Contractual Means of Achieving High-level Performance in Transit Contracts (2013)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

7 3. An estimate of the reduction in Contract performance costs that will result from adoption of the Proposal, tak- ing into account the cost of implementation by the Con- tractor (including any amount attributable to subcontracts in accordance with Paragraph E. below and the basis for the estimate). 4. A statement of the time by which a Change Order must be issued so as to obtain the maximum cost reduc- tion during the remainder of this Contract, noting any ef- fect of the Contract delivery schedule. C. The Authority will not be liable for any delay in acting upon, or for failure to act upon, any Value Engineering Proposal submitted pursuant to this Article. The deci- sion of the Authority as to the acceptance of any such Pro- posal shall be final. The Authority may accept in whole or in part, any Proposal submitted pursuant to this Article by issuing a Change Order. Unless and until a Change Order is issued, the Contractor shall remain obligated to perform in accordance with the terms of the Contract. D. If a Value Engineering (cost reduction) Proposal is ac- cepted and applied, an equitable adjustment in the Con- tract price and in any other affected provisions will be made. The equitable adjustment in the Contract price will be established by determining the total estimated decrease in the Contractor’s cost of performance resulting from the accepted changes, taking into account the Contractor’s cost of implementing the change (including any amount attrib- utable to subcontracts in accordance with Paragraph E. below). The Contract price shall be reduced by such total estimated decrease in the cost of performance minus 50 percent of the difference between the amount of such total estimated decrease and any ascertainable collateral costs to the Authority which must reasonably be incurred as a result of application of the cost reduction Bid. E. The Contractor shall include appropriate value engi- neering arrangements in any subcontract, which, in the judgment of the Contractor, is of such a size and na- ture as to offer reasonable likelihood of cost reductions. In computing any equitable adjustment in the Contract price under Paragraph D., the Contractor’s cost of implementa- tion of a Value Engineering Proposal which is accepted shall include any implementation cost of a Subcontractor and any value engineering incentive payments to a Sub- contractor, which clearly pertain to such Proposal and which are incurred, paid or accrued in the performance of a subcontract. F. The Contractor may restrict the Authority’s right to see any portion of the Contractor’s Proposal by marking it with the following requirement: 1. This data, furnished pursuant to Article 2.4 of the General Conditions of Contract No. ______ may not be duplicated, used or disclosed, in whole or in part, for any purpose except for evaluation, unless the Proposal is ac- cepted by the Authority. This restriction does not limit the Authority’s right to use information contained in this data if it is or has been obtained, or is otherwise available, from the Contractor or from another source, without limitations. When this Proposal is accepted by the Authority, the Au- thority will have the right to duplicate, use, and disclose any data in any manner and for any purpose whatsoever, and have others do so whether under this or any other Au- thority contract. G. Contract modifications made as a result of this Arti- cle will state that they are made pursuant to it.35 Other agencies supplied examples of their contracts with VE clauses, including: • A value engineering change proposal (VECP) specifying the conditions under which a VECP will be considered;36 and • Other VE provisions and cost reduction incen- tives.37 In replying to the survey questions, one agency stated that it had made incentive payments on its con- struction projects for VE, the costs of which “are shared with the contractor on a 50% basis.”38 Although stat- ing that it had not made incentive payments, Metro- politan Transit Authority’s Metro-North Railroad (Metro-North) stated that its contracts contain a VE clause that permits compensation to be paid to a con- tractor for “an amount equal to 50% of the savings to Metro-North to be determined by calculating the differ- ence between the cost of the original workscope and the revised workscope.”39 III. AUTHORITY FOR THE USE OF INCENTIVES AND LIQUIDATED-DAMAGES CLAUSES IN TRANSIT AGENCY CONTRACTS A. Statutory and Regulatory Authority According to the FTA’s CPIR, not only are many contracts throughout the nation already providing for the payment of incentives to contractors, but also no new additional authority for the use of incentive provi- sions is needed in contracts funded under the New Starts process.40 The only limitations on the use of incentives are those in other federal and state laws. Thus, “[c]ontracts to support New Starts project grantees are subject to the same rules and regula- tions as are other procurement contracts….”41 The applicable federal law includes the Common Grant Rule Procurement regulations, 49 C.F.R. § 18.36; the laws applicable to New Starts grantees, 49 U.S.C. Chapter 53;42 and FTA’s guidance on third-party con- tracting in FTA Circular 4220.1F (November 1, 2008).43 The Circular sets forth the requirements to which a grantee must adhere with respect to the solici- tation, award, and administration of third-party con- 35 MBTA, App. 3, at A3-73–A3-76. 36 MTA Metro-North, App. 3, at A3-78–A3-81. 37 Orange County Transp. Auth., App. 3, at A3-82–A3-87; SANDAG, App. 3, at A3-88–A3-92 § 5-1.16. 38 Survey response of LACMTA. 39 Survey response of MTA Metro-North. 40 CPIR, supra note 15. 41 Id. at 4. 42 Id. 43 Id. at 5.

