Construction Proposal

1
Construction Proposal
2
Features

• The proposal form is an offer and a promise to
  enter into a contract if selected
• A prepared proposal form is included in the bid
  documents
• Not using the prepared form results in
  disqualification

3
Features (cont.)

• The proposal form must include
• the promise
• list of addenda
• base cost and alternatives
• accompanied by surety deposit or bid bond
• signatures and seal

4
Features (cont.)

• Examine the proposal form for unit price
  contracts in Appendix E, p. 483
• Notice the acceptance period of 60 days is cited
• Financial responsibility
• Competency
• Experience
• Bonds and insurance

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Proposal Details

• Detailed Costs
• Item by item
• Total Bid
• Bidders Statement of Understanding
• Sufficient time to examine work
• Understanding of General Conditions,
  supplements, and addendums
• Bid Proposal Guaranty Bond

6
Proposal Details

• Prequalification certificate
• List of Subcontractors
• Qualifications
• Bonded and insured
• Certifications
• DBE, MBE, PA or US suppliers
• Specialty requirements..

7
Sample Schedule of Prices
Item Approximate Quantity Item Unit Item Total
1018-0001 1 Removal of Existing Bridge, LS
1999-9999 6000 hrs Trainees/Interns 90,000
8000-0288 1 Prestressed Concrete Bridge Structure, LS
8100-0288 1 or Steel Bridge Structure, LS
9005-1000 3771 LF Concrete Filled Pipe Bearing Piles, 14 Dia. LF
9005-1301 1921 LF Predrilling for Pipe Piles, LF
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Penn States Bid Form
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Penn States Bid Form
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Bid Development
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Bid Components
Bid Price
Markup
Home Office Job Site
Indirect Job Cost
Direct Job Cost
12
Bid Components (cont.)
Direct Job Cost
Labor
Materials
Equipment
Subcontracts
13
Bid Components (cont.)
Indirect Job Cost
Overhead
Support Structures
Purchase Orders
Salaries Insurance Office equip. Training Safety U
tilities
Access roads Parking lots Project Office Storage
trailers
Portable toilets Trash Security Testing
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Bid Components (cont.)
Markup
Home Office Overhead
Contingency
Profit
Clerks Secretaries Officers Utilities Travel Adver
tising Bidding
Quality of plans Unforeseen cond. Owner and
designer Schedule Location Work on hand
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Risks

• Quantity takeoff
• something will be left out or computed
  incorrectly
• plans are incomplete and the quantities change
• owner will delete certain items

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Risks (cont.)

• Detail sheets
• numbers will be erroneously transferred
• subcontractor quotes will be misunderstood
• productivity will be overly optimistic or
  pessimistic
• unforeseen conditions will affect productivity
• there may be noncompensable fabrication errors
• overestimate ability of superintendent to
  organize and plan the work

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Risks (cont.)

• Markup
• incorrectly assess contingencies
• desired profit is too great or too little

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Form of Agreement
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Terms

• Retainage - That portion of each progress payment
  that is withheld to cover correction of
  deficiencies and omissions
• Liquidated Damages - A damage assessment that is
  withheld in the event of late completion

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Features

• The form of agreement is the contract
• PSUs Construction Contract
• On public contracts, statutory requirements must
  be followed
• One doing business with a public entity must be
  aware of the laws governing its administration
  and the limitations on the powers of the public
  officials involved

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Contractor Acceptance
22
Background

• Construction services are procured by negotiation
  or competitive bid
• For competitive bid projects, the d.p. usually
  prepares the proposal form

23
Background (cont.)

• The proposal
• is a legally binding promise to enter into a
  contract
• references the project, requires addenda to be
  listed, and is accompanied by security deposits
  or bid bonds
• assures everyone is bidding on the same thing

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Private Sector

• Owner can do as he or she pleases
• negotiate with one or more contractors
• receive competitive bids from selected
  contractors or in an open bidding process
• select any bidder he or she wants

25
Public Sector

• Statutes require competitive bidding
• Agency is seeking a fair and reasonable
  (competitive) price
• Process begins with advertisements
• Timeliness and other parameters of advertising
  are governed by regulations
• Statutes also govern how bids are received and a
  contract is awarded

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Contractor Qualification

• Is a way to screen who is on the prospective
  bidders list
• The purpose is to assure a reputable contractor
• Inquiries ask questions about
• financial capability
• past experience
• managerial expertise
• integrity-

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Construction Contracts
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Pricing Arrangements

• cost proposal can be lump sum (fixed price), unit
  price, or cost reimbursable
• The choice is a function of the type and size of
  project and the project risks

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Lump Sum (Fixed Price) Contracts

• I propose to be paid ________ to build this
  project
• Used most often on residential, commercial
  buildings, engineered projects, and most
  industrial projects
• Design must be complete or nearly so
• Price will be fair and reasonable only if the
  contractor can assess and assume the risks

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Advantages of Lump Sum

• If properly applied, the owner receives a
  competitive price
• Minimum owner risks for unforeseen conditions
• Well-established administrative, legal, and
  contractual precedents

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Advantages of Lump Sum (cont.)

