construction proposal

CE 332

Construction Proposal

CE 332

Features

The proposal form is an offer and a promise to enter into a contract if selectedA prepared proposal form is included in the bid documentsNot using the prepared form results in disqualification

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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

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Features (cont.)

Examine the proposal form for unit price contracts in Appendix E, p. 483Notice 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

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Proposal Details

Prequalification certificateList of Subcontractors Qualifications Bonded and insured

Certifications DBE, MBE, PA or US suppliers…… Specialty requirements…..

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Sample Schedule of Prices

Item Approximate

Quantity

Item & Unit ItemTotal

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

Penn State’s Bid Form

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SECTION B

FORM OF PROPOSAL

1. In compliance with the Notice to Bidders and the Contract Documents, we, the undersigned, do hereby agree to provide all labor, materials, services, tools, and equipment, and to perform all of the required work to complete the: Contract No. 1, [(Insert Construction Type)] Construction For the: PSU Project Official Name

PSU Project No. Located at: The Pennsylvania State University

[(Insert Campus Name)] [(Insert Campus City)], Pennsylvania For: The Pennsylvania State University, Owner All in strict accordance with the Specifications, Schedules, Drawings, and Conditions for the consideration of the following amounts, including federal, state, and all applicable taxes, for the sum of: Bid Item No. 1--Base Bid $

(write in dollar amount using words) [(Insert Additional Bid Items as Appropriate)] $ 2. We, the undersigned, agree, if awarded the Contract, to execute an agreement for the

above-stated work and compensation on the standard Form of Agreement 1-C. 3. We, the undersigned, agree, if awarded the Contract, to begin work at the site within ten

(10) days after Notice to Proceed, and to complete the work in a thoroughly good and workmanlike manner under the direction of the Architect and to the satisfaction of the Owner, on or before Completion Date.

Penn State’s Bid Form

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4. We, the undersigned, acknowledge receipt of and have considered in our proposal the

following Addenda:

5. Bid results are available on the web at <http://www.opp.psu.edu/construction/bidders/bids.cfm>. 6. We, the undersigned, acknowledge that all Contractors/Sub-Contractors requiring prequalification

are contractors presently on the Prequalified Bidders List as issued by The Pennsylvania State University. Prior to the execution of the Contract, we will submit in writing their names and addresses to The Pennsylvania State University.

7. We, the undersigned, agree that this Proposal as submitted shall hold good through the forty-

fifth (45th) day following the bid date. Submitted By: Federal ID Number: Address: Signed By: Authorized Signature Attest: Surety Name: Surety Address: Date:

CE 332

Bid Development

CE 332

Bid Components

Bid Price

Markup

Indirect Job CostDirect Job Cost

Home OfficeJob Site

CE 332

Bid Components (cont.)

Direct Job Cost

Labor Materials Equipment Subcontracts

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Indirect Job Cost

OverheadSupport

StructuresPurchaseOrders

SalariesInsuranceOffice equip.TrainingSafetyUtilities

Access roadsParking lotsProject OfficeStorage trailers

Portable toiletsTrashSecurityTesting

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Markup

Home OfficeOverhead

Contingency Profit

ClerksSecretariesOfficersUtilitiesTravelAdvertisingBidding

Quality of plansUnforeseen cond.Owner and designerScheduleLocationWork 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 omissionsLiquidated Damages - A damage assessment that is withheld in the event of late completion

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Features

The form of agreement is the contractPSU’s Construction ContractOn public contracts, statutory requirements must be followedOne 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

CE 332

Background

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

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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

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Public Sector

Statutes require competitive biddingAgency is seeking a fair and reasonable (competitive) priceProcess begins with advertisementsTimeliness and other parameters of advertising are governed by regulationsStatutes 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 listThe purpose is to assure a reputable contractorInquiries 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 reimbursableThe 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 projectsDesign must be complete or nearly soPrice 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 priceMinimum owner risks for unforeseen conditionsWell-established administrative, legal, and contractual precedents

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Advantages of Lump Sum (cont.)

Owner knows the cost in advance of the workMinimum owner involvement in construction processSignificant contractor incentive to control costs and meet the schedule

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Disadvantages of Lump Sum

Design-construct time frame takes more timeAdversarial relationships sometimes developChanges and unforeseen conditions are more difficult to handleContractor has limited input into constructability issues

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Unit Price Contracts

I propose to be paid this way to build this project

Line Item Unit Price No. Line ItemCost

Item 1 $1.00/ea 3 3.00

Item 2 $2.00/ea 8 16.00Item 3 $0.50/ea 1 0.50Total $19.50

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Unit Price Contracts (cont.)

Used where quantities are uncertainRemoves some of the contractor’s riskUnit prices are requested for major or all items in the projectSum of all unit prices times the quantity yields the bid priceThere can be several hundred or more items

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Unit Price Contracts (cont.)

