STUDY OF SINGLE-RESPONSIBILITY
CONCEPTS FOR WATER POLLUTION
CONTROL PROJECTS
Prepared for
UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
' I A
Final Report
BECHTEL INCORPORATED
April 1974
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STUDY OF SINGLE-RESPONSIBILITY
CONCEPTS FOR WATER POLLUTION
CONTROL PROJECTS
Prepared for
UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY
Final Report
BECHTEL INCORPORATED
April 1974
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74-24C,
I 029'5-nOI
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FOREWORD
In accordance with the Environmental Protection Agency (EPA) Delivery
Order 68-01-1364 (dated May 21, 1973) of Contract 68-01-0973 to Bechtel
Incorporated (dated November 17, 1972), Bechtel has performed a Study
of Single-Responsibility Concepts for Water Pollution Control Projects.
This study was performed for the U.S. Environmental Protection Agency,
Municipal Wastewater Systems Division, Mr. Harold Cahill, Director,
by Bechtel Incorporated, Hydro and Community Facilities Division, Mr.
Richard P. Godwin, Vice President and Deputy Division Manager, and
Mr. William A. Sandberg, Project Manager.
Acknowledgment is given to the members of the Bechtel Advisory Panel
Dr. E.J. Cleary of the University of Cincinnati, Mr. J. F. Lagnese of
Duncan, Lagnese, and Associates, Inc., and Dr. D. A. Okun of the
University of North Carolina who were kind enough to review and com-
ment upon the report drafts, but are not responsible for the contents of
the report as issued.
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CONTENTS
Section Page
FOREWORD lii
1 INTRODUCTION 1-1
1.1 Scope of Report 1-1
1.2 O rganization of Study 1-2
1.3 Background for Study 1-2
1.4 Terminology 1-3
2 EXECUTIVE SUMMARY 2-1
2.1 Project Forms 2-1
2.2 Contractor Selection 2-12
2. 3 Compensation 2-14
2.4 Responsibilities, Guarantees, and Liabilities 2-14
2.5 Regulations 2-16
2.6 Discussion 2-17
3 BASIC CONSIDERATIONS 3-1
3. 1 Introduction 3-1
3.2 Project Forms 3-5
3.3 Contractor Selection 3-5
3.4 Compensation 3-11
3.5 Responsibilities, Guarantees, and Liabilities 3-17
3.6 Laws and Regulations 3-20
4 ENGINEERING .-CONSTRUCTION 4-1
4.1 General Description 4-1
4.2 Contractor Selection 4-1
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Section Page
4. 3 Compensation 4-6
4.4 Responsibilities, Guarantees, and Liabilities 4-9
4. 5 Law and Regulation 4-11
4.6 Summary 4-12
5 ENGINEERING AND CONSTRUCTION 5-1
5.1 General Description 5-1
5. 2 Contractor Selection 5-3
5.3 Compensation 5-6
5.4 Guarantees and Liabilities 5-7
5. 5 Regulations 5-8
5.6 Summary 5-10
6 PROJECT MANAGEMENT 6-1
6.1 General Description 6-1
6.2 Contractor Selection 6-5
6.3 Compensation Practices 6-7
6.4 Responsibilities, Guarantees, and Liabilities 6-8
6.5 Regulations 6-9
6.6 Summary 6-10
7 ENGINEERING AND MANAGEMENT 7-1
7.1 General Description 7-1
7.2 Contractor Selection 7-2
7. 3 Compensation 7-4
7.4 Responsibilities, Guarantees, and Liabilities 7-5
7. 5 Law and Regulations 7-6
7 6 Summary 7-7
8 CONSTRUCTION AND MANAGEMENT 8-1
8.1 General Description 8-1
8.2 Contractor Selection 8-3
8.3 Compensation 8-3
VI
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Section Page
8.4 Responsibilities, Guarantees, and Liabilities 8-4
8. 5 Law and Regulations 8-4
8.6 Summary 8-5
9 DISCUSSION 9-1
9.1 Shorter Project Schedules 9-2
9.2 Improved Process Performance 9-9
9.3 New Technology 9-14
9.4 Project Options 9-17
A GLOSSARY OF TERMS A-l
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ILLUSTRATIONS
Figure Page
2-1 Pictorial Representation of Project Forms 2-3
2-2 Pictorial Representation of the Interrelation-
ships Between Project Forms 2-11
3-1 Basic Project Organization Alternatives and
Functions 3-3
4-1 Typical Responsibilities of the Various Parties
in an E:C Project 4-1
5-1 Typical Responsibilities of the Various Parties
ill an EPC Project 5-1
6-1 Typical Responsibilities of the Various Parties
in a PM Project 6-1
7-1 Typical Responsibilities of the Various Parties
in an E8tM Project 7-2
8-1 Typical Responsibilities of the Various Parties
in a C&M Project 8-1
9-1 Project Performance Using Normal Procedures,
Fast-Track Schedules, and Continuous Overlap 9-5
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TABLES
Table Page
2-1 Characteristics of Project Forms 2-7
3-1 Application of Basic Methods of Compensation 3-13
9-1 Comparison of Project Forms 9-20
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Introduction
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Section 1
INTRODUCTION
1. 1 SCOPE OF REPORT
The objective of this report is to describe various means of controlled
Śr
accomplishment of design & construct projects that comprise planning,
engineering design, construction, start-up, and initial operation of a
water pollution control facility for a public owner. In this report, the
forms of organization and contract provisions considered are those that
contractually centralize responsibility for the satisfactory design and con-
struction of wastewater treatment facilities. It is expected that the methods
described here will be put into practice by 1) a public owner who lacks the
engineering, construction, and other staff personnel needed to accomplish
the project without outside help and who does not wish to temporarily em-
ploy such talent, and 2) a large public owner who may choose to contract
for outside assistance to increase his capability to carry on capital projects.
The report discusses methods used^by both public and private owners for
contracted design and construction of process facilities. The examination
of the methods of the private sector has been made with the intention of
pointing out techniques that might be applicable to work in the public sector.
To simplify discussion of the many variations of organizational arrange-
ment, contract terms, payment provisions, obligations, and interrelation-
ships between the parties involved in major capital projects, this report
'^Editor's Note: The term "design & construct, " as used m this report,
is substituted for the term "design/construct, " as it
appears in EPA regulations. This has been done to
avoid ambiguity due to the use of the slant (/) in a con-
junctive, instead of its normal alternative, sense
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deals with four basic organizational forms plus the traditional form of
performing public works project. In addition, a special case that is a
combination of two of the basic forms is briefly discussed.
It should be noted at the outset that the concept of centralized (or single)
responsibility for design & construct projects, as presented in this re-
port, is considerably broader than that exemplified by the project ap-
proach known as "turnkey. " Turnkey is included here as only one
possible combination of procedural options available within one of the
four basic forms of design & construct project organization.
The closing section of this report discusses the possibilities of improving
the performance of both the project and the resulting treatment facility
through the use of the forms of organization and contractual relationships
presented in the body of the report. A glossary of terms used in this re-
port is included in Appendix A.
1.2 ORGANIZATION OF STUDY
The study which produced this report was undertaken in two phases:
Phase I, which resulted in Sections 1, and 3 through 8, was a review
of present design & construct practices and experience in both the public
and private sectors. Phase II, which resulted in SecUon 9, was an ana-
lysis of the alternative design & construct methods of project execution
as related to EPA objectives. Section 2 is a summary of the whole
report.
1.3 BACKGROUND FOR STUDY
Under EPA Regulation 40 CFR Part 35, as previously issued, the con-
struction of wastewater treatment facilities receiving federal financial
assistance authorized in Section 8 of the Federal Water Pollution Control
Act could proceed only after final plans and specifications had been ap-
proved by the EPA Administrator. In addition, construction work had
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to be performed under the lump-sum or unit price compensation method,
and competitive bidding was necessary prior to award of the construction
contract. However, the regulations placed no requirements on the appli-
cant as to the contents of the contracts for the project. Under these reg-
ulations, the applicant for federal financial assistance would normally
use separate contracts for design and construction of the facility in ac-
cordance with his conventional practices and procedures.
On February 28, 1973, revised regulations were published m the Federal
Register amending the then-existing regulations and adding provisions
to permit combined design & construct contracts. A design & construct
contract was defined in the new regulations as a combined agreement
cpvering engineering design and construction whereby the bidder submit-
ting the lowest responsive lump-sum or unit price bid, based on perfor-
mance specifications prepared by the applicant, would be selected to
perform the work. Under this contract, the design & construct contractor
would be required to provide adequate guarantees of process performance
of the completed facilities. (These regulations were further revised on
February 11, 1974, but the ideas expressed above remain basically
unchanged. )
Although this regulation revision (which has been popularly characterized
as the turnkey regulation) is presumable intended to allow the grantee
more options in project execution, it has been interpreted by some as
representing EPA's intent to specify the turnkey method. And, in fact,
it was not clear in the absence of implementing guidelines, whether these
new regulations would have permitted the use of forms of combined de-
sign &t construct project forms other than turnkey that might have been
of equal or superior utility. However, it is felt that other options must
be considered if the EPA is to realize its objective to provide public agen-
cies with effective alternative project methods. Expected gains from new
methods are: 1) the creation of incentives for design innovations, evalu-
ation of alternatives, improved cost-effectiveness, and new technology;
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2) the achievement of overall time savings; 3) the assurance of greater
responsibility on the part of the process designer for facility performance.
This study is based on the premise that the significant element in the EPA
intention is not the turnkey approach per se, but rather singleness of
responsibility; that it is essential that the grantee and the EPA look to a
single qualified organization to be responsible for determining what is
needed, for designing and building the facility, and for putting it into suc-
cessful operation, all within agreed-upon schedule and cost estimate.
Based on this premise, the report is intended to provide information for
use by the EPA when developing regulation revisions and the implementing
guidelines for contracting methods specifically suited to public agency
wastewater projects. It is recognized, however, that in some localities
many of the possibilities discussed in the study may be only of academic
interest because of local external conditions (e.g., aesthetic, environmen-
tal, safety, and land use control procedures; long-established business
and market practices; state regulatory requirements; and political factors)
none of which may be directly influenced by EPA regulation.
1.4 TERMINOLOGY
The terms used in this report are intended to be those in common use in
the engineering and construction professions, but it is recognized that the
understanding of terms may vary widely. In an effort to avoid ambiguity,
a number of terms are defined in a glossary, Appendix A. When a de-
fined term is introduced for the first time in Subsection 3. 2, it is written
in capital letters. No attempt, however, is made to define all of the terms
used in this study, and any undefined terms should be considered in their
context and be assumed to have their commonly accepted meanings.
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Executive Summary
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Section 2
EXECUTIVE SUMMARY
In recent years, the EPA has sought to extend and improve the options
available to recipients of federal water pollution control grants lori con-
tracting project engineering and construction. It has been felt that the
public interest may be well served by allowing, under appropriate cir-
cumstances and controls, organizational practices that may represent
a departure from those traditional for wastewater projects. These prac-
tices include some methods used in. other public works fields, In addi-
tion, an attempt is being made ta apply private sector experience to
public sector projects, The improvements sought include earlier use
of facilities, lower costs, better performance, and increased application
of new technology. Since in the proposal for this study, it was suggested
that these goals could best be achieved by centralization of responsibility
for project execution in a single contracting party, this report describes
the various methods for providing single-responsibility leadership of
"design fc construct" projects and discusses the conditions under which
each method is applicable.
2. 1 PROJECT FORMS
Design construct project can be carried out in a number of different
organizational forms. These potentially involve four principal parties:
the owner, the engineer, the constructor or the engineer-constructor
(considered as one party), and the project manager (in conjunction with
whom "the owner may elect to award contracts for engineering, construc-
tion, and other services to be administered by the manager).
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In a single-responsibility project, the owner assigns to a single contractor
the non-policy portion of the owner's project functions. The project orga-
nizational forms available to the owner are determined by the contrac-
tual relationship between the owner and each of the various parties respon-
sible for carrying out the work. The form selected, and therefore the
contractual relationship entered into, is determined by the owner's need
for project control, process performance guarantees, outside technical
assistance, cost control, and schedule requirements. And throughout
this entire procedure, everything must be considered in the context of
legislative and institutional restraints on the owner, regarding such mat-
ters as contractor selector methods, compensation method for each por-
tion of the project, and review and approval requirements.
The possible combinations of relationships between the owner, engineer,
constructor, engineer-constructor, and project manager result in four
organizational forms for contracting single-responsibiLity projects. In
each of these forms, the duties of the responsible contractor are con-
tained in the title. The four forms are:
Engineering &: Construction (EPC)
Project Management (PM)
Engineering & Management (EM)
Construction & Management (C&M)
Also included for consideration is the traditional two-party form in which
engineering and construction is contracted separately:
Engineering : Construction (E:C)
These forms are illustrated diagrammatically in Figure 2-1 and discussed
below. (For a more detailed presentation of this material, see Figure 3-1. )
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NOTE For more detail,
see Figure 3-1
(A) ENGINEERING: CONSTRUCTION (E:C)
(B) ENGINEERING & CONSTRUCTION (EPC)
(C) PROJECT MANAGEMENT |PM>
(D) ENGINEERING & MANGEMENT (E&M) (E) CONSTRUCTION & MANAGEMENT (C&M)
LEGEND
T A CONTRACT
AN AGENT OF THE OWNER
Figure 2-1. Pictorial Representation of Project Forms
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Engineering : Construction (E:C) Traditional
The traditional method of contracting public works is to use a professional
engineer for the design and a general contractor for construction cf faci-
lities. This method of organization is called the two-party, or the engi-
neering : construction (E:C) form. Since with E:C, the owner must re-
tain the overall coordination responsibility, it cannot be considered a
single-responsibility form as defined in this report. But because under
such a form, the engineer is often expected to assume more responsi-
bility for the project than simply the engineering, E:C takes on some of
the characteristics of the E&tM form.
Engineering fc Construction (EPC)
With the engineering & construction (EPC) form, the owner contracts with
a single firm (or joint venture) to carry out both the design and the con-
struction and frequently the procurement (P) for the total project. The
single firm or joint venture so contracted is known as the engineer-con-
structor.
Project Management (PM)
The organizational arrangement in which a fourth party is contracted to
manage the project is defined as the project management (PM) form. Here,
the owner contracts individually with the manager, the engineer(s), and the
constructor(s). The manager acts as the owner's agent in dealings with
the engineers and constructors and accepts overall responsibility for
the project.
Engineering Management (EfoM)
A variation of the PM form is the engineering and management (E&M)
form. Here, instead of contracting with a fourth-party manager, the
owner retains the engineer to be responsible for the management of the
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project, including construction, as well as for the engineering. The
E&M organization resembles the E:C form to some extent but calls for
considerably more managerial and construction know-how on the part
of the engineer than is required for E:C.
Construction Management (C&cM)
Construction and management (C&M) is another variation of the PM orga-
nization and is similar to the E&M form in that no fourth-party manager
is retained. In C&M, the owner assigns to the constructor both the over-
all responsibility for the management of the project and the construction
responsibilities. The CfcM form is uncommon in current practice.
The foregoing organizational forms have much in common. And many
variations and combinations of these four basic forms are possible. In
one such combination of special interest (symbolized PM : EPC), the
manager is retained to oversee one or more engineer-constructor(s)
performing EPC projects. This organizational form is useful to an owner
involved in a project that taxes his capability to supervise an EPC con-
tractor without outside assistance.
The organizational forms presented above are further defined in Section
3 and are individually discussed in Sections 4 through 8. Table 2-1 very
generally sum'marizes and compares the chief characteristics of the sev-
eral forms.
Discussion of Forms
The single-responsibility concept provides the owner with the following
benefits:
Good overall project performance as a result of
continuing project leadership by a fully qualified
owner's representative
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Tighter process and performance guarantees
Closer control of costs and schedule
Shorter project schedules through the paralleling
of more project activities
Integration of construction planning into the design
phase
While the basic organizational structures are easy to describe, the vari-
ety of acceptable variations is very great and cannot possibly be adequately
described in a synopsis such as this.
The EPC contract maximizes the number of activities placed under the
responsibility of a single contractor. The degree of contractor involve-
ment makes it difficult for the owner to exercise control over the project.
At the other extreme is the PM form, in which the project manager has
no direct design or construction performance responsibility. In this
case, the manager is the owner1 s control medium, but because the mana-
ger must work through the owner's contractor Sj he is not in a position to
assume as significant a contractual responsibility as the EPC contractor
might be able to.
Guarantees are generally spoken of in terms of the financial redress avail =
able to the owner {that is, the extent of financial liability accepted by the
contractor) and are a function of the extent of the contractor's direct per-
formance of the work and the amount of compensation he receives. When
the various project forms are compared, it is evident that the contractor
does the least amount of work and receives the least amount of compen-
sation in projects of the PM types, whereas the reverse holds true for
EPC type projects.
If maximizing the responsibility of the contractor to furnish guarantees
and provide for financial recovery in the event of failure were the owner's
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only consideration, the EPC contract would always be the one of choice.
In actual practice, however, a compromise has to be struck between con-
tractor responsibility and owner control.
In those project forms (such as EPC) in which the contractor has a major
direct-performance obligation (and especially if he is working for a fixed
compensation), his primary interest is to conduct work in the most efficient
and profitable fashion within the limitations of the project specifications.
Moreover, because engineering and construction decisions are made wholly
within the same contractor's organization, he is encouraged to take uni-
lateral action in project decisions, such as the economics of materials
selection and construction practices. This reduces the owner's involve-
ment in control of the decision-making processes. As the project develops,
the owner may find that a kind of adversary relationship develops between
himself and his contractor.
On the other hand, in the PM form, the manager does not directly perform
any engineering or construction services, but assumes the responsibility,
on behalf of the owner, for the work performed by each contractor. The
manager thus represents the owner's interest in dealing with the perform-
ing contractors on an equal-capability basis, and the probability that the
project is carried out properly is maximized.
The tradeoff is therefore between (1) a project form (such as PM) in which
the owner's interest in well represented, but which does not provide firm
guarantee provisions to compensate the owner in the event of process per-
formance failure, versus (2) a form (such as EPC) in which the contractor
has total financial responsibility for his work, but in which the owner gives
up a portion of his ability to control the ongoing project activity.
In many cases, the owner may find it advantageous to choose an organiza-
tion form somewhere between PM and EPC. By so doing, he may be able
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to achieve a suitable balance between contractor guarantees and owner
control within the context of prevailing laws, regulations, and procure-
ment rules.
The owner can vary the form of the project in a way that depends on the
extent of the various functions assigned to each of his contractors. It
can be demonstrated that a path of evolution exists from one to another
of the basic forms described here. Figure 2-2 provides a pictorial re-
presentation of the interrelationships between the forms and their charac-
teristics. ( Some precision of illustration is lost by using a sphere. )
In this figure, the four project forms defined in this report are located
around the equator. The E:C form is at one pole; the consolidated PM:EPC
variation is at the other pole.
