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12/19/2011

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The Construction Specifications Institute

Audio Sessions

Session 4

PROCUREMENT

Construction Contract Administration

Education ProgramCertified Construction Contract Administrator (CCCA)

Preparatory Course2011

1www.csinet.org

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© The Construction Specifications Institute 2011

The Construction Specifications Institute is a Registered Provider with The AmericanInstitute of Architects Continuing Education Systems. Credit earned on completion ofthis program will be reported to CES Records for AIA members. Certificates ofCompletion for non-AIA members available on request.

This program is registered with the AIA/CES for continuing professional education.As such, it does not include content that may be deemed or construed to be anapproval or endorsement by the AIA of any material of construction or any method ormanner of handling, using, distributing, or dealing in any material or product.Questions related to specific materials, methods, and services will be addressed atthe conclusion of this presentation.

AIA

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Learning Objectives• To name the various pricing methods and become familiar with the

concept of pricing

• To identify pricing considerations and pricing under various delivery methods

• To contrast between public and private bidding and negotiating

• To explain subcontracting as well as the issues and concerns, especially bid shopping

• To describe the general considerations and processes of good purchasing

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Session OutlineSTUDY GUIDE: Subject Matter Area No. 4 - 8%

PROCUREMENT

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A. The Concept of Pricing1. Pricing methods2. Purchasing 3. Project funding

B. Pricing Considerations1. Pricing categories2. Competitive pricing3. Value analysis of substitutions4. Pricing under various delivery

methods

C. Project Information1. Distribution of information2. Control of information

D. Bidding 1. General considerations2. Public bidding process3. Private bidding process

E. Negotiating 1. Participants2. Procurement documents3. Negotiating procedures4. Value analysis

Continued on following slide

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Session OutlineSTUDY GUIDE: Subject Matter Area No. 4

PROCUREMENT

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F. Subcontracting 1. Subcontractor prices2. Subcontractor issues and

concerns3. Bid shopping4. Subcontractor bidding

environment

G. Award of Contract

Continued from previous slide

H. Purchasing of Goods1. General considerations2. Participants 3. Documents 4. Processes5. Cost impacts and concerns

I. Agreements

The Construction Specifications Institute 6

PROCUREMENTSTUDY GUIDE AREA NO. 4

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THE CONCEPT OF PRICINGSTUDY GUIDE: Submit Matter Area No. 4 - A.

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1. Pricing methods2. Purchasing 3. Project funding

Pricing Methods• Stipulated sum, also known as lump sum

• Cost of the work plus fee

• Cost of the work plus fee with guaranteed maximum price (GMP)

• Time and material with an estimate of probable cost

• Unit price

Project Delivery Practice Guide: 12.2 8

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Pricing MethodsStipulated Sum – Lump Sum

• Simplest type of bidding

• Typical for competitive bidding

• Fixed amount for extent of work

• Includes – Cost of the work

– Contractor overhead

– Contractor profit


Pricing MethodsCost of the Work Plus Fee

• Usually negotiated, often during design phases

• Owner accepted risk of not knowing final cost when construction begins

• Construction input on design

• Control of scheduling commitments

• Includes – Cost of direct expenses

– Contractor fee

- Fixed- Percentage of direct expenses


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Pricing MethodsCost of the Work Plus Fee with GMP

• Same as cost of the work plus fee, except Contractor provides a not to exceed price (usually an estimate)

• Protects more knowledgeable Owner

• Opportunities for shared savings if actual costs are less GMP


Pricing MethodsTime and Material with Estimate of

Probable Cost• Alternate to cost of the work plus fee with GMP

• Also effective for negotiated Contracts

• Owner and Contractor agree to– Proceed on a time and material basis

– Include percentages for overhead and profit

– Include estimate of probable cost


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Pricing MethodsUnit Price

• Popular method for public and private projects that can not be accurately defined prior to construction

• Type of work known at time of bidding

• Extent of some or all of the work not known until project completion

• Cost of the work based on a price per unit of measure for designated items

• Price per unit of measure includes– Labor and materials

– Overhead and profit

– Other applicable pricing considerations


Purchasing• Direction acquisition of materials and equipment by Owner

(buyer)– For installation in project

– Use in constructed facility

• Supplier not normally engaged in project site installation

• Purchasing requires documentation that, governed by Uniform Commercial Code (UCC)– Define extent of goods and related services to be purchased