D. p. must provide estimated quantities for each itemBid equals actual cost only if all quantities are exactly rightIn reality, owner knows only the approximate cost prior to the start of the workUsed often on earthwork type projects where quantities are not known

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Unit Price Example

Line Item Unit Qty. Unit Price Line Item Cost

Mobilization ls18” Conc. Pipe lf 1,20024” Conc. Pipe lf 37236” Conc. Pipe lf 588Manholes ea 7 ________Total

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 minimizedChanges are easier to makeOwner knows the approximate cost in advanceWell established administrative, legal, and contractual precedents

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Disadvantages of Unit Price

Owner has to provide greater contract administrative servicesCost can escalate with significant changes in quantitiesSome of the same disadvantages of lump sum

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Cost Reimbursable Contracts

Owner pays contractor expenses plus a feeUsed sometimes on large, industrial type projects where scope cannot be determinedMore appropriate where design is incomplete or changes will be commonCan sometimes be used on emergency projectsReserved 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 completeCan make changes easily

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Disadvantages of Cost Reimbursable

Owner has no idea of the final cost until the endThere is greatly increased contract administrationThere 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 scaleCost plus fixed fee--provides some incentive to minimize cost and time of performanceCost plus incentive target--could be fee + bonus/penaltyGuaranteed maximum price (GMP)--cost = fee < max $

CE 332

Delivery System

Owner

CM

Elec.

Mech.

Piping

D.P.

CostReimb.

HVAC

Lump Sum/Unit Price/

Cost Reimb.

Fixed Unit Price

Unit Price/Cost Reimb.

CostReimb.

CE 332

Subcontracts

CE 332

Contractual Obligations

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

CE 332

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 usedSub may not be bound to the same obligations as the primeSub may not receive all the prime contract provisions to know the full extent of its obligationsSub may not get paid

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Relationship with Subcontractors

Ethical considerations: bid shopping or using a sub’s 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 sub’s work is complete

CE 332

Relationship with Subcontractors (cont.)

Contractual and legal considerations: sub should be given all the contract

provisions to use in preparing the sub’s bid

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Contract Bonds

CE 332

Background

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

CE 332

Background (cont.)

If there is a default, the surety will step in and see that the project is finishedThe extent of the surety’s obligation is defined by the contract documentsThe 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 capitalBonding 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 suretyPremiums 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 performanceAssume 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

Construction Classification for Bonds

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Bond Premium Determination

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Bond Premium Calculation

Classification: BBase rate:First $100,000 $25.00/1,000 = $2,500Next $400,000 $15.00/1,000 = 6,000Next $2,000,000 $10.00/1,000 = 20,000Next $1,500,000 $7.50/1,000 = 11,250Total of $4 m $39,750

CE 332

Bond Premium Calculation (cont.)

$39,750 (1.18) = $46,905or 1.17% of the bid

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 options1. 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

CE 332

Contractor Default Options (cont.)

2. 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 ExampleSuppose 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

CE 332

Default Liability Example (cont.)

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

CE 332

Default Liability Example (cont.)

Total payout by owner $4,250,000

405,000$4,655,000

Surety Liability $4,655,0004,000,000$655,000

But not to exceed $4,000,000Net owner payout is $4,000,000

CE 332

Cash Flow and Bonding Capacity

CE 332

Topics

Cash flow normal project impacted project

Bond capacity calculationsEffect of cash flow on bond capacity

CE 332

Cash Flow - Normal ProjectCash flow is the difference between project receipts and expendituresIt is usually expressed graphicallySince expenditures exceed receipts part of the time, the contractor is a short term investor in the projectContractor must have cash reserves to pay for labor and materialsConsider the New Jersey contractor PHA

CE 332

Cash Flow Diagram - Normal Project

Positive Cash Flow

Negative Cash Flow

60

– 9

0 d

ays

Investment in Project

CE 332

Cash Flow

Where the expenditures greatly exceed receipts, the contractor’s financial position is seriously compromised--perhaps leading to bankruptcyOn impacted projects, owners often stop paying which makes matters worse

CE 332

Cash Flow Diagram – Impacted Project

Positive Cash Flow never occurs!

Negative Cash Flow entire project

Investment in Project

CE 332

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 undertakeAggregate capacity is the total amount of uncompleted work that the surety will bond

CE 332

Bond Capacity Equations - Project Capacity

Project capacity

Project Capacity Working Capital

= =

10 x Working Capital Liquid or Quick Assets - Liabilities

CE 332

Bond Capacity Equations - Aggregate Capacity

Aggregate Capacity = Total Assets – TotalLiabilities

Aggregate capacity (Worth of Firm)

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Risk Management

CE 332

Owner Strategy

Recognize and identify risksMeasure the degree of exposureDecide how to protect against those risksDevelop a company-wide program of loss control and prevention

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Categories of Risk

Project risksLegal and contractual risksBusiness risks

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Insurance Policy

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

CE 332

Differences With Bonds

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

CE 332

Insurance Checklist

Property insurance on projectProperty insurance on contractor’s propertyLiability insuranceEmployee insuranceAutomobile insurance

CE 332

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

CE 332

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

Contractor’s equipment floater covers construction equipment, but

not liability

CE 332


Liability insurance imposed by law

Public liability and property damage covers liability to third persons

Workman’s compensation is a legal requirement covers injuries to employees

CE 332


Wrap-up insurance owner provides certain coverages

Owners liability insuranceSocial security employers and employees share the

cost

construction proposal

Documents

insurance ce

bid components cont

featuresthe proposal

bid bondsignatures

bid developmentce

bid documentsnot

risks cont

features cont