As one moves from the EPC form to the PM form, there is a tradeoff
of guarantees for control as illustrated on the guarantees/control axis.
The relationship of the guarantees/control axis to the other two axes
suggests that as one moves along the equator, the singleness of respon-
sibility remains approximately constant, while the degree of project
control, the strengths of guarantees, and the balance between engineer
and constructor control all change. For example, the C&M and E&M
forms differ primarily in the seat of responsibility; the former invests
full responsibility with the constructor while the latter invests full re-
sponsibility with the engineer. This relatively simple difference, how-
ever, produces a profound effect on the types of procedures used to imple-
ment these two forms.
Figure 2-2 can be useful for determining in gross terms the character-
istics of project forms that are combinations of the six forms depicted
here. By projecting from the position of a combination project form on
Recall that the spherical model is only an approximation.
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SINGLE
RESPONSIBILITY
RESPONSIBILITY
Figure 2-2. Pictorial Representation of the
Interrelationships Between Project Forms
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the surface of the sphere onto the various axes, one can make a rough
analysis of the characteristics of this form. For exampLe, if the owner
were to engage several EPC contractors instead of one to perform the
work, this project form would appear at a point intermediate between
EPC and E:C in the lower, front portion of the sphere, indicating that
there is a reduction in the singleness of responsibility and in the strength
of the guarantees. If, however, the owner were to place a project man-
ager over the severaL EPC contractors, this project form would fall at
the point intermediate between PM and PM.EPC (which is very highly
centralized and therefore at the extreme end of the single-responsibility
axis). Another example is a project procedure, frequently used in public
works projects, that involves an engineer, plus a construction m anager
overseeing the procurement-construction activities. This might be sym-
bolized as an E:CM or E:M and would be located intermediate between
the E:C and the PM on the lower, rear portion of the sphere, indicating
some division of responsibility, a weak guarantee position, and a moder-
ate degree of control.
2.2 CONTRACTOR SELECTION
The single - responsibility concept calls for early selection of the con-
tractor who will have overall responsibility for the project, so that
continuity can be provided from initial design decisions through opera-
tion and acceptance. This is a rather straightforward matter for the
E8tM form because the engineer is immediately involved with the plan-
ning and design phases of a given project. Similarly, in the EPC form,
the contractor, by definition, does design work and at least some of the
planning as well. In the PM form, the manager should be selected before
or when the engineer is retained for the design work. In the C&M form,
it is necessary to select the constructor for the management role at the
beginning of the design phase in order for it to be a single - responsibility
form.
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Since the methods for selecting the types of contractors in the private
sector are much less restrictive than in the public sector, the transfer
of practices from one sector to the other is difficult. Most public works
procurement rules differentiate markedly between the selection of a "pro-
fessional" contractor (i.e., the engineer and the manager) and the selec-
tion of the "nonprofessional" contractor (1. e. , the constructor and equip-
ment suppliers). The former is usually selected by negotiation, the latter
by price-competitive bidding among qualified candidates. The result is
that the E:C, E&M, and PM forms can be entered into prior to detailed
definition of the physical facilities, whereas special arrangements are
needed to enter into the EPC or C&M forms in the very early phases of
the project.
It is possible, however, to select the engineer-constructor (EPC) on a
firm-price basis using only basic process design criteria in a manner
often practiced in the private sector. During the bid preparation period,
the engineer-constructor performs a portion of the design and solicits
pricing of major equipment to an extent suitable for the support of a defi-
nitive estimate and the resulting bid price.
However, very large and/or complex projects cannot be bid firmly in
the above manner. For to hold to this form, it would be necessary to
retain the EPC contractor on a professional basis to perform the engi-
neering needed for the preparation of the process design criteria. Modi-
fication of procurement rules generally would be required to allow such
an early selection of the engineer-constructor (EPC) or the constructor-
manager (C&M) as would be required to assure a full single-responsibility
approach. The method then used would be to select the contractor on the
basis of his qualifications and to contract for a later development of a
firm price for his services when these are adequately defined. To satisfy
public concern in the absence of price competition, the owner at the ap-
propriate times could retain a consultant who would serve as referee
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for review of the contractor's estimate(s) and would assure that the basis
for compensation was appropriate.
In any event, public sector procurement and contractor selection methods
are in need of change to allow the maximum flexibility in the selection of
project methods.
2. 3 COMPENSATION
A major issue in construction contracts is the type of compensation. There
are two basic types of compensation for professional or nonprofessional
services and materials: fixed price, and reimbursable cost. Within these
two categories, many variations exist. These include lump-sum, percent-
age (of facility) cost, cost-plus, unit price, and fixed quantity. Each of
these types can be modified by the application of a guaranteed maximum
price, target price, various incentive formulas, and variation in the num-
ber of stages and time of development of the compensation basis.
As a rule, all the project forms can be employed with fixed-price compen-
sation for the constructors. Exceptions are C&M, and in some cases EPC,
which require that the constructor's compensation be on an initial reimburs-
able basis, subject to firmer definition in a later phase of the project.
Several project-related factors influence the choice of compensation method
acceptable to both owner and contractor. They include the size of the proj-
ect, the extent of commercial risk involved, the thoroughness of the defi-
nition of the scope, and the procurement rules that are applicable.
2.4 RESPONSIBILITIES, GUARANTEES, AND LIABILITIES
The responsibilities of the various contractors are established in the con-
tract. The amount of responsibility a contractor assumes depends on such
factors as activities performed, the risks or other factors beyond his con-
trol, and the amount of profitable compensation for each activity. For a
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single-responsibility project to be effective or to offer any advantages,
certain guarantees must be stated in the responsible contractor's contract
and are usually stated in the other contracts as well. These guarantee
forms may include:
Performance
Materials and workmanship
Completion date
ť Process
The performance guarantee is concerned with the assurance of completion
of the project and is Frequently supported by a performance bond. Related
to the performance guarantee is the materials and workmanship guaran-
tee, whereby the contractor pledges to install quality materials in a work-
manlike fashion, The materials and workmanship guarantee, together
with the performance guarantee, may be supported by holdback of compen-
sation until facilities are accepted by the owner.
Ill the completion date guarantee, the contractor promises to finish his
work by a specified date. This date may be stated in the contract without
additional provision, but usually exists as the basis for a bonus/penalty
provis ion.
One of the advantages of a single-responsibility contract is the process
guarantee. The process guarantee affirms the ability of the completed
facility to perform its functions satisfactorily. Process guarantees are
somewhat rare m the public sector, except for certain types of U.S. gov-
ernment building contracts, and are used only occasionally in the private
sector because of the additional cost involved and the difficulties of ade-
quate definition and measurement.
When the appropriate contractor selection methods and compensation
methods are used, the single-responsibility contract in design & construct
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projects provides greater assurance of satisfactory design, construction
and operation than traditional methods. However, written guarantees are
not free of charge. As the contractor's risk is increased, his require-
ment for compensation also increases. Contractors customarily limit
their liabilities to a predetermined amount, primarily to protect them-
selves from being forced out of business in the event of extremely high
cost overruns, The limit is generally defined as some fraction of the
total compensation to be received.
2. 5 REGULATIONS
The selection of project forms is usually subject to federal, state, and
local laws and governing regulations. These may be quite extensive and
do vary markedly from one section of the country to another, as well as
from one type of owner agency to another. Many laws and regulations
have been enacted that limit the latitude of the public owner in the selec-
tion and compensation of his contractors. In the private sector, the owner
and contractor usually have wide latitude under applicable contract law and
commercial codes
In addition, ce rtain federal requirements are applicable to recipients of
grant funds, and especially to wastewater management facility grants.
These include the current regulations of OMB Circular A102 and the EPA
regulations under Title 40, Part 35, published February 1 1, 1974. Cir-
cular A102 requires that construction labor, materials, and equipment be
procured by competitive sealed bids; that award of construction should be
made to the lowest responsive, responsible bidder, and that proprietary,
exclusionary, or discriminatory requirements must be absent from the
specifications. Some of the successes of private sector project perform-
ance may be attributed to the owner's ability to negotiate construction
contracts and to direct procurement in an advantageous manner.
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EPA regulations provide for grants for the performance of Step One of a
project (the preparation of facilities plans and related studies or the
planning phase), Step Two of the project (the preparation of construction
drawings and specifications or the design phase); and/or Step Three
(the fabrication and building of a treatment works or the construction
phase).
Application for grants for each of the three steps is consistent with tra-
ditional practice. The most recent regulations, however, provide for a
grant combining Step Two and Step Three. This allows the owner to pro-
ceed with a project form that combines both design and construction.
2. 6 DISCUSSION
Some fundamental characteristics of public works projects that differentiate
them from private sector projects are:
The absence of the profit motive on the part of the
owner
The stewardship responsibility of public officials
handling public funds
The need for full public disclosure of business mat-
ters and decision variables in public agency proce-
dures (e.g., aesthetics, land use, safety, rate struc-
tures, financing, intervenor, participation, and fair
employment practices)
The relative absence of constructor preselection
The legal and regulatory obligation to select the low-
est responsible bidder for construction work
The limited technical capability of owners
The uniqueness of major projects, or the infrequency
of their occurrence during the tenure of public officials
The transfer of private sector methods to public works projects must
take into account the differences listed above.
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There is a current trend in public works undertakings to adopt and imple-
ment new, improved project procedures. And now may be the time to
seek a thorough review and revision of public procurement and contractor
selection methods.
The EPA objectives sought through single - responsibility design & construct
project methods are:
The shortening of project schedules
The improvement of processing performance of
treatment facilities
The encouragement of new technology
Implicit in the above is the desire to increase the cost effectiveness of
water pollution control expenditures.
Accelerated project techniques allow schedules to be shortened in all the
project forms discussed in this report. These techniques reduce the time
between the completion of the design and the start of construction and per-
mit increased preprocurement of material. The greatest promise for sched-
ule acceleration, amounting to as much as 20 to 25 percent, is offered by
EPC and C&tM. The application of these accelerated methods has been
impeded by existing procurement rules, extensive agency review require-
ments at all levels, and institutional traditional practices.
Improved process performance is frequently equated with tight process
guarantees. Such guarantees, however, are difficult to define and their
validation is difficult to quantify. As a consequence, such guarantees
must necessarily have limited financial support probably amounting to
less than five percent of the facility cost. (It has been suggested that
greater process satisfaction will result simply through the application of
the single-responsibility concept of design &: construct project methods. )
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Both the shortening of project schedules and the improvement of processing
performance of treatment facilities cannot be readily achieved if govern-
mental review agencies make changes in design criteria or details during
the course of the project.
None of the project forms appears to offer any advantage in stimulating new
technology beyond that which exists in normal engineering activity. The
invention and development of new equipment and processes will be mainly
the task of the academic community or the proprietary process or equip-
ment suppliers, and will appear in projects as these ideas are tested and
made commercially available.
Given the relaxation of existing external factors inhibiting change, the proj-
ect form best suited to any given project will vary and will be a function of:
The size of the project
The complexity of the technical or managerial aspects
of the project
The size and sophistication of the owner's staff
The availability of competent single-responsibility
contractors
The availability of a complete performance criteria
package
The best project form is probably that which encourages the selection of
the most qualified assemblage of contractors.
It may be concluded that two of the EPA objectives shorter schedules,
improved process performance (and the inherent cost savings resulting
therefrom) can be approached through a broadening of the options avail-
able to grantees which would allow them to apply single-responsibility
design & construct project forms. Because of the myriad restraints be-
yond the direct control of EPA, these options should be facilitated by per-
missive, rather than directive, regulations and guidelines.
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Basic Considerations
-------
Section 3
BASIC CONSIDERATIONS
3. 1 INTRODUCTION
When an owner is faced with the need for the construction of new or ex-
panded wastewater treatment facilities within his iurisdiction, he has a
number of decisions to make. These decisions pertain to obligations re-
lating to the required quality of effluent, the time needed for completion
of the facility, the available methods of financing, and the extent of par-
ticipation of cognizant public agencies. If state and federal agencies
specify the require effluent quality, this specification becomes the basis
for determining the treatment method and hence the type of physical plant
and its associated cost. The completion date requirement may be self-
imposed and based on population, flow, and loading projections prepared
by the owner, or it may be mandated by a pollution control authority. Fi-
nancing decisions are influenced by the probable cost of the plant and the
availability of grant funds from the state and federal governments. It is im-
portant to make an accurate cost prediction at the earliest possible date
and to maintain good cost control throughout the project. All of these con-
siderations must be dealt with within the context of the owner's enabling
legislation and procedural rules.
Traditionally, wastewater treatment plants have been designed and built in
a two-step procedure: 1) a professional engineering consultant is retained
to do the planning and design services, culminating in a design report which
serves as a bid package for the solicitation of lump-sum, competitive bids
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for the construction of the facility; 2) the facility is constructed in ac-
cordance with the engineer's drawings and specifications. In other types
of public works projects and to a major extent in the private sector,
combined design construct methods of approach to capital projects are
practiced in which the same contractor is responsible for both the design
and the construction of the facility. It was in this context that the U.S.
EPA revised its construction grant regulations to allow a grantee to apply
other methods of approach to the performance of capital projects asso-
ciated with the wastewater quality improvement programs.
When considering which procedure to adopt, the owner must be aware of
the characteristics of each of the procedures, he must know what is com-
mercially available to him from contractors, and he must be cognizant of
his own capabilities.
This report deals with essentially four basic organizational forms for the
performance of design construct single-responsibility projects and
discusses in detail the characteristics of each. An attempt was made to
differentiate between the nature of each organizational form, and the con-
tractual procedures associated with that form. However, a clean-cut
separation of these two subjects could not be made, because when the
simplified structure was developed, it became apparent that the primary
distinguishing feature of these forms, as presented in Figure 3-1, was
the party with whom the owner contracts. The functional capability of
the forms can overlap significantly, with only the authority i.e. , agent
versus independent contractor differing. Using an example cited else-
where in this report, the casual observer might find it difficult to differ-
entiate between a project operated by a manager in charge of the owner's
construction contracts from one operated by a constructor using construc-
tion subcontractors to do the work.
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PAGE NOT
AVAILABLE
DIGITALLY
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In light of the above, this section discusses 1) the potentially available
contractual relationships and the functions commonly performed by the
individual contracted parties in each of these relationships; and 2} pro-
cedural and contractual factors that can be expected in each form.
After this general discussion of the forms and their characteristics in
Section 3, the forms will be described in greater detail in Sections 4
through 8.
3. 2 PROJECT FORMS
There are many ways of approaching the performance of DESIGN &
CONSTRUCT projects. The emphasis in this study is on the SINGLE-
RESPONSIBILITY forms. Although the OWNER has the fundamental re-
sponsibility for the performance of his work, he may assign a major por-
tion of that responsibility to a single CONTRACTOR. In view of the num-
ber of major contracting PARTIES involved in a project the ENGINEER,
the CONSTRUCTOR, and the MANAGER the possible organizations'can
be limited to the four basic structures diagrammed in Figure 3-1. In this
figure, a double-headed arrow represents a contract, and the overlap of
a box and an arrow represents a third-party agency relationship. Most
of the ways in which single-responsibility projects can be carried out can
be shown to be variations of one or another of these basic forms. For
.comparison, Figure 3-1 also includes the traditional engineering: con-
struction forms.
Lesser functions, which are not shown in the figure, but which might be
contracted to additional parties, include PLANNING, START-UP, and
operation.
In the definitions of project parties, no differentiation is made between
parties that use their own forces and parties that subcontract any or all
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of the work. Also, it is likely that a party may handle more than one
functional responsibility. For example, a party under a MANAGEMENT
contract may subcontract for more than incidental CONSTRUCTION ser-
vices. And since he is performing both management and construction
responsibilities, he would be considered a constructor-manager.
Similarly, the owner may find it advisable to augment his technical capa-
bility by hiring consultants to provide engineering or other support during
the planning or start-up PHASES and to interface with the several other
parties. Throughout this discussion, whenever the owner is mentioned as
the supplier of technical and commercial data, it is understood that he may
have contracted lor assistance in its development.
The traditional project form and the four basic single-responsibility proj-
ect forms are defined below, and the latter are discussed in greater detail
later in this report. The title selected for each form describes the
function(s) of the contractor who is assigned the overall responsibility.
3. 2. 1 Engineering: Construction
Engineering:construction (E:C) is the designation applied in this report to
the traditional method of performance of public works projects in which the
DESIGN engineer and the constructor are separately contracted by the
owner (see Figure 3-1A). E:C is not a single-responsibility method of
organization in the sense of this report. It is described here only as a
basis for comparison with other project forms. However, in an E:C
project, the engineer has certain construction-phase responsibilities
primarily those associated with conformance to engineering drawings
and specifications. In this regard, E:C is related to the engineering and
management (E&M) form, but in the absence of a qualified construction
supervision staff, it is erroneous to refer to E:C as an engineering and
construction management form.
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3. 2. 2 Engineering and Construction
The engineering and construction (EPC) form of project is the one most
commonly used for single-responsibility contracts (see Figure 3-1B), In
this form, a single party is contracted to perform both engineering and
construction and is referred to as the engineer-constructor. Turnkey con-
tracts fall into this category. The EPC form is frequently referred to as
engineering-procurement-construction (hence the abreviation EPC) because
the engineer-constructor normally performs the PROCUREMENT services
as well as preparing material specifications and requisitions and handling
the material delivered to the job site. Since procurement by the engineer-
constructor, however, is not mandatory in this project form, the title
"engineering and construction" is adopted in this report. The abbrevia-
tion EPC, because of its familiarity, is still retained.
3. 2. 3 Project Management
The project management (PM) form is one in which a party is contracted by
the owner to manage the project that is, to oversee on a third-party basis
the efforts of other parties contracted by the owner to carry out the functions
of the project (see Figure 3-1C). The project manager performs many of
the owner's activities and acts as an intermediary to advise and assist the
owner during the performance of these activities.
3. 2. 4 Engineering and Management
Engineering and management (E&tM) is the project form that gives the
engineer major third-party responsibilities in the owner's contract with
the constructor (see Figure 3-1 D). The E&M form differs from theE:C
form primarily in the degree of responsibility assigned to the engineer
during the construction phase. There can be considerable overlap of the
E:C and E&M forms because there is no unique contractual element which
differentiates them. In the E&cM form, the engineer-manager is called
upon to perform the activities of a project manager as well as a field
engineer. The term E&M should be used only when it is the owner's intent
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to contract with the engineer for fall construction management services
and when the engineer is qualified to perform such services.
