Q. We awarded an A&E design contract for a new Greyhound Depot that would also include commercial space. Design and eventual construction would utilize FTA funding. The original program said approximately 8,000 to 9,000 square feet for Greyhound and 22,000 square feet for commercial. The user department now wants to increase the size of the building by going from 2 to 3 or 4 stories which would require a change in the architect's original contract. The footprint and site are the same as before. Does this constitute a cardinal change? It seems to be within the general scope of the original solicitation but the fee may increase by 20 to 25 percent.
A. If this was a construction contract there would be little question that a re-bidding would be necessary as the cost of the work would increase beyond anything that was originally contemplated by the parties. However, since this is an A&E design contract, awarded without price competition, the issue of whether this is a cardinal change is largely irrelevant. Your analysis should be whether the A&E design contractor can perform the work or whether you should recomplete the work and make another selection based on qualifications. Since the footprint of your building does not change and the added floors probably require no different A&E expertise than the original design, it is hard to imagine that you will need qualifications other than those you now have. (Revised: September 9, 2009)
Q. Our engineering staff issued a T&M change order for the construction project. Now the work is complete and the contractor is getting ready to submit their payment application. The contractor notified us that they were not able to produce the invoices for some of the material used for this change order due to some internal issues. Our contract specifies that in the absence of the invoices the agency will determine the lowest price for a specific item. However, the contract does not specify the methodology for determining the lowest price. What are the best practices for establishing the material lowest price for a Construction Change Order?
A. You could ask the contractor to submit accounts payable documentation that shows what the supplier was actually paid; ask for the supplier's name so you can contact it and get invoice information from the supplier. (Reviewed: September 9, 2009)
Q. We are building a new water treatment facility. At the time of bid preparation our technical staff felt it was impossible to itemize all items/materials in order to establish unit costs. Therefore, they opted for a lump sum bid. Our agency is now reviewing a cost proposal from the Contractor for extra work (owner requested change). We cannot agree on the material cost for the new material verses deleted material. What are some of the best practices for negotiating material cost for the Change Order in the absence of the itemized bid proposal? Can you recommend pricing strategies for construction projects that are very complex and involve a multitude of materials and items?
A. The Best Practices Procurement Manual (BPPM) discusses the pricing of deleted work in construction contracts in section 188.8.131.52 – Pricing of Construction Changes. The basic rule, as discussed in the BPPM, is that the cost of items deleted must be the cost that the contractor would have incurred had the change not been issued. The deduction is not to be based on the amount included in the basic bid for that item of material or work, unless the item being deleted was a severable item in the pricing schedule of the contract. Thus it is not relevant what the contractor included in its lump sum bid price for the pipe. This rule leaves the contractor in the same profit or loss situation that it was in before the change was issued.
As far as pricing strategies for large, complex projects, one of the most helpful things you can do is to invite industry representatives to provide their input after the project scope has been determined. You will need to determine if you are going to contract for the project on a traditional design-bid-build method, a design-build method, Construction Manager (Agent or At-Risk), or some other method. The choice of project delivery methods will go a long way towards determining how the contract items are priced. One basic suggestion is to talk to other agencies that have built similar facilities to determine their experiences, recommendations, lessons learned, etc. The other very positive thing you can do is to solicit industry comments and suggestions as to how to mitigate the risks both to the agency and the bidders and still get the best possible prices. In other words, get all the information and experience you can from those who have built that kind of facility before you commit to an approach. (Reviewed: September 9, 2009)
Q. We currently have a contract with a service provider to provide Transit Management and Operations - the transit authority provides facilities, rolling stock, and fuel, the contractor provides the remainder of what is needed for Operations, including a general manager and support staff as well as drivers. The Contract calls for a fixed fee paid to the contractor, including profit and all management and other fixed cost, plus variable costs (drivers wages, cost of providing fare media, etc.) that are submitted in a budget every year with a not to exceed cap. We want to expand service by adding a regional connector to the downtown district of a larger regional neighbor. Would adding a regional connector bus service be considered a cardinal change to the contract assuming that the other parameters of the contract (i.e. the authority provides rolling stock and facilities) remain the same? The number of additional drivers required for the route change would be 8 (to be added to an existing staff of 90).
