Denoting an overestimate c additional cost of work

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Unformatted text preview: Unit price Cost plus fixed % C(1 + R + R2) C(1 + R) P = (1 + R + R2)A + C P = (1 + R)(A + C) Cost plus fixed fee C Guaranteed max cost 0 P = RE + A + C P=B Adapted from Chris Hendrickson, 2000 Contractor’s Gross Profit with Contractor Gross Different Contract Provisions Different Type of Contract Lump sum Unit price Cost plus fixed % Cost plus fixed fee Guaranteed max cost Profit from Change Order Contractor's Gross Profit C(R + R1) C(R + R2 CR 0 -C F F F F F = E - A + (R + R1)(E + C) = (R + R2)(A + C) = R (A + C) = RE = (1 + R + R3)E - A - C Adapted from Chris Hendrickson, 2000 Principles of Incentive Principles Contractslowering cost Additional profits are possible by Customer and contractor share cost savings •OWNER PAYS 80 % OF OVERRUN •CONTRACTOR PAY 20 % OF OVERRUN EXAMPLE TARGET COST: $20,000 TARGET FEE: $1500 SHARING RATIO: 80/20 % •PROFIT IS $1500 LESS CONTRACTOR’S 20 % •OWNER KEEPS 80 % OF OVERRUN •CONTRACTOR KEEPS 20 % OF OVERRUN •PROFIT IS $1500 PLUS CONTRACTOR’S 20 % Note: limitations may be imposed on price or profit Kerzner, 2000 Conclusion Conclusion When market is not very good, clients insists When on fixed price bids whereas when the project offers are numerous, it is more difficult to obtain those conditions The contract type choice must depend on: The The accuracy of the estimation The The ultimate cost know since the beginning or at The least the maximum The desired risk The If quick completion of work is wanted If Part III Part Award Methods Award Contract Selection Contract Award Methods: Contractor Selection Selection Extremes Extremes Payment method: Product Type: Award method Reimbursable Service Solicit based on Reputation and agree via Negotiation Fixed Price Commodity Bidding Bidding Bidding Variants Variants Low bid Low Multi-parameter bidding Multi Low bid plus arithmetic combination of other factors Low Low bid divided by ranking of other factors Low Fixed price low bid is win-lose Fixed Typically associated with lump-sum contract Typically Prequalification critical Prequalification Bidding Tradeoffs Bidding Time provided to bidders to review documents Time Too long: Construction delayed Too Too short: Too Bids low-quality because too little time to review contract Bids quality docs (incorporate high risk premium or unrealistically low) low) Few bidders willing to participate Few Bid count Bid Too many bidders: Scare away best contractors Too Too few bidders: Bid not competitive Too Bidding Tradeoffs Bidding Advantages Advantages Can get good price Can Transparency Transparency Disadvantages Disadvantages Can set up win-lose situation Can Competitive pressures can eliminate profit from bid Competitive Try to make up with change orders, cutting corners Try Can lead to combative relationships Can Insufficient consideration of design before pricing Insufficient Bidding Metrics Bidding Most common: Price alone Most Bidding “cap”: Bid on how far can go with set amount Bidding of money Multi-parameter bidding (increasingly popular) Multi Consider non-price items (time, quality, qualification) Consider A+B Additive measures A+B Price+($/day)*days (common for retail), Price+qualification+design Price+($/day)*days rank, price+design rank,… A/B (e.g. B scoring along some metric: Design, etc.) A/B Issues with Bids Issues Low bidders can be unreliable Low Prequalify aggressively! Prequalify To allow for fast-tracking may bid early (30%) To Don’t try to force delivery from low bid Don Growing Frequency: innovative bidding method Growing Pressure for lowest bid can create Pressure Cutting corners Cutting Low-quality personnel Low Bad feelings Bad Bidding Process Bidding A/E oversight typical A/E Publicity (specifies qualification requirements) Publicity Provide bid documents Provide Typically include fair cost estimate, sample contract Typically Answer RFIs Answer Pre-bid conference Pre Explain scope, working conditions, answer Explain questions, documented in writing) Public vs. Private Bidding Public Public Bidding Public Must be publicly advertised (posting in newspapers, Must public building, etc.) Qualification occurs after submission of bids Qualification Typically 60 day period in which can submit bids Typically Private Bidding Private May be by invitation only May Qualification occurs before submission of bids Qualification Dealing with Way-Out Low Bids Dealing Forcing collection from unrealistically low bids Forcing is dangerous Construction highly contentious, poor morale Construction Risk of extreme corner cutting Risk Default is possible Default Disruption Disruption Insurance companies fulfilling performance bonds very Insurance difficult to work with Subcontracting Bids Subcontracting GCs push subs for lowest possible price before GCs GC bids GC not obligated to use sub who gave bid GC Can lead to serious predatory behavior Can Bid shopping (before and after GC wins bid) Bid and Bid peddling (unsolicited calls from subs to GCs Bid after GC wins bid) Some owners/states require listing of chosen Some subs at bid time or assign based on sub-bidding Qualifications Qualifications Common items for qualifications Common Bonds/Insurance (bid, per...
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This note was uploaded on 07/25/2012 for the course ECON 111 taught by Professor King during the Spring '12 term at CSU Bakersfield.

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