3. 2. 5 Construction and Management
The construction and management (CL-M) project farm is the complement
of the F.& M form (see Figure 3-1E). In the CIM form, the constructor
has the third-party responsibility to oversee the performance of the en-
gineer, who has been contracted directly by the owner. In a C&M project,
the constructor-manager has overall project responsibility, which includes
sequencing the engineer's efforts to conform to the field requirements,
fitting the engineer's performance into the overall plan, and assuring that
the drawings and specifications are suitable and prepared on schedule
for use by suppliers and construction groups. This project form is rarely
used but is presented here because the constructor-manager can normally
be expected to carry more overall project responsibility than the E&M
contractor.
3. 2. 6 Project Management : Engineer and Construction
The project management: engineering and construction (PM-EPC) project
form is not discussed in detail here, but is applicable in some cases. In
this form, a manager (PM form) is retained to oversee an engineering-
construction firm which has full project responsibility (EPC form). This
is a powerful variation of the PM form combining the high degree of
control of the PM form with the centrality of responsibility of the EPC.
3. 3 CONTRACTOR SELECTION
In a single - re sponsibility project form, it is necessary to make an early
selection of the expected responsible party so that continuity can be pro-
vided from design decisions to operational acceptance,
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The selection method is influenced by the extent to which the scope of the
work is developed or by the type of COMPENSATION basis required for
the anticipated contract. In the project forms discussed, there are dif-
ferent problems of contractor selection, depending on whether the con-
tract is for management, planning, engineering, or construction. If firm
price bidding is required, the proposal basis must be very clearly defined.
If a selection is to be made very early in the development of the project,
compensation arrangements will be less firm. In the absence of firm
price bidding, the owner's appraisal of the contractor's qualifications
becomes rather important.
The owner has more latitude in contractor selection in the PRIVATE
SECTOR than in the PUBLIC SECTOR. He may prequalify bidders, apply
quantitative factors in the selection process, or select someone other than
the low bidder. He is not required to make public disclosure of his selec-
tion process, and he may adopt a number of different compensation methods.
Methods of selection vary from simple negotiation with a single entity to
complex competition involving many entities. There are basically three
approaches: competitive price, competitive negotiation, and non-
competitive negotiation. The competitive process of selection requires
each bidder to submit a proposal in response to a specific list of criteria
provided by the owner. Competition need not be strictly quantitative in
nature (i.e. , price competitive), but may involve negotiation in order to
resolve qualitative factors as well as priced items. In the public sector,
law and regulation generally require that the award of construction con-
tracts be made to the lowest responsive bidder, with negotiation of adjust-
ments to the bid after the opening allowed in some cases.
Selection procedures usually begin with a prequalification of bidders (if
this is allowed) based on the owner's knowledge of the prospective con-
tractors through previous experience, reputation, capabilities, current
workload, and other such factors.
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Upon completing the criteria for the proposal, the owner contacts a num-
ber of potentially acceptable candidates. Interested candidates are sup-
plied the criteria and asked to submit a proposal. For private sector
contracts and for public sector professional contracts, this proposal may
discuss only qualifications or it may discuss both qualifications and cost.
In the former case, the owner may use the proposals as a basis for se-
lecting the two or three most qualified candidates, who will then be asked
to enter into negotiations or to submit priced proposals, if appropriate.
Using these criteria as a guideline, the owner evaluates the contractor on
the basis of a ranking system. Evaluation by the owner includes review
of the extent of services, the proposed method of approach to the work, the
qualifications of key personnel assigned, the method of organization, the
related experience, the costing methods, and the amount of FEE (if re-
quired as part of the proposal).
During the negotiation phase that follows, the owner and the potential con-
tractor work jointly to prepare mutually agreeable contract provisions
and compensation terms. The owner may negotiate with only one pros-
pect or, in the private sector, with several prospects simultaneously.
In the latter case, the selection of the contractor becomes difficult
because the acceptable middle ground of the various negotiations can
differ markedly and make comparison difficult.
The major advantage of Tion-competitive negotiation over price competition
is that it allows one to consider qualitative factors that could affect the
overall cost of the work but that might not be easily quantifiable at the time
of contractor selection. Among these factors are expected productivity,
extent of surveillance and expediting required, proximity of contractor's
office to the work, and optimum life cycle costs. Another advantage of
non-competitive negotiation is that it tends to create an understanding
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between the owner and the propective contractor early in the game, and
this understanding reduces the likelihood of an owner-contractor adversary
relationship developing.
3.4 COMPENSATION
Over the years, many different methods have been developed for establishing
the basis for compensating a contractor and for providing suitable INCEN-
TIVES for both the owner and the contractor to operate in an economical
and responsive manner. The major forms are described in a general way
in this section and more specifically in the sections that follow.
In establishing the compensation expected by a contractor for the perform-
ance of a design & construct project (whether a contract calls for fixed
price or reimbursable cost compensation), one must consider the following
major cost components:
Salaries of technical, supervisory, clerical, and ad-
ministrative personnel
Payroll costs associated with salaries
Other direct costs, such as travel, printing, com-
munications, etc.
Field labor wages and associated costs
Subcontractors' compensations
Construction materials and equipment
Indirect costs
Fee
Incentives (plus or minus), bonuses, and penalties
Contingency in one or more of the above to com-
pensate for contributory risk and liabilities.
Several project-related factors influence the choice of compensation method
acceptable to both the owner and the contractor. These factors include the
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size and complexity of the project, the site conditions, the extent of com-
mercial risk relative to the contractor's net worth, and the completeness
of the scope of definition.
It is desirable to retain, at the earliest possible time in a project, a party
that has overall project responsibility. It is also desirable to establish as
firmly as possible the compensation basis for that contractor. As these two
desires are in conflict, a balance is required. The degree of difficulty of
striking this balance varies from one project to another. One method is to
make provision in the contract for renegotiation of the form and method
of compensation as appropriate project milestones are passed. For example,
the contractor can be engaged on a REIMBURSABLE COST basis; then when
the engineering scope is better understood, the fee can be converted to a
FIXED PRICE, or percentage basis; and finally when the physical scope is
better understood, the total compensation can be fixed or a target price set.
This stepwise method of setting compensation can be specified in the orig-
inal contract by incorporating appropriate compensation language and by
specifying milestones.
There are basically two methods of compensation: (1) fixed price and,
(2) reimbursable cost. Within these two broad categories there are a
number of variations. Some of these variations are:
Fixed price
LUMP-SUM Competitive bid
Negotiated
Reimbursable cost
COST-PLUS
UNIT PRICE
Fixed Quantity
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Optional terms which may be applied to any of these basic methods include
GUARANTEED MAXIMUM PRICE, TARGET PRICE, target quantities,
and incentive fee. Additionally, combinations of the above basic methods
are sometimes used in a single contract (e.g., professional services, out-
of-pocket expenses, material costs, and construction costs may each be
compensated under a different formula). The most common applications
of the basic methods of compensation are illustrated in Table 3-1.
Table 3-1
APPLICATION OF BASIC METHODS OF COMPENSATION
Method of Compensation
Lump-Sum, Competitive Bid
Lamp-Sum, Negotiated
Percentage
Cost-Pius
Unit Price for Material
and Labor
Unit Price for Professional
Services
Contract Between Owner and:
Engineer Manager Constructor
One of the best-known pricing methods is the lump-sum price, wherein
the contractor commits himself to the performance of a specified scope
of work for a fixed compensation.
A compensation payment schedule related to calendar time is generally
associated with the lump-sum price. Frequently, in lieu of calendar
time, percentage completion or specified milestones are used. This
payment schedule, sometimes called "project cash flow" or "progress
payments," is established to approximate the contractor's anticipated
cost and/or commitment experience.
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Under a reimbursable cost contract for engineering and management
services, a percentage of the total facility cost is commonly used to
establish a fixed compensation or to limit compensation. The "ASCE
curves" are typical of several recommended methods commonly used in
the public sector as a guide for setting the percentage. This form of
compensation may be a percentage of either actual or estimated facility
cost. The estimated cost can be used to establish a fixed-price compen-
sation at an early stage. When the actual cost is used, the compensation
is not fixed until construction costs are determined.
As a rule, the facility cost should be that portion over which the con-
tractor exerts a direct influence. Thus, owner's costs of financing,
staff, land, etc. are normally excluded, while the values of contracts
managed, as well as costs of other services provided, must be considered
for a manager's compensation.
In the cost-plus contract, the owner promises to reimburse the contractor
{ox all costs associated with the performance of the work and to provide
an agreed-upon fee, which may be either fixed (CPFF) or a specified
percentage of the costs (CPPF).
There are two methods of converting costs to compensation. One calls
for the reimbursement of actual costs experienced; the other uses unit
prices approximating actual costs.
Unit prices are commonly established at levels approximating the con-
tractor's DIRECT COST and may or may not include markups. Unit prices
will frequently include INDIRECT COSTS and they may include fee as well.
More complex projects do not lend themselves to combining indirect costs
and fee components into unit prices because these components may be ap-
plied in differing ratios to different functions (e.g., field office salary ex-
penses carry a different indirect cost ratio than do home office salaries).
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In an alternative compensation method, one sets a fixed or target value
for the amount or quantity of resources the contractor uses, i. e. , materials
or labor man-hours, and calculates the compensation on the basis of the
actual costs of the materials and/or labor. This form makes the contractor
responsible for quantity (the thing over which he has most control) and allows
prices to be set by the marketplace.
Although not an incentive in the normal sense, the application of a guaranteed
maximum price (GMP) to a contractor's compensation influences his cost
consciousness, particularly as the forecast costs approach the GMP. The
costs of performing required services that cause the contractor's expenses
to exceed the GMP must be swallowed by the contractor. Savings are to the
benefit of the owner. The GMP value is established by negotiation between
the owner and the contractor and is usually some agreed-upon percentage
over the estimated cost of performing the specified scope of work.
Because of its up-side risk and lack of down-side gain, the GMP is usu-
ally unpopular with contractors. This lack of popularity could be lessened
if incentives were introduced into a GMP contract in the form of a partici-
pation by the contractor in some portion of cost savings below the GMP.
There are those who suggest that the fact that the GMP is set at a level
higher than the most probable cost is enough of an incentive for the con-
tractor. This objection can be met by using a more complex incentive
formula which provides an incentive if the actual cost of the work falls
below some predetermined fraction of the GMP, rather than below the
GMP itself, leaving a "dead-band" between the GMP and the incentive
base.
An incentive system being used with increasing frequency in reimbursable
cost contracts is the target price system. In this system, there is a
sharing of savings or overruns relative to a target price value that is
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established at or only slightly above the most probable cost estimated
at an early stage in the design development. Sharing is normally equal,
with the contractor's share of savings or overruns limited to an agreed-
upon fraction of his base compensation.
A limited form of target price incentive is the "value engineering incentive"
that is at present being applied to some government contracting. In this
incentive scheme, the contractor shares 50 percent of the savings achieved
as a consequence of the implementation of approved cost-reduction ideas
developed during construction. A similar procedure has also been applied
by some to the design phase. In this procedure, estimated overall cost
savings or specific improvements are rewarded, giving the engineer (on,
say, a lump-sum contract) incentive to spend more in engineering to gain
a more cost-effective facility.
For a given job, the contractor's price will depend upon the compensation
terms applicable. In general, a target price approximates the most probable
cost, a lump-sum price is 5-10 percent higher than the most probable cost,
and GMP is 10-20 percent higher than the most probable cost. The higher
prices for lump-sum and GMP reflect the higher risks associated with
these types of compensation. If desired, targets may be applied to quan-
tities instead of costs.
In addition to incentives to perform within cost budgets, there are incen-
tives applied to time budgets (see the completion guarantee below) in the
form of bonus/penalty provisions for early/late completion. These usually
involve a unit amount of adjustment to compensation for each day the com-
pletion precedes/follows a specified date. On projects of long duration, a
grace period of several weeks is generally provided on either side of the
scheduled completion date. Here again, the total adjustment of the con-
tractor's compensation by this means is usually limited to some fraction
of his base compensation.
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3. 5 RESPONSIBILITIES, GUARANTEES, AND LIABILITIES
The fundamental responsibility for a project resides with the owner. The
responsibility of the contractor is established in the contract between the
parties. The amount of responsibility that a contractor can assume is
dependent on such factors as the authority granted to him, the number of
activities he performs, the risks or factors beyond his control associated
with the performance of these activities, and the amount of compensation
he receives.
Both implied and explicit GUARANTEES of various sorts exist, but to
prevent misunderstandings, as many guarantees as possible are explicitly
included in the written contract. The guarantee is supported by the rep-
utation and integrity of the contractor as well as by contract law.
The usual types of guarantees are:
Performance
Materials and workmanship
Completion date
Process
The PERFORMANCE GUARANTEE is implicit in any contract. It is
commonly supported by holdback of compensation by the owner. In the
public sector, and to a lesser extent in the private sector, performance
bonds are required of all construction contractors.
The basic form of stated guarantee is the MATERIALS AND WORKMANSHIP
GUARANTEE. This guarantee commits the contractor to assist the owner
in enforcing suppliers' guarantees and warranties and is supported by the
holdback of compensation provided for in the contract or by performance
bond.
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COMPLETION DATE GUARANTEES are not common. Since their function
is to protect the owner against undue loss of profit and/or usage of the fa-
cility, they are usually supported by a bonus/penalty provision which esta-
blishes a per diem amount of payment to the owner/contractor for any
schedule overrun/underrun.
The PROCESS GUARANTEE is also not common because:
It is difficult to define m terms of actual conditions
versus design conditions.
The performance of the facility is related to external
conditions, such as process feed or influent character-
istics, that may change prior to completion.
It poses a significant risk to the contractor and hence
requires increased compensation.
Expending additional effort to assure good de-
sign and construction makes more sense than
pursuing a default in a process guarantee.
With the exception of some U.S. Government contracts, process guarantees
in the public sector are rare. Recently, however, in response to bidding
requirements in a few water pollution control projects, process equipment
suppliers have offered limited process guarantees to constructors, through
whom the guarantee flowed to the owner.
Support of a process guarantee can take many forms. The most stringent
form, which is commercially impractical for large facilities, is to require
the contractor to repair or replace the facilities, at his own expense if
necessary, to bring the performance characteristics up to specification.
The most common form requires redesign at the contractor's expense
and modification at the owner's expense. Some process guarantees are
similar to a performance guarantee, involving simply a commitment to
maintain engineering and construction forces at the owner's expense until
the facility performs to the owner's satisfaction.
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In Europe, and to an increasing extent in the United States, process equip-
ment manufacturers have provided process guarantees for process con-
figurations that incorporate their proprietary equipment. In the past, these
guarantees were limited to "packaged units, " but it has become more and
more common for them to cover unit processes or whole facilities sup-
plied on an EPC basis.
When the characteristics of the material charged to the facility are well-
known, a process guarantee can be supported by a liquidated damages
formula establishing a financial penalty for falling below guarantee levels
of certain produce values (e.g. , dollars per percentage point of deviation
from specified efficiency, dollars per unit of chemical required over speci-
fication, or dollars per incremental unit of power consumption). Frequently,
the contract will provide premium compensation for process performance
that exceeds expectations as well as penalties for process performance that
falls short of expectations.
When entering into a design & construct contract, the contractor assumes a
number of liabilities in addition to those associated with the guarantees dis-
cussed above. These include liabilities related to his possible negligence,
liabilities for damage to the owner as a result of any act by the constructor
or his employees (such as accident or error in employee judgment), and
contingent or secondary liabilities from owner's losses resulting from
but not directly caused by the contractor's actions. However, contractors
rarely accept contingent liabilities because prior approximation for risk
assessment purposes is difficult. In lieu of contingent liability, liquidated
damages formulas are sometimes agreed upon for such things as failure
to complete the facility on time; these formulas should reasonably approxi-
mate actual damages.
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The contractor normally sets a limit on the magnitude of the liabilities
accepted, mainly to prevent his being forced out of business by some ex-
tremely high-cost incidents. (The seeming precedent of small, low-net-
worth contractors accepting unlimited liability must be viewed in the light
of actual potential recovery under bonds, errors and omissions insurance,
and the bankruptcy laws in the event of a major claim. ) Liability limits
are some fraction of the compensation received. Financial liabilities
associated with guarantees, although limited, serve as commercial in-
centives to the contractor. However, unsupported guarantees establish
the contractor's intent to he responsible for that aspect of the work.
Insurance is commonly purchased to cover a large number of the normal
risks. Directly or indirectly, the cost of such insurance appears in the
contractor's compensation from the owner. Contract language establishes
which party is responsible for deductible and uninsured risks.
While the fundamental responsibility for a project rests with the owner and
his contractor, all who participate in influencing the technical or adminis-
trative nature of the project share or assume that responsibility, and this
must be reflected in contract terms or compensation. The technical im-
pact, the added costs, and the time delays resulting from governmental or
public reviews and revisions can neutralize the contractor's responsibilities,
voiding the advantages of the single - responsibility concept of project
pe rformance.
3. 6 LAWS AND REGULATIONS
The laws and government regulations applicable to design & construct
projects are quite extensive and vary from one locality to another. As
a general rule, all contracts are operated under the commercial code
of the state designated in the contract. The p e rformance of corporations,
partnerships, and consulting engineers is regulated at the state level,
and corporate licensing, personal licensing, and permits are usually
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required. In certain states, federal, state, and local legislation places
restrictions on corporations that wish to perform construction work,
engineering, or consulting services. In other states, only individuals
and partnerships are permitted to practice engineering. There are a
number of codes and precedents bearing on the responsibilities, lia-
bilities, and obligations of various parties to contracts, particularly on
the quality of engineering and construction. More information on laws
and regulations can be found in later sections of this report.
In the public sector, some of the major provisions pertain to 1) the
method of selecting contractors, 2) the requirements for the separation of
engineering and construction activities, 3) competitive and nondiscrimina-
tory bidding, and 4) public disclosure.
Certain federal requirements are applied to recipients of federal grant
funds when these funds are used to assist development of public facilities,
regardless of the method of project execution. Federal procurement reg-
ulations are found in the "Uniform Administration Requirements for
Grants-In-Aid to State and Local Governments, " OMB, Circular A-102.
The regulations of most importance to the subject of this study can be
briefly summarized as follows:
All construction labor, materials of construction,
and installed equipment must be procured by com-
petitive sealed bids.
Awards for facility construction must be made to
the responsible bidder making the lowest responsive
bid.
No specification for bids in connection with public
facilities shall be written in such a manner as to
contain proprietary, exclusionary, or discrimina-
tory requirements other than those based upon per-
formance, unless at least two brand names or trade
names of comparable quality or utility are listed and
are followed by the words "or equal. "
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There are provisions in A-102 for the project officer to waive the re-
quirement for competitive lump-sum bidding under certain circumstances,
or for waiving the nonproprietary limitation.
