Dear Reader:
The following document was created from the MTAS website (www.mtas.tennessee.edu). This website is maintained daily by MTAS staff and seeks to represent the most current information regarding issues relative to Tennessee municipal government.
We hope this information will be useful to you; reference to it will assist you with many of the questions that will arise in your tenure with municipal government. However, the Tennessee Code Annotated and other relevant laws or regulations should always be consulted before any action is taken based upon the contents of this document.
Please feel free to contact us if you have questions or comments regarding this information or any other MTAS website material.
Sincerely,
The University of Tennessee
Municipal Technical Advisory Service
1610 University Avenue
Knoxville, TN 37921-6741
865-974-0411 phone
865-974-0423 fax
www.mtas.tennessee.edu
Mr. Steve Hendrix
Assistant City Manager
120 Gary Wade Blvd.
Sevierville, TN 37864
Mr. Hendrix:
You requested information on contract incentives. You indicated that the city has some delays with construction contract completion times. You asked if other cities use incentive contracts.
Attached are my notes on Incentive/Disincentive (I/D) contracts. This information gives definitions, explains where I/D provisions apply, discusses time/cost tradeoffs, outlines guidelines on determining I/D dollar amounts and provides an example.
I am not aware of TN cities that may use I/D contracts. However, the Tennessee Department of Transportation (TDOT) and DOTs in other states routinely use I/D contract provisions.
I hope this information is helpful as a first step in considering I/D contracts. As you get further along in considering this matter, please let me know how I may help. I would be happy to provide more information.
Sincerely,
Sharon L. Rollins, P.E.
MTAS Public Works and Engineering Consultant
Attachment
Owners are often frustrated when construction contracts are not completed on time. For that reason, owners are interested in motivating contractors to complete work on time, or better yet, early. These motivators are often called incentives and/or disincentives (I/D). Incentives and disincentives should be used together.
The U.S. Federal Highway Administration defines incentive/disincentive for early completion as: a contract provision which compensates the contractor a certain amount of money for each day identified critical work is completed ahead of schedule and assesses a deduction for each day the contractor overruns the I/D time .
FWHA is primarily concerned with road construction, but I/D applies to other public works contracts as well.
Disincentives are not the same as liquidated damages, a standard element of construction contracts. FWHA defines liquated damages as: the daily amount set forth in the contract to be deducted from the contract price to cover additional costs incurred by the owner because of the contractor’s failure to complete all contract work within the time specified in the contracts. Liquated damages apply to all projects. I/D provisions do not apply to all contracts.
I/D provisions include a bonus/penalty scheme to motivate the contractor to produce a project that meets or exceeds performance goals on or before a target date and within a target cost. A critical part of using I/D provisions is to accurately determine what the target date should be. For this reason, a critical path method (CPM) schedule is necessary to accurately determine how long it should take to complete a project. A second critical area is ensuring that meeting or beating the target date does not result in excessive costs. Costs and time are always trade-offs. Research shows that I/D contracts tend to receive slightly higher bids than similar non-I/D contracts.
For road construction, the FWHA recommends that I/D contracts apply only in situations where traffic inconveniences and delays must be minimized, such as:
Road construction on Route ___
Contract Amount $1,000,000
Total Project Duration = 100 calendar days
Milestone Milestone Duration (days)*
|
Max. Days Allowed for Early Completion
|
Daily Incentive Amount
|
Daily Disincentive Amount
|
Milestone Start Date
|
Milestone Completion Date
|
Milestone 1: describe work | 25 | 5 | $5,000/day for 5 days. Maximum = $25,000 | $5,000/day | ||
Milestone 2: describe work | 50 | 10 | $2,000/day for 10 days. Maximum = $20,000 | $2,000/day | ||
Milestone 3: describe work | 25 | 5 | $1,000/day for 5 days. Maximum = $5,000 | $1,000/day | ||
$50,000 cap |
* Does not include weather delays, time-suspensions, float-days or holidays
Links:
[1] https://www.mtas.tennessee.edu/kb-authors/rollins-sharon
[2] https://www.mtas.tennessee.edu/system/files/knowledgebase/original/Incentive.pdf
DISCLAIMER: The letters and publications written by the MTAS consultants were written based upon the law at the time and/or a specific sets of facts. The laws referenced in the letters and publications may have changed and/or the technical advice provided may not be applicable to your city or circumstances. Always consult with your city attorney or an MTAS consultant before taking any action based on information contained in this website.
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