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Construction Proposal. Features. The proposal form is an offer and a promise to enter into a contract if selected A prepared proposal form is included in the bid documents Not using the prepared form results in disqualification. Features (cont.). The proposal form must include: the promise

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.

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Construction Proposal

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Construction proposal

Construction Proposal

CE 332



  • The proposal form is an offer and a promise to enter into a contract if selected

  • A prepared proposal form is included in the bid documents

  • Not using the prepared form results in disqualification

CE 332

Features cont

Features (cont.)

  • The proposal form must include:

    • the promise

    • list of addenda

    • base cost and alternatives

    • accompanied by surety deposit or bid bond

    • signatures and seal

CE 332

Features cont1

Features (cont.)

  • Examine the proposal form for unit price contracts in Appendix E, p. 483

  • Notice the acceptance period of 60 days is cited

    • Financial responsibility

    • Competency

    • Experience

    • Bonds and insurance

CE 332

Proposal details

Proposal Details

  • Detailed Costs

    • Item by item

    • Total Bid

  • Bidders Statement of Understanding

    • Sufficient time to examine work

    • Understanding of General Conditions, supplements, and addendums

  • Bid Proposal Guaranty Bond

CE 332

Proposal details1

Proposal Details

  • Prequalification certificate

  • List of Subcontractors

    • Qualifications

    • Bonded and insured

  • Certifications

    • DBE, MBE, PA or US suppliers……

    • Specialty requirements…..

CE 332

Sample schedule of prices

Sample Schedule of Prices

CE 332

Penn state s bid form

Penn State’s Bid Form

CE 332

Penn state s bid form1

Penn State’s Bid Form

CE 332

Bid development

Bid Development

CE 332

Bid components

Bid Components

Bid Price


Home Office

Job Site

Direct Job Cost

Indirect Job Cost

CE 332

Bid components cont

Bid Components (cont.)

Direct Job Cost





CE 332

Bid components cont1

Bid Components (cont.)

Indirect Job Cost








Office equip.




Access roads

Parking lots

Project Office

Storage trailers

Portable toilets




CE 332

Bid components cont2

Bid Components (cont.)


Home Office











Quality of plans

Unforeseen cond.

Owner and




Work on hand

CE 332



  • Quantity takeoff

    • something will be left out or computed incorrectly

    • plans are incomplete and the quantities change

    • owner will delete certain items

CE 332

Risks cont

Risks (cont.)

  • Detail sheets

    • numbers will be erroneously transferred

    • subcontractor quotes will be misunderstood

    • productivity will be overly optimistic or pessimistic

    • unforeseen conditions will affect productivity

    • there may be noncompensable fabrication errors

    • overestimate ability of superintendent to organize and plan the work

CE 332

Risks cont1

Risks (cont.)

  • Markup

    • incorrectly assess contingencies

    • desired profit is too great or too little

CE 332

Form of agreement

Form of Agreement

CE 332



  • Retainage - That portion of each progress payment that is withheld to cover correction of deficiencies and omissions

  • Liquidated Damages - A damage assessment that is withheld in the event of late completion

CE 332



  • The form of agreement is the contract

  • PSU’s Construction Contract

  • On public contracts, statutory requirements must be followed

  • One doing business with a public entity must be aware of the laws governing its administration and the limitations on the powers of the public officials involved

CE 332

Contractor acceptance

Contractor Acceptance

CE 332



  • Construction services are procured by negotiation or competitive bid

  • For competitive bid projects, the d.p. usually prepares the proposal form

CE 332

Background cont

Background (cont.)