The EPA regulations of direct concern to this study are those promul-
gated under Title 40, Protection of Environment, Chapter I, Environ-
mental Protection Agency, Part 35, State and Local Assistance, as pub-
lished in the Federal Register, February 11, 1974. These regulations
indicate that the construction of federally financed facilities is usually
accomplished in three steps (the analogous project phases as defined in
this report are shown in parenthesis):
Step One: Facilities plans and related studies (Planning Phase)
Step Two: Preparation of construction drawings and specifi-
cations (Design Phase)
Step Three: Fabrication and building of a treatment works
(Construction Phase)
A minimal amount of engineering work is required to develop the informa-
tion needed m an application for a Step One grant. This data should be
available from current basin plans and/or metropolitan area-wide plans,
as required under other EPA regulations. Many owners are qualified
to prepare a Step One application without additional technical assistance.
The content of an application for a grant for design work (Step Two) is
more detailed. Essentially, it is a submission of the work completed
in Step One (Planning). Since several of the Step Two application re-
quirements call for a significant amount of specialized technical and
professional skill, most public entities must retain an engineer to de-
velop the contents of this application.
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An application for a grant for construction (Step Three) includes com-
pleted construction drawings and specifications, developed in Step Two,
which can be used for bidding purposes.
The regulations also provide that a grant may be authorized for a com-
bined Step Two plus Step Three project. In the current regulations, two
forms of combined grants are described: the Step Two and Three, and
the Step Two/Three. Of interest in this report are the Step Two/Three
applications, which are for design & construct projects entered into on
the basis of performance criteria and basic design, and which are followed
by the submission of detailed engineering drawings and specifications for
EPA approval before construction proceeds. The required detailed design
review by the EPA and state approved agencies can be done progressively
as designs are completed. Where state regulations are not consonant
with federal regulations on this matter, they inhibit implementation of ac-
celerated project schedules possible under a Step Two/Three approach.
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Engineering : Construction
-------
Section 4
ENGINEERING: CONSTRUCT ION
4. 1 GENERAL DESCRIPTION
Engineering:construction (E:C) is the most commonly practiced form of
project execution in the public sector. It is the norm for wastewater
management facilities developed by state and local agencies.
The typical responsibilities of the various parties in an E:C project are
illustrated in Figure 4-1,
The E:C form of project is also employed occasionally in the private sector,
but in a manner that differs somewhat from that used in the public sector.
^-^phases
PARTIES^\^
PLANNING
DESIGN
PROCUREMENT
CONSTRUCTION
START-UP
OPERATION
OWNER
A
ENGINEER
0
\
CONSTRUCTOR
# COMMON PRACTICE
O ALTERNATIVE PRACTICE
Figure 4-1. Typical Responsibilities of the Various
Parties in an E:C Project.
4-1
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Typically, in a private sector project, an engineer is retained because of
his special qualifications and because of the owner's need to increase his
technical staff so that it can handle the large task of preparing a definitive
scope description and bid-request documents for use in subsequent bidding
by potential constructors. The engineer's services are usually terminated
immediately after the bidding documents have been submitted or (if he has
been engaged to assist in bid evaluations) immediately after the con-
struction has been selected. However, if the engineer is qualified to
do construction, and the owner has no objection, the same firm may
compete for and win the construction contract as well. In the latter
case, the form becomes EPC (see Section 5) under two sequential con-
tracts. Normally, an owner has sufficient engineering capability to
oversee the work of the engineer and the constructor, and the E:C form
is used in the private sector primarily to provide the owner maximum
flexibility in selecting the best engineer and the best constructor for
each phase.
In the public sector, the engineer is responsible for providing profes-
sional engineering services, including total responsibility for design
engineering, and in many instances for planning as well. In addition, he
usually bears some measure of responsibility as the owner's agent for
providing engineering supervisory services during construction. This
responsibility varies widely. In the case of a public owner with a large
and sophisticated staff capable of construction management, the engi-
neer's responsibility for the project execution may virtually cease once
the owner accepts the detailed plans and specifications. If the public
owner does not have m-house capability for construction management or
if he recognizes the desirability of retaining the engineer in a more re-
sponsible role for execution of the project in conformance with the engi-
neer's designs, the engineer is given a larger assignment during con-
struction.
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The usual practice is for the public owner (no matter how capable he may
be himself) to require some degree of general supervisory responsibility
by the engineer during construction. This takes the form of periodic in-
spections, approval of shop drawings, review of the constructor's monthly
progress statements, participation in final inspection procedures, and
general consultation during construction. On occasions, the engineer may
be asked to provide continuous resident engineering and inspection service,
to approve the constructor's change and extra-work orders, and in general
to serve as the owner's agent in matters described in the specifications as
"rights reserved to the owner. " The engineer may also function as the
purchasing agent for the owner when the latter has to furnish equipment,
materials, and supplies. And finally, he may provide start-up, operator
training, and performance evaluation.
When the engineer acts in a capacity requiring in-depth knowledge of
construction practices, he is operating in a manner described in this
report as the engineering and management project form (see Section 7).
The existing E:C method is characterized by a separation of the responsi-
bilities of the engineer and the constructor. The engineer performs his
planning or conceptual function and completes the design; competitive bids
are solicited; a contract is rewarded; and the construction is performed
by the constructor. As a result, the form is sometimes called "sequential
engineering:construction. "
The sequential nature of this form is sometimes modified by prepurchase
of long-delivery major equipment and by preparation of multiple-design
reports. This overlap of design and construction in the public sector is
mandatory on very large projects and is normally undertaken by owners
with competent in-house project management staffs that are capable of
working with the contractor on complex problems. If the owner does not
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have the necessary in-house management capability in a public sector
project, this capability must either be engaged as a professional service
(PM form) or must be assumed as an additional responsibility by the
engineer (E&M form) or the constructor (C&cM form).
Two major projects carried out under a form that resembles E:C more
closely than any other form are: (1) the rapid transit rail system of the
Washington Metropolitan Area Transit Authority, and (2) the Blue Plains
wastewater treatment plant of the District of Columbia Department of
Environmental Services.
The Washington Metropolitan Area Transit Authority has retained one
firm to provide both preliminary (conceptual) engineering services and
design engineering management of approximately 40 firms performing
engineering design services, and has engaged the services of another
firm to provide construction management of over 50 major constructors.
In the case of the Blue Plains wastewater treatment plant, the planning
and the design of a portion of the job were performed by one engineer,
other portions of the design were completed by another engineer, and
construction to date has involved ten or more constructors.
4.2 CONTRACTOR SELECTION
4.2.1 Engineer
In the public sector and to a lesser extent in the private sector, the amount
of compensation is not a primary factor in selecting the engineer. The
engineer does not bid for work, nor will he knowingly allow price to be a
consideration in the determination of his qualification to do the work pro-
posed. Only later, after a selection based on qualifications is made,
is the price of his services considered.
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Since price is not an initial consideration, the engineer's qualifications
and availability are the principal basis for selection. The owner1 3 task
is to make an objective analysis of the qualifications of the engineers
available and to select the one most competent for the project at hand.
Normally, there are several engineers available, each with comparable
qualifications.
In the public sector, engineer selection procedures are usually more
rigidly constrained than in the private sector. Pertinent legislation on
this subject includes the Brooks Bill, the Annual Military Construction
Authorization Bill, state laws, and state board rules of professional
conduct. In addition, several professional associations have suggested
procedures concerning the selection of engineers for public sector proj-
ects, all of which rely on the concept of initial selection based solely
on qualifications.
In the private sector, under the E:C form, the engineer may be selected
rather arbitrarily by the owner on the basis of < 11 the owner's prior
experience with the engineer or (2) a proprietary process position held
by the engineer. When more than one engineer is qualified, the owner
may use any one of several contractor selection techniques involving
proposals and direct negotiation.
4. 2. 2 Constructor
In the public sector, selection of the constructor under the E:C form is
accomplished by taking competitive bids from constructors who have
responded to a publicly advertised invitation to bid. Bids are usually
received and handled in such a manner as to maintain seciecy until
simultaneous public disclosure, and tfie contract is awarded to the low
responsible bidder.
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Because the design specifications under the E:C form are relatively de-
tailed, the constructor in the private sector is often selected on the basis
of a firm lump-sum price proposal based on the specifications. In many-
cases, however, his qualifications, past performance record with the
owner, and other factors are often considered as well as price, and it
is not unusual for private sector awards to be given to other than the low
bidder. Industry ethics require, however, that the owner have cause for
passing over the low bidder.
4. 3 COMPENSATION
4. 3. 1 Engineer
Under the traditional E:C form of project execution, the method of com-
pensation for engineering services can be determined in several ways,
depending on the services provided, the custom or practice of the owner,
and other factors. Normally, it is in the form of some reimbursable
cost method, with or without a guaranteed maximum price (GMP). Lump-
sum compensation may be used when the scope of the work can be com-
pletely agreed upon.
Oddly enough, in the public sector, ill-defined projects (e.g. , planning
phase conceptual studies, environmental assessments, feasibility studies,
and other "front-end" consulting services) are frequently contracted on a
lump-sum basis in spite of the fact that it is precisely this type of work
for which it is most difficult to predetermine the scope of the project or
the amount of work required. The reason lump-sum contracts are used in
these projects is that it is felt that reimbursable cost methods do not pro-
vide the owner adequate control of the cost of the services. Hence, most
federal agencies and many municipal agencies require that a guaranteed
maximum price (GMP) be included in reimbursable cost contracts. From
the engineer's standpoint, control of the scope of work under a reimburs-
able cost contract is not within his power, yet he is expected to assume the
4-6
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risk of costs exceeding the GMP. As a result, he is more inclined to
accept a lump-sum type of contract whose scope is carefully defined.
In the public sector, design phase services under the E:C form are most
commonly contracted on one of the following bases:
Lump-sum
Percentage of facility costs (i.e., the ASCE curve)
Unit prices up to the guaranteed maximum price
As long as the planning work is sufficiently detailed, it is possible to
accurately determine the scope of the work'for a design assignment and
consequently to predict the type and amount of work required. For
this reason, a lump-sum contract for design services is recommended
and preferred by most engineers, although a unit price contract with a
GMP is often acceptable. Both lump-sum and unit price contracts have
many advantages over percentage of facility cost contracts and are be-
coming more common in public practice.
In the private sector, the engineer may perform his services under any
of the forms of compensation described earlier. It is common in private
work to use a reimbursable cost method constrained by an informal type
of guaranteed maximum price, which, when approached or equaled, is
subject to reevaluation between the parties before work continues. When
the scope of the project is sufficiently defined, design work is often done
on a lump-sum basis, particularly when a proprietary process engineer
supplies the design of a processing unit in his field of specialization.
In the special case of licensed proprietary processes, the engineer may
negotiate the cost of design in conjunction with the royalties or other con-
siderations associated with the proprietary processes. Because of the
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compensation received through a separate royalty agreement, the actual
engineering compensation may not be commensurate with actual costs.
In both the public and private sectors, engineering services performed
during construction are usually compensated for under a unit price method.
The unit price method is employed because the amount of work required
is difficult to predict and may depend on the constructor's or owner's
actions. And both of these are beyond the engineer's control. Despite
the difficulties in predetermining the construction engineering effort re-
quired, many municipalities insist on a guaranteed maximum price or
lump-sum price, frequently based on a percentage of facility cost.
4. 3.2 Constructor
In an E:C project in the public sector, constructor services are contracted
for on either a lump-sum or a unit price basis. In some cases, the con-
structor is asked to furnish a unit cost breakdown of his bids that will
provide individual prices for various items, including equipment, sub-
contracts, or other construction items that may be changed during the con-
struction operations. This breakdown helps determine the value of pro-
gress payments, provides a basis for negotiating changes and generally
assists the engineer and owner in evaluating the bids and the constructor's
operations. The award, however, is based solely on the amount of the
lump-sum, and this sum determines the value of the contract.
Unit price bids closely resemble lump-sum bids. The chief difference
between them is that in unit bids, the total project is broken down into
units for which quantities are provided, and the bidder bids a price for
each unit. The unit prices are multiplied by the quantities estimated by
the engineer, and the sum of the unit cost extensions provides a total price
which is used as a basis for comparison of bids.
4-8
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Single-facility installation (e.g. , pump stations and treatment plants) re-
quiring complex construction operations, large amounts of installed equip
ment, and several distinct operations (e. g. , structural, mechanical, and
electrical work) are usually bid on a lump-sum basis. On the other hand,
projects that call primarily for the application of construction labor and
construction equipment are usually bid on a unit price basis.
In the private sector, lump sum price and unit price construction con-
tracts as described above are commonly used. However, while the E:C
project form lends itself well to the solicitation of lump-sum proposals
from constructors, in the private sector other compensation forms may
also be applied. For example, the owner may want the constructor in-
volved as early as possible in the project and, consequently, may retain
him prior to the completion of the design work by the engineer. A typi-
cal way of accomplishing this might be the "fee bid, " wherein the con-
structor is given an approximate description of the scope of the total
facilities and the scope of his services, from which he estimates the
degree of involvement and sets a firm fee to be applied in a cost-plus
fixed fee form of compensation.
4.4 RESPONSIBILITIES, GUARANTEES, AND LIABILITIES
4.4.1 Engineer
In the public sector, under the E:C project form, the engineer assumes
little or no contractual liability for process performance of the facility.
As a rule, he guarantees only optimum professional effort and freedom
from errors and omissions that relate to the physical integrity of struc-
tures and components. It is generally considered unprofessional to pro-
vide financial guarantees, because the engineer does not accept employ-
ment based on price considerations, and his incentive for good perfor-
mance is the maintenance of his reputation and the anticipation of con-
tinuing work. When process guarantees are offered, they are limited to
redesign services required to correct deficiencies.
4-9
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It is apparent that planning studies do not carry process guarantees and
can be performed only on a "best effort" basis. To limit guarantees in
the design engineering phase to simply a "best effort" basis is increas-
ingly coming under attack in the courts. When considering such questions
in the recent past, the courls have held that the engineer does have a
process guarantee responsibility. The increasing difficulty of acquiring
errors and omissions insurance and the rising premium costs associated
with this insurance attest to the changing nature of this matter.
In most cases, the private sector guarantees by the engineer are very
similar to those in the public sector, except that in the private sector the
engineer is usually expected to provide some form of process guarantee.
4.4.2 Constructor
Under the E:C form, in both the public and private sectors, the construc-
tor's function is to construct the facility in accordance with the engineer's
plans and specifications and within the time and price constraints specified
in his contract with the owner.
Constructors in the public sector have historically been required to guar-
antee their work in accordance with the plans and specifications (perfor-
mance, materials, and workmanship guarantees). In fact, most govern-
mental entities have regulations stipulating that constructors provide
bonds as security. The amount of the bonds is commonly 100 percent for
performance and 50 percent for material and labor. The bond require-
ment relates to the timely completion of services with good workmanship,
to the quality of materials and equipment applied to the project relative
to the engineer's plans and specifications, and in the absence of specified
standards, to generally accepted industry standards. If the constructor
purchases specified equipment, he assumes the responsibility for pursuing
the manufacturer's warranties pertaining to the equipment. If on the other
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hand, the equipment is purchased by the owner, the constructor assumes
responsibility only for the quality of installation.
In the private sector (as in the public sector), the general absence of facility
design or process design responsibility by the constructor limits the guar-
antees to the normal materials, workmanship, and performance guarantees.
In addition, the requirement that the constructor provide bonds may not
exist or may be waived.
4. 5 LAW AND REGULATION
There are no laws and regulations applicable to E:C projects performed in
the private sector beyond those previously discussed.
4. 5. 1 Federal Laws and Regulations
In the public sector, there are no federal Laws that unduly inhibit the E:C
form of project execution beyond those described earlier concerning com-
petitive bidding. E:C is, in fact, the most popular form and is actually
required under many existing laws.
The E:C form is consistent with EPA regulations in that it separates the
preparation of construction plans and specifications (Step Two) from the
construction (Step Three). And according to these regulations, a separate
grant can be made for each step. The E:C form is also suitable for Step
Two/Three projects, whether carried out in a sequential or in an accel-
erated manner.
4. 5. 2 State and Local Lawa
State and local laws concerning execution of public projects are compatible
with and reinforce federal requirements. Concepts embodied in federal
law tend to be amplified by state law and are frequently carried forward
in a more restrictive manner.
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Most states require competitive bidding for construction work, require
that the award go to the lowest bidder, and place restrictions on the use
of proprietary, exclusionary, or discriminatory language in specifications.
The previous discussion regarding the effect of similar federal require-
ments on the E C execution method obviously applies to state and local
laws as well
4.6 SUMMARY
Enginee ring :construction (E:C) is the traditional method of executing
projects m the public sector. The method is characterized by a sharp
separation between the engineering function and the construction func-
tion, with the engineer and the constructor separately contracted for
by the owner.
The engineer is employed on a professional basis to perform services
and normally does not bid for work. He is responsible for all planning and
design activities and may have some supervisory responsibility over
construction as an agent of the owner. The engineer guarantees his
work against errors and omissions, but does not contractually provide
process guarantees.
The constructor makes competitive bids that are based on detailed plans
and specifications. In the public sector, bids are either lump-sum or
unit price, award is made to the lowest responsible bidder, and the bids
are secured by bonds. The constructor is usually expected to provide
performance guarantees and materials and workmanship guarantees and
is frequently responsible for pursuing equipment warranties. He does
not contractually provide process guarantees since he has no part in the
des ign.
There are no federal state, or local laws or regulations which unduly
restrict the E:C method.
4-12
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Engineering and Construction
-------
Section 5
ENGINEERING AND CONSTRUCTION
5. I GENERAL DESCRIPTION
The engineering and construction (EPC) form is the most commonly-
practiced form in private sector construction of process facilities of
small and intermediate size. Very large projects (over 100 to 200
million dollars) are often beyond the staffing and financial capabilities
(if lump-sums compensation is required) of a single engineer-constructor.
These large-scale projects can be divided among several EPC contractors
that are contracted with the owner and managed by the owner or a project
manager. This is the PM:EPC form described earlier.
The typical responsibilities of the various parties in an EPC project are
illustrated in Figure 5-1.
^PHASES
PARTIES"
PLANNING
DESIGN
PROCUREMENT
CONSTRUCTION
START-UP
OPERATION
OWNER
\
./V
7*
ENGINEER -
v
v
CONSTRUCTOR
0
u
# COMMON PRACTICE
O ALTERNATIVE PRACTICE
Figure 5-1. Typical Responsibilities of the Various
Parties in an EPC Project
5-1
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A distinguishing characteristic of theEPC form is that the contractor is
free to proceed with the purchase of equipment and materials and with
construction activities as soon as they are adequately defined in the engi-
neering phase (barring legal or regulatory restraint). There is no time
loss due to design information retention (for design report preparation)
and to subsequent constructor lead-time requirements. An exception to
this occurs when theEPC contractor finds it advantageous to give certain
portions of the work to subcontractors, but time can be saved by obtain-
ing unit price bids from subcontractors on preliminary design information
rather than awaiting final detail design.