– Rules defining manner in which supplier’s price is to be presented

• Prices can be presented as– Stipulated sum

– Unit prices


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Project Funding• Sources will influence

– Project delivery method

– Pricing method

• Privately funded projects may be– Competitively bid

– Negotiated

• Publicly funded projects, by law, states that contractors are to be selected by competitively bid process– Funds are from publicly generated revenue, such as tax revenue or

publicly issued bonds

– Many AHJ’s have determined that it is in public’s interest to procure projects according to design-build delivery method

Construction Contract Administration Practice Guide: 6.7.1

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PRICING CONSIDERATIONSSTUDY GUIDE: Submit Matter Area No. 4 - B.

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1. Pricing categories2. Competitive pricing3. Value analysis of substitutions4. Pricing under various delivery methods

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Pricing Categories• Construction costs – Cost to perform the work

• Contingency – Amount estimated for unknown costs

• Contractor’s overhead – Business costs

• Contractor’s profit – Financial benefit

17Project Delivery Practice Guide: 12.4.1

Construction Costs

18Project Delivery Practice Guide: 12.4.1.1

• Labor and personnel

• Subcontractor

• Products

• Allowances

• Mock-ups and samples

• Tools and equipment

• Rentals

• Fuel

• Safety and security

• Special training

• Temporary facilities and controls

• Waste removal/disposal

• Administrative

• Permit and inspection

• Field engineering

• Testing and inspections

• Coordination

• Mobilization and start-up

• Site restrictions

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Construction Costs• Royalties, licenses, and

fees for use of patented designs or products

• Delegated design costs for engineering of products based on performance criteria

• Insurance and bonds

• Applicable taxes

• Deductions


Construction Costs• Costs can vary significantly from Contractor to Contractor

– Product cost vary among suppliers

- Quantity discounts- Payment history- Credit rating of purchaser

– Labor costs and time estimates vary

– Labor rates vary with skill and experience

– Cost vary with composition of workforce

– Cost vary with Contractor’s perception of difficulty

– Profit margins vary with other work available

– Competition for project

– Human error


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Contingency Costs• Covers unexpected cost perceived by Contractor arising

from– Incomplete documents

– Estimated sums for unverified cost factors

– Errors made in pricing

– Costs related to dispute resolution, legal fees, and claims

– Costs and penalties related to scheduling delays

– Subcontractor or supplier default resulting in delays and monetary losses

• Unspent contingency can result in more profit when all costs and claims are settled


Contractor’s Overhead• Cost of maintaining a business not directly related to a

particular project– Business licensing fees

– Salaries, wages, and benefits for general management

– General office expenses including rent, mortgage, and utilities

– Equipment

– Office supplies


• Overhead usually calculated as a percentage against cost of a project

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Contractor’s Profit• Financial benefit after all

costs and claims are paid

• Often based on a percentage of the cost of the work


Competitive Pricing• Depends on

– Seeking lowest prices available from subcontractors and suppliers for known cost factors

– Accurately estimating contingency factors without overestimating or underestimating their economic effects

– Determining reasonable sums for overhead and profit

• Represents accurate analysis of project

• Prices can vary from contractor to contractor– Product costs vary among different suppliers

– Labor costs and time estimates will vary among Contractors and subcontractors

– Labor rates vary with skill and experience


24Project Delivery Practice Guide: 12.5

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Competitive PricingContinued from previous slide

– Costs vary with composition of workforce

– Costs vary with Contractor’s perception of difficulty in executing project

– Profit margins vary with other work available

– Competition for project

• Human error can influence pricing– Straining Contractor’s resources

– Project participants might be adversely affected

• Careful review of price prior to award of contract can reveal problematic areas


Value Analysis of Substitutions• When value analysis are proposed during procurement,

value analysis procedures determine acceptability


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Pricing UnderDesign-Bid-Build (D-B-B)