  • The proposal:

    • is a legally binding promise to enter into a contract

    • references the project, requires addenda to be listed, and is accompanied by security deposits or bid bonds

    • assures everyone is bidding on the same thing

CE 332

Private sector

Private Sector

  • Owner can do as he or she pleases

    • negotiate with one or more contractors

    • receive competitive bids from selected contractors or in an open bidding process

    • select any bidder he or she wants

CE 332

Public sector

Public Sector

  • Statutes require competitive bidding

  • Agency is seeking a fair and reasonable (competitive) price

  • Process begins with advertisements

  • Timeliness and other parameters of advertising are governed by regulations

  • Statutes also govern how bids are received and a contract is awarded

CE 332

Contractor qualification

Contractor Qualification

  • Is a way to screen who is on the prospective bidders list

  • The purpose is to assure a reputable contractor

  • Inquiries ask questions about

    • financial capability

    • past experience

    • managerial expertise

    • integrity-

CE 332

Construction contracts

Construction Contracts

CE 332

Pricing arrangements

Pricing Arrangements

  • cost proposal can be lump sum (fixed price), unit price, or cost reimbursable

  • The choice is a function of the type and size of project and the project risks

CE 332

Lump sum fixed price contracts

Lump Sum (Fixed Price) Contracts

  • I propose to be paid $________ to build this project

  • Used most often on residential, commercial buildings, engineered projects, and most industrial projects

  • Design must be complete or nearly so

  • Price will be fair and reasonable only if the contractor can assess and assume the risks

CE 332

Advantages of lump sum

Advantages of Lump Sum

  • If properly applied, the owner receives a competitive price

  • Minimum owner risks for unforeseen conditions

  • Well-established administrative, legal, and contractual precedents

CE 332

Advantages of lump sum cont

Advantages of Lump Sum (cont.)

  • Owner knows the cost in advance of the work

  • Minimum owner involvement in construction process

  • Significant contractor incentive to control costs and meet the schedule

CE 332

Disadvantages of lump sum

Disadvantages of Lump Sum

  • Design-construct time frame takes more time

  • Adversarial relationships sometimes develop

  • Changes and unforeseen conditions are more difficult to handle

  • Contractor has limited input into constructability issues

CE 332

Unit price contracts

I propose to be paid this way to build this project

Unit Price Contracts

CE 332

Unit price contracts cont

Unit Price Contracts (cont.)

  • Used where quantities are uncertain

  • Removes some of the contractor’s risk

  • Unit prices are requested for major or all items in the project

  • Sum of all unit prices times the quantity yields the bid price

  • There can be several hundred or more items

CE 332

Unit price contracts cont1

Unit Price Contracts (cont.)

  • D. p. must provide estimated quantities for each item

  • Bid equals actual cost only if all quantities are exactly right

  • In reality, owner knows only the approximate cost prior to the start of the work

  • Used often on earthwork type projects where quantities are not known

CE 332

Unit price example

Prices include layout, excavation, bedding, materials, placement, sealing, testing, compaction, backfill, overhead, profit, etc.

Unit Price Example

CE 332

Advantages of unit price

Advantages of Unit Price

  • Risk to the contractor of variations in quantities is minimized

  • Changes are easier to make

  • Owner knows the approximate cost in advance

  • Well established administrative, legal, and contractual precedents

CE 332

Disadvantages of unit price

Disadvantages of Unit Price

  • Owner has to provide greater contract administrative services

  • Cost can escalate with significant changes in quantities

  • Some of the same disadvantages of lump sum

CE 332

Cost reimbursable contracts

Cost Reimbursable Contracts

  • Owner pays contractor expenses plus a fee

  • Used sometimes on large, industrial type projects where scope cannot be determined

  • More appropriate where design is incomplete or changes will be common

  • Can sometimes be used on emergency projects

  • Reserved for only extreme or highly unusual circumstances

CE 332

Advantages of cost reimbursable

Advantages of Cost Reimbursable

  • Can accelerate the schedule because the design need not be complete

  • Can make changes easily

CE 332

Disadvantages of cost reimbursable

Disadvantages of Cost Reimbursable

  • Owner has no idea of the final cost until the end

  • There is greatly increased contract administration

  • There is little incentive for contractors to control cost or meet the schedule

CE 332

Variations in fee arrangements

Variations in Fee Arrangements

  • Cost plus % of cost--% is fixed or may be a sliding scale

  • Cost plus fixed fee--provides some incentive to minimize cost and time of performance

  • Cost plus incentive target--could be fee + bonus/penalty

  • Guaranteed maximum price (GMP)--cost = fee < max $

CE 332

Delivery system

Delivery System








Lump Sum/

Unit Price/

Cost Reimb.

Unit Price/

Cost Reimb.