The EPC form is used m municipal wastewater treatment projects only
to incorporate package facility elements. Frequently these components
are of a proprietary nature. When the size of the facility is small, these
elements may constitute essentially the total facility. These small proj-
ects, which can be developed with package plant elements, are a separate
class of project exempted from the general prohibition of the EPC form
from public sector work.
Several federal agencies allow the use of EPC project forms for package
units. (These units may be quite large. ) The Department of Defense,
for example, recommends this method of procurement for package-type
wastewater treatment facilities. With this exception, the EPC form of
project is virtually nonexistent in the U.S. wastewater management field.
In Europe, EPC procedures are commonly used in constructing waste-
water treatment facilities and the equipment supplier is commonly the
EPC contractor. In the U.S., the suppliers provide the small package
units and recently have begun furnishing whole processing units on an
EPC basis, incorporating their equipment when applicable.
5-2
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5. 2 CONTRACTOR SELECTION
The selection of an EPC contractor normally follows the planning phase.
The contractor is retained at the beginning of the planning phase only if
he js able to handle the complexities of the developmental and planning
work. If such a firm is retained to help with the planning, it is on a
negotiated basis, with the understanding that at a later date the firm will
be allowed to negotiate for engineering and construction (private sector)
or to bid for the remainder of the project.
In a sense, EPC resembles the construction phase of the E:C form in
that the owner prepares, or has some other party prepare, a set of bid-
ding documents suitable for the solicitation of proposals from contractors.
In fact, however, the differences are significant:
The EPC proposals are solicited on the basis of
criteria and general specifications developed in the
planning stage, rather than on the basis of the detailed
plans and specifications produced in the design phase.
When lump-sum bids are required, instead of using
completed designs, the bidders do a great deal of
engineering, obtain equipment bids, and prepare
a definitive cost estimate upon which to base their
proposals.
A significant amount of engineering is included in the
scope of work of the contractor.
In private sector lump-sum EPC bidding, the prospective contractors'
design work procurement effort and the cost estimating required for a
proposal may take three to five months and cost up to several hundred
thousand dollars each for major jobs. Occasionally, the owner will offer
to compensate unsuccessful bidders (preselected) for all or part of their
proposal costs to preclude qualified candidates from declining to bid for
5-3
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financial reasons. Because of the advanced stage of desLgn and procure-
ment at the time of award, the project begins very promptly once the
award is made. However, in the long run, owners pay the bidding costs in
incrementally higher project costs.
Some federal programs provide for prequalification of a list of potential
EPC contractors based on submitted statements of qualifications. Pro-
spective contractors so prequalified are then asked to submit detailed
proposals containing preliminary designs and facility specifications, a
firm price and completion schedule, and any other information necessary
to characterize their offer. The contractor who offers the least-cost (first
or life cycle) facility, considering both price and quality, is selected.
Different agencies of the federal government have different selection pro-
cedures: some agencies allow negotiation with one or more of the pro-
posers prior to selection; some depend more on bid price, and some rely
heavily on the quality of the proposal.
In the bid review, the owner reviews the details of the facility designs
submitted by the bidders. The following kinds of comparisons are made-
conservatism in design, use of known processes, economic tradeoff of
operating versus capital costs, ease of maintenance, future expansion
capability, operating flexibility, and in Lhe private sector a subjective
evaluation of quality of design, equipment selection, and relative con-
tractor capability.
The owner then enters into discussions with one or more of the bidders
to 1) clear up exceptions or to 2) modify the scope of the work to better
suit his needs and desires or to bring competitors to a more common
basis. During this period, the contractor may find it necessary to adjust
his bid price to reflect revisions requested by the owner.
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These revisions may change the ranking of the bidders. Unless significant
changes develop, the bidding procedure is seldom repeated and once the
proposals are technically and commercially acceptable, the owner selects
the lowest bid, as adjusted.
The procedures recommended by the DOD for EPC contractor selection
are:
One-Step Competitive Negotiation. One-step procedure
provides for the competitive evaluation of priced tech-
nical proposals, with the award decision based on the
optimum combination of technical merit and price rather
than on the lowest bid price. The agency enters into
negotiations with the most promising bidders to reconcile
minor deviations from criteria. Detailed comprehensive
evaluation criteria are used which provide the means to
competitively evaluate the quality of the technical proposals
as measured by functional life cycle costs, aesthetics,
and other considerations as may be indicated. One-step
procedures are appropriate for use in the acquisition of
facilities in which a wide variety of acceptable solutions
are available.
Two-Step Formal Advertising. The use of two-step
formal advertising is considered appropriate in situations
in which it is possible to prescribe, through the use of
performance specifications, readily available commercial
products and/or expertise which will satisfy the project
requirements. The first step is the submission of a tech-
nical concept proposal. The second step is the submission
of price proposals by all those offering acceptable technical
concept proposals.
For a more detailed description of.the DOD procedures, see Department
of Army "Interim Guidance for Two-Step Construction Contracting,"
July 9, 1971, and ASD (I81L) memo, dated November 27, 1972.
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5. 3 COMPENSATION
There is a tendency to equate lump-sum compensation with the engineer-
ing and construction project form, but the EPC form can have terms of
compensation other than lump-sum. It is true that of the project forms
discussed in this report the EPC form lends itself most conveniently to
lump-sum compensation for the total project. But as in any of the project
forms, the compensation method agreed upon between the parties is that
which best satisfies the needs and desires of the parties.
Public sector EPC projects are compensated primarily on a lump-sum
basis, established by competitive pricing analysis which determines the
least overall cost. The lump-sum amount of the contractor's bid then
establishes the value of the contract and consequently the amount of his
compensation. Lump-sum compensation is inappropriate in projects that
might go beyond the state of the art. In such projects, compensation could
be on a reimbursable cost basis for all portions of the work or for just the
engineering.
EPC work need not always be on a lump-sum bid price basis. One popular
and mutually desirable compensation method involves a multi-step pro-
cedure through which the contractor is compensated as the project proceeds.
The following example illustrates one such case. It is drawn from the pri-
vate sector.
The owner engaged an engineer-constructor on a reimbursable cost (unit
price) basis to perform the planning phase, which consisted of two parts:
the first part involved rather general conceptual studies and decisions and
lasted approximately one year; the second part was devoted to a defini-
tion of the process design. After the planning phase was completed, the
engineer-constructor spent about sue months on the design effort, also
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on a cost reimbursable basis, until a definitive facility cost estimate could
be prepared. By the terms of the original contract, the parties had agreed
to establish a firm or target price, at the owner's option, for the supply of
equipment and materials and for the construction of the facilities, the price
to be based on the definitive cost estimate prepared by the engmeer-
constructor and thoroughly reviewed by the owner. Upon completion of the
planning phase, the scope of the project was sufficiently defined to allow a
lump-sum price to be determined. But because the facility interacted so
intimately with existing processing facilities, the owner selected the CPFF
terms in order to maintain maximum participation in the project effort.
5.4 GUARANTEES AND LIABILITIES
The obligations of the engineer-constructor under the EPC form are a
combination of the engineer's and the constructor's guarantees and lia-
bilities as described in the earlier sections. Process guarantees are
frequently specified in private sector process plant contracts and in
certain federal projects.
The performance and process guarantees are usually secured by signifi-
cant holdback of compensation by the owner. Performance bonds are
normal in the public sector. The contractor's completion schedule may
be secured by liquidated damage or bonus/penalty provisions.
Proprietary or exclusive know-how is particularly well-handled by the EPC
form of project when it is applied to facilities that may be supplied by a
process licenser in a manner similar to a piece of complex major equip-
ment. These facilities might be complete package units or components
of a larger facility, assembled on site by the engineer-constructor. In
the former case, the proprietary supplier would be the engineer-constructor;
in the latter case, the proprietary component might be supplied to the EPC
contractor on a subcontract basis.
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An attractive characteristic of manufacturer-supplied processes is that
the suppliers frequently offer process guarantees not available from com-
petitive engineers or engineer-constructors who do not have proprietary
equipment or processes. Since the process contractors have as a rule
spent a good deal of money to develop and test their product line, a portion
of this cost must be recovered in their compensation. However, this value-
added component in their compensation gives them a stronger financial base
for support of guarantees. There are two major disadvantages of using
proprietary offerings: 1) they are unique, which makes it difficult to per-
form a comparative evaluation of competitive offerings, and 2) they may
require other products that can be furnished only by the same supplier.
For both the small unit or the large process complex, the engineer-
constructor can expect to be asked to provide a process guarantee, includ-
ing "flow-through" of subcontractors' guarantees.
5. 5 REGULATIONS
There are no laws or regulations exclusively applicable to the EPC proj-
ect form in the private sector. The remainder of this subsection dis-
cusses public sector considerations.
5. 5. 1 Federal Laws and Regulations
As applied to EPA, federal procurement rules, not law, usually prohibit
the EPC method of project execution. But as has been pointed out earlier,
there are conditions under which this method of procurement may be allowed
or encouraged. Procurement rules generally forbid the use of a single-
source, non-competitive supply, but an EPC contractor selected by com-
petitive bid is free of this limitation and may select those he will be willing
to guarantee. The contractor wishes to retain the right to use what he has
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greatest confidence in, whether or not it involves application of pro-
prietary or single-source items from his own supply or from others.
The procurement rules constitute a restraint to other project forms be-
cause a non-competitively selected contractor, such as the manager, is
not normally able to make arbitrary judgments, even if in his opinion,
they are in the best interests of his client.
EPA regulations stipulate that if an application is made for a design &
construct project, the application need not include construction drawings
and specifications but may instead contain proposed performance spec-
ifications and other relevant criteria.
As envisioned in the regulations, the EPC form of project execution is
clearly a design & construct project. Therefore, in using this method, an
applicant can make a combined application for funds for design (the pre-
paration of construction drawings and specifications EPA Step Two), and
for construction (EPA Step Three). As a prerequisite, he must com-
plete all of the planning activities itemized in the reguations, as required
for a Step Two application.
Under the combined Step Two/Three grant, the owner and contractor may
proceed with plans and specifications for equipment and construction that
may be most convenient for phasing and overlapping of design and con-
struction, submitting them for state and EPA approval as they become
available.
5. 5. 2 State and Local Laws
Some states have laws concerning public projects that are more restrictive
than the federal rules. For example, several states apparently specifically
prohibit the EPC method as defined in this report. In addition, certain
states require approval of detailed plans and specifications before the
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construction award is authorized, whether or not federal regulations
call for them. And since performance specifications may not satisfy
the requirement for prior approval of detailed plans and specifications,
the EPC method is severely constrained in these states.
As has been mentioned earlier, some states have statutes or registration
law provisions that prevent engineers licensed in those states from sub-
mitting competitive bids in connection with professional services. In
these states, an EPC contractor who offers engineering services under a
competitive price situation might be considered to be operating unlawfully.
5. 6 SUMMARY
The engineering and construction (EPC) project form is the major single-
rcsponsibility method of performing design & construct projects. It has
been used effectively in the private sector, where the owner has con-
siderable latitude in methods of contractor selection and compensation and
is not burdened with laws and regulations that limit his choice of action or
that require him to make public disclosures. In the public sector, the
EPC form is rather uncommon, and with the exception of package units,
it is not practiced in the municipal wastewater management field.
Since the EPC contractor is directly responsible to the owner for virtually
all activities in the project, time can be saved by overlapping design and
construction activities. And since the EPC form can be bid on a competi-
tive lump-sum basis, it can conform to existing public procurement rules.
While it does not appear that federal law prohibits the EPC method for public
works projects, some state and local statutes do so, either directly or in-
directly. However, present EPA regulations specifically provide for the
EPC form as an acceptable alternative.
The primary reason for the success of certain federal and private sector
efforts employing the EPC form is the staff capability available to plan,
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monitor, and manage projects executed this way. Most municipal entities
involved with wastewater facilities lack such capability.
A disadvantage of lump-sum EPC is that the relative autonomy of the con-
tractor obliges the owner to maintain a strong organization or retain
qualified consultants to assist in the administration of an EPC project.
Another disadvantage of lump-sum is the effect of delays, such as from
EIS, intervenors, etc., upon the firmness of the price. A negotiated
compensation basis, with provision for such delays, can result in a more
economical job.
A major advantage of EPC is its ability to apply staged compensation
methods that is, the setting of the price (TP or LS or GMP) and com-
pensation incentives for each phase of the project as the scope of that
phase becomes apparent. Although staged compensation can be applied
to other project forms, it is most advantageous in EPC because the
engineer-constructor is directly responsible for all the work and does
not need to depend upon other contractors (except, of course, his sub-
contractors) for cost and schedule data.
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Project Management
-------
Section 6
PROJECT MANAGEMENT
6. 1 GENERAL, DESCRIPTION
The project management (PM) farm of project execution for public proj-
ects has appeared in recent years. Several variations of the approach
have been used and more are being developed.
The typical responsibilities of the various parties in a PM project are
illustrated in Figure 6-1.
^vs^PHASES
PARTIES^^
PLANNING
DESIGN
PROCUREMENT
CONSTRUCTION
START-UP
OPERATION
OWNER
/I
/
ENGINEER
o
\
/
MANAGER
/
CONSTRUCTOR
I
Ł COMMON PRACTICE
O ALTERNATIVE PRACTICE
Figure 6-1. Typical Responsibilities of the Various
Parties in a PM Project
6-1
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The PM project form has become quite common as a method of project
execution in the public sector. Although relatively new as a concept, it
is now the method of choice of many agencies of the federal government, '
particularly those agencies (such as GSA) that construct facilities directly
for the government's account. It is also a preferred method of DHEW
for third-party applicants using federal funds for public projects (hospi-
tals, schools, etc. ). Many medium-size and large-scale projects
(costing between 50 and 100 million dollars) have been performed using
this method. And many federal agencies have either adopted the PM
method as an alternative or are in the process of doing so.
In the PM form, a manager is contracted to oversee the efforts of the
engineer(s) and constructor(s) and any other parties contracted by the
owner. The project manager does the following:
Provides technical consultation to the engineer and
the owner
Prepares a project schedule
Establishes and monitors a project budget
Prepares a project cash flow
Provides or assists in supporting fields surveys,
subsurface investigations, etc.
Provides procurement assistance
Prepares bidder's lists for contracts to be let
Prepares invitations for bids, arranges prebid con-
ferences and postbid conferences with potential con-
tractors and suppliers, where advisable
Provides field labor only to the extent required to
carry out his own function
The method is frequently known to federal agencies as "Construction
Management. "
See Technical Handbook For Facilities Engineering and Construction
Manual, Part 2, "Guide For Project Applicants Construction Manage-
ment Services, " DHEW.
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Guarantees the input of construction-related factors
in the design
Maintains a field office and supervises field activities
Coordinates the efforts of other contractors
Monitors and schedules the constructor's work
Recommends adjustments to field procedures to accom-
modate changing conditions
Provides or coordinates with the engineer the means of
inspection of workmanship and material
Arranges for field delivery and tests
Receives contractor reports and prepares a manager's
report on work progress
Reviews progress payments and makes recommendations
to the owner
Reviews all contractors1 change proposals, coordinates
with the engineer and makes recommendations to the
owner
Coordinates labor relations
Provides for overall job-site safety and security
The prime purpose of the PM form is to combine engineering, construc-
tion, and procurement know-how into a management team involving the
owner, so that the formerly separate functions can be integrated into one
organization with overall responsibility for the successful completion of
the project. The manager works as a team member with the owner, the
engineer, and the constructor during the design and construction phases.
Many public PM projects (usually hospitals, schools, universities, air-
ports, and similar facilities) are undertaken by owners who are recipients
of federal funds but who do not have the large and sophisticated staffs
necessary to provide the management required. In these cases, the owner
retains a manager who serves as an independent contractor and furnishes
project management services.
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The World Trade Center of the New York Port Authority is an example
of the PM form applied to a major project. An experienced engineer-
constructor was retained as project manager to direct construction man-
agement, scheduling, expediting, procurement, and to advise two A8tE
firms on the impact of those functions on the planning and design phases.
Over 170 separate constructors were contracted.
Another example is the GSA project for the 40 million dollar Air &: Space
Museum for the Smithsonian Institute. An A&E was chosen by CSA using
conventional procedures. A construction manager was then selected by
competitive negotiations. Technical (Qualifications) proposals were
solicited, and the firms that submitted the best technical proposals were
asked to submit price proposals. The technical proposal was weighted
at 60 percent, the price proposal at 40 percent. The construction manager
worked closely with the AScE in design, advised GSA of long-lead items
that required governmental procurements, and inspected construction per-
formed on a fast-track basis with 33 contractors.
Despite the apparent advantages of the PM method, it has seldom been
used by municipal entities for development of wastewater management
facilities. The authors are aware of only two major projects of this type
being developed under a modified form of the PM method.
The above comments on the PM form in the public sector are for the most
part applicable to the private sector as well. The PM form of project is
used in the private sector primarily on extremely large projects which
involve a multiplicity of design and construction contractors and which
cannot be adequately managed by the owner's staff.
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6.2 CONTRACTOR SELECTION
6. 2.1 Engineer
In either the public or private sector, under the PM form the engineer
contracts directly with the owner to provide professional engineering ser-
vices. If the project has not been well defined previously, a major empha-
sis must be given to the preliminary engineering function, and this activity
may proceed entirely outside of and prior to project initiation. In this
event, the planning services may be performed by an engineer other than
the design engineer. (Such an occurrence, however, is uncommon. ) In
most instances, the engineer who does the design also does the planning,
either under a separate contract or as a distinct initial subphase of the
design contract.
Under the PM form, the engineer is selected and employed on the same
basis as under the traditional E:C form of project execution. But in the
PM form, he works through the project manager, who is responsible for
design and construction, rather than with the owner directly. If the engi-
neer is hired to perform planning prior to the selection of the other project
team members, the owner must evaluate his capability and willingness
to cooperate with the project manager during project execution.
6. 2. 2 Project Manager
In both the public and private sectors, manager candidates are expected to
be very proficient in engineering, budgeting, cost estimating, scheduling,
purchasing, inspection, management, and labor relations. In addition, all
the firms involved must have records of successful performance in furnish-
ing professional services during the project design phase and in managing
the construction.
At about the time that design engineering is initiated, a project manage-
ment contract is executed between the owner and the manager. Like the
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engineering contract, this is a professional services contract. A signifi-
cant feature of the PM method is that the manager has some degree of
supervisory responsibility over the engineer. The manager also has broad
supervisory, managerial, and administrative authority over the construc-
tion program performed by the co'nstructor(s).
