Are Blue Book Equipment Rates Appropriate for use on Alternative Delivery Projects?
Imagine you are at a restaurant. The server brings you a menu labeled “Equipment Watch (Blue Book Rates).” You notice that the other patrons in the restaurant are ordering from a menu labeled “Internal Equipment Rates,” that has the same options as your Blue Book menu but with lower prices. Would you order from the Blue Book rates menu simply because the server handed you that menu, or would you insist on ordering from the Internal Equipment Rates menu?
Like this analogy, Contractors’ internal equipment rates are typically less expensive than the rates found in Equipment Watch. To answer the question above, no it is not appropriate for a contractor to propose Equipment Watch rates on alternative delivery projects. Why? Simply put, Contractor’s use their internal equipment rates on competitively bid scenarios because they want to be competitive. Following that same logic, Owners should insist that their contractors use internal equipment rates on alternative delivery projects. Owners should not accept the prices on the more expensive menu for the same meal.
To highlight this point, the table below shows Equipment Watch pricing for commonly used pieces of equipment and compares it to an average of five anonymized Contractors’ internal rates all from the same region/state. Here are the results of our comparison:
While Equipment Watch rates are developed through field research and investigative methods throughout the construction industry; each Contractor is the most well-informed party regarding their equipment’s historical ownership and operating costs. Contractors use their documented ownership and operating costs to create internal equipment rates that they can use in competitive bidding environments.
So, when is it appropriate to use Equipment Watch equipment rates? We recommend using Equipment Watch rates as a conflict resolution tool, especially during a change order negotiation process or for Force Account work. Project teams can also utilize Equipment Watch rates as a base price point for a piece of equipment that is new to the fleet, or to develop a rate for specialty equipment, or when a piece of equipment will be utilized differently than normal.
Using Provisional Sums, Shared Risks, and Contingencies
The Progressive Design Build (PD-B) delivery method is being used more frequently in our industry. On major projects, PD-B provides benefits that can only be achieved using its collaborative, phased approach. Its lauded design flexibility, cost transparency, and price reliability are some of the major factors that compel Owners and agencies to adopt PD-B. To get the most out of PD-Brisk identification begins in the early phases as the Scope of Work is being developed. In this way, projects benefit from risk mitigation strategies that can be applied immediately as the design develops. Independent cost estimating teams are often used to facilitate the risk management process. Brought on during these early design development phases the ICE can help a project, and its team, by using three primary risk mitigation tools to account for uncertainty: provisional sums, shared risks, and contingencies. These tools allow teams to estimate costs more accurately and to manage risk more effectively. Let’s do a review of each tool:
Provisional Sums – Provisional Sums are allowances for specific elements of the construction that have not yet been designed in enough detail to accurately price. They are typically included in the project estimate as a unit price, and the actual cost of the item is determined when it is designed or built. Provisional sums are replaced by the cost of the work as it is completed resulting in a total project cost that may increase or decrease. Provisional sums may also be used to cover known requirements with unknown application. With the increasing use of new and innovative technology, this one becomes increasingly important. For example, Rock Excavation has potentially unknown conditions such as the type of rock, how much rock, and which activities it may affect. You may need to use a specialist or a different piece of equipment. This may be difficult to price because the quantity is unknown. A provisional sum allowance can be built to identify the trigger and the measurement and payment. This allows us to right size the risk and pay for the actual quantities.
Shared Risks – Shared Risks are risks that are shared between the contractor and the Owner. These risks are typically identified and quantified at the start of the project, and the cost of each risk is allocated to either the Owner or the Contractor based on their area of expertise and experience. For example, on a project with dust sensitive stakeholders, the contractor had one water truck for the duration of the project. If the team decided that one truck was not enough to control the dust, then the owner would direct the contractor to deploy additional trucks to mitigate issues beyond the control of the contractor.
Contingencies – Contingencies are amounts of money set aside to cover unforeseen or unexpected costs that may arise during the project, and they are used to cover risks that have not been identified or quantified due to incomplete design, unknown permit requirements, or other factors. One example we use quite a bit is bus stations. Most often, the station design lags significantly behind the rest of the project design. We use a contingency for each size and number of stations to make sure we have the dollars in the estimate to make sure we have funds in the project budget. Then once the station design is completed, the costs can be finalized, and contingencies are then used to fill in where we had those uncertainties. We caution against the use of too many contingencies on most projects, mostly because we do like to have solid costs more than uncertain contingencies.
Understanding the Scope of Work is the most important part of reducing risk and deciding how you will manage it. You must carefully consider every detail of the Scope of Work and discuss it with the PD-B team. This is the first step. Next, use your team to do a comprehensive review of the project requirements. Discuss specific design elements, and rough out a cost model. Finally, compare. Use a past project that was similar in Scope of Work as a point of comparison for your current project.
Finally, a word of caution. While these tools can be used to develop a realistic project budget, there are dangers associated with allocating too many resources to provisional sums, shared risks, and contingencies. The dangers include increased project costs, delayed project delivery, reduced project scope, and increased risk of disputes. The solution? Careful consideration of risk and a clear and defensible Risk Register.
Independent cost estimators can also greatly help in risk discussions. Their experience will ensure that the appropriate resources are assigned to these factors to produce an accurate cost estimate while addressing and reducing project risk. Independent cost estimators can provide the following risk management benefits on a PD-B project:
Providing expert advice on the amounts that should be allocated to provisional sums, shared risks, and contingencies,
Helping to define the provisional sums, shared risks, and contingencies associated with the project in a clear and unambiguous way, and
Monitoring and documenting the allowances (or contingencies) throughout the project and adjusting them as needed.
