) Linear . Regarding the A + B method. A + B. Total contract time is shortened by allowing each contractor to bid the number of days in which the work can be accomplished. Liquidated Savings.

Under this method. the CEI and administration costs expended by the Department. The Department multiplies the number of lane rental days bid by the contractor by the daily lane rental rate to determine the total lane rental bid. The impact on the traveling public is decreased when a contractor is charged for blocking a lane.g. resulting in reduced lane closure time. Bonuses are intended to reward a contractor for early completion of a contract and can be tied to either milestones. or both. Milling and resurfacing. if the contractor uses less lane rental time than was bid a daily incentive equal to the lane rental fee is awarded. The contractor is assessed a fee for each time period in which a lane is closed to traffic. reduces disruption to the motoring public. box culvert extensions and bridge widening projects make good candidates for the lane rental method. as determined by the Department.Encourages contractors to minimize road-user impacts during construction. Unforeseen conditions.An incentive placed on a specific contractual milestone for the express purpose of completing an element or elements within the prescribed time regardless of any problems or unforeseen conditions that might arise. Lane Rental . are not a consideration when granting a bonus. The lane rental rates. It is designed to shorten the amount of time a contractor actually closes lanes to traffic. and as a result. hourly or fractions of an hour). No Excuse Bonuses . If the bonus date is not met. This technique can be applied to a wide variety of project types for which completing the project/milestone by a particular date (e. It is similar to the A + B concept in that it works well with urban reconstruction and bridge-related projects. the contractor will not receive the bonus. a final completion date. the contractor will be granted time extensions for hurricanes and other catastrophic events according to the Department’s rules. This concept can be used on a wide variety of project types and is best applied when the Department is willing to pay the contractor to expedite the work to reduce the contract time. Lane rental fees are assessed based on actual lane rental days used by the contractor. 04B-0001 18 . Design and construction staffs • Report No.. However. the bidder determines the number of lane rental days required to perform the specified work and shows this number in the bid item of the proposal. If the contractor uses more lane rental time than was bid.Office of Inspector General The Incentive/Disincentive for a particular project is set by the Department based on daily road-user costs. major sporting event) or within a specified time frame (number of calendar days once the project begins) is important. The contractor focuses on completing the work within the travel lanes. This is an incentive for the contractor to find innovative ways to avoid closing lanes and/or to perform multiple functions during a single lane closure. weather delays. This total lane rental bid is added to the standard bid and used to determine the apparent low bidder based on the total bid. the appropriate amount of lane rental fees will be deducted from the monthly progress payment. which normally extend contract time. are stated in the bidding proposal in dollars per lane per time period (daily. and other such issues. However.

The suggested maximum Liquidated Savings Fee is $10. Lump Sum . Liquidated Savings is different from the No Excuse Bonus technique in that contract time is adjusted for unforeseen conditions. Warranties provide the incentive or emphasis for contractors to look at life cycle costs as opposed to initial costs alone. striping. A contractor may have to accelerate work to get a bonus. The amount of incentive or reward is based on direct savings to the Department related to CEI and contract administration costs. ITS type projects and asphalt pavement contracts. it appears to be best suited for milling and resurfacing. longer workdays. The Department may establish contingency funds to cover the CEI’s increased workload. higher amounts may be used. However.000 per day. requiring the CEI to increase staffing or work overtime. the benefits have proven to outweigh the potential for increased costs.Is a guarantee of the integrity of a product and of the maker’s responsibility for the repair or replacement of deficiencies. The new emphasis on warranties in highway construction involves the guarantee of longer-term performance of highways. However. warranty provisions should be for specific construction products or features. 04B-0001 • 19 . An additional advantage is that it serves as a tool to motivate efficient construction as it encourages contractors to keep their projects on schedule.Involves the contractor providing the Department with a lump sum price to complete a project as opposed to bidding on individual pay items with quantities provided. Double crews. It is an absolute liability on the part of the warrantor and the contract is void unless it is strictly and literally performed. This technique does not impact the bidding and award process. Warranties for materials and workmanship are common in the construction industry with most performance bonds covering such items for 1 year following completion of a project.Office of Inspector General cooperate to ensure the work associated with the milestone is clearly defined in the contract specifications. The potential for increased costs is greater as the contractor earns incentives for rapidly completing projects. It rewards those contractors who are more efficient or have a better method of performing the contract work. The intent is to reduce quantity overruns due to errors in quantity calculations or changed field conditions. Bonuses are intended to shorten the construction time that would normally be required to perform the work.the bonus date and the normal contract completion date. Warranty Clauses . however. extra work and weather delays.Encourages the contractor to finish a project early by providing a financial incentive for each calendar day the project is completed and accepted prior to the expiration of the allowable contract time. and working weekends are anticipated when using No Excuse Bonus contracting. This concept has the potential for use in bridge painting. The Department can potentially pay a premium for early completion. It reduces the costs of contract administration associated Report No. This concept can be used in a variety of project types. As a general rule. It is designed to encourage the contractor to finish the job rather than pulling personnel off to work on other projects. upon the Department’s approval. Liquidated Savings . No Excuse Bonus contracts may include two dates .