The initial selection of the manager is seldom based on competitive bids
or price considerations (in fact, government agencies frown upon selec-
tions so based) and the manager is usually chosen in a manner similar to
that previously described for engineers. That is, the qualifications of
several firms arc examined, and a preselection is made of a few firms
that are then asked to submit formal qualification proposals. These pro-
posals do not normally include pricing information and are intended to
further demonstrate the firm's ability to handle the specific project.
In the private sector, under the PM form the selection of a manager is
based primarily on his qualifications and experience and on his compati-
bility with the owner. The owner generally chooses his manager during
the beginning of the planning phase, recognizing that compensation terms
may have to be left open until the overall scope of the work is known.
However, at this early stage of the work, it is common practice for some
agreement to be reached as to the compensation formula that would apply
both in the initial phases and for the total project. This is done in order
that the manager's compensation can be negotiated more readily once the
scope of work is understood. The nature of the manager's compensation
formula may be a factor in the selection of the PM contractor.
6. 2. 3 Constructor
In the public sector, the bidding on construction contracts must be con-
ducted to maximize competition among qualified bidders and to obtain the
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most reasonable price for acceptable work. Therefore, under the PM
form (as in the traditional E:C form) competitive bidding by public ad-
vertising is the usual method of selecting constructors. In the private
sector, competitive bids and contract awards need not go to the lowest
responsible bidder. The result is much greater flexibility in selecting
constructors.
6.3 COMPENSATION PRACTICES
6. 3. 1 Engineer
The compensation the engineer receives and the methods of determining
this compensation are traditional, but as a rule less use is made of the
percentage of facility cost as a means of setting fees. It is more com-
mon for the engineer to be paid on the basis of a negotiated lump sum or
on unit costs. The engineer's compensation for design services are
somewhat less than would be normal under an E:C project because of the
contribution of the project manager. And his compensation for services
during construction are often significantly less because of the assump-
tion by the project manager of many of the engineer's traditional duties.
6. 3. 2 Project Manager
The compensation for project management services is normally based on
either a percentage of the facility cost or on reimbursable costs.
It may not be in the interest of the owner to enter into an open agreement
with no limit on fee or reimbursable costs for the manager's services.
The compensation may be phased with the project: a specific lump-sum
amount can be negotiated as the compensation for services during the
design phase, and a separate lump-sum compensation can be set for the
development and implementation of a management control system on
those projects where a significant expenditure is required for such a
control system. On smaller projects, the cost of the management con-
trol system may be included in the basic fee of the project manager.
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For the balance of the project costs, the project manager might be ex-
pected to provide a target price (TP) or guaranteed maximum price (GMP).
This is usually required when the project is to be completed in an acceler-
ated manner, with an overlap design and construction. In this way, the
owner avoids the risk of entering into a project and making major finan-
cial commitments without firm knowledge of his ultimate obligation. The
price of the work would be agreed upon only after enough of the design has
been completed and enough bids have been taken on major equipment items
to permit a definitive estimate to be made.
6.4 RESPONSIBILITIES, GUARANTEES, AND LIABILITIES
6.4.1 Engineer
In general, the engineer's responsibilities for design are the same under
the PM as under the traditional E:C method. His responsibilities for
construction are minor.
6.4.2 Project Manager
In all the management forms (PM, E&cM, and C&M), the manager usually
assumes some form of responsibility for cost and schedule, and some in-
crease in the manager's compensation can be expected with these guaran-
tees. Those activities not directly under the manager's control will not
normally be significantly underwritten by him. (Sometimes, however,
contractor-performed activities that he does not control have guarantees
that "flow through" him.) The manager may be willing to provide guar-
antees if he has the option, in the event of unanticipated difficulties, to
assume the performance of the work with his own forces or his subcon-
tractors.
Construction performance bonds may be furnished by either the individual
constructors in the amount of their contracts or by the proj'ect manager.
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If the project manager furnishes the bonds, he may, in turn, require the
constructors to provide him with guarantees secured by bond for their
respective portions of the work. Process guarantees usually are not pro-
vided by the manager; he does, however, pursue the engineer's process
obligations and the equipment suppliers' and manufacturers' warrantees.
In the private sector, the same guarantees are available from the project
manager as may be required in the public sector. However, much more
flexibility is possible; performance bonds may not be required or may be
waived in the interest of reducing costs.
6.4.3 Constructors
In both the private and public sectors, under the PM method the con-
tor's responsibilities are to all extents and purposes the same as under
the traditional E:C form.
6. 5 REGULATIONS
6. 5. 1 Federal, State, and Local Laws
Public projects executed under the PM form encounter no difficulties that
are due to federal, state, or local regulations. And there seems to be no
reason why the use of this form should be restricted by the requirement
for competitive, sealed construction bids or for award to the low respon-
sive bidder. The fact that the method is presently used for many types
of public projects for federal, state, and local agencies is proof of its
legality and feasibility.
In the private sector, there are no laws or regulations, except those
previously described, that are uniquely pertinent to the PM form.
6. 5. 2 EPA Regulations
As discussed earlier, two methods of handling projects are provided for
in EPA regulations: 1) as a traditional sequential project using the two
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step application method, or 2) as a combined design & construct project
using the Step Two/Three procedure. The PM form is applicable to both.
6.6 SUMMARY
The project management (PM) form is now approaching the traditional
E:C form in popularity as a method of executing public works projects.
It is recommended for use by many federal agencies, including DHEW
which, like EPA, furnishes grant funds to local municipalities for public
projects.
The method provides single-project responsibility, with the project man-
ager serving the owner's interests with respect to the engineer(s) and the
con5:iaclor(s)< I: offers a means of brineir.g strong, knowledgeable
project administration to bear on the assignment. Because of this
capability, complex projects can be successfully accomplished m a multi-
phased manner in which design, procurement, and construction overlap.
If the project manager has the required construction experience and fi-
nancial capacity and is given sufficient construction control, he can pro-
vide the owner with some type of cost guarantees m the form of target
price or guaranteed maximum price. This is a safeguard for the owner
usually unavailable in a multiple construction contract method ("flash-
trade"} under E.C. The PM method oilers all the other guarantees avail-
able under the E;C form, at least on a. "flow-through" basis, but like the
E:C form, it does not provide significant process guarantees.
Since the project manager and the engineer under the PM method are
separately retained by the owner to perform professional services and
have no financial interests in the constructor's operations, the traditional
separation of interest between construction and engineering is maintained.
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Under the PM method, the responsibility for innovative design and the
application of new technology reside with the engineer and to a lesser
extent, the manager. And because of the technical capability of the
manager, the owner may be more favorably inclined to accept new and
innovative ideas proposed by the engineer and approved by the manager.
There are no legal restraints that unduly restrict the PM method in either
the private or public sectors. It would appear that the method can be used
under the EPA regulations, to execute projects in either a conventional
manner or as a combined design & construct project.
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Engineering and Management
-------
Section 7
ENGINEERING AND MANAGEMENT
7. 1 GENERAL DESCRIPTION
Engineering and management (E&M) is used extensively in both the pub-
lic and private sectors. It has been described in a previous section as
a form that extends the construction supervision aspects of the E:C form.
By the same token, E&M is a variation of the PM form, whereby the en-
gineer undertakes the management of the total project, as described in
Section 6. Construction is performed by separate constructor(s) con-
tracted by the owner. As a result, the E&M form does not materially
change the separation of design and construction functions characteris-
tic of the E:C form, but it does increase the engineer's responsibilities
to the owner and requires the constructor to be responsive to the engi-
neer in overall project performance.
The typical responsibilities of the parties in an E&M project are illus-
trated in Figure 7-1.
Some of the characteristics of the E&M form are:
The engineer assumes a greater project management
role than is usual under the sequential E:C method.
Division of the work among several project construc-
tors is readily accomplished.
The engineer-manager's cost estimates are relied upon
for project budget purposes, pending receipt of the last
of possibly several constructors' bids, and the engineer-
manager may be required to operate within that budget.
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""\PHA5ES
PART1ES~^^^
PLANNING
DESIGN
PROCUREMENT
CONSTRUCTION
START-UP
OPERATION
OWNER
/ y
/
ENGINEER-
MANAGER
o
N
L /i
S/
/
CONSTRUCTOR
/
0 COMMON PRACTICE
O ALTERNATIVE PRACTICE
Figure 7-1. Typical Responsibilities of the Various
Parties in an E&M Project
When more than one constructor is involved, the
engineer-manager functions in some of the roles of
a general contractor, coordinating the work of sev-
eral constructors and performing general job site
administration.
If prepurchase of long-lead-time items of equipment
is necessary, the engineer-manager can serve as
project purchasing agent for the owner and can expe-
dite delivery and administer equipment warranties.
In the EfcM form, the engineering firm acting as engineer-manager
should have previous construction experience. Entities with limited
construction capability should be expected to augment their organiza-
tions or form joint ventures with construction entities m order to par-
ticipate in projects of this form.
7.2 CONTRACTOR SELECTION
7.2.1 Engineer - Manage r
Under the E&M form of project execution, the basic Toles of the engi-
neer and the constructor remain the same as in the E:C form, except
7-2
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that prospective engineers must have construction management exper-
ience in order to perform the manager's role. And in the public sector,
a great deal of attention must be given in the selection of an engineer to
the engineer's construction management experience.
In the public sector, the method of selection of the engineer-manager
depends in part on whether the owner wishes to involve the selected
contractor in the planning phase. At such an early stage, the magnitude
of both the design and construction management functions is too indeter-
minate to allow firm cost or fee commitments by the contractor. At the
completion of the planning phase, there is sufficient definition of process
configuration, basic site specifications, and basic process criteria to
allow a firm estimate of the engineering effort required to do the design
phase of the project. At the same time, the engineer-manager is able to
define with sufficient accuracy the scope and sequence of the procurement
and construction effort needed to develop a formula for compensation of
the management function.
In the private sector, the selection of the manager is done from quali-
fication proposals or by direct negotiation with one or more candidates.
The proposals may include unit cost data for various services and a de-
scription of the method of approach. Compensation terms are negotiated,
and generally some form of reimbursable cost compensation is adopted
for the early stages, with provision for renegotiating the compensation
terms as the scope of work becomes better known.
7.2.2 Constructors
In the public sector, the constructors are selected as in the E:C form,
namely, on a competitive price basis, using the engineer-manager's de-
sign report as the bid document. In the private sector, the constructor(s)
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are usually selected by competitive price bidding. Prequalification of
bidders may be used, but in any event, the owner and/or engineer-manager
limit the length of the bidders list.
7.3 COMPENSATION
7, 3. 1 Engineer - Manager
The engineer-manager is compensated in two ways, 1} for his services
as an engineer responsible for the preparation of drawings and speci.fi-
tions, and 2) for his managerial role in overseeing total project perfor-
mance, specifically the work of the constructor(s}.
In :.te pufj.ic sector, unofer (A-e E&M fnrtn the methcds -of compensating
tlaa er.graaej .are ai in :ne !S:C form. However, the amount, of compen-
sation paid to t'ne engineer .3 proportionally mora, consistent with his
increased res-^orsiTr.lity curing the construction phase aT Lhe project.
In the private sector, a broader range of compensation methods may be
used. But competitive lump-sum bidding for the total project cannot con-
vemently be applied because the scope of work is not weli-defjned when
the enginee*-manager is selected. If the engineer-manager is involved
in the planning function, his engineering services are most apt to be
compensated for on a reimbursable cost basis. If he is retained after
the planning function, the definition of the work may permit the establish-
ment of a lump-sum price for the engineering.
The compensation for the manager's role is normally on a reimbursable
cost basis. But if the engineer-manager is expected to assume respon-
sibility for the total project cost, in the form of a target price or CMP,
his compensation will be included in that total amount and will be com-
mensur ateiy higher to reflect the greater financial risk. The opportu-
nity for bonuses or target underrun shares increase the contractor's
7-4
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probability of increased compensation and tends to offset his risk of
penalties and overrun shares.
7.3.2 Constructor
The selection of the constructor is made after the completion of a firm
engineering design. Successful lump-sum bidding establishes the basic
compensation of the constructor, but in the private sector, other com-
pensation forms may be used if desired by the owner.
7.4 RESPONSIBILITIES, GUARANTEES, AND LIABILITIES
7.4. 1 Engineer-Manager
Under the E&M form, the engineer-manager's responsibilities for de-
sign are identical to those in the E:C form. As construction manager,
the engineer-manager guarantees professional best efforts in the per-
formance of the managerrient task, including pursuit of supplier's and
contractors' warranties, if necessary, on behalf of the owner. The
engineer-manager gives the owner advice and consultation on construction
costs and is responsible for providing the necessary services to keep
project costs within budget estimates.
One of the principal advantages of management forms, including the
E&M form, is that they can provide an efficient means of overlapping
design and construction by breaking the project down into several pro-
curement and construction units. As a result, there may be no single
constructor to bid a firm price for the total project. Since the owner
must rely solely on the engineer-manager's estimates for budget con-
trol, he may be called upon to sssume some degree of responsibility
for the overall project cost, in the form of a GMP or target price, and
he may have to provide completion date guarantees and targets as well.
The engineer-manager's financial liability under such cost and schedule
guarantees is limited to some portion of the fee component of his
compensation.
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In the public sector, construction performance bonds are normally pro-
vided by the constructors to the owner through the engineer-manager.
Likewise, equipment warranties are provided by the manufacturers to
the owner through the constructor^) and/or manager, who may be held
responsible for pursuing them.
As m the E:C method, contractual process guarantees are not normally
provided by the engineer, but because he is the manager with the great-
est responsibility for the overall project, implicit process guarantees
are expected of him.
7.4.2 Constructor
Under the E&M method, the constructors operate in the same manner,
provide the same guarantees, and assume the same liabilities and respon-
sibilities as in the E:C method.
7. 5 LAW AND REGULATIONS
In the private sector, there are no laws or regulations bearing uniquely
on the E&M form of project.
The federal, state, and local laws applicable to municipal wastewater
projects are essentially the same for E&M as for E:C because of the
basic similarity of forms. To perform some of the managerial services,
the engineer-manager may need a construction contractor's license m
some states.
The E&M form lends itself equally well to projects handled under EPA
grant regulations, as either a traditional sequential engineering: con-
struction or as a design & construct (Step Two/Three) procedure.
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7.6 SUMMARY
The engineering and management (E&M) form of project execution can
be described as an extension of the traditional E:C form, with more re-
sponsibility for project management being assigned to the engineer than
would be traditionally given, or as a variation of the PM form wherein
the manager does engineering work. It is similar to E:C in that all en-
gineering and management functions are contracted for on a professional
basis and provide for separation of financial interest from the constructor(s).
With the E&M form, the project period is easily expanded to include the
planning, as well as design and construction. This feature strengthens
the single-responsibility feature of E&M by providing greater technical
continuity throughout the project.
Because no independent third party is available to represent the owner's
interest concerning engineering, the E&M form is from the owner's view-
point a weaker single-responsibility form than the PM form. Offsetting
this drawback is the stronger position regarding process guarantees;
this stronger position stems from the fact that the design engineer man-
ages construction. Engineers practicing in the public sector may not
have sufficient construction capability or financial resources to provide
the level of project responsibility expected from the manager in the E&M
form, but can enter into joint ventures, for example, in order to engage
in this form of project.
The engineer-manager can provide earlier firm assurances of overall
project cost than in the E:C form.
Guarantees and responsibilities assumed by the contractors under the
E&M form are like those available under the E:C or PM forms, with
stronger possibilities for process guarantees.
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Laws, rules, and regulations do not prohibit the use of the EfkM form.
Under EPA regulations, it would appear that the method could be used
to execute a project in a conventional manner or as a combined design
k construct project.
When the E&M method is used as a means of overlapping design and con-
struction, greater time savings can be achieved than in the sequential
completion of design followed by construction, typical of the E:C form.
And, as in the E:C form, design innovation and application of new tech-
nology are the responsibility of the engineer.
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Construction and Management
-------
Section 8
CONSTRUCTION AND MANAGEMENT
8. 1 GENERAL DESCRIPTION
The construction and management (C&M) project form is not used in the
public sector. The practice of retaining the constructor by competitive
price bidding precludes the possibility of contracting a construction
firm to be both constructor and manager during the planning and design
phases of the project. The additional duties that the constructor assumes
are included in the discussion of the PM form in Section 6.
A typical division of responsibilities in a C&M project is illustrated in
Figure 8-1.
^-\PNASES
PARTIES^\^
PLANNING
DESIGN
PROCUREMENT
CONSTRUCTION
START-UP
OPERATION
OWNER
\
A
/
ENGINEER
n
X
\
7 /
/
CONSTRUCTOR-
MANAGER
/
-J
^ COMMON PRACTICE
O ALTERNATIVE PRACTICE
Figure 8-1. Typical Responsibilities of the
Various Parties in a C&M Project
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There have been a few major public projects m which the owner has con-
tracted an engineering-construction firm for professional consultation in
the formative stages of the project. But for the reason cited above, these
projects did not result m any construction activities on the part of the en-
gineering firm so retained, but evolved into what is more appropriately
identified as the project management (PM) form.
Construction and management is a form used but rarely in the private
sector. Normally, if an owner wishes to retain a constructor early in
the project so that that firm can assume overall responsibility for the
work, he selects an engineering-construction firm and enters into an EPC
contract.
The primary application of the C&M form is in the special case where the
owner retains a constructor with engineering capability to manage a design
phase in which a proprietary or highly specialized process must be de-
signed by an engineering firm holding patent or know-how rights to the pro-
cess. The engineer may have limited overall engineering capability, or
the owner may desire to limit the proprietary engineer's involvement.
The constructor-manager will therefore coordinate 1) the proprietary de-
sign with other engineers, 2) the owner's effort, and/or 3) engineering
done incidentally by the constructor himself.
This form has been included in this discussion because it is theoretically
interesting. It permits the responsible contractor to offer stronger guar-
antees because of his direct involvement in the major share of the project
in terms of value added. Widespread acceptance of this form in the pub-
lic sector would require treating the constructor-manager as a profes-
sional and waiving the necessity of lump-sum competitive bidding as a
means of selection.
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8.2 CONTRACTOR SELECTION
Comments in this section pertain primarily to the private sector.
8. 2. 1 Engineer
The engineer may be selected by any of the means described in the dis-
cussion of other forms. The special case of applying proprietary pro-
cessing units requiring specially qualified engineering firms has one
function only to establish a criterion for qualification of the candidates.
8. 2. 2 Constructor
Because the method of selection of a C&tM form contractor must exclude
lump-sum or other competitive price bidding based on a firm design basis,
procedures of a more qualitative nature are used to retain the contractor
prior to completion of the design phase. A few qualified contractors are
preselected from candidates on the list to form a "short list," and com-
bined compensation and qualifications proposals are requested. Compen-
sation considerations must be limited to the contractor's management
costs, exclusive of field material and labor costs, which are undefinable
at that point. From this information, the owner selects the one or two
most attractive bidders and negotiates a contract with one of them.
