Use of Award Fees on Lump-Sum

Contracts
John E. Schaufelberger, University of Washington
ABSTRACT
Most public projects are procured using lump-sum contracts after the project
designs have been completed. Awarding the contracts to the lowest responsive,
responsible bidder does not always result in best-value projects. Award fees may be
used when the owner wishes to provide an incentive for improved contractor
performance. This paper examines the award fee procedures used by the General
Services Administration in the Pacific Northwest and the results that they have
obtained by use of award fees.
INTRODUCTION
For much of the past century, the primary procurement strategy for public
projects has been design-bid-build using lump-sum construction contracts. Using
the lowest responsive, responsible bidder did not always result in best-value
projects. Award fees may be used when the owner wishes to motivate a contractor
to achieve desired project objectives. Such fees have long been used in many cost-
plus contracts and facilities operation and maintenance contracts. Little has been
written regarding the use of award fees on lump-sum contracts.
The NorthwestIArctic Region of General Services Administration has been using
award fees on lump-sum contracts to motivate contractors to perform well and
emphasize key areas of management concern. These award fees range from % to 3
percent of the contract amount. The fee that a contractor earns is based on the
owner's evaluation of the contractor's performance on the project. Typical
performance criteria include quality, timeliness, technical integrity, and cost-
effective management. This paper examines the procedures used by the General
Services Administration and analyzes the results obtained on their projects. The
agency has seen a significant reduction in the number of claims on projects that
were constructed with contracts that contained award fee provisions.
2003 by CRC Press LLC
820 Innovative Project Delivery Systems
AWARD FEES IN LUMP-SUM CONTRACTS
Award fees may be used in lump-sum contracts when the owner wishes to
motivate a contractor to exceed minimum contractual requirements. Such contracts
specify a lump-sum price for the construction of the project described in the
contract plans and specifications. The award fee is an additional fee the contractor
can earn based on the owner's evaluation of the contractor's performance.
Contracts with award fee provisions list the criteria the owner will use in making the
performance evaluations and the frequency of the evaluations. Typical award fee
contract provisions state that the amount of fee the contractor earns each evaluation
period will be made by the owner and that the owner's decision is not subject to the
disputes provisions of the contract.
EVALUATION PROCEDURES
Contractor performance is evaluated at predetermined intervals throughout the
duration of the project. Evaluation intervals may be calendar-based, such as
quarterly, or construction-based, such as when the project is 25%, 50%, 75%, and
100% complete. Award fee monitors typically are selected by the owner to perform
these periodic evaluations using a set of criteria that was specified in the contract
solicitation. The amount of the award fee earned for a specific evaluation period
may range from no fee to the maximum amount for that period. Construction
contracts that contain award fee provisions typically specify the total award fee that
the contractor may earn and the maximum award fee that may be earned each
evaluation period. For example, the contract may state that the maximum award fee
the contractor may earn is $200,000 and that the maximum fee for each of four
evaluation periods is $50,000. Some contracts allow unearned fee amounts to be
carried over to succeeding evaluation periods, while other contracts do not allow
carry over.
The general contractor, the fee monitors, and the owner generally participate in
periodic award fee meetings. The fee monitors' evaluations are discussed, and the
owner decides the amount of the fee that is to be awarded. The contractor may be
required to submit a self-assessment of its performance to the fee monitors and the
owner prior to each meeting. The owner's decision regarding the amount of award
fee earned each evaluation period is final and is not subject to protest by the
contractor. The owner generally provides the contractor feedback regarding its
performance after each evaluation period to motivate the contractor to improve its
performance.
2003 by CRC Press LLC
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Use of Award Fees 82 1
EVALUATION CRITERIA
The specific criteria to be used by the owner in evaluating the contractor's
performance should be contained in the initial contract solicitation. Weighting
factors may be used to establish the relative importance of each criterion, and the
weighting factors may be changed during the execution of the project. For example,
criteria relating to close-out documentation may be assigned a weight of zero during
early evaluation periods and a significant value during later evaluation periods.