• Pricing activity between bidders, subbidders, and separate Contractors

• Owner exposed to risk if prices are not verified

• Requiring list of subcontractors on bid form ensures bid is complete


Pricing UnderDesign-Negotiate-Build (D-N-B)

• Similar to design-bid-build (D-B-B), but negotiated

• Can be a protracted process

• Conducive to value analysis and repricing during negotiations


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Pricing UnderConstruction Management (CM)

• Usually multiple prime contracts each bid separately

• CMa – Agent or advisor to Owner

• CMc – Capacity as Contractor


Pricing UnderDesign-Build (D-B)

• Pricing and design by same entity

• Pricing estimated early in design stage

• Pricing confirmed with bids or negotiation later


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Pricing UnderOwner-Build (O-B)

• Contractors bid or negotiate with Owner

• Pricing may be phased

• Pricing may take place at a fixed time


Pricing UnderIntegrated Project Delivery (IPD)

• Early involvement by suppliers and trade contractors during design allows cost to evolve along with design

• Buyout stage– Owner, A/E, Contractor, and supplier teams interact before

construction documents are completed to have a positive impact on the project cost

– Decisions can be made and orders placed for products needing long lead delivery time

– Process managed better because of team interactions and extended time


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PROJECT INFORMATIONSTUDY GUIDE: Submit Matter Area No. 4 - C.

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Project Information• Complete and timely graphic and written documents

– Important to efficient pricing

– Must be available to

• Prospective Contractors• Subcontractors• Suppliers• Other contributing to pricing process


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Distribution of Information• Information distributing methods

– Owner and A/E to prospective Contractors

– Prospective Contractors to subcontractors and suppliers

– Through construction trade organizations

– Through plan rooms

– Through construction reporting services

– Through subscription information services

– Project websites

– Purchasing from reproduction services


Distribution of Information• Information forms

– Printed

– Reproducible media

– Electronic

• Electronic distribution becoming primary means of information distribution– Cost savings

– Time savings

– Ability to transfer complete documents


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Control of Information• Procurement procedures

– Should be fair and effective

– Carefully managed

– Ensure participants receive same information

• Having an information control plan helps avoid misuse or loss of information and should include– Owner’s disclosure and privacy services

– Reporting and distribution services

– Quality control system before distribution

– Timely distribution of supplemental information

– Information integrity

– Oral information documentation



BIDDINGSTUDY GUIDE: Submit Matter Area No. 4 - D.

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1. General considerations2. Public bidding process3. Private bidding process

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General Considerations• Objective of competitive bidding is to ensure cost of project

is reasonable and consistent with prevailing conditions in construction industry

• Competitive bidding participants

• Qualifications for prospective contractors– Experience

– Special training and certification or licensing

– Personnel

– Specialized equipment

– Financial stability

– History of claims and disputes


General Considerations• Competitive bidding activities

• Procurement documents

• Establishing a competitive bidding period

• Prebid meeting

• Substitution requests

• Addenda

• Subcontractor and supplier bids

• Preparing competitive bids


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General Considerations• Submitting bids

• Bid depository

• Evaluating bids– Timeliness

– Completeness

– Variance from the construction budget

– Competitive bidding irregularities


Public Competitive Bidding Process• Design-bid-build (D-B-B) project delivery method is the

traditional method, although use of design-build (D-B) project delivery method is growing due to public demand – To ensure costs stay within established budgets

– Prevent cost overruns


• General characteristics of public projects

• Contractor qualifications for public projects

• Multiple-prime contracts in public projects



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Public Competitive Bidding Process• Bid solicitation

• Receipt, tabulation, and review of bids

• Award of public contracts

• Additional considerations– Wage requirements

– Percentage of the bidder’s own labor forces provided

– Minority business enterprise (MBE)/ disadvantaged business enterprise (DBE)

– Environmental requirements

– Liquidated damages

– Incentives


Private Competitive Bidding Process• Competitive bidding procedures for private projects may be

as formal or informal as Owner prefers with framework of laws governing private enterprise

• Owner should practice fair and reasonable competitive bidding procedures to ensure that reputable contractors will participate


• Design-build (D-B) participants

• Construction management (CM) participants

• Owner-build (O-B) participants



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NEGOTIATINGSTUDY GUIDE: Submit Matter Area No. 4 - E.