Appropriate engineering capability is a requirement in the selection of a
manager.
8.3 COMPENSATION
A normal contract has provisions for starting the project on a reimbursable
cost or unit price basis and includes an estimate of the number of man-hours
expected during the early stages. On the other hand, if the owner has
completed the planning phase and can conceptually describe the intended
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facility adequately and if the proposing contractors have previous experi-
ence with that type of facility, they may initially agree upon firm com-
pensation for the management services portion of the contract, to be fol-
lowed by later negotiation of the construction portion. Provisions for
a subsequent cost estimate determination and for negotiation of a firmer
price are included in the contract terms. This stepwise firming-up of
the compensation can bring the compensation to a lump-sum, target, or
guaranteed maximum price, if desired.
The compensation method for the engineer under the C&M project form
is the same as under other engineering only forms.
8.4 RESPONSIBILITIES, GUARANTEES, AND LIABILITIES
The constructor-manage r's direct involvement in many aspects of the
performance of the total project and the resulting magnitude of compen-
sation suggest that of the several forms discussed in this report (except
the EPC form) the C&M form offers the owner the greatest potential of
obtaining significant financial support of guarantees from the contractor.
An exception is the case involving the proprietary process design engi-
neer in which process guarantees flow from that engineer to the owner
di rectly.
In addition to process guarantees, the constructor-manager assumes
the normal constructor obligations of material, workmanship, and per-
formance guarantees. Also, in this form, certain professional perform-
ance obligations are required which pertain to the quality of his services
and the obligation to pursue the warranties of others.
8. 5 LAW AND REGULATIONS
In the private sector, there are no laws or regulations uniquely applicable
to the C&M project form.
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The C&M form may not be applicable in certain portions of the public
sector because of legal restrictions. If, for example, an engineering-
construction firm is retained on a professional consultant basis during
the early phases of the project, that firm might be legally banned from
consideration for the construction portion of the work. The firm could,
of course, continue in the management role, m the manner of the proj-
ect management (PM) form described in Section 6. As noted earlier,
the almost universal requirement that public construction be procured
on the basis of sealed competitive bids with award to the lowest respon-
sive and responsible bidder makes it difficult, if not impossible, for this
form to be used in the public sector.
A number of states require than an engineer or an engineering corporation
must be licensed to perform engineering in both public sector and private
sector projects. Whether the coordination and supervision of an engineer
is considered "engineering" is subject to interpretation. The law in some
states prohibits a corporation from practicing engineering, and this might
reduce the C&M form's usefulness in those states.
8.6 SUMMARY
The construction and management (C&M) form of project execution is
little used in either sector. It requires negotiated selection of a construc-
tor at the start of the design phase. If bids based on performance specifi-
cations requiring engineering design effort are solicited, then the method
is no longer C&M as described herein but EPC.
The C&M method is a relatively powerful single-responsibility method
wherein engineering management and construction are m the hands of the
party handling the major portion of the work the constructor. For this
reason, process (on a flow-through basis) and all other guarantees dis-
cussed for other forms can be expected of the constructor-manager.
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Since most federal procurement regulations, many state and local laws,
and present EPA regulations require competitive bidding for construc-
tion services in the public sector, C&M type projects in this sector are
not possible.
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Discussion
-------
Section 9
DISCUSSION
The foregoing sections have dealt with the manner in which design 8c
construct projects are carried out. In the course of development of
this material, certain ideas have suggested themselves. These ideas
relate to the design and construction of wastewater treatment plants as
partially funded under the EPA grant program. It is appropriate here
to review such ideas in light of the EPA objectives for improved waste-
water treatment plant projects as set forth in the Administrator's state-
ment accompanying the issuance of the proposed revised regulations of
1971. These objectives are:
To shorten project schedules
To improve processing performance of treatment
facilities
To encourage the application of new technology
Implicit in the above is the desire to reduce costs or to increase cost-
effectiveness of water pollution control expenditures.
A primary method suggested to achieve the EPA objectives is to increase
the number of options available to the owner for obtaining single-respon-
sibility project performance. The EPA can influence this through issu-
ance of permissive regulations removing impediments to such options.
There are, however, external factors such as local, state, and institu-
tional requirements, beyond the direct reach of EPA regulations, that
affect the owner's ability to exercise some of the options discussed in
this report.
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It has been noted that many private sector projects tend to be superior
to public sector projects in terms of the three objectives noted above
presumably because of the different project organization methods used.
What, then, are the characteristics pertinent to the stated objectives of
the various available project forms ?
9. 1 SHORTER PROJECT SCHEDULES
From the public viewpoint, the chief value to be derived from shorter
project schedules is the earlier implementation of treatment facilities.
By mandate of its representatives in Congress, the public has less than
four years to place in service a large number of water pollution control
facilities involving at least secondary treatment. Major project periods,
typically five years and longer, are not acceptable for achieving this
goal.
Shorter project schedules mean reduced project time and increased
cost savings. These savings result from shortened periods of construc-
tion management supervision, reduction of inflationary effects, and
lowered probability of unforeseen impacts and changes.
If material availability, labor availability, and labor productivity are
constant, there are basically two ways to shorten a project schedule-
one is to eliminate any steps in the project procedure which advance
neither design nor construction activities; the other is to overlap func-
tions that were previously sequential. As will be seen shortly, some of
the project forms discussed in the earlier sections lend themselves to
one or both of these two methods.
The desire for shorter schedules has caused attention to be focused on
the potential time savings resulting from overlap of normally sequential
phases of design, procurement, and construction. In many private
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sector projects, overlapping of this type is achieved by continuous re-
lease of design and procurement documents as they are completed. In
the public sector, it is accomplished by a technique commonly called
"fast-tracking. " Fast-tracking is a stepwise increase of construction
activity by means of multiple design reports (used as bid documents)
and associated multiple construction bidding cycles, in lieu of a single
design report and construction contract.
Figure 9-1 illustrates the relative differences in time to perform a
hypothetical project by each of the three methods discussed here. In
fast-track procedures, early design reports are completed for such
initial construction activities as site preparation and foundations, while
reports for mid-term and final job-site activities are prepared later.
Fast-tracking permits an early start on the bidding and on the mobili-
zation of constructors. The gains in project schedule and in leveling
of the high-peaking field activity, however, are accompanied by an in-
crease in the engineering and management effort required to prepare
the additional bid documents and by an increase in the management
effort required to handle the additional constructors (e. g., multiple
constructors' bids must be received and evaluated for each portion of
the work, and the numerous constructors working on the site must be
coordinated).
Fast-track is suitable to the E/C, E8tM, and PM forms. The faster con-
tinuous overlap is common in EPC projects, but can be practiced in any
of the other forms if procurement rules allow it.
Whereas the fast-track method produces a stepwise progression, over-
lap of the project phases in the EPC and C&M forms is continuous.
Thus, as each engineering document is completed, the constructor may
proceed immediately with procurement and field work instead of awaiting
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complete design reports. Continuous overlap saves more time than fast-
tracking because.
It requires less formal preparation of design data.
It eliminates time for bidding cycles associated with
design work released after selection of the original
constructor.
It eliminates the "learning curve" involved for each
new constructor and avoids the coordination diffi-
culties that arise when several general contractors
are at the job site.
A disadvantage of continuous overlap is that it is not applicable to proj-
ects in which a lengthy design review is required by third parties (such
as state and federal agencies) or where delays arise stemming from
public disfavor. Because of the early commitment of resources, to
attempt to operate on an accelerated basis in the face of such delays can
be very costly and inefficient. Under such a design & construct pro-
cedure, construction may already be underway while plans are being re-
viewed and approved by the regulatory authorities. If requirements
change, the question then becomes, "Who is now responsible for the proj-
ect7 the owner (and his contractors) who submitted satisfactory perfor-
mance specifications but "unsatisfactory" detailed plans, or the regula-
tory authority who approved the performance specifications, but will not
approve the detailed plans or who is in some other manner delaying the
project'
The EPC and the C&M forms eliminate the constructor selection period
between the design and construction phases by shifting it to the outset of
the project (except for subcontract work as discussed below). In itself,
this shift tends to make EPC projects slower because the EPC contrac-
tor selection process is a relatively lengthy one. However, the time
saved by continuous overlap of the schedule, including the construction
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subcontractor selection process, more than offsets the longer EPC con-
tractor selection process. Subcontractors may be involved in from
25 percent to 100 percent of the field effort. The time involved for sub-
contractor selection is markedly reduced if private sector experience is
followed and subcontractors are selected prior to completion of the de-
tailed design through the solicitation of unit prices against preliminary
drawings and quantity requirements. The result is a shorter bidding
procedure and earlier award of subcontracts.
An example of the time savings available by schedule acceleration is a
GSA study of a 10 million dollar building project estimated to require
60 months to complete by E:C methods, 48 months by PM methods, and
44 months by EPC methods.
A major time-consuming factor in public works projects is the need for
design approval by both the owner (grantee) and the grantor agency, and
also by numerous other external agencies and organizations. At present,
the agency reviews that require detail design information coincide with
the contractor bidding and selection period; hence the time effect is not
readily apparent until project acceleration is attempted. The review
requirements of state and federal agencies are outside the scope of con-
trol of the contract parties and limit the time-saving possibilities of
applying either fast-track or continuous-overlap methods.
The latest EPA regulations concerning the use of design &c construct
methods by a Step Two/Three grant apparently allow a significant
reduction in the amount of formality, the amount of detail, and the
time frame in which the reviews are to be done by the EPA. If other re-
viewing agencies can be encouraged to reduce their review requirements
in a similar way or if they can agree to work through a single review
panel, the project acceleration characteristics of the design & con-
struct forms can be realized.
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Many people involved in the design-construction industry question the
need for extensive detailed review of drawings and specifications by
public agencies. They point out that such materials have been prepared
by qualified, licensed engineering contractors and reviewed by an owner
who is experienced in the field and who may frequently have the assist-
ance of outside consultants. It is suggested that public agencies con-
cern themselves with assurances that the contractors are properly
selected and that the owners are properly staffed, in lieu of providing
the detailed technical surveillance now practiced. The one exception
to this would be the review of major technical changes which may be
proposed subsequent to the original approval.
Projects in the private sector include review periods by the owner ~ a
recommended provision in any major capital project. These review
periods are generally quite short (on the order of two weeks plus mail-
ing time) and are frequently further shortened by stationing the owner's
technical representatives in the design office of the contractor. If it is
required that a technical review by grantor agencies continue as a mat-
ter of public policy, it is suggested that consideration be given to follow-
ing the private sector example
Another aspect of shortening project schedules involves the overlap of
the procurement function with design and construction, specifically m
prepurchase of materials. The concern for prepurchase of major equip-
ment is well known, and prepurchase is practiced today in many E C
projects. It is generally limited, however, to those major items which
are obviously of greatest importance to the schedule. But there are
a number of materials, both specific and of bulk character, that can also
be ordered early, thus helping to expedite field work. Any procedure,
therefore, that selects the constructor before engineering work is com-
plete, or that allows for the procurement of materials in advance of con-
tractor selection, will improve project schedules. Such an accelerated
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procurement mode can be used in any of the four single-responsibility
project forms described in this report. However, the forms (such as
EPC and C8tM) that require early selection of a constructor permit pre-
procurement of materials by the constructor himself and thus minimize
difficulties in defining in advance the amount of material actually needed
by the constructor.
9. 2 IMPROVED PROCESS PERFORMANCE
It is in the area of satisfactory process performance that the subject of
singleness of responsibility becomes a major issue. Process guarantees
are often desirable, but not always possible. An alternative to tough
process guarantees to obtain better process operation is to place the
total project under the responsibility of a single agent capable of handling
the process technology and the construction aspects of the overall proj-
ect. All four project forms discussed herein were selected to satisfy
this requirement.
Fundamentally, the responsibility for satisfactory project completion
lies with the owner. He can select his agents and contractors carefully,
assign certain responsibilities to them (with commensurate authority),
require certain guarantees and assurances, and retain good advice,
but he continues to be responsible to the public and the grantor agency.
An example of owner involvement is his review and acceptance of cost-
saving changes or technological improvements that are suggested by
his engineer or that are implicit in his selecting an EPC contractor's
bid and design.
Some of the factors affecting the degree of confidence in the process
performance of treatment facilities are:
The increasingly sophisticated chemical and biological
processing nature of wastewater treatment plants,
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which in turn increases the difficulty of the
design engineers' task
The reluctance of engineers (for reasons of pro-
fessional custom or for lack of sufficient control
or construction) to guarantee processes
The wide variations m influent characteristics and
f-Ow, from the initiation to the completion of the
project and during operating periods
The difficulty of evaluating the actual performance
of a facility relative to the anticipated performance,
particularly when the facility is designed for future
high-load conditions
It has been suggested that the complex question of greater assurance of
good process performance can be easily solved through tough process
guarantees. In practice, for a facility as complex as a wastewater treat-
ment plant, this is too simplistic an answer.
If an evaluation formula is thoroughly prepared, if procedures covering
expected ranges of influent characteristics and flows are used, and if
the difficulties involved m the measurement of performance against
design expectations are recognized, a moderately effective process
evaluation can frequently be made. A form of process guarantee may
be tied to this evaluation procedure. The primary effect of the guaran-
tee, however, is ta establish the process designer's intent :c carry a
moral responsibility for the performance of the completed facility.
In addition, if financial liabilities are associated with the guarantee,
they provide a commercial incentive to the designer to exercise care
in the design and checkout of the processes involved. It must be recog-
nized, however, that process guarantees represent a financial liability
of the contractor, and! that this liability is reflected in higher compen-
sation requirements. There are basically two reasons why a process
guarantee will not fully compensate the owner if the process does not
perform one is the limited liability the guarantor will accept, the other
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is the high probability that conditions will change to an extent that will
make it impossible to "prove" or "disprove" the guarantee.
Contrary to the commonly held view, the process designer, or the re-
sponsible party in a management type contract, cannot reasonably be
held financially responsible for the total cost of revamping, or for the total
replacement of a major process facility which has been constructed in
accordance with his design. The actual financial responsibility assumed
by the contractor must be contractually limited to a portion of his total
compensation, which is a fraction of the total project cost. It can be
expected that the total cash penalties for the failure of performance of
the process will amount to perhaps three to seven percent of the total
cost of the facility.
Two areas of apparent precedent for greater damage compensation de-
serve comment. The first involves small contracting firms which have
accepted virtually unlimited liability, either in the process guarantees
or in other contractual liabilities for damages. These cases are not
germane to this report, however, because when a major claim is made
against such an obligation, the seemingly significant liabilities, when
distributed under the bankruptcy laws, are limited to some fraction
of the net worth of the contractor. (An exception, of course, is any
protection available through applicable bonds or insurance.)
The second area involves the practice whereby equipment suppliers offer
a form of replacement guarantee. This is also not applicable to major
process facilities because 1) manufacturers produce many of their prod-
uct items, and 2) the "value added" component (i. e., the change in
value from raw material to finished product) of their products is high.
In contrast, the contractor's individual project is normally a major
portion of his corporate worth at any given time and the "value added"
component is relatively low.
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It should be noted here that American equipment manufacturers are
increasingly applying a common European practice in which certain
process and equipment firms supply and guarantee complete process
configurations incorporating their products. These configurations
comprise both unit processes and complete treatment plants. "Packaged
plant" or "systems design" offerings are frequently available as a
special case of the EPC form. The guarantees commonly offered are
more comprehensive than can be obtained from competitive engineer-
constructors lacking a proprietary and profitable interest m the equip-
ment they supply. Because these process configurations are as a rule
completely different from competitive offerings and because there is
little data available from nonproprietary sources, the owner and the
manager who "passes through" to the owner these process configura-
tion guarantees to the owner are dependent upon the supplier for data
that substantiates the adequacy of the configurations.
Inherent m the various project forms discussed are certain tradeoffs
between owner control and strength of guarantees. The project manage-
ment approach can provide the highest degree of owner control and
assurance of quality of the ongoing project, but with some sacrifice of
direct responsibility. The EPC contract, on the other hand, may place
a high degree of financial liability on the contractor while sacrificing
some of the owner's control over the manner in which the project is
carried out. The choice of a project form, therefore, involves a cer-
tain tradeoff between the owner's desire to maintain close control of
the project while it is in progress, and the advantage of a high, if some-
what limited, financial obligation against the contractor. It is generally
acknowledged that a well-controlled project is more satisfactory for all
parties concerned than a loosely controlled contract m which the owner
depends upon potential financial claims against the contractor as a
means of bringing about a quality effort.
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This report has emphasized the desirability of placing central responsi-
bility for overall project performance on a single contractor selected by
the owner in any one of the several project forms described. A most
important contribution to the centralizing of responsibility is the involve-
ment of the contractor in the planning phase. This assures technical
continuity through all phases of the project.
The reluctance of the owner to bring in an additional party (such as the
manager) at a very early stage in the development of the project can be
expected. This reluctance stems from general inertia and a disinclina-
tion to assume the burden of the extra costs involved. But if the owner
is to be held responsible in an overall way for the success of the project,
including the processes, he must take part in the process selection or
be provided an opportunity to accept perhaps with modifications ~~ the
processes that are adopted. Postponing this selection may result in
inefficient use of engineering time and may cause delays in the project
schedule in addition to dividing responsibility and weakening guarantees.
It is recommended, then, that for all forms (including EPC, if negotiated
selection is allowed) the responsible contractor should be selected in the
planning phase of the project. Similarly, in the requests for bids, EPC
contractors should be asked to acknowledge acceptance of specified pro-
cess configurations and to give notice of any modifications they would
expect to incorporate before assuming a process guarantee obligation.
The ability to predetermine discharge requirements and influent waste-
water characteristics can be an important factor relating to the applica-
bility of design & construct forms. In recent years, the quality stan-
dards and consequent discharge requirements have changed rapidly,
frequently, and without warning. All too often projects have had their
basic design criteria or procedures changed between initiation and com-
pletion. It is felt, however, that this situation should be expected to
improve as a result of the adoption of the 1972 Act and that, with approval
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of basin-wide and metropolitan plans, there will develop greater stabil-
ity m the application of discharge requirements (subject to settlement
of the meaning of "best practicable treatment" and so-called "zero
discharge").
The viability and utility of design & construct procedures, relative to
process guarantees and centralized responsibility, depend upon the abil-
ity of the owner and his contractor to establish process and performance
criteria and to be free to proceed with the project without change by
some higher authority.
9. 3 NEW TECHNOLOGY
The third consideration of the EPA in attempting to broaden the range of
alternative methods of wastewater treatment plant construction involves
the encouragement of the application of new technology.