Evaluation criteria typically used by the Northwest/Arctic Region of the General
Services Administration for project coordination are:
Coordination drawings
Coordination of trades
Coordination with other contractors
Coordination/partnering meetings
Performance of administration and supervisory personnel
Tradespersons and workmanship standards
Cleaning and protection of work
Submittals
Schedules
Quality control
Safety and health
Evaluation criteria used for project closeout are:
Substantial completion
Final acceptance
Operation and maintenance training
2003 by CRC Press LLC
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822 Innovative Project Delivery Systems
Final cleaning
Record documents
Operation and maintenance manuals
GENERAL SERVICES ADMINISTRATION EXPERIENCE
The NorthwestIArctic Region completed five projects between 1996 and 2000
that were constructed using fixed price contracts that contained award fee
provisions. The projects ranged in size from $1.3 million to $13.7 million. Two of
the projects were for new construction and three were for repair and alteration.
Specific award fee evaluation criteria were included in the contract solicitations,
and six evaluation periods were identified. An example evaluation matrix is shown
in Table 1 to illustrate the criteria weighting used.
Evaluation monitors were used to evaluate contractor performance immediately
following the completion of 10%, 30%, SO%, 75% and 90% progress payments and
immediately before the final payment. The award fee pool was divided into six
allotments, which represented the maximum award fee the contractor could earn for
each evaluation period. The allotment for each of the first five evaluation periods
was $40,000 and for the sixth evaluation period was $80,000. Each evaluation
criterion was scored using the scale shown in Table 2.
2003 by CRC Press LLC
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Use of Award Fees 823
Table 1 Sample Award Fee Evaluation Matrix
Evaluation Criteria
Project coordination
Coordination drawings
Coordination of trades
Coordinatiodpartnerin
g meetings
Adminlsupervisory
personnel
Tradeslworkmanship
Cleaning and
protection
Submittals
Scheduling
Quality control
Safety and health
Project close-out
Substantial completion
Final acceptance
Training
Operating instructions
Cleaning
Record documents
0 and M manuals
Contract modifications
Totals
Eval
50%
10
8
7
10
12
5
10
13
10
5
5
iods
90% Final
2003 by CRC Press LLC
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824 Innovative Project Delivery Systems
Table 2 Evaluation Criteria Ratings
Ratin Points Assi ned
Excellent
Very good
Marginal
Less than mar inal
The rating for each criterion was multiplied by the appropriate weighting factor
and the results summed to determine the total number of points earned for the rating
period. The total number of points earned was divided by the maximum number of
points that could have been earned for the period, and the resulting percentage was
multiplied by the maximum fee for the period to determine the amount of the award
fee that was earned. The average percentage of the maximum award fee earned on
the five contracts was 97 percent (it ranged from 94 to 99 percent). There were no
claims on any of the projects completed using the award fee, which compares to an
average General Services Administration claim rate of 5 percent on fixed price
contracts without award fees.
The general contractors' project managers on the five projects were interviewed
to determine their perspectives regarding the use of award fees. All the project
managers stated that their bids reflected a reduction in profit, which they assumed
they could recoup by earning the award fee. This provided a strong motivation for
the contractors to strive to satisfy the General Services Administration. The project
managers also stated that the award fee provisions and periodic evaluations resulted
in better coordination and a better team approach to project execution. The
government project managers on the five project also were interviewed, and they
stated that the use of the award fee and periodic meetings led to improved
communications and trust among the project participants.
CONCLUSIONS
The NorthwestIArctic Region of the General Services Administration has
successfully used award fees on fvred price construction contracts. They recently
have awarded a $1 50 million contract for the construction of a new federal
courthouse in Seattle. The contract provides for a maximum award fee of $1
million that may be earned by the contractor. The government agency has found
that the use of award fees provides effective incentives for contractors to exceed
minimal contract requirements, eliminate claims, and achieve the owner's project
objectives. For award fees to be effective, project owners must identify specific
criteria that are important to them early in the contract solicitation phase.
2003 by CRC Press LLC
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Use of Award Fees 825
Contractors must understand what is expected of them when they submit their bids
for contracts that have award fee provisions. An award fee can be an effective
contract management tool if contractors understand the evaluation criteria and
believe that they will be evaluated fairly.
2003 by CRC Press LLC
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