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Construction Proposal

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Construction Proposal CE 332 Page * CE 332 Page * Default Liability Example (cont.) CE 332 Page * Cash Flow and Bonding Capacity CE 332 Page * Topics Cash flow normal ... – PowerPoint PPT presentation

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Title: 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

5
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
8
Penn States Bid Form
9
Penn States Bid Form
10
Bid Development
11
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
14
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
15
Risks
  • Quantity takeoff
  • something will be left out or computed
    incorrectly
  • plans are incomplete and the quantities change
  • owner will delete certain items

16
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

17
Risks (cont.)
  • Markup
  • incorrectly assess contingencies
  • desired profit is too great or too little

18
Form of Agreement
19
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

20
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

21
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

24
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

26
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-

27
Construction Contracts
28
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

29
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

30
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

31
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

32
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

33
Unit Price Contracts
  • I propose to be paid this way to build this
    project

34
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

35
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

36
Unit Price Example
  • Prices include layout, excavation, bedding,
    materials, placement, sealing, testing,
    compaction, backfill, overhead, profit, etc.

37
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

38
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

39
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

40
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

42
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

43
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
44
Subcontracts
45
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)

46
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

47
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

48
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

49
Relationship with Subcontractors (cont.)
  • Contractual and legal considerations
  • sub should be given all the contract provisions
    to use in preparing the subs bid

50
Contract Bonds
51
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

52
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

53
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

54
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

55
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

56
Bond Premiums
  • Premium amounts are a function of risk to the
    surety
  • Premiums are based on two risk factors
  • project risks
  • contractor risks

57
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

58
Construction Classification for Bonds
59
Bond Premium Determination
60
Bond Premium Calculation
  • Classification B
  • Base rate

61
Bond Premium Calculation (cont.)
  • Adjustment for time of performance
  • Bond premiums usually range around 0.75 - 1.50
    of the bid

62
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

63
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

64
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

65
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?

66
Default Liability Example (cont.)
67
Cash Flow and Bonding Capacity
68
Topics
  • Cash flow
  • normal project
  • impacted project
  • Bond capacity calculations
  • Effect of cash flow on bond capacity

69
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

70
Cash Flow Diagram - Normal Project
Investment in Project
60 90 days
Positive Cash Flow Negative Cash Flow
71
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

72
Cash Flow Diagram Impacted Project
Investment in Project
Positive Cash Flow never occurs! Negative Cash
Flow entire project
73
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

74
Bond Capacity Equations - Project Capacity
  • Project capacity

75
Bond Capacity Equations - Aggregate Capacity
  • Aggregate capacity (Worth of Firm)

76
Risk Management
77
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

78
Categories of Risk
  • Project risks
  • Legal and contractual risks
  • Business risks

79
Insurance Policy
  • A contract where an insurer assumes financial
    responsibility for a specific loss

80
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

81
Insurance Checklist
  • Property insurance on project
  • Property insurance on contractors property
  • Liability insurance
  • Employee insurance
  • Automobile insurance

82
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

83
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

84
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

85
Types of Policies (cont.)
  • Wrap-up insurance
  • owner provides certain coverages
  • Owners liability insurance
  • Social security
  • employers and employees share the cost
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