Unit Price




CE 332



CE 332

Contractual obligations

Contractual Obligations

  • A subcontract is an agreement between a contractor and a subcontractor where the sub agrees to complete a part of the work

  • The sub has no contract with the owner

  • The sub is usually bound by the same obligations as the prime has to the owner (see AIA AS201, Art. 5.3.1)

CE 332

Contractual obligations cont

Contractual Obligations (cont.)

  • The owner often has the right to approve subcontractors (AIA A201, Art. 5.2.1 - 5.2.4)

  • Disapproval of subcontractors is not that common

CE 332

Potential problems

Potential Problems

  • Disagreements often occur when a non standard contract is used

  • Sub may not be bound to the same obligations as the prime

  • Sub may not receive all the prime contract provisions to know the full extent of its obligations

  • Sub may not get paid

CE 332

Relationship with subcontractors

Relationship with Subcontractors

  • Ethical considerations:

    • bid shopping or using a sub’s bid as the low bid and shopping for a better bid after the prime contract is awarded is troublesome

    • trying to get a lower bid from a sub after being awarded the contract is to be frowned on

    • sub should be offered the same payment provisions as the prime

    • pay the sub when the sub’s work is complete

CE 332

Relationship with subcontractors cont

Relationship with Subcontractors (cont.)

  • Contractual and legal considerations:

    • sub should be given all the contract provisions to use in preparing the sub’s bid

CE 332

Contract bonds

Contract Bonds

CE 332



  • A surety is a party that assumes a liability for the debt, default, or failure of another

  • A bond is not insurance, but rather an extension of credit in the form of an endorsement

  • A bond is a three party instrument where the surety promises the owner (obligee) that the contractor will perform in accordance with the contract documents

CE 332

Background cont1

Background (cont.)

  • If there is a default, the surety will step in and see that the project is finished

  • The extent of the surety’s obligation is defined by the contract documents

  • The face value of the bond is the value of the bond and is expressed as a percentage of the contract amount, i.e., 100% bond

CE 332

Contractor risks

Contractor Risks

  • A surety will investigate contractors to evaluate their financial capacity and available capital

  • Bonding capacity is the maximum value of uncompleted work the surety will allow the contractor to have on hand at any one time

CE 332

Types of bonds

Types of Bonds

  • Bid bond

    • protect the owner against a contractor that submits the lowest bid but refuses to sign a contract

  • Performance bond

    • protects the owner against default and assures that the owner will get the facility without undue delay

CE 332

Types of bonds cont

Types of Bonds (cont.)

  • Payment bond

    • protects third parties like suppliers, vendors, craft labor against not being paid

    • protects the owner from liens being attached to the project

CE 332

Bond premiums

Bond Premiums

  • Premium amounts are a function of risk to the surety

  • Premiums are based on two risk factors:

    • project risks

    • contractor risks

CE 332

Project risks

Project Risks

  • Project risks are related to the type of project and time of performance

  • Assume we have a commercial project (use the Walker Building on campus as an example) that is estimated to cost $4.0 million and as a project schedule of 30 months. Calculate the bond premium using the information in the following Tables

CE 332

Construction classification for bonds

Construction Classification for Bonds

CE 332

Bond premium determination

Bond Premium Determination

CE 332

Bond premium calculation

Classification: B

Base rate:

Bond Premium Calculation

CE 332

Bond premium calculation cont

Adjustment for time of performance

Bond premiums usually range around 0.75 - 1.50% of the bid

Bond Premium Calculation (cont.)

CE 332

Contractor default options

When the contractor defaults, the surety has two options

assume charge of and complete the contract. Surety may be able to get a lower price or be able to limit its exposure if the surety is in control. The surety is responsible for the total cost of completing the work, less the contract amount, even if the difference is higher than the face amount of the bond

Contractor Default Options

CE 332

Contractor default options cont

make available to the owner sufficient funds to complete the work. Owner secures a new contractor. The liability of the surety is limited to the face value of the bond

The purpose of the bond is not to allow the owner to make a profit

Contractor Default Options (cont.)