A. The subject of contract changes, including cardinal changes, is covered in the Best Practices Procurement Manual (BPPM), section 9.2.1. The BPPM discusses several issues that must be considered when deciding whether a change is "within the scope of the contract." First is the language of the contract changes clause itself. Would the proposed change be covered by the language in the clause? You may want to have your counsel review the clause, and for future reference make sure the language would allow for changes to routes, etc. One of the tests to be applied is the amount of effort the contractor is required to perform for the changed work vs. the effort in the original contract. From the information provided by you it would appear that the additional effort for this route expansion would not be so large that it would be found to be a cardinal change on that basis.
Another important test is the scope of the original competition; i.e., what the competitors should have anticipated to be within the scope of the original competition. From your information, we would surmise that the original offerors would have anticipated changes/additions to routes since this is normal for the industry. Further, the language in your solicitation was clear in requesting offerors to suggest services for routes other than the base requirements in the solicitation. Your agency was telling the competitors that route changes should be expected.
Based on the above, we do not feel this change to include a regional connector would be a cardinal change. We feel it is a proper change order given the tests that are normally applied. (Reviewed: September 9, 2009)
Q. We have a construction contract that is complete and all changes resolved but two. We did not receive claims, although the contractor continually "reserved his rights." Almost a year has passed and although the Contract says he will submit his final pay application and the release of claims and Surety release - we have received nothing, regardless of how many times I follow up with him. We have about $38K in retainage - what do we do as we can't pay it without the release - but do not have written claims to resolve.
A. You very much need to work with your legal counsel's office to devise a solution to this problem. As far as the outstanding change orders that have not been negotiated, your contract clauses need to be reviewed carefully to see if the contractor has waived his rights to an adjustment by not submitting a timely claim. You also need to determine if you have the contractual right to issue a final contracting officer's decision (which may be appealable), but which at least starts the clock moving toward resolution. (Reviewed: September 9, 2009)
Q. We have a 3 year construction contract that was competitively procured. We are now negotiating our first change order. Is strict T&M the only method of performing cost analysis for a negotiated change order? By strict T&M, I mean that the cost proposal and the independent estimate must be analyzed according to the markup percentages (direct labor, materials and subcontractors) with no stipulation for profits. If such is true then why do we even negotiate, instead just verify the units. Are there any other methods?
A. The FTA procurement Circular 4220.1F, Chapter VI, Sec. 6 provides guidance on cost and price analysis. The method and degree of the analysis required will depend on the individual circumstances, such as the value of the contract or modification, etc. It leaves the degree of the analysis to the grantee's discretion. It also requires that the analysis begin with an independent cost estimate (ICE) performed by the grantee before receiving the contractor's proposal.
It is clear that you will have to do a cost analysis of the various cost elements and profit submitted with a lump sum proposal for the changed work. If you have advance agreements in the contract, however, that already stipulate what rates the contractor is to charge on change order work (ceilings subject to later audit), then we would think your analysis would simply have to confirm the fact that the proposal does indeed reflect the agreed-upon rates. If there are costs not addressed by the advance agreements (e.g. materials) then you will have to satisfy yourself the contractor's estimates are reasonable, and document the file with an explanation of how you evaluated those costs (e.g., copies of quotes from contractor's suppliers). For quantities of labor hours and materials proposed we would suggest you compare them with the independent cost estimate (ICE) you did before receiving the contractor's proposal, and document the file to explain any significant variances between the proposal and the ICE that you actually negotiate with the contractor.