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1. Participants 2. Procurement documents3. Negotiating procedures4. Value analysis

Negotiating• Process of dialog, offer, compromise,

and resolution between two parties, precedent to an agreement, or contract modification

• Negotiating takes the place of bidding when– Contract can be awarded without formal

bidding process

– Owner and Contractor have established a level of trust making competitive bidding unnecessary

– Contractor meets Owner’s requirements for skill, timing, and cost


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Participants• Participants

– Owner

– A/E

– Prospective contractors and subcontractors

• Owners may negotiate with– Design-builders

– Construction managers

• Contractors may negotiate with– Subcontractors

– Suppliers


Procurement Documents• Request for proposal (RFP)

– Invitation to a prospective contractor to submit an offer to perform the work

– Contains

- Instructions- Offer format- Time limit in which offer is to be submitted

– Types of bonds and supplemental information required

• Drawings and specifications

• Offer forms and supplements


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Negotiation Procedures• An RFP by one participant to another to engage in a

negotiation process

• Discovery

• Pricing procedures

• Offer

• Counteroffer

• Resolution

• Award of contract

• Execution


Value Analysis• Owner might discover cost of project will exceed established

budget without design changes

• Value analysis can determine how project can be reduced in extent and still serve Owner’s program requirements


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SUBCONTRACTINGSTUDY GUIDE: Submit Matter Area No. 4 - F.

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1. Subcontractor prices 2. Subcontractor issues and concerns3. Bid shopping4. Subcontractor bidding environment

Subcontracting• Principal providers of

following in commercial construction process– Labor

– Materials

– Services

• Subcontractor defines contractual relationship between a specialist trade contractor and a prime contractor


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Subcontracting• Subcontractors can provide important information useful for

all project stages– Technical information about systems, subsystems, and products for

design development and construction documents

– Financial information for estimating


– Installation information for project coordination

– Manufacturing and delivery information for project scheduling

– Information and services necessary for facility management programs

Subcontractor Pricing• Most construction contracts can be broken down into

smaller units of specialized work, such as– Demolition

– Excavation

– Concrete

– Masonry

– Roofing

• Within each area of specialization, separate competitive bidding occurs– Subcontractors compete on price basis within their specialty

– Price submitted by Contractor is made up of prices from as many subcontractors as appropriate for project scope


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Subcontractor Issues and Concerns• Concern that affect their

relationships with– A/E

– Prime contractors

– Owners

• Concerns include– Bid shopping

– Payment and retainage provisions

– Labor availability and competency

– Liability risk management

– Legislative initiative affecting labor


Bid Shopping• Practice of revealing subbid of one subcontractor to obtain a

lower price from another subcontractor

• Concerns include– Potential for adversely altering project performance

– Imposes unanticipated risks on other project participants

– Encourages cost cutting measures that might compromise project requirements

– Owner does not always receive benefit of cost savings

– Can lead to unauthorized substitutions

– Generally degrades competitive bidding environment


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Bid Shopping• Possible remedies include

– Bid depositories

– Requiring bidders to list subbidders they intend to use

– Provisions requiring the Contractor to submit lists of subbidders and suppliers within a specified period prior to award of a contract


Subcontractor Bidding Environment• A/E and Owner can improve competitive bidding

environment by implementing a few measures– Consult qualified subcontractors during design

– Consider bid listing and bid depository provisions

– Control substitutions

– Accurate, concise contract documents

– Clear quality assurance/quality control provisions and submittals

– Enforce contract documents

– Promptly review submittals and payment requests

– Reasonable retainage provisions

– Administer contract closeout procedures effectively


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AWARD OF CONTRACTSTUDY GUIDE: Submit Matter Area No. 4 - G.

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Award of Contract• After bids have been evaluated to satisfaction of Owner,

Owner notifies successful bidder that they will be awarded the contract

• For projects using public funds, there may be a need to notify all bidders or proposers of intent to award the contract

• For some projects requiring qualified bidders, proposers, contractors, vendors, or subcontractors, a specific period of time may be required after notification of intent to award in which a challenge may be made


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PURCHASING OF GOODSSTUDY GUIDE: Submit Matter Area No. 4 - H.