If you are considering a major CMGC or PD-B project, Innovative Contracting and Engineering (IC&E) will maximize the value you get from using these tools. IC&E will ensure that your project is appropriately and adequately funded and that the risks associated with unforeseen costs are minimized.
For a more in depth conversation about provisional sums, shared risk, and contingencies, call Dan Bender at 702-523-2354
Collaborative Risk Management on De Soto Local Roads Improvement Project
The Kansas Department of Transportation (KDOT) is executing a roadway improvement project to provide essential infrastructure supporting the Panasonic Energy Company electric vehicle battery manufacturing facility in De Soto, Kansas. The project entails widening approximately 4.5 miles of a two-lane asphalt road to a new 4-lane divided roadway. Additionally, the project includes storm drain installations, lighting, curb & gutter, sidewalks, the reconstruction of an existing culvert, utility improvements, and modifications to three intersections, including the installation of a roundabout at the intersection of Astra Parkway and 103rd Street.
This project serves as an excellent example of collaborative risk management on a progressive design-build (PDB) project. Despite being KDOT's first PDB project, they positioned themselves for success from the outset. KDOT selected a PM/CM team composed of Burns & McDonnell and Garver. Subsequently, they selected an experienced PDB team, comprising Clarkson Construction Company, HDR, and BHC. The PDB team worked closely, managing over $11.4 million in risk utilizing the three tools discussed above (provisional sums, shared risk, and contingencies). In reference to the risk management process employed, the PM/CM team stated, "On the De Soto, KS project, KDOT is delivering the improvements with an approach to collaboration and risk management that is not often seen in the roadway construction industry. This project can serve as a model for future infrastructure initiatives and industry partnering across the industry." ~ Brett Harding, PE.
IC&E served as the independent cost estimators on this important project. As part of our scope, we managed the development of the risk register and facilitated the risk workshops. Regarding our work on this project, KDOT's project director stated, “KDOT selected IC&E as its Independent Cost Estimator for its first PDB project. IC&E’s past experience and guidance were vital to ensure a streamlined quantity and cost reconciliation process with the Contractor-Consultant team. Their knowledge and insight into the appropriate items for the risk register reduced potential project costs and contingency.” ~ Paul Kulseth, Project Director (KDOT).
Christopher Bender, Contract Manager
It is with great pleasure that we highlight the exceptional contributions of Christopher Bender, our dedicated Contract Manager at IC&E since May 2023. Christopher's primary focus on Marketing and Proposal writing has been nothing short of outstanding, showcasing his remarkable skills as a technical writer. However, where Christopher truly stands out is in his unwavering commitment to staff support.
With a background in Civil Engineering, having earned his B.S. from Brigham Young University in 2016, Christopher kicked off his career as a transportation engineer at Fehr & Peers. His journey towards developing effective and innovative transportation solutions for the community laid the foundation for the insightful and analytical problem solver we have on our team today.
Christopher's strengths extend far beyond technical prowess. His knack for supporting our team members sets him apart—always ready to learn something new to better assist the collective effort. His attention to detail and data-driven approach have not only streamlined our processes but have also enhanced the overall efficiency of our team.
Outside the professional realm, Christopher leads a fulfilling life in Salt Lake City, Utah. He is a proud father of two girls, Lucy and Molly, and he volunteers as the head coach of an adult swim team. His adventurous spirit also extends to rock climbing, and when the day winds down, Christopher enjoys the occasional game of Dungeons and Dragons.
We are fortunate to have Christopher on our team, and we look forward to witnessing his continued success and positive impact on both our projects and the IC&E family. Congratulations, Christopher, on your well-deserved recognition and thank you for being an invaluable part of our team!
Alternative Delivery Consulting Services (PDB, CMGC, CMAR, DB, P3)
Alternative Delivery Processes Training
Independent Cost Estimating (Production-Based Cost Estimating)
Critical Path Scheduling Using Primavera P6
Constructability Reviews
Risk Management/Mitigation
Innovation in Construction Techniques
Negotiation
Change Order Reviews
We love what we do! We have a passion for finding creative approaches to construction. We are constantly looking for innovative construction techniques to add value to the projects we are working on. Our team has found ways to reduce schedule and/or construction costs on every project we have worked on to date!
Innovative Contracting & Engineering (ICE) is a team comprised of former contractors and professional engineers who have a thorough understanding of market fluctuations, pricing trends, construction strategies, and innovations. Our experience working on alternative delivery projects across the United States has provided our team with a tool bag full of industry best practices. Construction cost estimating and scheduling is our primary focus. This focus is how we stay current on construction trends and price changes, and that helps us produce more accurate estimates than our competition. We have a passion for finding creative approaches to construction. We are constantly looking for innovative construction techniques to add value to the projects we are working on. Our team has found a way to reduce schedule and/or construction costs on every project we have worked on to date! ICE works closely with our clients to improve the quality of their most challenging projects.
Past Newsletters:
Free Tools! - Innovations Tracking
Pareto’s Principle and Concept Cost Estimates
Meeting Project Risks & Challenges
Leaders Turn Vision into Infrastructure
Early completion milestone bonuses in CMGC contracts
Risk Management Best Practices
Vision 2020?? Nobody saw this coming!
How can we help you? Send us your questions, comments, and request.
Email, Call, or Text: Dan Bender, 702-523-2354, danbender@iceteams.com