• Owner knows the cost in advance of the work
• Minimum owner involvement in construction process
• Significant contractor incentive to control costs
  and meet the schedule

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Disadvantages of Lump Sum

• Design-construct time frame takes more time
• Adversarial relationships sometimes develop
• Changes and unforeseen conditions are more
  difficult to handle
• Contractor has limited input into
  constructability issues

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Unit Price Contracts

• I propose to be paid this way to build this
  project

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Unit Price Contracts (cont.)

• Used where quantities are uncertain
• Removes some of the contractors risk
• Unit prices are requested for major or all items
  in the project
• Sum of all unit prices times the quantity yields
  the bid price
• There can be several hundred or more items

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Unit Price Contracts (cont.)

• D. p. must provide estimated quantities for each
  item
• Bid equals actual cost only if all quantities are
  exactly right
• In reality, owner knows only the approximate cost
  prior to the start of the work
• Used often on earthwork type projects where
  quantities are not known

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Unit Price Example

• Prices include layout, excavation, bedding,
  materials, placement, sealing, testing,
  compaction, backfill, overhead, profit, etc.

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Advantages of Unit Price

• Risk to the contractor of variations in
  quantities is minimized
• Changes are easier to make
• Owner knows the approximate cost in advance
• Well established administrative, legal, and
  contractual precedents

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Disadvantages of Unit Price

• Owner has to provide greater contract
  administrative services
• Cost can escalate with significant changes in
  quantities
• Some of the same disadvantages of lump sum

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Cost Reimbursable Contracts

• Owner pays contractor expenses plus a fee
• Used sometimes on large, industrial type projects
  where scope cannot be determined
• More appropriate where design is incomplete or
  changes will be common
• Can sometimes be used on emergency projects
• Reserved for only extreme or highly unusual
  circumstances

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Advantages of Cost Reimbursable

• Can accelerate the schedule because the design
  need not be complete
• Can make changes easily

41
Disadvantages of Cost Reimbursable

• Owner has no idea of the final cost until the end
• There is greatly increased contract
  administration
• There is little incentive for contractors to
  control cost or meet the schedule

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Variations in Fee Arrangements

• Cost plus of cost-- is fixed or may be a
  sliding scale
• Cost plus fixed fee--provides some incentive to
  minimize cost and time of performance
• Cost plus incentive target--could be fee
  bonus/penalty
• Guaranteed maximum price (GMP)--cost fee lt max

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Delivery System
Owner
Cost Reimb.
Cost Reimb.
CM
D.P.
Lump Sum/ Unit Price/ Cost Reimb.
Unit Price/ Cost Reimb.
Mech.
Fixed
Unit Price
Elec.
Piping
HVAC
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Subcontracts
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Contractual Obligations

• A subcontract is an agreement between a
  contractor and a subcontractor where the sub
  agrees to complete a part of the work
• The sub has no contract with the owner
• The sub is usually bound by the same obligations
  as the prime has to the owner (see AIA AS201,
  Art. 5.3.1)

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Contractual Obligations (cont.)

• The owner often has the right to approve
  subcontractors (AIA A201, Art. 5.2.1 - 5.2.4)
• Disapproval of subcontractors is not that common

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Potential Problems

• Disagreements often occur when a non standard
  contract is used
• Sub may not be bound to the same obligations as
  the prime
• Sub may not receive all the prime contract
  provisions to know the full extent of its
  obligations
• Sub may not get paid

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Relationship with Subcontractors

• Ethical considerations
• bid shopping or using a subs bid as the low bid
  and shopping for a better bid after the prime
  contract is awarded is troublesome
• trying to get a lower bid from a sub after being
  awarded the contract is to be frowned on
• sub should be offered the same payment provisions
  as the prime
• pay the sub when the subs work is complete

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Relationship with Subcontractors (cont.)

• Contractual and legal considerations
• sub should be given all the contract provisions
  to use in preparing the subs bid

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Contract Bonds
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Background

• A surety is a party that assumes a liability for
  the debt, default, or failure of another
• A bond is not insurance, but rather an extension
  of credit in the form of an endorsement
• A bond is a three party instrument where the
  surety promises the owner (obligee) that the
  contractor will perform in accordance with the
  contract documents

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Background (cont.)

• If there is a default, the surety will step in
  and see that the project is finished
• The extent of the suretys obligation is defined
  by the contract documents
• The face value of the bond is the value of the
  bond and is expressed as a percentage of the
  contract amount, i.e., 100 bond

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Contractor Risks

• A surety will investigate contractors to evaluate
  their financial capacity and available capital
• Bonding capacity is the maximum value of
  uncompleted work the surety will allow the
  contractor to have on hand at any one time

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Types of Bonds

• Bid bond
• protect the owner against a contractor that
  submits the lowest bid but refuses to sign a
  contract
• Performance bond
• protects the owner against default and assures
  that the owner will get the facility without
  undue delay

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Types of Bonds (cont.)