8 tracts. Although FAR subpart 16.444 is “helpful,” the FAR is not binding on FTA grantees.45 As FTA notes, state law applies to grantee procure- ments, “particularly with respect to completion re- quirements and contracting procedures….”46 Thus, when an agency is “procuring property and services under a grant or cooperative agreement, a State may use the same procurement policies and procedures that it uses for acquisitions not financed with Federal assis- tance.”47 The FTA cautions, however, that “[s]tate con- tract law may limit a grantee’s ability to use incentive contracts, and, in several instances, may expressly prohibit a grantee’s ability to use mechanisms like De- sign-Build, DBOM [Design-Build-Operate-Maintain], and CM/GC [Construction Manager/General Contrac- tor]”48 Another possible limitation is a grantee’s inabil- ity to manage a complex or sophisticated contract.49 State law may authorize the use of incentives. For example, in Florida, the chapter on public transporta- tion provides: If the department determines and adequately documents that the timely completion of any project will provide a substantial benefit to the public health, safety, or welfare; will limit the disruptive effect of construction on the community; or is cost beneficial on a revenue-producing project, the contract for such project may provide for an incentive payment payable to the contractor for early com- pletion of the project or critical phases of the work and for additional damages to be assessed against the contractor for the completion of the project or critical phases of the work in excess of the time specified. All contracts contain- ing such provisions shall be approved by the head of the department or his or her designee. The amount of such incentive payment or such additional damages shall be established in the contract but shall not exceed $10,000 per calendar day, except that for revenue-producing pro- jects the amounts and periods of the incentive may be greater if an analysis indicates that additional revenues projected to be received upon completion of the project will exceed the cost of the incentive payments.50 (Emphasis added.) As for whether transit agencies are precluded from using incentive and liquidated-damages clauses in any contracts, although 20 agencies stated that they were not precluded from doing so, 3 agencies did report that they are subject to some limitations. In the case of the Central Oklahoma Transportation and Parking Author- ity (COTPA), the agency as a public trust may not use DBOM, CM/GC contracts51 By statute, the Connecticut 44 Available at https://www.acquisition.gov/far/. 45 FTA, Incentive Contracts, available at http://www.fta.dot.gov/13057_6148.html; see FTA Circular 4220.1F, supra note 24, at II-9. 46 CPIR, supra note 15, at 5. 47 FTA Circular 4220.1F, supra note 24, at II-2. 48 CPIR, supra note 15, at 11. 49 Id. at 1. 50 FLA. STAT. § 337.18(4)(a) (statute appearing in Tit. 26, Public Transportation). 51 Survey response of COTPA. DOT is not permitted to utilize Design-Build (DB) or DBOM contracting methods. The MBTA stated that it may not provide for incentives in a Construction Man- ager at Risk contract because the “CM at Risk Statute MGL 149A, Section 7 limits cost sharing incentives.”52 B. Bonding and Insurance Limitations Transit agencies responding to the survey did not note any limitations imposed by bonding or insurance agencies on their use of incentives or liquidated- damages clauses. However, one agency’s policy on de- termining the amount of liquidated damages to specify in a contract states that it is important not to have “open-ended, uncapped liquidated damages.”53 Besides being a detriment to competition that may result in an increase in the bid amounts, when “a surety bond is being required for the contract, uncapped liquidated damages may become a detriment to obtaining a bond. The contract, therefore, should include an overall maximum dollar amount or period of time, or both, during which liquidated damages may be as- sessed.”54 Section VI.D discusses best practices in the use of liquidated-damages clauses, including the legal re- quirements for an enforceable liquidated-damages clause, guidelines for determining the amount of liqui- dated damages, and guidelines for drafting a liquidated- damages clause. C. Suitability of Grantees, Contractors, and Contracts for High-Performance Contracts 1. Suitability of Grantees and Contractors There are two broad categories of contractors, the first category including “professional services contrac- tors like engineering and architectural companies, environmental, and project management consult- ants….”55 The second category of contractors includes companies that “perform demolition, construction, test- ing, and project management….”56 In regard to the suit- ability of contractors or grantees, “only those construc- tion contractors that can directly influence the final cost of the project…are best suited to receive incentives based upon project cost” and “only the more experi- enced grantees are likely to be able to successfully em- ploy these more complex or sophisticated incentives and innovative procurement practices.”57 The FTA advises that incentive contracts are suit- able in two areas—when contractors are influential in forecasting final project costs and when they are influ- ential in meeting final project costs.58 With respect to 52 Survey response of MBTA. 53 LYNX, App. 3, at A3-13–A3-14. 54 Id. 55 CPIR, supra note 15, at 5. 56 Id. at 6. 57 Id. at 1. 58 CPIR, supra note 15, at 10.