The Best Practices Procurement Manual (BPPM) discusses the topic of cost and price analysis in section 5.2. Sections 184.108.40.206 and 220.127.116.11 may also be helpful as they deal with the content of pre-negotiation plans and the memorandum of negotiations. There is also an extensive "Pricing Guide for FTA Grantees" available at the FTA website. (Revised: September 9, 2009)
Q. We are in the process of building a light rail extension. As part of this process, we are building soundwalls. During the construction of these walls, we have had to remove some trees from backyards and/or damaged existing landscaping. In order to be responsive to homeowners, we are trying to quickly resolve problems by purchasing gift certificates to places such as Home Depot or Lowe's. In other cases, we'd like to reimburse people for the loss of trees, plants, sprinkler systems, etc. as a result of this wall work. In most cases, these costs are unforeseen and not the fault of the contractor.
How would we bill this to our project? I do not want to call them claims because that involves a lengthy process that delays repairs, angers homeowners and results in negative public relations. Being as all these costs are less than $500 per house, it seems like there should be some way to expedite the process, cut them a check or gift certificate and continue our work.
A. We would recommend you issue a change order to the construction contract, directing the Contractor to reimburse homeowners affected by the work and accumulate the costs on a Time and Materials basis in a separate account so that you can reimburse the Contractor for actual expenses plus a nominal mark-up for administrative costs, fee, etc. This would automatically charge the project with the costs as if they were part of the construction costs (which they are). The change should stipulate a "not-to-exceed" amount so that you control your total potential liability, as well as an opportunity to review the reasonableness of each claim paid by the Contractor. We believe this is the fastest and most efficient way to accomplish your goal. This avoids the administrative problems that would arise if you made direct payments to homeowners. (Reviewed: September 9, 2009)
Q. Is the following scenario considered a sole source procurement or a change order?
Agency A decides to piggyback on Agency B's bus purchase procurement, which includes fare boxes as an option. At the time of entering into the contract, Agency A doesn't include fare boxes. Subsequently, Agency A determines that it is best to include the fare boxes in the purchase. The fare boxes called for by Agency B in the original request for proposal are from the same manufacturer (as agency A) but different model/system/software.
Can Agency A include the fare boxes as a change order or would that be sole source procurement?
A. The Best Practices Procurement Manual, Section 9.2.1, "Contract Scope and Cardinal Changes," discusses the various issues and criteria that must be evaluated when deciding if a particular contract change is "within the scope of the contract," or whether it is a "cardinal change." Cardinal changes are impermissible under the changes clause of the contract and they must be processed as sole source actions requiring agency management approvals.
We would interpret your present circumstance as one where you have a contract for buses without fare boxes (via an assignment of a portion of the original contract rights). Using all the criteria set forth in the BPPM, Section 9.2.1, we feel you may properly issue a change order to this contract requiring fare boxes of whatever design or performance characteristics you feel are appropriate for your buses. We assume the bus contract is still current and the buses are yet to be delivered. Such a change would appear to meet all the criteria discussed in the BPPM as being "within the scope of the contract." (Reviewed: September 9, 2009)
Q. Is the cost for a change order treated as a stand-alone cost (meaning that you document and obtain approvals based on the cost of the change; unless the amount of the change causes the original order to break through the next threshold)? Or does any change to the cost cause that contract to go through "again" the documentation/approvals that were required when the order was originally placed?
A. Internal agency procedures may differ on whether the cost of a change is to be treated as a stand-alone cost or whether the resulting contract value should be the determining factor. The Federal experience is to treat the change as a stand-alone cost for purposes of reviewing the change itself, so that internal agency reviews were more intensive the greater the value of the change orders. This applies to changes made pursuant to the "Changes" clause (i.e., changes in the specifications, place of delivery, etc.), and not sole-source add-ons to the contract. However, if the resulting contract value crossed a dollar threshold for the inclusion of certain contract clauses (e.g., at $100,000 and $500,000 more clauses were required), a Federal contracting officer would add the clauses to the contract when negotiating the change and issue the contract modification.