which optimize their construction capabilities. Bid Averaging Method (BAM) . It is a competitive bidding technique rather than the traditional low bid process. and environmental sensitivity. The potential time savings is a significant benefit because the time frame from concept to concrete is decreased. Design-Build (Major): Authorized under Section 337. the Federal Highway Administration (FHWA) has elected not to participate on BAM projects. then submit a lump sum bid for the entire contract. it allows construction personnel to spend more time on inspection and less time on paperwork. F. rail corridor. • Report No. box culvert extensions and minor bridge widening. It is anticipated this method will only be used on simple projects. construction can begin before all design details are finalized. These proposals are rated by the Department on design quality. and are within the $120 million statutory cap. the contractor must also assume greater responsibility for long term performance. such as resurfacing. F. F. Innovative Contracting Methods: Design-Build (Minor): This method also combines contracting both the design and construction of a particular project to a Design-Build firm and is defined as bridges under $10 million and other transportation projects not previously allowed under Section 337. The Design-Build concept provides flexibility for innovation while allowing the project design to be tailored to the contractor’s strengths.. Currently. BAM bidding is best used where there is ample competition in the project area (i.025. The Department establishes the design criteria package. as well as added or deleted work. and the potential for other types of claims is greatly reduced.. will be negotiated using standard practices. management capability. As a result.. Claims for design errors or construction delays due to redesign are not allowed. 04B-0001 20 . Both design and construction phases of a project are performed under a single contract.Designed to get contractors to bid a true and reasonable cost “up front” for a project to minimize claims and cost overruns. The contractor is required to calculate quantities.S. and buildings projects. These types of Design-Build contracts are not calculated in the $120 million statutory cap on Innovative Contracting Methods.11(7). timeliness. As a result. five or more bidders expected) and where a ? ? low bid is anticipated to be a significant problem. A major bridge is any bridge for which the estimated cost of the construction phase exceeds $10 million. However. Contractors and designers work together as a team to accomplish the project goals. It requires the contractor to take a closer look at the project prior to bidding. Any costs associated with changed or unforeseen conditions. Contractors using the lump sum technique may take more risk in developing a bid since the bid is based on their own calculations. Under Lump Sum contracting. this method combines contracting both the design and construction of a particular project to a Design-Build firm and is limited to major bridges. then the prospective bidders develop design proposals.Office of Inspector General with quantity verification and measurement.S. The minor design-build contracts are allowed under Section 337.S.11(7). the Department develops a design package.e. but does not provide quantities. bike paths.

Report No. the Department will average all bids and select the contractor whose bid is closest to the average. the Department will reject the bids and re-advertise. 04B-0001 • 21 . the Department’s normal contract administration processes are used. the Department will exclude the low and high bids. Upon award of the project. (2) If three or four bids are received. and (3) If fewer than three bids are received. average the rest and select the contractor whose bid is closest to average.Office of Inspector General The BAM bidding process is as follows: (1) If five or more bids are received.

the formula for bonus amounts is recommended in the Guidelines to be 2%-10% of project costs. CEI. factoring in adjustments based on business impacts. and other reasons is not an exact science. Freddie Simmons has asked that I submit our response directly to you. Bragg. C. The pilot has not restricted this flexibility. Greg Xanders. and lane rental fees. Teams to standardize the remaining techniques will proceed in the upcoming year.P.. In compliance with your recommendation. We agree that the Districts have taken varied approaches to this process.A. However. Recommendation 1: In response to Recommendation #1. Duane Brautigam SUBJECT: Alternative Contracting Methods – Report 04B-0001 ______________________________________________________________________________ Thank you for incorporating many of our recommended changes to the first draft and allowing us the opportunity to respond to the second draft. Quality Initiatives Office Freddie Simmons.Office of Inspector General ATTACHMENT A Management’s Response MEMORANDUM State of Florida Department of Transportation DATE: TO: FROM: CC: September 27. Jr. The Quality Initiatives Office. etc. The mathematical formula for road user costs can be calculated through a software program that has been provided to the Districts by Central Office Construction. The Alternative Contracting Guidelines framework for determining incentives and bonus amounts is: A+B. an objective of the teams assessing and standardizing each technique will be to develop improved guidelines and bonus/incentive formulas. 2000 Cecil T. guidelines and methods for determining bonus/incentive amounts have been provided to the Districts. with the appropriate functional offices. such as business impacts. and other relevant factors.. 22 • Report No. Incentive/Disincentive. Task teams are in the process of standardizing Lump Sum and Design-Build. 04B-0001 . However. has begun standardization of the Alternative Contracting Program. Standardization will include developing a work process for calculating bonuses. we agree that the program can be improved and will initiate process improvement through standardization task teams. as exemplified below. importance to the public. incentives/disincentives.. Inspector General Ken Leuderalbert. importance to the public. and Lane Rental are determined by road user cost.