9 the early planning and preliminary engineering phases of a project, however, contractors are “heavily influ- enced by assumptions and information beyond the con- tractor’s control and project completion may occur many years after the foregoing preliminary phases.”59 Hence, the use of incentives for those stages may be difficult. The FTA advises that it is during the final design and construction phases that the use of incentives may be more feasible but that the construction phase is “[t]he most appropriate phase…for providing contractor in- centives linked to projects completed below the original cost estimate….”60 As seen in Table 3 below, of the 27 agencies respond- ing that they use performance-based contracting, 25 do so in their construction contracts. Sixteen agencies use the provisions in their procurement of rolling stock and other capital equipment. Ten agencies are using liquidated damages or incentive payment clauses in the procurement of services, including professional ser- vices such as for architects, engineers, or others. As for other types of contracts, eight agencies reported using the clauses in contracts for maintenance and repairs; five agencies do so in their management con- tracts; five use them in their procurement of materials; and four use them in the procurement of supplies. 59 Id. 60 Id. at 11.

10 Table 3. Types of Contracts in Which Transit Agencies Use Incentive Payment and Liquidated-Damages Clauses. Type of Contract No. of Agencies Construction 25 (93%) Management 5 (19%) Maintenance and repairs 8 (30%) Procurement of materials 5 (19%) Procurement of supplies 4 (15%) Procurement of rolling stock or other capital equipment 16 (60%) Procurement of services, including procurement of professional services 10 (37%) 2. Types of Suitable Contracts Although written from the perspective of the energy services industry, one commentator argues that “[a]nother critically important characteristic of per- formance contracting, but which is overlooked or mis- understood by many buyers, especially public agen- cies, is that performance contracting is a design-build process.”61 The writer argues that [b]ecause of this design-build nature of performance con- tracting, and the fact that performance contracts fre- quently have a very broad scope (covering an entire facil- ity and the majority of its infrastructure systems), the relationship between the parties and the process that is used to create and implement a project assumes new and much greater importance.62 Nevertheless, the FTA states that the use of incen- tives is feasible in all New Start projects but that they are more suitable in some contracts for projects than others.63 There are two typical types of incentives used by grantees in the New Start process: award fee, and incentive fee. Both Cost- Plus and Fixed Price contracts can contain these types of incentives, but with very different goals in mind. Cost-Plus Incentive Fee and Fixed Price Incentive Fee contracts provide incentives to the contractor strictly on cost-based, quantitative evaluation of contract work. In these contracts, a fee is awarded to the contractor based upon the ability of that contractor to meet the targeted cost. There is no evaluation of the quality of the work, just that the work was done and—hopefully— under the target project cost. 61 JAMES P. WALTZ, MANAGEMENT, MEASUREMENT & VERIFICATION OF PERFORMANCE CONTRACTING 8 (The Fair- mont Press, Inc. 2003). 62 Id. 63 CPIR, supra note 15, at 11. Cost-Plus Award Fee and Fixed Price Award Fee con- tracts provide incentives to the contractor based upon the quality or performance of the contract work. In these contracts, the contractor is evaluated using qualita- tive measures, and an award is given if the work meets or exceeds certain performance standards.64 As explained by the FTA, “[a] cost-plus contract is a contract framed in such a way that when the contractor finishes the agreed upon work, it receives compensation equal to its expenses plus some bonus, which for Feder- ally assisted contracts can be a fixed amount.”65 The CPIR states that “[t]ypical uses of cost-based contracts within the New Starts process are for professional ser- vices, program management, feasibility studies, envi- ronmental assessments, alternatives analysis that supports project development and delivery of con- struction work.”66 Under 49 C.F.R. § 18.36(f)(4), con- tracts may not be awarded on the basis of cost plus a percentage of cost. With a fixed-price contract, when a contractor “finishes the agreed-upon work, it will only receive the amount reflected in its bid price…regardless of what costs it incurred.”67 Such contracts “are typical for construction, system/vehicle procurement, and other aspects of development when a specific prod- uct/deliverable is expected.”68 The CPIR discusses in more detail other types of contracts such as DB, DBOM, 64 Id. at 7. There are two classes of contracts for procuring construction services, cost reimbursement or cost-plus and fixed price. Id. at 6. A contractor assumes a lower risk with a cost-plus-incentive fee, cost-plus-award fee, or cost-no-fee con- tract, whereas the contractor assumes a higher degree of risk with a fixed-price incentive fee, fixed-price-award fee, or firm- fixed-price contract. Id. 65 Id. at 7. 66 Id. 67 Id. 68 Id.