If you are dealing with modifications to the contract which are in fact new, sole source additions to the original work, then we would recommend that the value of the sole source work when added to previous sole source add-ons to the contract be the determining factor for agency reviews. It is important to avoid the appearance of a series of sole source add-ons, each of which is below a given dollar threshold, in order to avoid a higher-level management review. Your file documentation supporting the new work as a proper sole source action should reflect the entire history of the original contract and any previous modifications in order for the reviewing official to know the true extent of the sole source transactions with that contractor. We would also point out that if the additional work is such that the contractor might be placed in a non-competitive position for future work, that this fact be documented and the reviewing official made aware of the total picture when he/she reviews the proposed action. (Reviewed: September 9, 2009)
Q. We recently competitively awarded a construction contract for a new building. We would like to use sales tax recovery to purchase the commodities directly from the suppliers that the General Contractor received his quotes from. We would then deduct those amounts as well as the 6 1/2% sales tax from the total contract price of the General Contractor. What rules do we have to follow as it has already been competitively bid, and has anyone else used this to reduce the overall cost of their construction bids?
A. We do not see a problem with modifying this construction contract by use of a deductive change order, so that your agency can furnish the materials to the contractor, as owner-furnished-property, and thus avoid the 6.5% Florida sales tax on the materials if the contractor were to purchase the materials itself. The bidders were informed in the IFB that you reserved the right to buy any or all of the materials needed for this project and furnish them, so we see no basis for any complaints by the winning contractor or other bidders. (Revised: September 9, 2009)
Q. This question pertains to the New Jersey TRANSIT (NJT) Federal General Provision Contract Language "Audit of Change Orders." The text of NJT's Federal Contract Provisions contains a section entitled "Audit of Change Orders," which states that NJT has the right to audit "all documents related to the preparation of the contractor's bid including the final calculation on which the bid was based." A potential proposer for a specialized locomotive procurement claims that section 15.403-1 of the Federal Acquisition Regulation (FAR) states that any documents used in the preparation of a competitive bid are not subject to audit under any circumstances. The proposer requests that NJT delete the requirement from the contract. According to the proposer's interpretation of this section, NJT would also be prohibited from obtaining cost or pricing data to determine the fairness and reasonableness of change order pricing. It is unclear to NJT how FAR section 15.403-1 can be applicable to change order work since there is no price competition, that prices for a rolling stock manufacturer's labor and material are not set by law or regulation, and that, if this requirement does apply, changes would only involve the switching of one commercial item for another. It is NJT's position that this section of the FAR applies to commercial products, not rolling stock, and that this information is needed to determine price fairness and reasonableness.
A. It is important to note that your third-party contracts using FTA grant funds are not subject to the FAR, but to 49 CFR Part 18, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments. The CFR requirements have been incorporated by FTA within FTA Procurement Circular 4220.1F.
The Circular deals with cost analysis of contractors' proposals for change orders and does in fact require grantees to perform a cost analysis when there is no competition. This in turn will require the contractor to submit cost details supporting its price proposals for change orders. A cost analysis will be necessary when adequate price competition is lacking and for sole source procurements, including contract modifications or change orders, unless price reasonableness can be established on the basis of a catalog or market price of a commercial product sold in substantial quantities to the general public or on the basis of prices set by law or regulation. (Revised September 9, 2009)
Q. What is best practice for evaluating mobilization costs for providing service, especially for labor cost? The contactor proposed a mobilization cost of $35 per revenue hour (of which $25/hr is for labor). The contract price to actually provide service is $60 per hour. Background = Tompkins County has a newly implemented contract with a taxi company to provide paratransit service for $60 per hour. The specifications estimated the service would operate 16 revenue hours of per day, depending upon the number of ride requests.
The taxi company mobilized to obtain extra liability insurance, two vans, state operating authority, and hired to drivers with Commercial Driver Licenses (CDL) to operate the service. After starting on March 1, 2010, public demand for the service is slowly building. The taxi operator states it is losing money due to its mobilization costs are more than the contract revenue from the County. The County did not guarantee a minimum number of hours to the contractor.
