Question

1. What are some advantages and disadvantages of the general contract approach? Assume that the general contact will be awarded on the basis of competitive lump sum bidding.

2. What are the possible options and how a contracting method is selected for a federal-aided highway project?

Answer 1

Advantages of Lump Sum Construction Contract for Owner are as follows:

1. There is certain degree of limitation over owner’s exposure as well as accountability at the time construction since he has already agreed upon a fixed rate.

2. Since the contractor has accepted a fixed price for the construction, the owner is not liable for any over expenditure. This is the most important benefit.

3. It is much simpler to get construction loan with a Lump sum contract as it provides a high degree of certainty as far as cost is concerned.

4. It is much easier to supervise and manage Lump sum contracts.

5. The payments are made after fixed durations and that too based on the amount of work completed unlike the balloon payments in other arrangements.

Advantages of Lump Sum Construction Contract for the Contractor are as follows:

1. There is a greater margin for profit realization for contractors as well as designers.

2. Due to its general reliability, contractors try to enhance quality of production and performance and try to complete work faster.

3. Lump sum contracts offer comparatively easier assessment of soil conditions, bidding prices and pre- construction analysis which makes selection process less tedious.

4. Accounting related to lump sum contracts are low-intensive that diminishes overhead expenses of the contractor and allow for stable cash flow.

Disadvantages of Lump Sum Construction Contract

1. Lump sum contracts pose greater risk to contractor.

2. Quantifying changes is a big challenge. Such contracts demand documentation and record keeping of change orders at all stages that further requires more paperwork.

3. Rejection of change order requested by the employer.

4. The building and construction design and plans have to be completed well before beginning the execution of activities.

5. The overall construction completion could take longer than other contractual alternatives.

6. Since the contract is based on fixed price, the contractor may start using sub-standard means and methods and products. In such a case, the owner should specify building materials well in advance.

7. Lump-sum contracts usually end up with higher fixed price to cover unforeseen circumstances. Owners are responsible for unpredicted conditions which are beyond the control of either party.

how a contracting method is selected for a federal-aided highway project?

How the Program Works

The Federal-Aid Highway Program (FAHP) is an umbrella term for the separate highway programs administered by the Federal Highway Administration (FHWA). These programs are almost entirely focused on highway construction, and generally do not support operations (such as state DOT salaries or fuel costs) or routine maintenance (such as mowing roadway fringes or filling potholes). Each state is required to have a State Transportation Improvement Plan, which sets priorities for the state’s use of FAHP funds. State DOTs largely determine which projects are funded, let the contracts, and oversee project development and construction. More recently, metropolitan planning organizations (MPOs) have played a growing role in project decisionmaking in urban areas, but federal project funding continues to flow through state DOTs.

1. There are an increasing number of resurfacing, restoration, and rehabilitation type projects being constructed under traffic, resulting in an increase in the exposure of construction workers and motorists.

2. Traffic volumes on most highways are significantly greater and are continuing to increase, thereby creating a greater impact on the motoring public in both safety considerations and cost.

3. Proper selection of contract time allows for optimization of construction engineering costs and other resources.

In addressing the need for completing critical construction projects where it is important to minimize traffic inconvenience and delay, many States have applied non-traditional contracting methods including time-based contractual provisions for early completion.

Some New Terms-

a. Distribution of funds is FHWA notification to the states of the availability of federal funds. Once a distribution is announced, the funds usually remain available to the states to obligate for four years. The states do not receive the funds prior to undertaking work.

b. Apportionment is the distribution of funds among the states as prescribed by a statutory formula.

c. Allocation is an administrative distribution of funds (often for specific projects) under programs that do not have statutory distribution formulas.

d. Reimbursement occurs once a project is approved, the work is started, costs are incurred, and the state submits a voucher to FHWA. The reimbursable structure is designed to curb waste, fraud, and abuse.

e. Contract authority is a type of budget authority that is available for obligation even without an appropriation (although appropriators must eventually provide liquidating authority to pay the obligations).

f. Obligation of contract authority for a project by FHWA legally commits the federal government to reimburse the state for the federal share of a project. This can be done prior to an appropriation.

Limitation on obligations, known as limit, is used to control annual FHWA spending in place of an appropriation. The a limit on the total amount of contract authority that can be obligated in a single fiscal year.