CE 332

Default liability example

Default Liability Example

  • Suppose a 100% bond was issued on a $4,000,000 project. Shortly after the work began, the contractor went bankrupt and the owner called on the surety to complete the work. The following conditions existed:

    • initial contract value $4,000,000

    • face value of the bond $4,000,000

    • value of work performed $450,000

    • retainage $45,000

    • amount paid to contractor $405,000

CE 332

Default liability example cont

The surety elects to let the owner secure another contractor, thus limiting its liability to the face value of the bond

If the owner pays the new contractor $4,250,000, what is the extent of obligation of the surety?

Default Liability Example (cont.)

CE 332

Default liability example cont1

Default Liability Example (cont.)

CE 332

Cash flow and bonding capacity

Cash Flow and Bonding Capacity

CE 332



  • Cash flow

    • normal project

    • impacted project

  • Bond capacity calculations

  • Effect of cash flow on bond capacity

CE 332

Cash flow normal project

Cash Flow - Normal Project

  • Cash flow is the difference between project receipts and expenditures

  • It is usually expressed graphically

  • Since expenditures exceed receipts part of the time, the contractor is a short term investor in the project

  • Contractor must have cash reserves to pay for labor and materials

  • Consider the New Jersey contractor PHA

CE 332

Cash flow diagram normal project

Cash Flow Diagram - Normal Project

Investment in Project

60 – 90 days

Positive Cash Flow

Negative Cash Flow

CE 332

Cash flow

Cash Flow

  • Where the expenditures greatly exceed receipts, the contractor’s financial position is seriously compromised--perhaps leading to bankruptcy

  • On impacted projects, owners often stop paying which makes matters worse

CE 332

Cash flow diagram impacted project

Cash Flow Diagram – Impacted Project

Investment in Project

Positive Cash Flow never occurs!

Negative Cash Flow entire project

CE 332

Bond capacity

Bond Capacity

  • There are two types of capacities

    • project capacity

    • aggregate capacity

  • Project capacity is the maximum size single project that the surety will allow the contractor to undertake

  • Aggregate capacity is the total amount of uncompleted work that the surety will bond

CE 332

Bond capacity equations project capacity

Project capacity

Bond Capacity Equations - Project Capacity

CE 332

Bond capacity equations aggregate capacity

Aggregate capacity (Worth of Firm)

Bond Capacity Equations - Aggregate Capacity

CE 332

Risk management

Risk Management

CE 332

Owner strategy

Owner Strategy

  • Recognize and identify risks

  • Measure the degree of exposure

  • Decide how to protect against those risks

  • Develop a company-wide program of loss control and prevention

CE 332

Categories of risk

Categories of Risk

  • Project risks

  • Legal and contractual risks

  • Business risks

CE 332

Insurance policy

Insurance Policy

  • A contract where an insurer assumes financial responsibility for a specific loss

CE 332

Differences with bonds

Differences With Bonds

  • Insurance covers specific known losses or risks, bonds cover a failure to perform

  • In a bond, the owner is covered over and above initial contract amounts, insurance may have fixed limits

  • In bond defaults, the surety seeks to recover losses from the contractor

CE 332

Insurance checklist

Insurance Checklist

  • Property insurance on project

  • Property insurance on contractor’s property

  • Liability insurance

  • Employee insurance

  • Automobile insurance

CE 332

Types of policies

Types of Policies

  • Property insurance

    • covers the project from damages or loss

    • also covers subcontractors

  • Builders risk insurance

    • normally the basic policy on buildings

    • two types are all-risk and named risk; the latter is seldom used

CE 332

Types of policies cont

Types of Policies (cont.)

  • Builders risk (cont.)

    • policies are flexible and can include many coverages

    • covers direct losses, temporary structures, materials, etc.

    • may not cover labor losses

  • Contractor’s equipment floater

    • covers construction equipment, but not liability

CE 332

Types of policies cont1

Types of Policies (cont.)

  • Liability insurance

    • imposed by law

  • Public liability and property damage

    • covers liability to third persons

  • Workman’s compensation

    • is a legal requirement

    • covers injuries to employees

CE 332

Types of policies cont2

Types of Policies (cont.)

  • Wrap-up insurance

    • owner provides certain coverages

  • Owners liability insurance

  • Social security

    • employers and employees share the cost

CE 332

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