A. The first issue to deal with is the issue of entitlement to a price adjustment. We understand that the actual volume of service that has materialized to date is only about 20% of what was predicted by your agency when it solicited proposals for this service. We further understand that the level of service called for in the contract is also based upon the originally predicted levels that have not been experienced thus far. We believe you should consult with your legal counsel and explore with them several issues that could lead to a price adjustment for this carrier, who is unable to recover its non-recurring/fixed costs due to unexpectedly low service volumes. One question would be whether there was a mutual mistake when the contract was awarded that would entitle the carrier to a price adjustment. Another question would be whether a partial termination of the contract is called for in order to adjust contractual service levels to those now being required by current public demand. The typical Termination Clause would entitle the contractor to recover actual allowable costs incurred plus a reasonable profit on the work actually performed. Still another approach might be the Changes Clause and the ability afforded under that clause for an equitable price adjustment. Your agency will need to perform a cost analysis of the contractor's price adjustment proposal. We would think the objective of the price adjustment would be to put the contractor in the same financial position he would have been had the actual service demand materialized as originally predicted. The original financial position may or may not have been profitable based on his proposed hourly rate and his cost structure - you will have to determine this. In any event he should not be put in a more favorable position than he was in originally. (Posted: May 2010)
Q. May we add the Solar Canopy project to the Maintenance Facility project as a Change Order, to save time and money?
Background: We have been awarded a $5M SGR grant to construct new maintenance facilities including solar arrays on the roof of the building. The project is worth $6.25M. Contractor has been selected and is about one-third finished. A subsequent $470K TIGGER grant was awarded to construct a solar canopy (multi-vehicle carport with solar panels on the roof) at the same bus yard. That project is worth $522K.
A. We would advise you to solicit bids for the carport work, using a Design - Build approach to save time and shorten the bidding period to take advantage (if possible) of the contractors now at the site. The problem with a change order is that the carport structure is distinct from the maintenance facility and thus would be "outside the scope" of the existing contract. FTA would consider a change order to be an impermissible "cardinal change" in this case. You could also consider allowing the present GC to purchase additional solar panels for the carport when he buys the panels for the maintenance building if that would be a cost savings for the carport project. The RFP for the carport could then inform bidders that the solar panels would be furnished by the agency. (Posted: June, 2012)
Q. I understand that a Change Order requires a Price/Cost Analysis but does it also require Procurement History documentation? If so, what information should be included? Besides a Change Order and price analysis, are there other documentation requirements?
A. Change order files must document the "history" of the change. For example, what does the changed work entail and what has necessitated the change? How does this work relate to the existing contract work--the explanation must demonstrate that (1) the change represents work that the contractor was not required to perform in the original contract scope (and thus he is entitled to a price adjustment for the changed work); (2) the change is "within the scope" of the contract and does not constitute work that would be considered a "cardinal change" (the FTA Best Practices Procurement Manual discusses the various criteria for changes being "in scope" vs. "out of scope" in Section 9.2.1 - "Contract Scope and Cardinal Changes"; (3) a cost analysis of the contractor's proposal, to include labor hours, overhead rates, profit and other direct costs; and (4) a negotiation memorandum explaining how the contractor's proposal was negotiated in relation to the cost analysis (i.e., the basis for the price finally agreed upon and any other contract terms and conditions affected by the negotiations). Any documents related to the change should be included in the contract file. (Posted: August, 2013)
Q. Can a contractor’s indirect costs and profit be included in a change order?
A. The topic of contract change orders is discussed in the FTA Best Practices Procurement Manual, Section 9.2, which is available online.
The changes clause of your contract should contain language that entitles the contractor to submit a cost proposal for the added cost of performing the changed work. These costs would include both direct costs (labor, materials, etc.) as well as indirect costs such as overhead, G&A. A fee or profit will also be customarily included in the negotiated cost of the change. We would point out that when reimbursing contractors for costs incurred or when negotiating fixed prices based on estimated costs, FTA requires that the costs be "allowable" as defined in FAR Part 31. You should consult this Part of the FAR for a complete discussion of allowable costs on Government contracts and FTA funded grants. The FAR is accessible on the Internet: https://acquisition.gov/far/loadmainre.html (Posted: December, 2014)