Chapter 14-93.). § Lane Rental: Multiply Maintenance of Traffic (MOT) days by 60%. This step was initiated prior to the finalization of the audit. is automatically compressed by the removal of weather days and time adjustments.C.A.e.A.. Recommendation 3: In response to your recommendation to revise the Florida Administrative Code (F. § A+B: Multiply Maintenance of Traffic (MOT) days by 80%.C. F. to the Joint Administrative Procedures Committee for approval in the final phase of the rule development and adoption procedure. the following method for calculating the “B” portion of A+B and lane rental days was disseminated to the Districts by Central Office Estimates. there is no requirement to do so. we concur. please contact Jan Bordelon at 414-4383. However. Recommendation 2: We concur that specific project selection criteria and a method for documenting the reasons and benefits of using an alternative contracting technique should be established. We have submitted the revised Incentive/Disincentive Rule. there is not a standard formula for bonus/incentive time that can be applied to all projects. Each technique task team in the standardization process will also address this recommendation. The Quality Initiatives Office is currently developing a work process flow chart and selection criteria form to provide guidance to the Districts and ensure that justification for using alternative contracting has been adequately documented.Office of Inspector General Regarding the comments concerning formulas for lane rental days and A+B days. Although many of the Districts may be compressing time by applying a formula of increased resources and longer work weeks to accelerate construction time for bonuses and incentives. therefore. 04B-0001 • 23 . Report No. tied to the achievement of bonuses and incentives. If you have any questions.. Construction time. the task teams will review and develop the most effective method of determining the number of days (i. “B” portion) for each technique. Each project is unique in location and desired outcome. Thank you once again for the opportunity to comment.

Florida Transportation Commission Attention: Bill Ham (3) William Monroe. FHWA Distribution List 24 • Report No. Barry. Auditor General Attention: L. Secretary. Assistant Secretary for Transportation Policy Cris Speer. Director. State Construction Engineer Pamela Leslie. District 3 Rick Chesser. Senate Budget Committee Attention: Tom Barrett Chairman. Secretary. Chief Information Officer Carolyn Runyan. Secretary. District 7 Jim Ely. Public Information Administrator Sarah Porter.. Joint Legislative Auditing Committee Attention: Terry Shoffstall John Turcotte. District 4 Michael Snyder. Legislative Programs Administrator Bill Kynoch. State Highway Engineer Bill Albaugh. Budget Officer Robin Naitove. House Transportation and Economic Development Appropriations Committee Attention: Eliza Hawkins Chairman. John. Secretary. Weathermon (3) David Twiddy. Jr. Turnpike District Freddie Simmons. Governor's Chief Inspector General Attention: James Thomas Chairman. Secretary. Assistant Secretary for Finance and Administration John Browning. Secretary. R. Secretary Ken Morefield. Division Administrator. Highway Operations Director Greg Xanders. Jr. Secretary. District 6 Ken Hartmann.Office of Inspector General ATTACHMENT B Thomas F.. Senate Transportation Committee Attention: Reynold Meyer Chairman. 04B-0001 . Comptroller Nelson Hill. Office of Program Policy Analysis and Government Accountability (3 copies) James E. District 2 Edward Prescott. House Committee on Transportation Attention: John Johnston Chairman. Procedures Administrator Marcia Cooke. Chairman. General Counsel Dick Kane. District 1 Huey Hawkins. District 5 Jose Abreu. Secretary. St.

Moon@dot.fl. please call.us IA906NM (internal e-mail) Office of the Inspector General Florida Department of Transportation 605 Suwannee Street.For further information call (850) 488-2501/ Suncom 278-2501 or Fax (850) 488-4417/Suncom 278-4417 For a copy of the report. Florida 32399-0450 . Mail Station 44 Tallahassee. write or email: Ms. Nancy Moon Nancy.state.

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