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1. General considerations2. Participants 3. Documents 4. Processes 5. Cost impacts and concerns

General Considerations• Purchasing is direct acquisition by Owner

– Supplies

– Materials

– Furniture and furnishings

– Equipment

– Special services

• Goods are used for one or more of following– Installation by Contractor for project, referred to as owner furnished

and contractor installed

– Installation by Owner’s personnel or separate contractor engaged by Owner, referred to as owner furnished and owner installed

– Use in operation of completed project during facility management stage


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General Considerations• Procedures are similar to competitive bidding and negotiating

• Public owners (buyers) required to obtain goods at most competitive price available– Solicit purchasing proposals by legal advertisements

– Distribute documents to prospective good contractors (sellers)

• Private owners might select sellers based on other factors than price, such as – Buyer’s previous experience with seller

– Exceptional service from seller

– Reliability of seller

– Other qualifications


General Considerations• National accounts

– Contractor or Owner has special or “fixed” pricing direct from manufacturer, distributor, or supplier

– Guaranteed price regardless of project location

• Cooperative purchasing– National, regional, state, or local organizations of two or more buyers

who solicit bids for good and services from two or more sellers; buyers have enhanced purchasing power

– Organized by

- Federal, state, or local government agencies- Not-for-profit organizations- Hospitals and schools- Small private businesses



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General ConsiderationsContinued from previous slide

– Benefits to participants

- Sellers can be more competitive with buyers- Buyers receive better discounts- Public buyers can avoid cost of bidding and still comply with laws- Cooperatives are managed by review boards and experienced

management personnel which reduce administrative burden to buyers

- Cooperative can control value of goods and services


Participants• Buyers act individually or as a member of a purchasing

cooperative

• Sellers are the goods contractor who bids and supplies goods required by Owner


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Processes• RFP issued to one or more prospective goods contractor

• Visit – Point of destination of goods

– Point of performance of special services

• Perform pricing procedures

• Bid submitted

• Evaluation of prices

• Executing a contract or purchase order, and modifications

• Delivery to – Point of destination of goods

– Point of performance of special services


Cost Impacts and Concerns• Process is affected by combination of events and factors in

supply chain

• Delivery and distribution concerns– Lead times

– Supply and demand

– Labor disputes and strikes

– Weather

– Special handling considerations

– Geographic influences

– Coordination with adjacent materials

– Shipping and packaging requirements and damage claims


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Cost Impacts and Concerns• Lead time

• Special shipping and handling

• Import and export– Language

– Trade agreements

– Unit of measure and currency exchange

• Terms of payment


Cost Impacts and Concerns• Role of product representatives

– Can advise of potential delays or complications

– Can help facilitate timely delivery

– Can encourage buyer to place an order in a timely manner

– Can help coordinate delivery with installation

– Can assist with submittals


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AWARD OF CONTRACTSTUDY GUIDE: Submit Matter Area No. 4 - I.

DISCUSSED PREVIOUSLY IN SESSION 3

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Review OutlineSTUDY GUIDE: Subject Matter Area No. 4

PROCUREMENT

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A. The Concept of Pricing1. Pricing methods2. Purchasing 3. Project funding

B. Pricing Considerations1. Pricing categories2. Competitive pricing3. Value analysis of substitutions4. Pricing under various delivery

methods

C. Project Information1. Distribution of information2. Control of information

D. Bidding 1. General considerations2. Public bidding process3. Private bidding process

E. Negotiating 1. Participants2. Procurement documents3. Negotiating procedures4. Value analysis


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Review OutlineSTUDY GUIDE: Subject Matter Area No. 4

PROCUREMENT

73

F. Subcontracting 1. Subcontractor prices2. Subcontractor issues and

concerns3. Bid shopping4. Subcontractor bidding

environment

G. Award of Contract

Continued from previous slide

H. Purchasing of Goods1. General considerations2. Participants 3. Documents 4. Processes5. Cost impacts and concerns

I. Agreements