The subject of new technology can be divided into two categories. The
first pertains to inventions of new processing methods and improvements
which develop through invention of equipment or reconfiguration of pro-
cesses. (This reference to invention is not intended to imply that an
objective of the EPA construction grant program is to encourage in-
vention originating from basic and applied research. )
Inventions normally need to be tested by means of pilot plant or proto-
type operation to establish confidence in their soundness and to develop
the appropriate scale-up factors needed for adaptation to operations of
commercial size. Basic inventions or major process improvements
require a period of testing under various operating and influent quality
conditions before they can be incorporated in new construction with any
degree of confidence; hence these inventions and process improvements
cannot be used within the design &c construct project period.
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Process and equipment suppliers contribute technological advancement
by offering proprietary processes invented and developed at their own
expense, and these expenses must be recovered through compensation
when these processes are used in a facility. Otherwise, the fast-
moving design & construct project tends to discourage the application
of new inventions, because inherent in such a project is a tighter
guarantee position which strongly discourages the contractor from
using new, untried innovations.
The second category of technological innovation is that which may
result from a value-engineering type of activity. It is associated
primarily with the improvements that can be made in terms of plant
operating quality or cost as developed by enterprising engineers during
the planning or design phases. Such innovations are sometimes referred
to as "paper improvements" because they appear in the specifications
or in the drawings prepared by the engineers. Generally, with old
and well-established processes, improvements made by this means
are relatively minor. Occasionally some major change can result
through the use of new materials of construction or through some new
form of mechanical equipment or equipment design. These innovations
have frequently been drawn from other experiences of the engineer
and are not necessarily related to the specific application under ques-
tion.
Paper improvements normally appear in the form of capital-cost reduc-
tions, as this is the normal basis for evaluation of proposals. If, how-
ever, the invitation to bid includes other quantifiable evaluation criteria
- such as estimate operation and maintenance costs in the life cycle of
the plant, or quantitative credits for incremental improvements in
processing quality - some technological improvement will be stimulated.
Paper improvements can be encouraged by the design &t construct
projects in several ways. Through the EPC form, for example, the
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owneT is exposed to the ideas of various bidders. The latter work from
basic criteria and attempt to design to the lowest first cost (or lowest
facility life-cycle cost) by looking for the maximum number of paper
improvements to better their competitive position. This has been moder-
ately effective m the private sector. Transfer to the public sector, how-
ever, might be inhibited by the fact that the bidder's ideas are always
made public (even if his bid is unsuccessful), thereby injuring his future
competitive position.
Some innovation could be encouraged by expanding the usual design &c
construct contract to include a portion of the process planning phase.
The contract could provide a time period for development work on alter-
native processing schemes. The scheme that appears to offer the great-
est promise at the end of that period would be selected, and its pilot
plant testing completed prior to formulation of the process design cri-
teria upon which the final design would be based. Because it establishes
a specified time and level of effort for the required activities, this scheme
could be defined in terms suitable for relatively fixed-price bidding or
negotiation. There would have to be an agreement that the design would
proceed on th<= basis of the results of the development accomplished in
the time available. With this approach, the time period and level of
effort required may rule out any major technological breakthrough and
may make it impossible for the contractor to guarantee the extent of
technological improvement possible. If one or more methods were actu-
ally tested, however, a significantly better processing scheme which used
existing technology could be expected for a given influent characteristic
than normally would be the case, with or without paper improvements. In
this approach, the designer's guarantees would be established after com-
pletion of the test work by use of some previously agreed-upon formula.
Similarly, preliminary estimates of the probable cost of the facility are
subject to modification following the process definition, although the
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original estimate could be set as the goal or ceiling cost for the final
process facility design. Major process improvements that might in-
crease the capital cost could be dealt with in the context of the owner's
desire and ability to supply the incremental capital needed for the im-
plementation of these improvements.
Another method of encouraging paper improvements would be for the
grantors to include in the evaluation of grant applications some priority
credits for designs that incorporate technological innovation. But this
can be a very difficult thing to evaluate. Similarly, the grant applica-
tion could include indications of how the contractors are to be selected
and the extent of encouragement of technological improvement expected
from the bidders.
In summary, the introduction of design & construct project methods in
itself is not a major impetus (if it is any impetus at all) to the improve-
ment or advancement of the technology of the wastewater treatment in-
dustry. The most direct and effective method of encouraging invention,
demonstration, and application of new process technology is through
research or demonstration grants.
9.4 PROJECT OPTIONS
As regards optional project methods, the application of the individual
forms will have a differing impact on achievement of the EPA objectives.
In this report, very clear lines of demarcation have been drawn between
the various project forms, based upon the contractual relationship be-
tween the owner and the contractors and upon any existing third-party
agency agreements that influence these contractual relationships. In
practice, of course, the actual form in which projects are performed
will sometimes vary markedly from the standardized forms illustrated.
There can also be considerable overlap in the actual performance of
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projects among forms that are categorized differently. The project
sphere in Figure 2-1 illustrates the way in which project relationships
flow into one another. As project forms are followed through their vari-
ations, the characteristics of the project in terms of degree and central-
lty of control, extent of guarantees, and seat of responsibility will also
vary. The actual form selected for any given project, then, is the one
which best represents the interests of the owner and which takes into
consideration his previous experience, his m-house capability, the
experience of potential contractors available, and the contraints of
laws and regulations.
An example of how two seemingly different project forms (appearing on
opposite sides of the sphere in Figure 2-1) can be quite similar involves
the PM and EPC forms. The PM form can be operated quite like the
EPC form, the owner can grant broad agency powers to the manager to
contract (on behalf of the owner, of course) all engineering and con-
struction functions, just like an EPC contractor operating on a total
subcontract basis. When a high degree of responsibility is given to the
project manager, he could be expected to supply performance, material,
workmanship, and process guarantees similar to, if not quite exactly as
extensive as, those that would be expected of the EPC contractor.
In the private sector, the two forms when performed as described above
might be outwardly almost indistinguishable. In the public sector, however,
the applicable procurement rules, as now constituted, would usually pre-
vent the forms from being operated in so similar a manner. The project
manager would be selected as a professional consultant, free of the com-
petitive bidding currently required for the retention of an EPC contractor.
On the other hand, once an EPC contractor is selected, he is free to
retain subcontractors within his own procurement rules, whereas the
project manager is restrained to the competitive lump-sum bidding pro-
cedures presently required m public procurement for construction. The
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effect of the public procurement rules on schedule would be to slow the
job for the project manager as he went through the more formal bidding
procedures for the individual (sub)contractors. This fact accounts for
the four months' difference between EPC and PM projects as observed
by the GSA study referred to earlier in this section.
Owner capability is a significant factor when choosing a project form.
Required technical and managerial competence and capability are
directly related to the size and complexity of projects. An owner with
a large and sophisticated staff may have the technical and management
competence in-house to handle any wastewater project. This capability,
however, may already be overtaxed by an unusually heavy load of other
projects underway. Smaller public agencies are even less likely to have
in-house either the quality or quantity of skills required. This is no doubt
the case for most grant applicants. Unfortunately, this situation is not
clearly perceived by many public entities. Engineers and constructors
working in the public arena are all too frequently acquainted with the fact
that their clients underestimate both the quantity of work involved and
the skill required to successfully handle wastewater management projects.
They tend to be reluctant, therefore, to release to their contractors the
degree of authority required to carry out design & construct projects as
considered in this report.
The owner's capability must be considered from the standpoint of the
need for technical review (e.g., the review of EPC contractors' bids)
and for monitoring the performance of the contractor if guarantees or
other significant obligations of the contractor suggest an adversary re-
lationship may develop.
The individual project forms may be categorized in terms of the owner's
technical and managerial strength requirements, as shown in Table 9-1.
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Table 9-1
COMPARISON OF PROJECT FORMS
Form
Owner's required technical
and managerial strength
E: C
Mode rate
EPC
High
PM
Low
EfcM
Low
C&M
Low
PM-EPC
Minimal
If strong guarantees are expected of the contractor a stronger owner
organization is required, than that shown in Table 9-1. In such cases,
it may be -desirable to increase in-house capability by retaining a
consultant.
The type of project form to be selected for any given project, as we have
observed, is based on a number of factors. These are: the size of the
project; its complexity, the degree of sophistication of the owner agency
(including the extent of previous experiences of the owner in similar
types of projects and his technical capability), the availability of compe-
tent single-responsibility contractors for the form selected; the extent
of guarantees or other obligations of the contractor, and perhaps most
critical, the applicable procurement rules or laws which might constrain
the method of performance of the project or form selected, or more im-
portant, the method of compensation.
The potential for transfer of private sector experience to the public sec-
tor depends on several factors. The fundamental points of differentiat-
ing the public sector project from its counterpart in the private sector
are:
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The absence of the profit motive on the part of the
owner.
The stewardship responsibility of public officials
dealing with public funds
The need in public agency procedures for full public
disclosure of business matters and decision vari-
ables
The relative absence of constructor preselection
The legal and regulatory obligation to select the
lowest responsible bidder for construction work
The limited technical capability of owners
The uniqueness or infrequency of occurrence of
major projects during the tenure of public officials
Very small projects, lending themselves to skid-mounted or simple
field-erected single-stage process package units, are probably best pro-
cured like major equipment, as is commonly done in the industry today
in what is essentially an EPC project form. Other small jobs can be
E&M or EPC, where allowed.
Intermediate-size projects can be carried out in any form. But the pro-
vision of adequate full project capability in very large projects may be
beyond the capacity of many individual engineers and constructors, in
which case the PM and PM:EPC forms appear preferable. Alternatively,
the E &c M form can be carried out by large engineering-construction
firms, or by joint ventures of engineers and construction contractors,
to gain the construction expertise not commonly available in engineering-
ing only firms.
It may be concluded that:
There are a number of options that can be used in
the performance of wastewater treatment facility
projects.
The various forms may be individually feasible, to a
greater or lesser extent, depending upon the external
conditions that exist for each separate project situation.
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A reevaluation of contractor selection methods as
presently practiced is necessary. Increased consid-
eration of cost in selection of engineers and man-
agers is expected. De-emphasis of strictly fixed
price methods of selecting constructors and increased
use of negotiation based on relative qualifications will
be needed to implement some of the project perfor-
mance options discussed herein.
The consideration of these optional forms can be en-
couraged by revising EPA regulations that now for-
bid them.
The best form in any project is probably that which
encourages the selection of the most qualified group
of contractors.
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Glossary of Terms
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Appendix A
GLOSSARY OF TERMS
Accelerated Schedule is the shortening of a project schedule through
overlap of the construction and engineering phases by fast-track or
continuous means.
Completion Date Guarantee is a guarantee by the contractor to complete
his work within the time limits specified in the contract.
Compensation is the price paid (i. e. the money contracted to be paid)
by the owner to the contractor for the supply of materials and the per-
formance of services. Compensation normally covers the contractor's
profit, direct costs, indirect costs, fee, and incentives (bonuses or
penalties). It may be as reimbursement of costs by a formula that
takes these factors into account in the form of unit rate payments in
lieu of direct reimbursement or lump-sum payments.
Construction is a function of the constructor and involves the perform-
ance of the site preparation work, the building of structures, the pro-
curement of specified materials, and the assembling, erecting, and
installing of the various material components delivered to the site. The
construction activities include materials receiving and warehousing, job
site security, labor relations, labor supervision, services subcon-
tracting, job site procurement, cost control, progress control, and
quality control. The term "construction phase" also includes the on-site
inspection function.by other parties, such as the engineer or manager,
for assurance of quality of workmanship and conformance to design.
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Constructor is the party (individual, partnership, or corporation) that
performs construction services and procures the required materials.
Continuous Overlap is the means of schedule shortening in which procure-
ment and construction is released to proceed as each engineering docu-
ment is completed.
Contractor is any party entering into a contract with the owner, whether
it be for engineering, construction, management, or other services.
Cost is the actual expense incurred by a party to the contract. Contrac-
tor's compensation by the owner is an owner's cost, but the word 'cost"
as used here is in general reserved for the expenses 4e. g. , salaries,
materials, services, license fees, taxes, etc.) that the contractor
incurs in performing his services
Cost-Pius Fixed Fee (CPFF) is a form of compensation whereby specified
contractor costs are reimbursed and the fee is established in the original
agreement as a fixed sum of money.
Cost-Pius Percentage Fee (CPPF) is a form of compensation whereby
contractor costs are reimbursed and a fee is established as a fixed per-
centage, either of those costs or of the facility.
Design is the engineering function which includes detailed calculations,
drawings, specifications, and materials and subcontract requisitions.
Non-engineermg activities, such as cost budget preparation and project
schedule preparation, are also considered to be part of the design phase.
Design Construct refers to a type of project m which a single responsible
entity is in charge of or oversees both the design and the construction (and
perhaps planning and/or start-up) activities that are performed.
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Direct Costs are those directly attributable to activities of a specific
project, including salaries and wages, fringe benefits, and payroll taxes,
costs of supplies, materials, equipment, freight, insurance, various fees,
etc.
Engineer is the party (an individual, partnership, or corporation) that
performs engineering in connection with a project. For purposes of this
study, the term "engineer" is applied specifically to the party that per-
forms professional services associated with the design phase.
Fast- Track is a stepwise type of schedule acceleration involving the pre-
paration of multiple-design reports for construction bidding.
Fee is that additional sum of money, over direct and indirect costs, in-
cluded in the compensation of the contractor to provide him a reasonable
profit based on the extent of his services and on the financial risks under-
taken. The word "fee" as used here should not be confused with total comp-
ensation, with reimbursement for direct salaries and other costs, or with
indirect job-related costs.
Fixed Price is fixed compensation of a contractor for an agreed-upon
amount of work.
Guarantee is a promise given by the contractor to the owner concerning
the fact and/or quality of his performance of his contractual obligations.
A guarantee is normally supported by an obligation of the contractor to
do something or pay some specified amount (to some limit) if he fails.
Guaranteed Maximum Price (GMP) is a fixed value of compensation which
sets an upper limit for reimbursable costs. Material and services costs
that exceed the GMP must be swallowed by the contractor.
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Incentives are the adjustment of the contractor's compensation to reward
promptness of completion and/or quality of the work. Liquidated or other
damage payments made by either party are not considered compensation
or incentives in this sense.
Indirect Costs, also called overhead, burden, markup, multiplier, and
similar names, are those costs, incurred by an entity, that are assigned
to a specific protect by proration and are attributable to general admin-
istrative and operating expenses common to all projects being carried
on at one time by the entity. Included are expenses such as office space,
heat, light, furnishings, etc., and executive and administrative em-
ployees' salaries and associated expenses (including the cost of main-
taining central service offices, such as legal, procurement, general
accounting, etc. ). Indirect cost is a matter of definition in the contract
between the owner and contractor, but contractors attempt to have it
defined m the same way in all of their contracts to assure that the
common pool of indirect costs is equitably distributed to all projects.
Lump-Sum Price is that fixed compensation which a contractor commits
to the performance of a specified amount of work.
Management is the commercial and technical surveillance of a project
and the parties performing it for the purpose of assuring satisfactory
performance and completion of the activities. This function can be per-
formed by the owner or by a party contracted by the owner (by means of
an agency-type contract) to act on his behalf with regard to third parties
used in the project.
Manager is the party (an individual, partnership, or corporation) that
performs management as defined herein.
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Materials and Workmanship Guarantee is a guarantee by the contractor to
provide materials and workmanship of a nature and quality as specified
and agreed to in the contract or, in the absence of specified and agreed-
to standards, in conformance with standards commonly acceptable in
general usage.
Owner, as used in this study, is the party, public or private, for whom
the project is executed. The owner is the party who will have ownership
title to the completed facilities.
Parties are those entities contracted to engage in the performance of the
project. The parties are the owner, the planner (optional), the engineer,
the constructor, and the manager (optional).
Percentage (of Facility Cost) Compensation is an amount of compensation
determined as an agreed-upon fraction of the cost of the facility being
provided in the project. Either an early estimate of the cost or the actual
completed cost of the facility may be used. The components of the facility
cost are subject to contract definition. They usually include the contrac-
tor's cost for technical services, materials, and labor, but do not include
owner's costs.
Performance Guarantee is a guarantee by the contractor that he will per-
form all work and services specified in the contract.
A Phase is a chronological segment or major sequential step of a project.
It is normally capable of standing alone for scope definition purposes.
Phases include planning, design, construction, and start-up.
Planning is the activity, preceding the design, wherein the planner estab-
lishes the feasibility of the basic criteria, screens alternatives and
recommends the preferred configurations of the intended facility, or
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develops financing plans. These activities vary widely in magnitude,
depending upon the complexity of the problem and the availability of time
and money for such work. The planning activities may also include test-
ing by means of laboratory, pilot plant, or semi-works facilities, site
selection; economic analysis, sewer system analysis, infiltration/inflow
studies, and environmental assessment. Typical final planning documenta-
tion includes site data, economic and financial data, process flow diagrams,
material balances, physical property data for process fluids and solids,
rating data for equipment, and basic control system requirements.
Process Guarantee is a guarantee by a contractor that the completed fa-
cility will perform in accordance with agreed-upon criteria.
Procurement is a function involving purchase of materials (including the
qualification of suppliers and the solicitation of bids), expediting of sup-
pliers, and factory inspection, where desired. This function is not a
separate phase, but is performed in conjunction with the design and/or
construction phases. The review of the suppliers' drawings is done in
conjunction with procurement, but this is an engineering function which
may be performed by either the engineer or the constructor, depending
upon the method of project execution.
Public Sector, as contrasted to Private Sector, generally refers to owners
who are governmental agencies, at any level, including regional admin-
istrations operated by non-elective officials or public corporations
operating under governmental procurement regulations. The primary
differences between public sector projects and private sector projects
are that in the former, public disclosure of contractual action is re-
quired and the profit motive is absent
Reimbursable Costs are those costs agreed upon by contract to be passed
on to the owner by the contractor. Any contractor's cost not subject to
reimbursement is a nonreimbursable cost.
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Single Responsibility refers to the use of a single party under contractual
obligation to the owner to perform or be responsible for a specified amount
of work and/or services required to carry out a design & construct proj-
ect, whether or not there are financial penalties for failure to perform.
Start-Up 13 the activity whereby the completed facility is put into opera-
tion to perform the function for which it was designed. This includes
starting and adjusting the equipment, installing in-process inventory,
writing of O&M and operator training manuals, and {if necessary) per-
forming test runs to see whether process performance requirements are
met.
Target Price (TP) is a mutually agreed-upon value of compensation around
which the contractor and the owner share in overruns and underruns ac-
cording to a specified formula.
Unit Price is a compensation form in which measurable units (such as
man-hours for professional services of labor) or quantities of materials
supplied by constructors are assigned a value by contract. Compensation
is calculated by multiplying the number of units with the unit price.
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