• Payment bond
• protects third parties like suppliers, vendors,
  craft labor against not being paid
• protects the owner from liens being attached to
  the project

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Bond Premiums

• Premium amounts are a function of risk to the
  surety
• Premiums are based on two risk factors
• project risks
• contractor risks

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Project Risks

• Project risks are related to the type of project
  and time of performance
• Assume we have a commercial project (use the
  Walker Building on campus as an example) that is
  estimated to cost 4.0 million and as a project
  schedule of 30 months. Calculate the bond
  premium using the information in the following
  Tables

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Construction Classification for Bonds
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Bond Premium Determination
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Bond Premium Calculation

• Classification B
• Base rate

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Bond Premium Calculation (cont.)

• Adjustment for time of performance
• Bond premiums usually range around 0.75 - 1.50
  of the bid

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Contractor Default Options

• When the contractor defaults, the surety has two
  options
• assume charge of and complete the contract.
  Surety may be able to get a lower price or be
  able to limit its exposure if the surety is in
  control. The surety is responsible for the total
  cost of completing the work, less the contract
  amount, even if the difference is higher than the
  face amount of the bond

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Contractor Default Options (cont.)

• make available to the owner sufficient funds to
  complete the work. Owner secures a new
  contractor. The liability of the surety is
  limited to the face value of the bond
• The purpose of the bond is not to allow the owner
  to make a profit

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Default Liability Example

• Suppose a 100 bond was issued on a 4,000,000
  project. Shortly after the work began, the
  contractor went bankrupt and the owner called on
  the surety to complete the work. The following
  conditions existed
• initial contract value 4,000,000
• face value of the bond 4,000,000
• value of work performed 450,000
• retainage 45,000
• amount paid to contractor 405,000

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Default Liability Example (cont.)

• The surety elects to let the owner secure another
  contractor, thus limiting its liability to the
  face value of the bond
• If the owner pays the new contractor 4,250,000,
  what is the extent of obligation of the surety?

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Default Liability Example (cont.)
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Cash Flow and Bonding Capacity
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Topics

• Cash flow
• normal project
• impacted project
• Bond capacity calculations
• Effect of cash flow on bond capacity

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Cash Flow - Normal Project

• Cash flow is the difference between project
  receipts and expenditures
• It is usually expressed graphically
• Since expenditures exceed receipts part of the
  time, the contractor is a short term investor in
  the project
• Contractor must have cash reserves to pay for
  labor and materials
• Consider the New Jersey contractor PHA

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Cash Flow Diagram - Normal Project
Investment in Project
60 90 days
Positive Cash Flow Negative Cash Flow
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Cash Flow

• Where the expenditures greatly exceed receipts,
  the contractors financial position is seriously
  compromised--perhaps leading to bankruptcy
• On impacted projects, owners often stop paying
  which makes matters worse

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Cash Flow Diagram Impacted Project
Investment in Project
Positive Cash Flow never occurs! Negative Cash
Flow entire project
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Bond Capacity

• There are two types of capacities
• project capacity
• aggregate capacity
• Project capacity is the maximum size single
  project that the surety will allow the contractor
  to undertake
• Aggregate capacity is the total amount of
  uncompleted work that the surety will bond

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Bond Capacity Equations - Project Capacity

• Project capacity

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Bond Capacity Equations - Aggregate Capacity

• Aggregate capacity (Worth of Firm)

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Risk Management
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Owner Strategy

• Recognize and identify risks
• Measure the degree of exposure
• Decide how to protect against those risks
• Develop a company-wide program of loss control
  and prevention

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Categories of Risk

• Project risks
• Legal and contractual risks
• Business risks

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Insurance Policy

• A contract where an insurer assumes financial
  responsibility for a specific loss

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Differences With Bonds

• Insurance covers specific known losses or risks,
  bonds cover a failure to perform
• In a bond, the owner is covered over and above
  initial contract amounts, insurance may have
  fixed limits
• In bond defaults, the surety seeks to recover
  losses from the contractor

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Insurance Checklist

• Property insurance on project
• Property insurance on contractors property
• Liability insurance
• Employee insurance
• Automobile insurance

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Types of Policies

• Property insurance
• covers the project from damages or loss
• also covers subcontractors
• Builders risk insurance
• normally the basic policy on buildings
• two types are all-risk and named risk the latter
  is seldom used

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Types of Policies (cont.)

• Builders risk (cont.)
• policies are flexible and can include many
  coverages
• covers direct losses, temporary structures,
  materials, etc.
• may not cover labor losses
• Contractors equipment floater
• covers construction equipment, but not liability

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Types of Policies (cont.)

• Liability insurance
• imposed by law
• Public liability and property damage
• covers liability to third persons
• Workmans compensation
• is a legal requirement
• covers injuries to employees

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Types of Policies (cont.)

• Wrap-up insurance
• owner provides certain coverages
• Owners liability insurance
• Social security
• employers and employees share the cost